Government at War With Itself

Posted by Chris Edwards

An op-ed in the Washington Post discusses why federal farm subsidies don’t even make sense from an activist government point of view. Most farm subsidies go for animal-feed crops, which can be viewed as a subsidy for meat production. At the same time, the government propagandizes the public to follow healthy habits and eat lots of fruit and vegetables, but not so much meat.

At www.DownsizingGovernment.org, we’ve come across many federal policies that are contradictory. The government tells the public that X is good, but then it takes actions to do the opposite. Here are some examples:

  • Government health experts tell new moms to breastfeed, but the government spends billions of dollars a year on the WIC program, which subsidizes baby formula for moms.
  • The government imposes strict rules on property owners to protect wetlands, but the government’s Corps of Engineers and Bureau of Reclamation have destroyed vast amounts of wetlands.
  • The government enforces strict anti-pollution laws, but the Department of Energy and other federal agencies have been notorious polluters.
  • The Corps of Engineers has spent billions of dollars building levees to protect against flooding, but its own infrastructure has worsened the damage caused by hurricanes.
  • The government imposes tight rules to ensure proper funding and to prevent abuse in private pension plans, but its own “pension plan”—Social Security—is a Ponzi scheme.
  • The Constitution says that the federal government is created to “insure domestic tranquility,” but the government has spurred violence with alcohol prohibition and now the drug war.

My Cato colleagues are probably aware of many other contradictions, and it seems that the more the government intervenes in society, the more it will work against both the people and itself.

Polls Show Voters Don’t Support Corporate Welfare

Posted by Tad DeHaven

Two polls of likely voters released by Rasmussen Reports today indicate that the federal government’s corporate welfare programs should be prime targets for spending cuts.

The first poll found little support for the Small Business Administration’s lending programs:

  • A majority (58 percent) of likely voters said that the federal government shouldn’t guarantee loans issued by private lenders to small businesses. 23 percent said the government should back small business loans and 19 percent were unsure.
  • A majority (59 percent) of likely voters said that reducing government regulations and taxes would be more helpful to small businesses than the government providing loans to small businesses that can’t obtain financing on their own. 22 percent said the government loans were better and 18 percent were unsure.
  • Entrepreneurs particularly believed that reducing government regulations and taxes is preferable to government lending programs. 76 percent of entrepreneurs felt that way and 61 percent opposed government loans to small businesses that couldn’t obtain financing.

(See this new Cato essay on why the Small Business Administration should be terminated.)

Similarly, the second poll found little support for various federal corporate welfare programs:

  • Only 15 percent of likely voters said the federal government should continue to provide funding for foreign countries to buy military weapons from U.S. companies. 70 percent were opposed and the rest were undecided.
  • Only 29 percent of likely voters said the government should continue to provide loans and loan guarantees to help finance export sales for large corporations. 46 percent were opposed and the rest were undecided. (See Sallie James’ new Cato paper on why the Export-Import Bank should be terminated.)
  • Only 37 percent of likely voters said the federal government should continue providing farm subsidies. A plurality (46 percent) said farm subsidies should be abolished and 17 percent weren’t sure. (See this Cato essay for more on farm subsidies.)

Should There Be ‘Shared Sacrifice’?

Posted by David Boaz

At the Encyclopedia Britannica blog, I take on the argument made, for instance, by President Obama in his Friday news conference:

We should not be asking sacrifices from middle-class folks who are working hard every day, from the most vulnerable in our society — we should not be asking them to make sacrifices if we’re not asking the most fortunate in our society to make some sacrifices as well.

I call that a fundamentally flawed argument:

The main thing our government does these days, despite the lack of any constitutional authority for it, is tax some people and transfer money to other people. …But there is no moral equivalence in the two sides of the transfer system. On the one hand, the government takes money by force from people who have earned it. On the other hand, it gives some of that money to people who have not earned it. Taking yet more money that people have earned is simply not equivalent to reducing the size of a government transfer.

There is, however, one way that we could ask businesses and the rich to join in the deficit-reduction effort:

But here’s a way to satisfy both those who see spending as the problem and those who want the highest-taxed Americans to pay yet more: Start cutting subsidies to businesses and the rich. Let’s cut out the big-business subsidy machine, the Export-Import Bank. Let’s get rid of farm subsidies. Let’s tell affluent people who build houses in coastal flood areas to pay for their own flood insurance at market prices.

Read the whole thing.

$1 Trillion in Phony Spending Cuts?

Posted by Chris Edwards

In the Washington Post Friday, Ezra Klein partly confirmed what I fear the Republican strategy is for the debt-limit bill—get to the $2 trillion in cuts promised through accounting gimmicks. As I have also noted, Klein says that there is about $1 trillion in budget “savings” ($1.4 trillion with interest) to be found simply in the inflated Congressional Budget Office baseline for Iraq and Afghanistan. Klein says, “I’m told that a big chunk of these savings were included in the debt-ceiling deal” that Rep. Eric Cantor (R-VA) and Sen. Jon Kyl (D-AZ) are negotiating with the Democrats.

Republican leaders have promised that spending cuts in the debt-limit deal must be at least as large as the debt-limit increase, which means $2 trillion if the debt-limit is extended to reach the end of 2012. In a Daily Caller op-ed, I noted that you can find $1 trillion in “savings” from this phony war accounting and another $1 trillion by simply pretending that non-security discretionary will stay flat over the next decade.

There is more evidence that few, if any, real spending cuts are being discussed. One clue is that the media keeps quoting Joe Biden essentially saying that it was easy to reach agreement on the first $1 trillion in cuts.

The other suspicious thing is that the media keeps floating trial balloons for specific tax hikes, but I’ve seen very few trial balloons for specific spending cuts. Friday, the Washington Post story on the debt discussions mentions all kinds of ideas for raising taxes on high earners. A few days ago, news stories revealed that negotiators were talking about changing tax bracket indexing to create annual stealth increases in income taxes. The only item I’ve seen being discussed on the spending side is trimming farm subsidies.

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.

I hope I’m wrong, but this is starting to look a lot like the phony $100 billion spending cut deal from earlier this year.

Sean, Rush, Greta, Glenn, Bill: When you get Republican leaders on your shows, get them to promise that they won’t use phony baseline accounting like war costs to reach the $2 trillion in cuts. The budget and the nation desperately need real cuts and real government downsizing.

Will the GOP Finally Cut Farm Subsidies?

Posted by Daniel Griswold

With trillion dollar deficits and mounting federal debt, will Congress finally get serious about cutting farm subsidies? We’ve been disappointed before, but there are a few hopeful signs—like the front-page story in this morning’s Washington Post—that this Congress may be serious about cutting billions in payments to farmers. As the Post reports:

In their recent budget proposals, House Republicans and House Democrats targeted farm subsidies, a program long protected by members of both parties. The GOP plan includes a $30 billion cut to direct payments over 10 years, which would slash them by more than half. Those terms are being considered in the debt-reduction talks led by Vice President Biden, according to people familiar with the discussions.

The Post story profiles a freshman Republican from Kansas, Tim Huelskamp, a fifth-generation farmer himself, who has been traveling his sprawling district telling his farmer constituents that they can no longer be exempt from budget discipline. Many farmers in his district appear to agree.

It remains an open question whether the Republican freshman class will live up to Tea-Party principles of limited government when it comes to agricultural subsidies, as we have speculated ourselves (here, here, and here) at the trade center.

Farm subsidies have certainly been a weak spot of Republicans in the past. According to our online trade-vote feature, more than half of the GOP House caucus voted in May 2008 to override President Bush’s veto of the previous, subsidy laden farm bill. In July 2007, more than half the GOP caucus voted against any cuts in the sugar program, and more than two-thirds opposed any cuts in cotton subsidies. (Of course, Democrats were just as bad overall on farm subsidies.)

The next farm bill, due to be written by this Congress, will tell us a lot about whether the Republicans really believe what they’ve been saying about limiting government and reducing the debt.

A Fiscal Royal Wedding

Posted by Chris Edwards

The British royal wedding was splendid, and the bride and groom were a great match. As a fiscal wonk, my idea of a royal match-up would be marrying corporate tax cuts and business subsidy cuts. The Obama administration is talking about corporate tax cuts and Republicans are talking about cuts to farm subsidies. Might they get together over a cup of tea and work out nuptials?

The global average corporate tax rate has fallen over the last decade from 32 to 25 percent (KPMG, page 79). We have been stuck with a highly damaging 40% federal-state rate. Canada is chopping its combined federal-provincial rate to 25 percent. The Conservative government just won a parliamentary majority, which promises even more pro-investment changes for our largest trading partner.

Consider a Japanese car company deciding where to build its next North American plant. Should it choose a place with a 25 percent tax and stable government finances, or a place with a 40 percent tax and soaring government debt threatening major tax hikes?

The American economy is sputtering, and today we learned that the unemployment rate is back up to 9 percent. If the Obama administration wants to get the economy booming before next year’s election, it should push for a cut in the federal corporate tax rate from 35 percent to 20 percent or lower. And it should put aside all this stuff about “closing corporate loopholes.” A lot of supposed corporate loopholes aren’t loopholes to begin with, and as soon as you start trying to cut the real loopholes, half the business community lines up against reform and nothing gets done. Furthermore, if we chopped the corporate rate, the economic distortions caused by loopholes would decline.

Anyway, the largest corporate “loopholes” are probably “homemade loopholes,” which start disappearing automatically if we cut the tax rate. With a high tax rate, corporations have fashioned all kinds of financial structures to avoid taxes. Corporate tax experts agree that the mobility of the corporate tax base is high and rising. If we sharply cut our corporate rate, reported income would increase substantially as multinationals shift their profits into the United States. (For more on this, see my book).

A corporate tax cut would spur capital investment and economic growth. In 2005, the Joint Committee on Taxation used two macro models to look at the effects of various fiscal reform packages. By far, the largest positive impacts on GDP came from matching a corporate tax rate cut with federal spending cuts. (See charts 1c and 1d). The JCT found that:

A decrease in the corporate income tax rate primarily affects the economy through increasing the after-tax rate of return on corporate capital, which provides incentives for increased investment in corporate capital. Over time, this increased investment results in more goods and services and higher total output. It also results in higher labor productivity, leading to increased wages and employment.

So, let’s get cracking on a corporate tax rate cut. Forget about the corporate loopholes, and instead match a rate cut with cuts to business subsidies, such as farm handouts.

Let’s also put aside the idea of tying corporate tax reform to individual tax reform, as Ways and Means chairman David Camp has suggested. That’s just a recipe for gridlock. Obama is offering up corporate tax reform — for the sake of jobs and the economy, Republicans should jump on that opportunity right away.

Ryan’s Plan for Farm Subsidies

Posted by Sallie James

I thought I would add some detail to the posts my colleagues have already written on Congressman Paul Ryan’s (R-Wisc.) 2012 budget resolution.

Interestingly — and, I would argue, appropriately — the agriculture stuff appears in the “Ending Corporate Welfare” section of the plan, most of  it on page 36. After outlining the ways that farming America is doing well, Ryan’s plan would cut almost $30 billion (or 20 percent of projected outlays) over the next 10 years from farm subsidies (direct payments, currently costing about $5 billion per year) and crop insurance subsidies. Cuts will also reportedly fall on nutrition and conservation programs, but I will let my colleagues weigh in on those.

The focus on crop insurance is encouraging, because crop insurance is an increasingly important part of U.S. farm policy, especially in recent years when commodity prices have been high: high prices reduce the amount of money taxpayers spend on commodity payments, but increases crop insurance premiums, which we all subsidize. They now cost about $6 billion, or more than commodity payments.  And, as the blueprint points out, surely farmers “should assume the same kind of responsibility for assuming risk that other businesses do.” Well played, Congressman.

One point on where the cuts fall on the commodity payments side: As a free-marketeer, I acknowledge that direct payments are less market-distorting than price-linked payments, and they are less (although not fully) questionable under World Trade Organization rules.  If we are going to shovel money to farmers, in other words, sending unconditional welfare checks is the least distorting way to do it. But there is no money to raid from the price-linked programs because of high prices, so if savings are to be found, we need to raid the direct payment cookie jar. And, really, with $7 corn and red ink from here to eternity, surely this is an ideal time to wean farmers off of the government teat.

Reactions from the farmers’ friends, by the way? Predictable. The Chairman of the House Agriculture Committee dismissed the blueprint’s plans for agriculture as “simply suggestions” and that the Agriculture Committee will write the 2012 Farm Bill, thankyouverymuch. (Ryan himself said that the cuts should start in 2012, implying that the Farm Bill schedule should go ahead as planned).

The National Farmers Union spoke the usual blather about Americans spending less of their income on food than in other nations (perhaps because we are, you know, richer?) for the “safest, most abundant, most affordable food supply in the world,” which has been the favorite line of the farm lobby for years now.  The Corn Growers and the National Cotton Council joined them in trotting out variations of the new favorite talking point, about how agriculture has already taken a hit from cuts to crop insurance and that cuts to agriculture’s budget should be no larger than cuts to other areas. 

The blueprint is not my ideal plan, to be sure. That plan would have a line in it about removing the federal government once and for all from all aspects of the agricultural market, including by disbanding the U.S. Department of Agriculture.  It would at least include something about disbanding the production- and price-determined subsidies, so we’re not all on the hook again if prices fall. But it is a good start.

Federal Spending: Ryan vs. Obama

Posted by Chris Edwards

House Budget Committee Chairman, Paul Ryan, introduced his budget resolution for fiscal 2012 and beyond today entitled “The Path to Prosperity.” The plan would cut some spending programs, reduce top income tax rates, and reform Medicare and Medicaid. The following two charts compare spending levels under Chairman Ryan’s plan and President Obama’s recent budget (as scored by the Congressional Budget Office).

Figure 1 shows that spending rises more slowly over the next decade under Ryan’s plan than Obama’s plan. But spending rises substantially under both plans—between 2012 and 2021, spending rises 34 percent under Ryan and 55 percent under Obama.

Figure 2 compares Ryan’s and Obama’s proposed spending levels at the end of the 10-year budget window in 2021. The figure indicates where Ryan finds his budget savings. Going from the largest spending category to the smallest:

  • Ryan doesn’t provide specific Social Security cuts, instead proposing a budget mechanism to force Congress to take action on the program. It is disappointing that his plan doesn’t include common sense reforms such raising the retirement age.
  • Ryan finds modest Medicare savings in the short term, but the big savings occur beyond 10 years when his “premium support” reform is fully implemented. I would rather see Ryan’s Medicare reforms kick in sooner, which after all are designed to improve quality and efficiency in the health care system.
  • Ryan adopts Obama’s proposed defense (security) savings, but larger cuts are called for. After all, defense spending has doubled over the last decade, even excluding the costs of wars in Iraq and Afghanistan.
  • Ryan includes modest cuts to nonsecurity discretionary spending. Larger cuts are needed, including termination of entire agencies. See DownsizingGovernment.org.
  • Ryan makes substantial cuts to other entitlements, such as farm subsidies. Bravo!
  • Ryan would turn Medicaid and food stamps into block grants. That is an excellent direction for reform, and it would allow Congress to steadily reduce spending and ultimately devolve these programs to the states.
  • Ryan would repeal the costly 2010 health care law. Bravo!

To summarize, Ryan’s budget plan would make crucial reforms to federal health care programs, and it would limit the size of the federal government over the long term. However, his plan would be improved by adopting more cuts and eliminations of agencies in short term, such as those proposed by Senator Rand Paul.

This Week in Government Failure

Posted by Tad DeHaven

Over at Downsizing the Federal Government, we focused on the following issues this week:

Follow Downsizing the Federal Government on Twitter (@DownsizeTheFeds) and connect with us on Facebook.

Rearranging the Deck Chairs on the Farmhouse Porch

Posted by Sallie James

Mark Bittman had a column on the NYTimes online “Opinionator” blog yesterday on farm subsidies. He included a fairly (but not completely) thorough list of what is wrong with farm subsidies in America, but he ultimately comes down on the side of “fixing” farm subsidies rather than ending them altogether.

Bittman acknowledges that the “temporary” programs intended to offset the worst effects of the Great Depression have morphed into the bloated, corrupt, regressive and damaging programs we see today, and yet he still has enough faith in government to advocate new programs. He would like to see farm subsidies reformed to (a) encourage farmers to grow foods that Bittman determines we need more of;  (b) re-size American farms to what he thinks are the appropriate size; (c) help more people to go into farming; (d) prevent farmland from being converted into higher-value development; and (e) allow us to spend more money on programs he thinks more worthy (high-speed rail, for example).

Some of the money for the new farm programs would come from the budget, primarily from the so-called “direct payments” that flow to farmers and landowners based on past production of certain crops, but Bittman seems attracted to the idea of new taxes on food processors (which, you can be sure, would be passed on to consumers). He alleges the food companies are the main beneficiaries of farm subsidies, even as he admits that consumers have benefitted from lower prices of subsidized commodities. 

The solution to a lot of the problems caused by farm subsidies, however, lies not in changing the direction of the programs. Perhaps unwittingly, Bittman himself has pointed to the way out:

The subsidy-suckers don’t grow the fresh fruits and vegetables that should be dominating our diet. Indeed, if all Americans decided to actually eat the five servings a day of fruits and vegetables that are recommended, they would discover that American agriculture isn’t set up to meet that need. They grow what they’re paid to grow: corn, soy, wheat, cotton and rice.

While I agree that American farmers are producing far more for government programs than they are the demands of the market, the solution is to get rid of the farm subsidies. If Americans decide to eat more fruit and vegetables, you can be sure that farmers here or abroad (and it does not matter which) will be happy to provide them.  The solution lies not in tinkering with the program in the hope that finally, this time, bureaucrats in Washington will get it right, but in freeing the farmers from government interference totally, and letting the market decide which foods are grown.

Republicans Punt on Farm Subsidies. Again.

Posted by Sallie James

While I fully agree with my colleagues that President Obama “chickened out” in general in his FY2012 budget proposal, in one area he had the courage to propose some cuts that have proven controversial for ages: farm subsidies.  His plan would lower the income eligibility limits for subsidies (from $500,000 to $250,000 for off-farm AGI per farmer, and an on-farm AGI limit of $500,000, down from $750,000.) It would also lower the cap on annual direct payments that individuals can receive — from a maximum of $40,000 to $30,000.

The administration’s proposal would affect only about 2 percent of the total recipients of direct payments — subsidies that flow every year regardless of prices or farm output to owners of land that may or may not still be used for farming – and it does not by any means go far enough. But at least it is a start.

On the other side of the aisle, the Republicans followed their Republican Study Committee colleagues in failing to propose any cuts to “farm subsidies” as we typically understand them in their FY2011 budget proposal.  To be sure, 22 percent of the $60 billion in cuts they propose would come from the “agriculture function,” and they indeed get rid of entire programs, but they are mainly to the nutrition and conservation areas of the USDA’s responsibilities. Nothing, so far as I can tell, from the commodity programs.

I’m under no illusions that cutting farm subsidies are the key to our ever-growing fiscal mess. But it is telling that the Republicans can find not one dime in our bloated, distorting, regressive, corrupt farm programs to cut, even as farmers’ incomes and wealth soar. 

On the upside,  a group of  legislators is proposing amendments to limit direct payments and put an end to the disgraceful deal on cotton subsidies cooked up by the administration last year. So maybe some reform can come from there.

(This hardly needs to be said, but the farmers’ groups are, of course, maintaining their position that farm programs should be subject to cuts no greater than the cuts to other areas of federal spending.)

’1099′ Repeal Speaks Volumes About ObamaCare

Posted by Michael F. Cannon

From my latest Kaiser Health News op-ed:

When 34 Senate Democrats joined all 47 Republicans last week to repeal ObamaCare’s 1099 reporting requirement, their votes confirmed what their talking points still deny: ObamaCare will increase the deficit, no matter what the official cost projections say…

This public-choice dynamic [of concentrated benefits and diffuse costs] is why the Congressional Budget Office, the chief Medicare actuary, and even the International Monetary Fund have discredited the idea that ObamaCare will reduce the deficit. It is one of the principal reasons why, as Thomas Jefferson wrote, “The natural progress of things is for liberty to yield, and government to gain ground.” In other words, the game is rigged in favor of bigger government.

It also explains why the Obama administration is sprinting to implement ObamaCare in spite of a federal court having struck down the law as unconstitutional. The White House needs to get some concentrated interest groups hooked on ObamaCare’s subsidies – fast.

Read the whole thing here.