Archive for the ‘Tax and Budget Policy’ Category
Obama’s Big Tax Hike on U.S. Multinationals Means Fewer American Jobs and Reduced Competitiveness
The new budget from the White House contains all sorts of land mines for taxpayers, which is not surprising considering the President wants to extract another $1.3 trillion over the next ten years. While that’s a discouragingly big number, the details are even more frightening. Higher tax rates on investors and entrepreneurs will dampen incentives for productive behavior. Reinstating the death tax is both economically foolish and immoral. And higher taxes on companies almost surely is a recipe for fewer jobs and reduced competitiveness.
The White House is specifically going after companies that compete in foreign markets. Under current law, the “foreign-source” income of multinationals is subject to tax by the IRS even though it already is subject to all applicable tax where it is earned (just as the IRS taxes foreign companies on income they earn in America). But at least companies have the ability to sometimes delay when this double taxation occurs, thanks to a policy known as deferral. The White House thinks that this income should be taxed right away, though, claiming that “…deferring U.S. tax on the income from the investment may cause U.S. businesses to shift their investments and jobs overseas, harming our domestic economy.”
In reality, deferral protects American companies from being put at a competitive disadvantage when competing with companies from other nations. As I explained in this video, this policy protects American jobs. Coincidentally, the American Enterprise Institute just held a conference last month on deferral and related international tax issues. Featuring experts from all viewpoints, there was very little consensus. But almost every participant agreed that higher taxes on multinationals will lead to an exodus of companies, investment, and jobs from America. Obama’s proposal is good news for China, but bad news for America.
Filed under: General; Government and Politics; International Economics and Development; Tax and Budget Policy
Kent Conrad and Fiscal Federalism
Senator Kent Conrad (D-ND) has a reputation for being a “deficit hawk.” But the bar is apparently so low in Washington that merely paying lip service to “fiscal responsibility” is enough to earn you the hawk title in the press. In reality, Conrad is a tax and spender as a story in today’s Wall Street Journal demonstrates.
These examples illustrate Sen. Deficit Hawk’s commitment to deficit reduction and fiscal responsibility:
- “Like many in Congress, he is conflicted. He boasts a 23-year record of looking after North Dakota voters with ample farm subsidies, aid for drought-hit ranchers, defense spending and scores of pet projects. He has done little to help rein in Medicare and Social Security expenses—the U.S.’s biggest budget busters.”
Why the Slow Recovery?
“Wealthy Face Higher Taxes.” That’s the headline that greeted two million American businesspeople Tuesday when they opened their Wall Street Journals. Inside, another banner head: “Big Firms Would Face Deeper Tax Bite.” Turn to the New York Times: “A Red-Ink Decade/Obama Budget Sees Years of Deficits.” The Financial Times: “Obama to target overseas tax breaks.” Investor’s Business Daily: “Higher Taxes for All in Obama Budget, $1.6 Tril 2010 Deficit.” And the Washington Post (not that many productive people get that on their doorstep): “Obama budget would spend billions more.”
And President Obama wonders why banks aren’t lending, employers aren’t hiring, and investors are holding back? As the Economic Policy Institute illustrates, this is the slowest recovery of any postwar recession.
![[chart: Current downturn is far worse than any other in post-War period]](http://www.epi.org/page/-/img/20100127_snapshot_580.jpg)
Let’s hope the Obama administration soon learns that higher taxes, more regulation, a larger share of GDP shifted to government, fears of Fed monetization of soaring debt — not to mention newspaper reports of Obama budgeteers “flipp[ing] through the tax code, looking for ideas” — can only discourage employers, investors, and entrepreneurs. Robert Higgs has cited the role of “regime uncertainty” in prolonging the Great Depression, as investors worried about what FDR might do next. Will Wilkinson points to Treasury Secretary Tim Geithner’s saying “businesses want certainty. They need certainty so they can make long-term plans today.” Unfortunately, Will says, “Creating completely irresponsible, economically chilling regime uncertainty would appear to be the basic modus operandi of the Obama administration.”
Taxes, regulation, and uncertainty — and Obama asks why businesses aren’t lending, investing, and hiring.
Filed under: Finance, Banking & Monetary Policy; Government and Politics; Tax and Budget Policy
FHA Bailout Watch
The Federal Housing Administration has been one of the government’s main instruments for propping up the housing market in the wake of the housing bust. But as has been widely reported, the FHA is in danger of needing a taxpayer bailout because of rising defaults on mortgages it insures.
FHA-insured loans originated in 2007 and 2008 – when Bush administration housing officials were mainly concerned with “winning back our share of the market” – are defaulting at higher rates as this graphic from the Washington Post shows:
FHA officials are optimistic a bailout won’t be needed, but the Post reports that not everyone shares this optimism:
The audit, released in November, found that the cash the FHA set aside to pay for unexpected losses had dipped to historic lows, well below the level required by law. As of Sept. 30, those reserves were estimated at $3.6 billion, down from nearly $13 billion a year earlier. The most recent figure represents 0.53 percent of the value of all FHA single-family-home loans — far lower than the 2 percent required by Congress.
But Ann Schnare, a former Freddie Mac official, said the situation could be even worse. She said the audit underestimates future losses because it does not take into account all loans that are now overdue, only those that the FHA has paid claims on.
To avoid a bailout, the FHA recently proposed more stringent standards, which would include raising the premiums it charges to cover losses. However, even if a bailout isn’t needed and the FHA continues to “make money,” that would only call into question the need for the FHA to begin with. Why can’t the private sector provide all mortgage insurance?
The answer is that the mortgage lending industry likes knowing it can originate mortgages that the government will cover in the event of a default. Heads they win, tails Uncle Sam loses. The president’s new budget makes this clear in addressing concerns about the FHA’s currently low reserves:
However, it is important to note that a low capital ratio does not threaten FHA’s operations, either for its existing portfolio or for new books of business. Unlike private lenders, the guarantee on FHA and other federal loans is backed by the full faith and credit of the Federal Government, and is not dependent on capital reserves — FHA can never “run out” of money.
That’s right – the federal government can simply tax, borrow, or fire up the printing presses.
The government has been propping up the housing market with taxpayer subsidies in the wake of a housing boom and bust it helped create. If policymakers continue to keep the housing market on artificial life support, taxpayer will remain on the hook. If it pulls the plug and the market takes another downward spiral, Washington will probably rush in with more bailouts. It appears taxpayers can’t win.
See this essay for more on federal housing finance.
Filed under: Finance, Banking & Monetary Policy; Tax and Budget Policy
Taxing the Rich Won’t Work
The new budget reportedly hopes to raise $364 billion over ten years by raising the top two tax rates, plus $105 billion by raising the tax on dividends and capital gains to 20% from 15%, and $500 billion through discriminatory caps and limits on personal exemptions and deductions allowed to other taxpayers.
The $364 billion from raising the top two tax rates pales in comparison to the $2.56 trillion from keeping the rest of the Bush tax cuts in place, including $600 per couple (the 10% bracket) for everyone still rich enough to pay taxes (the Obama plan would exempt half of U.S. workers from paying income tax). That contrast between $364 billion and $2.56 trillion is definitive proof that Democrats’ endless complaint about the Bush tax cuts going “mainly to the rich” was one of the biggest big lies of the past decade.
The President’s urge to penalize mature, two-earner educated couples earning more than $250,000 is symbolic populism, having essentially nothing to do with reducing the deficit. Table S-2 of the Budget (p. 147) lists “Upper-income tax provisions dedicated to deficit reduction” as just $34 billion in 2011 — less than 1% of estimated spending of $3.8 trillion. Errors in estimating next year’s deficit have often been much larger than $34 billion, particularly during the early stages of economic recoveries.
Still, the false belief that higher tax rates on the rich could eventually raise significant sums over the next decade is a dangerous delusion, because it means long-term deficits are seriously understated.
Here are just a few reasons why punitive marginal tax rates on high-income families cannot possibly raise even the relatively trivial sums the Budget is counting on:
1. Professionals and companies who currently file under the individual income tax (including most trial lawyers and hedge fund managers) would form C-corporation to shelter income, because the corporate tax rate would then be lower with fewer arbitrary limits on deductions for costs of earning income.
2. Investors who jumped into dividend-paying stocks in 2003 when the tax rate fell to 15% would dump some of those shares in favor of tax-free municipal bonds if the dividend tax went up, and keep the rest in tax-free IRA or 401k accounts. Prices of dividend-paying stocks and funds could be depressed, reducing the yield of the capital gains tax.
3. If faced with a higher capital gains tax next year, investors would rush to realize taxable capital gains (those not in IRAs and 401ks) later this year. After 2010, investors would make greater efforts to avoid realizing gains in taxable accounts unless they had offsetting losses, and they would also make fewer investments in assets subject to the capital gains tax.
4. Many two-earner couples would become one-earner couples, early retirement would become more popular, physicians would play more golf, etc.
That is a small sampling of known behavioral responses which economists call “the elasticity of taxable income” or ETI for short. What that means is this: When the marginal tax rate goes up, the amount of reported incomes goes down. As a forthcoming study by Joel Slemrod, Seth Giertz and Emmanuel Saez concludes, “There is much evidence to suggest that the ETI is higher for high-income individuals who have more access to avoidance opportunities.”
I presented a 60-page paper in 2008 full of graphs and tables, many derived from the tax data of Thomas Piketty and Emmanuel Saez, offering undeniable evidence that static revenue estimates (which ignore or minimize the ways in which people react to higher tax rates) greatly exaggerate potential revenue from higher tax rates on individual salaries, dividends and capital gains.
I concluded, “There is a serious fiscal risk in the future that overly-optimistic revenue estimates based on the assumption of zero or 0.25 elasticity of taxable income could lead the federal government to make long-term spending plans on the basis of phantom revenues from higher tax rates, embarking on major new entitlement programs (in the guise of refundable tax credits) in the false hope that these static or nearly-static revenue estimates are realistic.”
Obama Budget Still Goes to the Moon
The president’s new budget proposes to end NASA’s Constellation program, a Bush initiative intended to put humans back on the moon by 2020. But Obama’s $3.8 trillion budget still goes to the moon figuratively — if you stacked 3.8 trillion $1 bills, the pile would reach the moon with 20,000 miles to spare!
The president’s proposal to end the Constellation isn’t sitting well with those members of Congress who enjoy large NASA spending in their districts. From the Washington Post:
“The president’s proposed NASA budget begins the death march for the future of U.S. human spaceflight,” Sen. Richard C. Shelby (R-Ala.) said Monday. “If this budget is enacted, NASA will no longer be an agency of innovation and hard science. It will be the agency of pipe dreams and fairy tales.”
Rep. Pete Olson (R-Tex.) said, “This is a crippling blow to America’s human spaceflight program.”
Senator Shelby and Rep. Olson exaggerate –- the proposal would only end government human spaceflight to the moon. Private entrepreneurs are likely to continue pushing into space, especially if we reduce the regulatory and tax burdens.
Five Decades of Federal Spending
The chart below shows federal spending in three component parts over the last five decades. It includes Obama’s proposed spending in 2011. Here are a few thoughts on the recent spending trends:
Defense: In the post-9/11 years, defense spending bumped up to a higher plateau of around 4 percent of GDP. But now we have jumped to an even higher level of around 4.9 percent of GDP.
Interest: The Federal Reserve’s easy money policies reduced federal interest payments in recent years. That is coming to an end. Obama’s budget shows that interest payments will start rising rapidly next year and hit 3 percent of GDP by 2015. And that’s an optimistic projection.
Nondefense: This category includes all other federal spending. After a steady decline during the Clinton years to 12.9 percent of GDP, President Bush pushed up nondefense spending to a higher plateau of around 14.5 percent. Then came the recession and financial crisis, and the Bush-Obama tag team hiked spending to an even higher level of around 19 percent of GDP. That level of nondefense spending is almost double the level in 1970 measured as a share of the economy.
Deficit Prognostications
Exactly two years ago, George W. Bush released his final budget. Here’s what the Washington Post had to say:
[T]he president’s budget envisions a big jump in the budget deficit, from $163 billion in 2007 to about $400 billion in 2008 and 2009. Much of that increase will be the result of a slowing economy and a stimulus package expected to cost about $150 billion.
Today’s release of President Obama’s FY 2011 budget shows that those deficit prognostications were way off:
Instead of a “big jump” to $400 billion in 2009, the actual deficit turned about to be a trillion dollars higher. Bush deserves most of the blame for that deficit, but the 2010 and 2011 deficits will be on Obama.
The frightening prospect is that, like Bush, Obama’s future budget projections will also turn out to be low-balled. Whether it has been war, natural disasters, or a recession, Bush and Obama have both responded to any “crisis” by spending gobs of money. Given that even Obama is projecting annual deficits still in the trillion dollar range by 2020, taxpayers had better hope the Taliban, Mother Nature, and the economy start cooperating.
Obama Can Blame Bush All He Wants, But His Budget Is Even Worse
In the defensive-sounding statement released with his budget this morning, President Obama repeatedly blames the previous administration for leaving him in a position where he had “no choice” but to send the nation deeper into debt. He blames “irresponsible risk-taking and debt-fueled speculation—unchecked by sound oversight” for a deep recession that he speciously claims his administration’s massive spending prevented from becoming a depression.
Not once does the president acknowledge the role the government played in fomenting the recession. Instead, the president promises to move away from “business as usual” even though more spending, deficits, and debt are precisely that: business as usual. In this regard, the Obama administration’s first term is looking more like George W. Bush’s third term. Bush left the president with a $1.4 trillion deficit in FY2009; the deficit under Obama’s first year is set to rise to $1.6 trillion and would still be $1.3 trillion in FY2011.
Just like Bush, the president proposes minuscule savings through a small number of program terminations and reductions. But overall spending continues to rise, and in a $3.8 trillion budget the president’s disingenuous attempt to “cut” anything amounts to little more than a rounding error. The president also proposes to freeze non-security discretionary spending for three years, which he falsely claims will “help put our country on fiscally sustainable path.” In reality, last year’s stimulus and appropriations spending binge will mean actual outlays for this tiny portion of the overall budget will still be higher than what Obama inherited.
The president says that “rising to these challenges is the responsibility we bear for the future of our children, our grandchildren, and our nation.” The truth is our children and grandchildren are going to pay a painful price for the Bush/Obama profligacy. Present and future generations would be better served by Washington putting on the spending brakes and bringing to an end the economic distortions caused by government interventions.
Filed under: Government and Politics; Tax and Budget Policy
There Is Some Budget Good News, but It Is Actually Really Bad News
The Office of Management and Budget has released the President’s FY2011 budget and the Congressional Budget Office has released its semi-annual Budget and Economic Outlook. Much of the coverage of these documents has focused on deficit numbers. This is not a trivial concern, particularly since the Bush-Obama policies of bigger government have dramatically boosted red ink.
But the most important numbers in the budget documents are the estimates of what is happening to government spending. The good news is that burden of government spending is projected to decline over the next few years from about 25 percent of GDP to less than 23 percent of GDP.
That’s the good news. The bad news is that federal government outlays only consumed 18.2 percent of economic output when Bush took office. In other words, notwithstanding the good news cited above, the size and scope of government has increased dramatically since 2001. The worse news is that the long-run spending forecasts show a cataclysmic expansion in the burden of government. The “optimistic” estimate is that the federal government will consume more than 30 percent of GDP by 2050 and 40 percent of GDP by 2080.
Filed under: Government and Politics; Tax and Budget Policy
Politicians Are SO Predictable!
The big vote-buy is on!
Today, the Obama administration will release its FY 2011 budget proposal, and while the administration would supposedly freeze discretionary spending in all areas except defense, homeland security, and veteran’s affairs, education is slated to get a huge boost in “investment.” (Politicians love the term “investment” when discussing education spending, by the way, because it suggests a big payoff to come. That we’ve never actually realized said payoff doesn’t seem to bother them.) The proposal is expected to include a $3 billion increase for No Child Left Behind-authorized programs; $1 billion for some sort of incentive to overhaul NCLB (it’s not clear how the president can offer Congress extra money to act, but I’m sure there are details to come); a $1.35 billion extension of the stimulus-funded Race to the Top fund; and a $17 billion increase in Pell Grant funding. In other words, education appears slated — as I feared it would — to be the administration’s post-Massachusetts, big vote bribe.
At the same time the budget proposal is coming out, the administration is also starting to release information about it’s plans for NCLB reauthorization. According to the New York Times, the basic idea will be to “change federal financing formulas so that a portion of the money is awarded based on academic progress, rather than by formulas that apportion money to districts according to their numbers of students, especially poor students.”
On the surface, it makes sense to reward high performance rather than just send money to states based on set formulas. But a little deeper digging reveals the pit below.
Filed under: Education and Child Policy; Tax and Budget Policy
Forget the QDR
There is a lot not to like about the Quadrennial Defense Review, which comes out today (the National Journal posted a leaked copy Friday). Like past QDRs, this one uses vague, trendy ideas about international relations to inflate threats and justify our massive defense budget. As usual, we hear the evidence-free claims that non-state actors are getting more powerful and that the world is getting more complex and unpredictable (“change continues to accelerate”). I believe that states are hanging onto or even gaining power relative to other sorts of social organizations and that the world is no less predictable than it was in 1900 or 1950. The QDR also says that climate change is a national security problem. That’s a popular line, which as near as I can tell is a marketing gimmick. Then there the usual tripe about how great our alliances are, how strategic every country with a Marine in it is, how terrific interagency cooperation is, and so forth.
The good news is that it doesn’t really matter. Newspapers confuse the QDR with law, but it is closer to PR. It’s like a particularly important speech. It sells what Secretary of Defense is selling and justifies what the Department of Defense does. Because it comes in part from agencies it is supposed to guide, it rationalizes rather than leads. Because it is largely a consensus document, it says only what half of the Pentagon can agree on—various strains of mush. Can anyone explain what past QDR’s have accomplished? I think nothing. Sure, there are interesting tidbits about forces structure plans, but these are in the budget documents too. At best it causes DoD to justify itself, giving us analysts something to argue about.
The administration’s proposed defense budget, also being released today, matters much more to policy. It reveals more about the nation’s defense strategy than the vacuous documents that purport to do so.
Policy types love strategy documents because they are mostly technocratic idealists. They want government polices to be made by rational processes that reveal national interests, which are then laid out in plans like the QDR. They want policy to be like science. But democratic government is the push and pull of competing ideologies and interests. Public plans or strategies are part of that process. Congress should thank DoD for these mind-numbing 120 pages, throw them away, and focus on the budget.
Filed under: Foreign Policy and National Security; Tax and Budget Policy
Do Democratic Presidents Create More Jobs?
Politifact.com looked into a remark from Rep. Carolyn Maloney, D-N.Y., that “Democrats have been considerably more effective at creating private-sector jobs.”
The statement was rated true, as a purely statistical matter. Yet the poltifact researcher did a good job questioning the significance of his own figures. He noted, correctly, that the president usually “deserves less credit for the good times — and less blame for the bad times.” And he added that job figures can be driven by outside factors such as oil price shocks, demographic changes or soldiers coming home after World War Two. He wryly noted “how surprised we are that Eisenhower, who presided over the ‘happy’ 1950s, managed an anemic half-percent job growth per year, while Jimmy “Malaise” Carter finished second with 3.45 percent annual job growth.” Anyone who remembers the runaway inflation of the Carter era will realize that annual rates of job growth are not enough to describe the overall economic situation.
The author also quoted me making the point that “timing can be hugely important.” It is so important, in fact, that we may need to add another dimension to politifact’s true-false meter to deal with political comments that are simply meaningless.
For the record, what follows is the full text of my email on this topic:
The error involved with assigning rates of job growth to Presidential terms is that six recent Presidents took office within a few months of the start of a recession: Obama (recession began December 2007), H.W. Bush (July 1990), G.W. Bush (Mar 2001), Reagan (July 1981), Nixon (Dec. 1969) and Ike (July 1953). As it happens, four of the five were Republicans.
One might argue that recessions launched near the end of the previous administration helped get these men elected. But these recessions were clearly left over from events that began previous years. It didn’t help that the first Pres. Bush passed a tax increase three months after the 1990 recession began, but the start of that recession is more plausibly blamed on the earlier spike in oil prices when Iraq invaded Kuwait.
Since employment is a lagging indicator (one of the last things to improve), that means average job growth among Presidents who took office near the start of recessions is bound to look bad in comparison with Presidents who took office after an expansion was well underway. Bill Clinton took office in 1993, long after recession ended in March 1991. The same was true of Truman, LBJ and Carter. JFK took office a month before the 1960 recession ended.
Two-term Presidents also have more time to show good numbers, but only if they’re lucky enough to get out of office just before the next recession starts. Clinton squeaked by (despite falling stock prices and industrial production 2000), but Nixon, Eisenhower, Carter and G.W. Bush did not.
Since Bush 2nd began and ended office in recession, averages over 8 years outweigh 4 reasonably good years. This unprecedented bad timing is exaggerated by Paul Krugman’s comparison of “decades” [and President Obama’s recent reference to “the lost decade” of 1999-2009] which relies on starting and ending each decade in boomy 1959 rather than slumping 1960, ditto 1969 rather than 1970, 1979 rather than 1980, 1989 rather than 1990, and 1999 rather than 2000.
In short, statistics about employment growth over Presidential terms are dominated by the timing of the “business cycle” (including Federal Reserve policy), and have no apparent connection to economic policies attributed to the White House (as opposed to Congress).
Filed under: Finance, Banking & Monetary Policy; Government and Politics; Tax and Budget Policy
Karl Rove’s Spending
Former George W. Bush adviser Karl Rove enjoys complaining about the spendthrift ways of President Obama and the Democrats. But I noted in a Wall Street Journal letter today:
Annual average real spending grew faster under President George W. Bush than any president since Lyndon Johnson… Even leaving out defense, President Bush was the biggest spender since Republican Richard Nixon.
My letter pointed to two prior op-eds by Rove, but he was at it again yesterday in the Journal. He said that his former boss “cut in half the growth of discretionary domestic spending from the sizzling 16 percent rate of President Bill Clinton’s last budget.” Call me crazy, but I don’t think supporting domestic spending growth of 8 percent during a time of very low inflation is an acheivement to crow about.
Over at National Review, Veronique de Rugy apparently gets just as annoyed as I do hearing big-spending Republicans complain about big-spending Democrats.
Mr. Rove’s columns are usually very interesting, but I’d like to see him accept at least some of the blame for the exploding size of government during his tenure at the White House.
Here are the data on spending by presidents.
Filed under: Government and Politics; Tax and Budget Policy
This Week in Government Failure
Over at Downsizing Government, we focused on the following issues this week:
- The federal government added its 2,000th subsidy program for individuals, businesses, or state and local governments. Statists, rejoice!
- Hundreds of the nation’s mayors meet in Washington to grovel for federal handouts.
- President Obama’s proposed spending freeze wouldn’t actually be a freeze.
- USDA chief Tom Vilsack says food stamps are an “economic driver.” Seriously.
- It’s hard to reconcile the massive increase in federal aid to state and local governments with the Tenth Amendment.
Can Unemployment Benefits Create Jobs?
At the Center on Budget and Policy Priorities, sociologist Michael Leachman claims “some of the most effective job-creation and job protection measures” in last year’s American Recovery and Reinvestment Act are excluded from the job figures to be released on recovery.gov on January 30. He explains that, “Most of ARRA’s distributed dollars to date have gone directly to individuals (including greater jobless benefits and food stamps) and states (including greater federal support for Medicaid). Although these dollars are likely protecting or creating hundreds of thousands of jobs, none of the aid for individuals or the Medicaid support are [sic] reflected in the January 30 jobs data release.”
In particular, Leachman claims Recovery Act funds to extend unemployment benefits from 26 to 79 weeks (and to 99 weeks since November) “produces and sustains jobs.” For proof, he cites estimates from Mark Zandi of Economy.com “that every dollar spent on extending unemployment insurance benefits produces $1.61 in economic activity.”
This analysis runs into two big problems. The first is that it assumes that the amount of time people spend on unemployment insurance is unrelated to how long the government offers to keep paying benefits. The second is that it assumes that the assumptions about “fiscal multipliers” built into Economy.com econometric model are actually evidence rather than just assumptions.
On the first point, page 75 of the 2007 OECD Employment Outlook explains: “It is well established that generous unemployment benefits can increase the duration of unemployment spells and the overall level of unemployment… This could have a negative impact on productivity through inefficient use of resources and depreciation of human capital during long spells of unemployment. In addition, by reducing the opportunity cost of unemployment, generous unemployment benefits may lead existing employees to reduce their work effort, thereby lowering productivity (see e.g. Shapiro and Stiglitz, 1984; Albrecht and Vroman, 1996).”
As I recently noted, the overwhelming evidence that extended unemployment benefits raise the duration and rate of unemployment comes from economists in the Obama administration, Larry Summers and Treasury economist Alan Krueger, as well as many others such as Lawrence Katz of Harvard and Bruce Meyer of the University of Chicago.
Contrary to Leachman, bribing people to stay on the dole for an extra 53-73 weeks leaves them with less money to spend, not more. It also looks bad on resumes, and may cause lasting damage to future job prospects.
Filed under: Finance, Banking & Monetary Policy; Government and Politics; Health, Welfare & Entitlements; Tax and Budget Policy
State and Local Subsidies
Earlier this week I criticized the U.S. Conference of Mayors for going to Washington and groveling for more federal handouts. Let me provide some more background for my criticisms with a look at federal budget data. The first chart shows that since 1960, total federal subsidies to state and local government have increased an astounding 1,173%.
Several readers have asked me what particular programs account for this large increase in state aid. The federal budget breaks down the total figures into categories. Not surprisingly, health subsidies — mainly Medicaid — account for almost half of the current total and are the driving force behind the massive overall increase:
State of the Union Fact Check
Cato experts put some of President Obama’s core State of the Union claims to the test. Here’s what they found.
THE STIMULUS
Obama’s claim:
The plan that has made all of this possible, from the tax cuts to the jobs, is the Recovery Act. That’s right — the Recovery Act, also known as the Stimulus Bill. Economists on the left and the right say that this bill has helped saved jobs and avert disaster.
Back in reality: At the outset of the economic downturn, Cato ran an ad in the nation’s largest newspapers in which more than 300 economists (Nobel laureates among them) signed a statement saying a massive government spending package was among the worst available options. Since then, Cato economists have published dozens of op-eds in major news outlets poking holes in big-government solutions to both the financial system crisis and the flagging economy.
CUTTING TAXES
Obama’s claim:
Let me repeat: we cut taxes. We cut taxes for 95 percent of working families. We cut taxes for small businesses. We cut taxes for first-time homebuyers. We cut taxes for parents trying to care for their children. We cut taxes for 8 million Americans paying for college. As a result, millions of Americans had more to spend on gas, and food, and other necessities, all of which helped businesses keep more workers.
Back in reality: Cato Director of Tax Policy Studies Chris Edwards: “When the president says that he has ‘cut taxes’ for 95 percent of Americans, he fails to note that more than 40 percent of Americans pay no federal incomes taxes and the administration has simply increased subsidy checks to this group. Obama’s refundable tax credits are unearned subsidies, not tax cuts.”
Visit Cato’s Tax Policy Page for much more on this.
SPENDING FREEZE
Obama’s claim:
Starting in 2011, we are prepared to freeze government spending for three years.
Back in reality: Edwards: “The president’s proposed spending freeze covers just 13 percent of the total federal budget, and indeed doesn’t limit the fastest growing components such as Medicare.
“A better idea is to cap growth in the entire federal budget including entitlement programs, which was essentially the idea behind the 1980s bipartisan Gramm-Rudman-Hollings law. The freeze also doesn’t cover the massive spending under the stimulus bill, most of which hasn’t occurred yet. Now that the economy is returning to growth, the president should both freeze spending and rescind the remainder of the planned stimulus.”
Plus, here’s why these promised freezes have never worked in the past and a chart illustrating the fallacy of Obama’s spending claims.
JOB CREATION
Obama’s claim:
Because of the steps we took, there are about two million Americans working right now who would otherwise be unemployed. 200,000 work in construction and clean energy. 300,000 are teachers and other education workers. Tens of thousands are cops, firefighters, correctional officers, and first responders. And we are on track to add another one and a half million jobs to this total by the end of the year.
Back in reality: Cato Policy Analyst Tad Dehaven: “Actually, the U.S. economy has lost 2.7 million jobs since the stimulus passed and 3.4 million total since Obama was elected. How he attributes any jobs gains to the stimulus is the fuzziest of fuzzy math. ‘Nuff said.”
Filed under: General; Government and Politics; Tax and Budget Policy
Less Is More in Education Funding
Spend more money on education, the President says? Actually, we should be looking there for savings . . . here are some of the numbers:
State governments spent 35 percent of their general funds on K–12 education in 2007, according to the National Association of State Budget Officers. In contrast, Medicaid — which is continually singled out as a problematic state-budget item, even though most Medicaid funds come from the federal government — accounted for just 17 percent of general-fund expenditures. Combined, state and local governments spend 27 cents of every dollar they collect on public K–12 education system, but only 8 cents on Medicaid.
Filed under: Education and Child Policy; Tax and Budget Policy
Food Stamps = Economic Driver?
It’s become standard fare for senior government leaders to declare that any and all subsidies are good for economic growth. Two weeks ago it was the Economic Development Administration’s John Fernandez. This week it’s USDA Secretary Tom Vilsack in a speech to the U.S. Conference of Mayors.
From GovExec.com:
In his speech, Vilsack called the increase in supplemental nutrition assistance program benefits “an economic driver” that helps truckers, grocery stores and farmers. Those benefits, which used to be known as food stamps, have gotten the most funding of any USDA program.
Vilsack also cited increased funding to bring high-speed Internet service to rural America; accelerated implementation of the energy title of the farm bill; and USDA investments in small, local processing and slaughtering plants for “creating a framework for a 21st century America.
Food stamps are an economic driver? Extending Vilsack’s logic, if the government put all citizens on food stamps it would create the economic equivalent of heaven on earth. There’s just one tiny problem: what the government gives with one hand it takes with the other.
Whether it is food stamps, high-speed internet, or slaughter houses, the government has to tax or borrow the resources to pay for these programs out of the private sector economy. One can debate the merits of these programs, but one cannot deny that they come at a cost. And with history and practical experience as a guide, it is clear that the private sector is more effective than the government when it comes to feeding the poor, fostering technology, and processing animals.
See here for information and essays on how to downsize the USDA.
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