Author Archive
Debt Debate a Reminder of What Government Is
If it is true that a failure to increase the debt limit on August 2nd has the potential to bring about economic Armageddon, shouldn’t we be asking ourselves if it’s a good idea to allow the political class in Washington to continue collectively play God with our lives? After all, these people are fallible human beings.
In a similar vein, Sheldon Richman reminds us of what government really is in a new column on the issue of federal debt. I like Richman’s statement because one need not be a hardcore libertarian to appreciate the message:
Government is not some higher super-competent entity like the man pretending to be the Wizard of Oz wanted the people to think he was. It’s a coercive organization of limited, flawed, and essentially ignorant men and women who, having been anointed in an election after campaigns hawking snake oil, are presumptuous enough to think they are capable of making wise decisions on our behalf.
Having worked in both federal and state government, I know from first-hand experience that there’s no wizard behind the curtain. My gut tells me that some of the pundits and analysts who display an almost child-like belief in the capabilities of government might think differently had they spent time behind the curtain.
It is my hope that the circus-like atmosphere in Washington over raising the debt ceiling will cause more Americans to question why so much power and money has been placed in the hands of imperfect (to put it politely) men and women. Therefore, while I think the odds that Republicans and Democrats will strike a deal to substantively cut spending are somewhere around zero, perhaps the sordid spectacle will generate more popular support for downsizing the federal government.
‘Gang of Six’ Plan Is Lousy
My colleague Dan Mitchell discussed the good, the bad, and the ugly in the deficit reduction plan released by the bipartisan group of senators known as the “Gang of Six.” As Dan noted, the plan is more of an outline and a complete assessment isn’t possible until more details emerge. However, the fact that President Obama immediately embraced the plan ought to tell proponents of limited government all they need to know.
Here are some random thoughts on the plan:
- There’s nothing impressive about the “immediate” $500 billion in deficit reduction. That figure includes revenue increases, so it’s not even $500 billion in spending cuts. And I’m not sure why they say “immediate” when they probably mean that the reductions would occur over the next several fiscal years. The deficit alone for next year will probably be at least $1 trillion.
- The plan promises about $2.5 trillion in spending reductions over 10 years. As I’ve been pointing out, $2 trillion in spending cuts isn’t a lot when compared to the $46 trillion the government is projected to spend over the next decade. See this Cato video for more.
- Tax reform is fine; more revenue for the government is not. Transferring more resources from the private sector to the government is a loser for both economic and individual liberty. In addition, the plan’s requirement that tax reform “maintain or improve the progressivity of the tax code” would result in more Americans viewing the federal government’s spending programs as a “free lunch.”
- My anti-tax credentials are beyond question: I equate taxation with theft. But I don’t like debt-financed spending any more than I like tax-financed spending. Had anti-tax advocates and Republicans put the same amount of effort into restraining spending during the Bush/Republican Congress years as they did in cutting taxes, we might not be facing the prospect of a large tax increase today. Unfortunately, I see little evidence that that lesson has been learned.
- The plan does almost nothing to rein in the scope of federal government’s activities. It doesn’t seem to matter which party or ideological faction on Capitol Hill releases a plan — conservatives, moderates, and liberals all apparently assume that the federal government should continue doing everything that it currently does. Generally speaking, Democrats want more tax revenue to maintain an expansive government. Republicans talk about smaller government, but only a handful can articulate exactly what programs or functions they’d eliminate. It’s more common to hear Republicans blubber on about “reducing waste, fraud, and abuse” in government programs and “saving” the pillars of the welfare state (Social Security and Medicare) for “future generations.”
- Our global military presence would make a Roman emperor blush and our Founding Fathers roll over in their graves, but there’s nothing in this plan to suggest that the military-industrial complex faces any threat.
In sum, if you’re hoping that debt reduction will be brought about through a reduction in the federal warfare/welfare state, you’re going to have to wait for a different plan. And the sad truth is that no such plan is going to materialize anytime soon – at least not one that will get through Congress and signed by the president. But look on the bright side – we’re not Greece! Not yet.
This Week in Government Failure
Over at Downsizing the Federal Government, we focused on the following issues this past week:
- People here in Washington are now considering military spending cuts that they thought strategically unwise and politically impossible just a few years ago. And conservatives are joining in.
- Federally funded spaceflight is the quintessential neoconservative project: a giant, wasteful crusade designed to fill Americans’ supposedly empty lives with meaning.
- The Obama administration wants to send bureaucrats from federal agencies that are notorious for wasting other people’s money to help local bureaucrats do a more “efficient” job of spending other people’s money.
- President Obama’s Fiscal Commission handed Republicans ready-made spending cuts on a silver platter — Republicans will never get better political cover for insisting on spending cuts than now.
- $500 billion in cuts and a $500 billion debt increase would certainly be better than Senator McConnell’s chicken-out plan.
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Strong Cities, Strong Communities: Bad Idea
When government officials come up with what they claim to be a wonderful new idea, I often think of an old Saturday Night Live skit from 1990 poking fun at commercials for blue jeans. The skit’s scene is a group of middle-aged buddies getting ready to play basketball in their new “Bad Idea Jeans.” Each guy optimistically announces a plan to do something that is actually a “bad idea.” For example, a character says “I don’t know the guy but I’ve got two kidneys and he needs one, so I figured…” and “BAD IDEA” flashes across the screen. (The skit can be watched here.)
The White House’s new “Strong Cities, Strong Communities” initiative had that BAD IDEA screen shot flashing repeatedly in my mind as I read the press release:
Today, the Obama Administration launched Strong Cities, Strong Communities (SC2), a new and customized pilot initiative to strengthen local capacity and spark economic growth in local communities while ensuring taxpayer dollars are used wisely and efficiently. To accomplish this, federal agencies will provide experienced staff to work directly with six cities: Chester, PA; Cleveland, OH; Detroit, MI; Fresno, CA; Memphis, TN; and New Orleans, LA. These teams will work with local governments, the private sector, and other institutions to leverage federal dollars and support the work being done at the local level to encourage economic growth and community development.
Additionally, communities nationwide will be eligible to compete for comprehensive economic planning assistance through a grant competition designed to spark local innovation. By integrating government investments and partnering with local communities, SC2 channels the resources of the federal government to help empower cities as they develop and implement their vision for economic growth.
The Wall Street Journal reports that federal officials from HUD, Labor, Commerce, Transportation, and the Small Business Administration will be “deployed” to the cities. In other words, the Obama administration wants to send bureaucrats from federal agencies that are notorious for wasting other people’s money to help local bureaucrats do a more “efficient” job of spending other people’s money. That’s like asking Anthony Weiner to fix your Twitter account.
A couple of the cities chosen by the administration are ironic. Seriously, hasn’t the federal government done enough to New Orleans already? Detroit is an example of why decades of federal subsidies to urban centers in decline have been a failure. As I note in a Cato essay on HUD community development subsidies, of which Detroit has been the fifth largest recipient since 2000, federal handouts create a disincentive for local officials to pursue sound policy reforms:
Despite all the abuses, perhaps policymakers believe that Community Development Block Grants are nonetheless effective at stimulating growth. After 30 years and more than $100 billion it should be easy to demonstrate the program’s success, but it’s hard to find any examples of city rejuvenation created by the program. Instead, numerous cities, such as Detroit, which have been major CDBG recipients, have fallen further into decline. The reality is that no amount of federal money can overcome the local hurdles to growth in cities such as Detroit—including political corruption and destructive tax and regulatory policies. Indeed, just like international development aid, federal aid to the cities likely increases corruption and stalls much-needed local reforms.
Some people will view this initiative as a crass effort to shore up urban support for the president’s reelection campaign. There’s probably a good bit of truth to that criticism. But both parties have been using subsidies to state and local government to curry political support for decades. Therefore, Republicans who raise a stink over the administration’s initiative should be prepared to work for the involved programs to be abolished. Otherwise, the complaints will amount to little more than political hot air.
See this Cato essay for more on federal subsidies to state and local government.
This Week in Government Failure
Over at Downsizing the Federal Government, we focused on the following issues this past week:
- Chris Edwards explains why government spending doesn’t work.
- Biggest Keynesian Stimulus + Slowest Recovery = Time to Rethink Keynesian Theory.
- When it comes to grabbing federal dollars, Indiana Gov. Mitch Daniels is just another politician.
- A new Cato video takes on the alleged $2 trillion in spending cuts being negotiated on Capitol Hill as part of a deal to raise the debt ceiling.
- Economics has numerous schools of thought, but Christina Romer’s writing reflects nothing but the most simplistic Keynesian framework.
- There is no good argument for keeping the federal government in education. But we can’t even have a reasoned debate about that as long as thinly veiled assertions of racism and callousness are the the standard response to any downsizing proposal.
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Cato Video on $2 Trillion in Spending Cuts
A new video produced by Cato’s Caleb Brown and Austin Bragg does a typically stellar job of visualizing the alleged $2 trillion in spending cuts currently being negotiated on Capitol Hill as part of a deal to raise the debt ceiling.
The video is based on my recent chart, which shows that $2 trillion in cuts over ten years is relatively small considering that the federal government is projected to spend almost $46 trillion over that same time frame. Indeed, rather than actually cutting spending, federal spending (and debt) would continue to grow – just at a slightly lower rate.
The video also highlights Chris Edwards’ concern that the cuts will be phony: instead of actual terminations in programs or reductions in entitlements, there is a strong possibility that budget gimmicks will be used to arrive at the savings.
Mitch Daniels and the Federal Money Grab
For much of the nation’s history, policymakers recognized that the federal government’s powers were “few and defined,” as James Madison noted. Issues like education and community development were largely left to the states. Unfortunately, the separation of responsibilities between the federal government and states has been eroded to the point that federal funds now account for approximately a third of total state spending. A consequence is that federal aid to the states has fostered bigger government at all levels.
State policymakers are addicted to federal money. The appeal is obvious: they get to take credit for all the wonderful things they do with money that they didn’t have to tax out of their state’s voters. Thus, it has been interesting to observe Republican governors who willfully fed at the federal trough now pontificate on the dangers of Washington’s spending addiction as potential or declared candidates for president.
Although he ultimately decided against running for president, Indiana Gov. Mitch Daniels has carefully crafted a public image as a voice of reason when it comes to addressing the federal government’s budget problems. When he was flirting with a run for president, Daniels received fawning coverage from various observers for labeling the federal government’s debt the “new red menace.”
One problem with this image is the fact that Gov. Daniels has been a “just another politician” when it comes to grabbing federal dollars. Indeed, Daniels signed an executive order on his first day in office creating a state agency devoted to increasing Indiana’s take from the federal honey pot. As an official with the Indiana state Office of Management and Budget, I can attest that it was the Daniels administration’s policy to find ways to use federal dollars instead of state dollars where possible.
Last week, a local Indianapolis television channel ran an investigation of the state’s Office of Federal Grants and Procurement. Although the agency has cost Indiana taxpayers almost a half-million dollars, the investigation team couldn’t figure out what it has been doing with the money. State legislators that were interviewed didn’t know much about the agency even though they continue to fund it. I admit that I can’t remember dealing with it (other than to be completely disgusted by its existence).
Daniels declined to be interviewed for the story, and instead sent out his deputy chief of staff, Cris Johnston, to take the heat. Johnston’s best defense was that Indiana has improved its ranking when it comes to bringing in federal taxpayer dollars. I suppose that means Daniels’s red menace isn’t such a menace when the federal spigot’s flow is being directed toward his state’s coffers.
I’ll wrap this up by making a suggestion to the journalists out there covering the presidential candidates with a background in state government: did they eschew federal handouts or did they have their hands out? It’s an important question because the next president is going to be facing an epic fiscal mess and we really can’t afford another politician who talks the talk but didn’t walk the walk.
See this Cato essay for more on the importance of fiscal federalism and why the flow of federal funds to the states needs to be shut off.
This Week in Government Failure
Over at Downsizing the Federal Government, we focused on the following issues this past week:
- As Congress scours the budget looking for spending cuts, federal employment and training programs would be good targets.
- If Republican and Democratic lawmakers were really discussing major spending cuts, then the media would be full of stories mentioning particular changes to entitlement laws to reduce benefits and stories about abolishing programs widely regarded as wasteful, such as community development grants.
- Indexing the tax code to the chained Consumer Price Index = stealth tax increase.
- Putting $2 trillion in spending cuts in perspective.
- Not only is individual financial literacy not an appropriate concern of the federal government, but the federal government itself is a monument to financial illiteracy.
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The Federal Government and Financial Literacy
Almost 600 pages into the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act is a provision directing the Government Accountability Office to assess the feasibility of the federal government certifying organizations that provide financial literacy. The GAO released its report this week and concluded that “While a federal process for certifying financial literacy providers appears to be feasible, doing so would pose challenges.”
The challenges cited by the GAO are generally of the bureaucratic variety: What agency or agencies would be in charge? What criteria would be used? How would oversight be conducted? And most importantly, how much would it cost [taxpayers] to implement and operate a federal process for certifying financial literacy providers?
Fortunately, the GAO says that the majority of the representatives of private sector financial literacy organizations, federal agencies, and academic experts that it interviewed said that the disadvantages outweighed the advantages. Numerous concerns were cited, but one in particular stands out: Financial literacy certification may not be an appropriate role for the federal government.
Well, Hallelujah. I’ve read my share of GAO reports – almost all of which have dealt with activities that are not a proper role of the federal government – and I don’t recall that concern being mentioned.
Not only is individual financial literacy not an appropriate concern of the federal government, the federal government itself is a monument to financial illiteracy. It isn’t just that GAO report after GAO report continues to document financial mismanagement across the entire government complex. No, it’s the fact that Washington’s financial mismanagement has left us with a bloated government that’s mired in debt and crippled by massive “entitlement” programs that operate like Ponzi schemes.
The additional irony is the Dodd-Frank regulatory overhaul was passed in the wake of an economic meltdown perpetrated in large part by government failure. Alas, there might not be a lot of shame in Washington, but the hypocrisy is seemingly without limit.
$2 Trillion in Cuts in Perspective
Congressional Republicans have said that spending cuts must be at least as large as an increase in the debt ceiling. Negotiations over lifting the debt ceiling are ongoing, but the “magic number,” so-to-speak, would be around $2 trillion in spending cuts.
Cutting $2 trillion in federal spending sounds like a lot, but it’s actually relatively small because the cuts would likely occur over ten years. According to the Congressional Budget Office’s most recent budget baseline, the federal government will spend almost $46 trillion over the next ten years.
The following chart shows what $2 trillion in spending cuts over the next ten years looks like when measured against the CBO’s baseline. Even with the cuts, federal spending would still increase by $1.8 trillion:
Rather than actually cutting spending, federal spending (and debt) would continue to grow – just at a slightly lower rate. And as Chris Edwards continues to warn, there is a strong possibility that some or all of the “cuts” could be phony.
This Week in Government Failure
Over at Downsizing the Federal Government, we focused on the following issues this past week:
- On the National Labor Relations Board’s recent meddling: The idea that a small regulatory board in D.C. should try to centrally plan $1 billion of private business investment is crackers.
- After finally being booted from office in November, ex-Rep. Jim Oberstar reemerges to voice his support for reauthorizing the Economic Development Administration. The EDA should be booted too.
- The numbers in the Congressional Budget Office’s latest long-term budget forecast are new but the message is the same: the budget is on an unsustainable path.
- The CBO’s projections show that the long-term debt problem is not a balanced one—it is caused by historic increases in spending, not shortages of revenues.
- It’s a sad commentary on the size and scope of the federal government that I would get into an argument with a senator—a Republican, no less—over a federally backed loan to a pizza shop.
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Sen. Scott Brown, the SBA, and Discrimination
I recently testified before the Senate Small Business Committee on the topic of the Small Business Administration. GovExec.com mentioned that there was a “bit of drama as the hearing ended” when Sen. Scott Brown (R-MA) “upbraided” me for comments I had made in an exchange with Sen. Rand Paul (R-KY). Having watched a recording of the hearing, I think I should comment.
Proponents of the SBA argue that a “market failure” exists because some otherwise worthy applicants are unduly denied credit under the standard criteria used by private lenders. Therefore, the federal government should correct this alleged “failure” by incentivizing private lenders to issue loans to less credit-worthy applicants. The SBA does this by “guaranteeing” up to 85 percent of the loan’s value in the event of a default.
Sen. Paul asked me to comment on the alleged “market failure” in small business lending. In my response, I stated that the SBA’s loan guarantee programs are “inherently discriminatory” because the government backs loans for some businesses but not others. I noted that businesses that do not receive an SBA-backed loan are put at a disadvantage when the government backs the loan of a competitor.
In an attempt to simplify my point for the audience, I gave an example. Upon moving to the Indianapolis area several years ago, I went to a pizza shop. On the wall was a newspaper clipping about the shop, which mentioned that it had gotten started with an SBA-backed loan. There are innumerable places to get pizza in the Indianapolis area. So it struck me as being unfair that the federal government had assisted a particular pizza shop and therefore advantaged it against competing pizza shops that did not receive government support, or pizza entrepreneurs who might have entered the market without government support.
A visibly bothered Sen. Brown claimed that I said that “I wondered how they [the pizza shop] got the loan.” However, I never said that I wondered how the pizza shop got the SBA-backed loan. I thought that my anecdote illustrated a very simple point: the government had effectively favored one pizza shop over others. But Brown apparently didn’t get it, and instead proceeded to question how I could talk about discrimination when I knew nothing about “the facts” of how the pizza shop came to get the loan.
The entire exchange was bizarre – particularly Brown’s closing comments before he cut me off (my transcription):
I find it kind of inappropriate that you would make a statement as discriminatory for that pizza place to get a loan without having the facts … and I think this kind of rhetoric like that as you throw it around … and we hear those things in a whole host of areas in Washington … it doesn’t help solve the problem and basically step up, and you know, make it better and encourage people to take a shot in business.
Maybe it’s best that he cut me off because the hearing was a week ago and I still don’t know what to make of those comments. (Those interested can go to the 122 minute mark to watch my full exchange with Sen. Brown.)
Perhaps my use of the word “discriminatory” got Sen. Brown agitated. I admit that if I could do it over again, I would chose a different word or phrase given that the ruling class in Washington is particularly sensitive when you’re on their turf. Regardless, it’s a sad commentary on the size and scope of the federal government that I would be arguing with a senator over federally-backed loans to a pizza shop.
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