Archive for the ‘Tax and Budget Policy’ Category
Terminating the Small Business Administration
An essay on terminating the Small Business Administration has been added to Cato’s Downsizing Government website.
Some highlights:
- Established in 1953, the agency had earned the nickname “Small Scandal Administration” by the mid-70s. President Reagan’s budget director, David Stockman, called it a “billion dollar waste—a rat hole” that benefited few small businesses, while distorting credit markets. Unfortunately, both Republicans and Democrats have continued to support it.
- The SBA guarantees loans issued by private lenders for up to 85 percent of losses in the event that loan recipients default. As a result of the guarantee, lenders are more willing to lend money to riskier applicants because the SBA is ultimately responsible for the bulk of any losses. The SBA is supposed to charge fees sufficient to require no annual appropriations from Congress. However, that has not been the case, and its lending programs continue to rely on taxpayer subsidies.
- Policymakers argue that market-driven lending denies credit to worthy small businesses, and so the Small Business Administration must correct this alleged “market failure.” The essay explains that there is no “market failure” to justify the SBA’s lending programs.
- Only small shares of small businesses get started with a loan from a commercial lender. Furthermore, loans issued by commercial lenders that are backed by the SBA represent only a very small share of total commercial loans to small businesses.
- The SBA’s lending programs benefit a powerful special interest group: the banking industry. The banking industry was originally opposed to the creation of the SBA on the grounds that the federal government should not be involved in commercial lending. However, when the SBA switched from direct lending to backing loans issued by private lenders, the banking industry became a key supporter of the SBA.
English Riots, Moral Relativism, Gun Control, and the Welfare State
I wrote earlier this year about the connection between a morally corrupt welfare state and the riots in the United Kingdom.
But what’s happening now is not just some left-wing punks engaging in political street theater. Instead, the UK is dealing with a bigger problem of societal decay caused in part by a government’s failure to fulfill one of its few legitimate functions: protection of property.
To make matters worse, the political class has disarmed law-abiding people, thus exacerbating the risks. These two photos are a pretty good summary of what this means. On the left, we have Korean entrepreneurs using guns to defend themselves from murdering thugs during the 1992 LA riots. On the right, we have Turkish entrepreneurs reduced to using their fists (and some hidden knives, I hope) to protect themselves in London.
Which group do you think has a better chance of surviving when things spiral out of control? When the welfare state collapses, will the Koreans or the Turks be in a better position to protect themselves? And what does it say about the morality of a political class that wants innocent people to be vulnerable when bad government policies lead to chaos?
Speaking of chaos, let’s look at the “root causes” of the riots and looting in the United Kingdom.
Allister Heath is the editor of City A.M. in London, and normally I follow his economic insights, but his analysis of the turmoil is superb as well. Here’s an excerpt. But as Instapundit likes to say, read the whole article.
Debilitating, widespread fear. The country held to ransom by feckless youths. Thousands of shocked Londoners cowering in their homes, with many shops, banks and offices shutting early. …It no longer feels as if we live in a civilised country. The cause of the riots is the looters; opportunistic, greedy, arrogant and amoral young criminals who believe that they have the right to steal, burn and destroy other people’s property. There were no extenuating circumstances, no excuses. …decades of failed social, educational, family and microeconomic policies, which means that a large chunk of the UK has become alienated from mainstream society, culturally impoverished, bereft of role models, permanently workless and trapped and dependent on welfare or the shadow economy. For this the establishment and the dominant politically correct ideology are to blame: they deemed it acceptable to permanently chuck welfare money… Criminals need to fear the possibility and consequence of arrest; if they do not, they suddenly realise that the emperor has no clothes. At some point, something was bound to happen to trigger both these forces and for consumerist thugs to let themselves loose on innocent bystanders. …the argument made by some that the riots were “caused” or “provoked” by cuts, university fees or unemployment is wrong-headed. …the state will spend 50.1 per cent of GDP this year; state spending has still been rising by 2 per cent year on year in cash terms. It has never been as high as it is today – in fact, it is squeezing out private sector growth and hence reducing opportunities and jobs. …This wasn’t a political protest, it was thievery. …We need to see New York style zero tolerance policing, with all offences, however minor, prosecuted. But what matters right now is to regain control, to stamp out the violence and to arrest, prosecute and jail as many thugs as possible. The law-abiding mainstream majority feels that it has been abandoned and betrayed by the establishment and is very, very angry.
Charity and the Federal Government
David Boaz’s post on bizarre and utterly preposterous claims that the federal government’s “social safety net” has been shrinking brought to my mind James Madison’s position that “Charity is no part of the legislative duty of the government.”
“The Father of the Constitution” wasn’t being cold-hearted when he took this position during a 1794 debate in the House of Representatives over federal aid to refugees. Rather, he was merely recognizing that “the government of the United States is a definite government, confined to specified objects.” Charity just wasn’t one of the specified objects. Of course, future politicians decided otherwise.
Today, most young Americans grow up in federally subsidized schools offering federally subsidized meals. They are inculcated to view the federal government as a benevolent caregiver that exists to provide Americans with housing, food, health care, and even income (to name just a few). Madison’s unfortunately quaint notion that the federal government isn’t supposed to be engaged in “charitable” activities would probably leave them dumbfounded.
I single out children because this week a private charity that I am involved with, the Purple Feet Foundation, is giving select inner-city sixth graders an opportunity to take hold of their futures now. Instead of promoting dependency, these kids will spend the week engaged in educational activities that will hopefully inspire them to utilize their individual talents to succeed in life. The Foundation does not seek, nor will it accept, taxpayer money. I believe this sets a good example for these kids.
Those of us who desire the limited federal government that Madison envisioned are often accused of being uncaring about those who are in need. In fact, the opposite is the truth: we recognize that government programs are wasteful, ineffective, and counterproductive to the aims that they are trying to achieve. As a Cato essay on federal welfare explains, private charity is superior to government programs for several reasons:
Private charities are able to individualize their approaches to the circumstances of poor people. By contrast, government programs are usually designed in a one-size-fits-all manner that treats all recipients alike. Most government programs rely on the simple provision of cash or services without any attempt to differentiate between the needs of recipients.
The eligibility requirements for government welfare programs are arbitrary and cannot be changed to fit individual circumstances. Consequently, some people in genuine need do not receive assistance, while benefits often go to people who do not really need them. Surveys of people with low incomes generally indicate a higher level of satisfaction with private charities than with government welfare agencies.
Private charities also have a better record of actually delivering aid to recipients because they do not have as much administrative overhead, inefficiency, and waste as government programs. A lot of the money spent on federal and state social welfare programs never reaches recipients because it is consumed by fraud and bureaucracy…
Another advantage of private charity is that aid is much more likely to be targeted to short-term emergency assistance, not long-term dependency. Private charity provides a safety net, not a way of life. Moreover, private charities may demand that the poor change their behavior in exchange for assistance, such as stopping drug abuse, looking for a job, or avoiding pregnancy. Private charities are more likely than government programs to offer counseling and one-on-one follow-up, rather than simply providing a check.
What Shift Right?
Liz Marlantes of the Christian Science Monitor joins other pundits in proclaiming “America’s Big Shift Right” in politics and governance. “In Washington today, when it comes to the size of government, the debate isn’t over whether to cut spending, but by how much,” she writes. That’s true, but it’s because the federal budget has doubled in just 10 years, with half the increase coming in the past three. Politics may be more conservative, but government is still getting bigger.
Some of Marlantes’s arguments are mystifying: “Instead of coming on the heels of a great liberal expansion of government, today’s shift comes after three decades of the unraveling of elements of the social safety net.” Really? The Congressional Budget Office reported in 2007 that three major “safety net” programs accounted for 45 percent of the federal budget. In this chart the red line represents “social safety net” programs:
Marlantes quotes a distinguished historian on the same point:
“The New Deal programs have been weakened and destroyed over decades, and there are just many fewer elements in the safety net,” says Alan Brinkley, a historian at Columbia University and author of “Liberalism and its Discontents.”
But what is he talking about? Social Security is bigger than ever, and we’ve added Medicare, Medicaid, the Medicare prescription drug entitlement, and food stamps. Farm subsidies are still in business, in far different economic conditions from those that allegedly required the creation of price supports and other payments.
Two years ago, in a review of two books on the rise of conservatism, Brian Doherty noted:
the right has shown an amazing ability to fool almost everyone, from average voters to academic historians like Schneider and Phillips-Fein, into believing that the conservative movement has won key victories and substantially achieved its most important goals….
And the free market? Under both Democrats and Republicans, the general direction of the U.S. government has been toward more spending, more taxing, and more federal control, even if Reagan did succeed in dramatically lowering the highest marginal tax rates. Otherwise smart observers such as Schneider and Phillips-Fein miss these facts, conflating the success of the Republican Party, as it comes and goes, with the success of conservative ideas.
Phillips-Fein expresses this confusion about right-wing success most baldly, declaring out of nowhere, to buttress the significance of her topic, that “the New Deal has been turned back.” Except for court packing and the National Recovery Administration, every significant practice, and certainly every big idea, behind the New Deal has only gotten stronger in the last 60 years.
Marlantes seems to make the same mistake. She notes that the percentage of self-described conservatives has risen in the Gallup Poll. But considering how much the federal budget has increased, the increase in conservative sentiment is pretty modest. Shouldn’t people who call themselves “moderates” when the federal budget is $2 trillion (about 2002) be “conservatives” now that it’s approaching $4 trillion? And yet most of them don’t.
By the way, Marlantes does note that “generational changes are clearly pushing public opinion to the left when it comes to certain moral and cultural issues, most notably gay rights,” a point that I’ve also made.
A shift to the right? In politics, maybe. In the actual size of government, no.
Responding to the Downgrade
Cato Senior Fellow Jagadeesh Gokhale argues today that S&P has left little doubt that credit rating agencies’ credibility has suffered because of the recent downgrade of U.S. Treasuries. He argues that the response from the President leaves much to be desired. On the tax increases proposed by the President today to cover entitlement spending, he says
It’s basically impossible to tax our way out of this commitment. If we try to impose huge taxes on the backs of workers and younger generations, we will destroy the incentives to work and destroy the incentives to people who can provide capital to provide it in the U.S. They would take that capital and migrate to other shores.
In other words, the taxes required to pay for past promises are uncollectible. Listen to the whole thing (and subscribe!):
Standard & Poor’s $2 Trillion Error Was Political Lobbying, Not an Innocent Mistake
The infamous $2 trillion error involved in the Standard and Poor’s downgrade was no mistake. It was largely the result of an unseemly urge to take sides in the partisan struggle over near-term tax policy, with no weight at all given to longer-term entitlement spending. “Our ratings,” the agency later explained, “are determined primarily using a 3-5 year time horizon,” and “the ratings decision to lower the long-term rating to AA+ from AAA was not affected by the change of assumptions regarding the pace of discretionary spending growth.” In other words, it’s all about taxes.
Amazingly, the S&P analysts adopted the Congressional Budget Office “alternative” scenario as their so-called baseline. In that scenario all Bush tax cuts remain in place until 2035 and (because bracket creep and cashed-out IRAs would nevertheless cause revenues to rise) “unspecified policy adjustments [i.e., tax cuts] will be made after 2021 to keep revenues constant as a share of GDP [18.4 percent].”
The reason for adopting that unlikely scenario as a the S&P baseline was to make an unsubtle political point. As the S&P analysts explained, “our revised base case scenario now assumes that the 2001 and 2003 tax cuts, due to expire by the end of 2012, remain in place. We have changed our assumption on this because the majority of Republicans in Congress continue to resist any measure that would raise revenues.”
Standard and Poor’s completely disregard the same baseline Congress and the Administration used, which assumes that all of the 2001-2003 tax cuts expire in 2013 as current law requires. That would mean doing away with such genuine revenue losers as $648 billion from cutting the lowest tax rate to 10 percent, $316 billion for marriage penalty relief, $238 billion from the enlarged child credit. Instead, the S&P “upside scenario” adopted a wildly optimistic view of the revenue potential of President Obama’s hoped-for taxes on high earners: “Our revised upside scenario . . . incorporates $950 billion of new revenues on the assumption that the 2001 and 2003 tax cuts for high earners lapse from 2013 onwards, as the Administration is advocating.”
In reality, the Obama health bill already imposes an extra 0.9 percent payroll tax on high earners and a 3.8 percent surtax on their investment income. The President’s proposed taxes on higher incomes go far beyond a mere lapse of the 2003 tax cuts for high earners. In addition to reverting to phasing-out exemptions and deductions, for example, Obama’s 2012 budget would have limited any remaining deductions to 28 percent, supposedly raising $293 billion.
There is no way to confirm or justify Standard & Poor’s unsourced estimate of “$950 billion of new revenues on the assumption that the 2001 and 2003 tax cuts for high earners lapse.” That $950 billion figure is an outright fabrication – indefensible even as matter of simplistic bookkeeping and quite absurd once tax avoidance (the elasticity of taxable income) is taken into account. Many have pointed to sloppy errors in the S&P analysis, but they neglect to mention that the alleged $950 billion revenue windfall from adopting the President’s tax plans is one of those sloppy errors.
As Ezra Klein pointed out, correcting the mistake “improved our deficit outlook by more than [the wildly exaggerated estimate of] letting the high-end tax cuts expire, which S&P had said would raise enough money to stabilize our rating. If the numbers mattered, then by S&P’s own logic, that should have changed their opinion of our finances.”
If the real point of this ill-timed S&P publicity stunt was to promote a rosy scenario for Obama’s tax plan, then the reputation of Standard & Poors has now been deeply downgraded.
Obama’s Failed Response to the Downgrade and the Outlook for Fixing America’s Spending Crisis
President Obama just spoke about the downgrade and his remarks were very disappointing. He uttered some empty platitudes, offered no plan, (amazingly) called for more government spending, and continued his advocacy of class-warfare taxation.
So what does this mean? Other than expecting volatility, I have no idea what will happen in financial markets over the next few days. But I can opine about the downgrade, Obama’s unserious response, and what it means in terms of public policy over the next few years and into the future.
Notwithstanding the President’s cavalier attitude, America is in trouble. But while the crisis is severe, we have some breathing room.
Our fiscal crisis is akin to a very dangerous, but slow-developing cancer. It is not a car wreck with immediate life-threatening injuries.
And there are solutions, as explained in this good news-bad news-bad news-bad news-good news-good news analysis.
1. There is virtually zero chance of the United States defaulting in the next 10 years (heck, probably the next 20 years). Yes, fiscal policy has been reckless and irresponsible during the Bush-Obama spending binge, but I’m guessing it will take another 10-20 years of additional over-spending to bring America to the point of Greek-style collapse. Simply stated, the U.S. economy is so large and so rich that it can’t be destroyed quickly.
…but…
2. The United States does not deserve a triple-A rating, at least for long-term debt. The nation has a giant fiscal problem, but it’s not the annual deficit or the national debt. The true crisis is the $100-trillion-plus unfunded liability for entitlement programs – especially Medicare and Medicaid. This is why America deserved to be downgraded.
…and…
3. The left in America, as exemplified by Obama’s vapid press statement, has no serious intention of addressing this problem. The President has failed to present any sort of plan. His budget early in the year was a business-as-usual document with no reforms and even the Democratic-controlled Senate rejected it 97-0. But while Senate Democrats joined Republicans in deep-sixing Obama’s joke budget, they have failed to produce a budget of their own for more than two years.
…moreover…
4. The left is treating America’s fiscal crisis is an opportunity to trick Republicans into a tax increase. That would be smart politics, to be sure, since it would automatically give Democrats the upper hand, but higher taxes would probably worsen the problem of excessive government since politicians would spend any additional revenue. And the kind of class-warfare taxes Obama has in mind would further undermine growth, adding to the nation’s fiscal woes.
…however…
5. After eight years of being corrupted by “big-government conservatism,” the GOP may finally be sincere about reducing the burden of government. Led by Congressman Paul Ryan, House Republicans approved a very serious budget plan that would have reformed both the Medicare and Medicaid and substantially reduced the long-run burden on the U.S. economy.
…fortunately…
6. America is not at the point of no return. I’ve periodically commented about the dangers of a nation reaching a tipping point, which occurs when the people riding in the wagon outnumber those pulling the wagon. But even though dependency has jumped in America, the national spirit of self-reliance, independence, and freedom remains strong. Indeed, I think that’s what the Tea Party largely represents.
But none of this should suggest optimism. We know the solutions, but that does not mean that the politicians will do the right thing. As I said in the beginning of this post, America is at a crossroads. We can either continue a descent into Greek-style fiscal morass or, at some point in the next few years, we can implement reforms.
But, barring some remarkable change in attitude, Obama is mostly irrelevant except to the extent that he can make matters worse by luring Republicans into a phony tax-hike deal.
What Are the Consequences of the Downgrade?
Even though I predicted it had to happen at some point because of the Bush-Obama spending binge and America’s giant long-run entitlement crisis, I confess that I’m somewhat surprised that the United States has suffered a debt downgrade for the first time.
That being said, I don’t think the downgrade will matter. Everyone knew the U.S. was heading in the wrong direction before the announcement by Standard & Poor. Moreover, big investors have very few attractive options for where to place their money – thanks to a weak global economy. As such, I suspect the federal government will still be able to borrow money at very low rates.
What does matter, however, is that the American economy is burdened with a bloated public sector that is sapping the nation’s economic vitality. And this problem will get worse every year because of a toxic combination of poorly designed entitlement programs and demographic change.
As the government gets bigger, this hinders growth by diverting resources from the productive sector of the economy. The damage is then compounded by the fact that the two main ways of financing the public sector – taxes and borrowing – both have additional adverse economic consequences.
In other words, the United States has fiscal cancer. Yet rather than try to cure the disease, politicians are – at best – kicking the can down the road. Here is my dour assessment on Bloomberg.
The only glimmer of hope, as I wrote yesterday, is that House Republicans have made serious efforts to restrain the burden of federal spending.
Is Medicare Sustainable?
A letter in the Washington Post from Dale Everett of Ashburn, Va., makes a point about the sustainability of our entitlements programs:
At 80, I am a “poster boy” for what is wrong with Medicare and Social Security. I worked full time from 1950 until 1993, when I retired. I paid the maximum amount annually required by law. My payment from Social Security in 1993 was $1,170 per month, and it now exceeds $1,500. I paid $47,377 into the fund and have so far received more than $288,000 from it.
As for Medicare I paid $14,350 into the fund from 1966 to 1993. I have been very healthy but had cancer several years ago and a craniotomy five years ago. The costs of those exceeded $1 million. Even minor surgery would far exceed what I paid to the fund.
Please tell me how such a system can be sustained. Both programs need to be overhauled now. No one should believe that he has paid for and earned the right to such payments.
This Week in Government Failure
Over at Downsizing the Federal Government, we focused on the following issues this past week:
- Republicans and Democrats have come together on a “historic” budget deal that cuts federal spending by more than $2 trillion over 10 years. However, the budget deal doesn’t cut federal spending at all.
- Even if Congress holds to the debt deal’s spending caps — and even if the “deficit reduction” targets established in the bill are achieved — the federal government’s spending binge will continue.
- Debt deal to slow the economy? Nonsense: biggest stimulus, slowest recovery. Keynesianism isn’t working.
- Centrist and liberal columnists are lamenting the lack of tax increases in the debt deal. But the hollowness of the deal itself provides a good justification for Republicans to oppose all tax increases in such bipartisan deals.
- The FAA’s problems should be solved by privatization.
- What does the debt deal mean for military spending?
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Solve the FAA Problem by Privatization
Everyone agrees that it’s rather stupid for a federal funding dispute to idle about 70,000 workers on airport-related construction. Just as absurd, there have been 20 stop-gap funding bills passed for the FAA since 2007. News stories are digging into the political disputes surrounding the FAA, but they aren’t addressing the root problem.
The root problem is that we have federalized the funding of airports in this country, when there is absolutely no need to. Airports are generally owned by state and local governments, and it should be up to them to figure out how to finance them. By federalizing infrastructure financing, we are simply encouraging the misallocation of resources through the political pork barrel.
We should get the federal government out of financing airports. Then state governments should look to the advantages of airport privatization, which is a reform that has swept the world from London to Sydney. Private airports can plan their investment programs in an efficient manner, balancing costs and the market demand for services. Privatized airports can raise revenue from debt, equity, fees on airlines and passengers, advertising, retail concessions, and other items. There is no need for taxpayer funding of airports.
The FAA dispute doesn’t affect current air traffic control operations, but it is affecting investments in ATC upgrades. Our ATC system needs large new investments in technology, but it is a battle in Congress to secure funding and to make sure the funding is spent efficiently. The FAA has a very poor record at making cost-efficient investments. The solution is to privatize our ATC system, as Canada has done.
When the federal government is like an octopus with tentacles stretching into every area of the economy, the economy gets dragged down by political dysfunction in Washington. We see the same sort of dysfunction in the federal government’s other business activities, such as passenger rail and mail delivery.
A lot of people worry about the quality and quantity of the nation’s infrastructure investments. But we don’t need to rely on disorganized and indebted governments to fix the problems. We can move ahead with privatization and let America’s entrepreneurs take on the challenge.
Budget Deals and Tax Increases
Centrist and liberal columnists are lamenting the lack of tax increases in the debt deal. But the hollowness of the deal itself provides a good justification for Republicans to oppose all tax increases in such bipartisan deals.
The federal debt crisis is being caused by spending increases, not revenue shortfalls. When the economy recovers, revenues will rise to the normal level of about 18 percent of GDP, even with all current tax cuts in place. It is spending that is projected to rise to abnormal levels, as I discussed in my recent Senate testimony.
However, let’s say a fiscal conservative in Congress was willing to swap, say, $1 of tax increases for $3 of spending cuts in a deficit-reduction deal. Most likely, the tax increases would turn out to be real and damaging, but the spending cuts would probably be phony or overstated, as the deal just passed illustrates.
In the debt-limit deal, discretionary spending rises over time. It isn’t cut. Economist Larry Summers seems to agree that the cuts in the deal aren’t real:
Despite claims of spending reductions in the range of $1 trillion, the agreements reached so far are likely to have little impact on actual spending over the next decade. The deal confirms the very low levels of spending already negotiated for 2011 and 2012 and caps 2013 spending about where most would have expected this Congress to end up. Beyond that, outcomes are anyone’s guess — Congress votes on discretionary spending annually, and the current Congress cannot effectively constrain future actions. True, there are caps and sequester threats in the debt deal, but these are virtually certain to be reformulated in 2013.
Deficit deals during the Reagan and Bush I years typically promised the public more spending cuts than tax increases. But the tax increases stuck, while the spending cuts were either smoke-and-mirrors or they didn’t last.
Consider the big budget deal in 1990, the one where Bush I infamously reneged on his “read my lips” promise. Bush claimed that the deal delivered two and a half dollars of spending cuts for each dollar of tax increases. But the cuts to defense in the deal were against an inflated baseline, and nondefense spending increased 15 percent in the two years following the deal.
Looking ahead to the special congressional committee that will report in November, I don’t see any incentive for a fiscal conservative to agree to tax increases. Democrats will call for a “balanced” plan, but that makes no sense because the cause of the government’s problems is not balanced. In addition, the idea that giving in a bit on taxes in order to leverage larger spending cuts has not worked in the past, as noted.
I’d like to be an optimist about spending cuts in a November deal, but most current political leaders show no interest in real cuts. Leaders in both parties continue to be positively allergic to naming any actual programs that they want to cut. Indeed, in the Washington Post today, Treasury Secretary Tim Geithner calls for more federal spending, not less. He wants more for “education and innovation.” He wants to “strengthen” Medicare. He decries the “extreme agenda” of policymakers who want to “dismantle” programs for the elderly and less fortunate. And he wants “short-term measures to strengthen the economy,” by which he means spending on infrastructure and unemployment subsidies.
Good grief. Geithner’s op-ed reflects the administration’s intransigence in defending the bloated welfare state, not any willingness to make serious budget reforms.
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