State ‘Opt-Out’ Proposal: a Ruse within a Ruse
President Obama and his congressional allies want to create yet another government-run health insurance program (call it Fannie Med) to cover yet another segment of the American public (the non-elderly non-poor).
The whole idea that Fannie Med would be an “option” is a ruse.
Like the three “public options” we’ve already got – Medicare, Medicaid, and the State Children’s Health Insurance Program – Fannie Med would drag down the quality of care for publicly and privately insured patients alike. Yet despite offering an inferior product, Fannie Med would still drive private insurers out of business because it would exploit implicit and explicit government subsidies. Pretty soon, Fannie Med will be the only game in town – just ask its architect, Jacob Hacker.
Now the question before us is, “Should we allow states to opt out of Fannie Med?” It seems a good idea: if Fannie Med turns out to be a nightmare, states could avoid it.
But the state opt-out proposal is a ruse within a ruse.
Taxpayers in every state will have to subsidize Fannie Med, either implicitly or explicitly. What state official will say, “I don’t care if my constituents are subsidizing Fannie Med, I’m not going to let my constituents get their money back”? State officials are obsessed with maximizing their share of federal dollars. Voters will crucify officials who opt out. Fannie Med supporters know that. They’re counting on it.
A state opt-out provision does not make Fannie Med any more moderate. It is not a concession. It is merely the latest entreaty from the Spider to the Fly.
(Cross-posted at National Journal’s Health Care Experts blog.)
Filed under: Cato Publications; General; Health, Welfare & Entitlements
U.S. Cutting Pay for Bailed Out Company Executives
According to reports, executives from bailed out companies Citigroup, Bank of America, GM, Chrysler, GMAC, Chrysler Financial and AIG are going to see major pay cuts this year, which will be enforced by the president’s “pay czar,” Kenneth R. Feinberg. WaPo:
NEW YORK — The Obama administration plans to order companies that have received exceptionally large amounts of bailout money from the government to slash compensation for their highest-paid executives by about half on average, according to people familiar with the long-awaited decision.
The administration will also curtail many corporate perks, including the use of corporate jets for personal travel, chauffeured drivers and country club fee reimbursement, people familiar with the matter have said. Individual perks worth more than $25,000 have received particular scrutiny.
The American people have every right to be upset about generous compensation packages for executives at financial firms that are being kept alive by subsidies and bailouts.
But their ire should be directed at the bailouts, because that is the policy that redistributes money from the average taxpayer and puts it in the pockets of incompetent executives. Unfortunately, rather than deal with the underlying problems of bailouts and intervention, some politicians want to impose controls on salaries. This might be a tolerable second-best (or probably fifth-best) outcome if the compensation limits only applied to companies mooching off the taxpayers, but some politicians want to use the financial crisis as an excuse to regulate compensation at firms that do not have their snouts in the public trough.
This would be a big mistake. So long as rich people make money using non-coercive means, politicians should butt out. It should not matter whether we are talking about Tiger Woods, Brad Pitt, or a corporate CEO. The market should determine compensation, not political deal making. Markets don’t produce perfect outcomes, to be sure, but political intervention invariably produces terrible outcomes.
I debate this further on CNBC:
C/P The Hill
Filed under: Finance, Banking & Monetary Policy; General
New Paper: Why Sustainability Standards for Biofuel Production Make Little Economic Sense
The U.S. sustainability standard currently requires ethanol production to emit at least 20% less CO2 than the gasoline it is assumed to replace. In a new study, authors Harry de Gorter and David R. Just argue that sustainability standards for ethanol are, by definition, illogical and ineffective. Moreover, say de Gorter and Just, those standards divert attention from the contradictions and inefficiencies of ethanol import tariffs, tax credits, mandates, and subsidies, all of which exist whether ethanol is sustainable or not.
Cato Launches New Web Site Exposing Wasteful Government Spending
Did you know that the average American family spends $1,000 each year on the U.S. Department of Agriculture, whether or not it consumes that agency’s services? Or that the federal government annually spends $1,500 per household on net interest costs alone?
In an ongoing effort to shed light on runaway government spending and expose wasteful government programs, Cato launched a new Web site today that examines the federal budget department-by-department to see which agencies can be reformed or terminated. DownsizingGovernment.org describes which programs are wasteful, damaging and obsolete in an era of trillion-dollar deficits.
The research exposes that many public outlays—though vigorously defended by the politicians who created them and the constituencies they purport to help—are remarkably ineffective at achieving their core aims.
Here are just a few examples:
- Though the Department of Education’s annual budget has more than tripled in real dollars since 1970, that period has not been marked by any tangible improvement in student performance.
- The Department of Housing and Urban Development operates a rural subsidies program even though hundreds of other federal programs benefiting rural constituencies already exist.
- HUD has been characterized by scandalous graft and cronyism under both Republican and Democratic presidents for three decades. The rate at which senior HUD officials have been investigated or prosecuted is chilling, and government watchdogs have found dozens of instances where officials’ private-sector contacts were showered with public money for projects.
Appearing on CNBC Monday, DownsizingGovernment.com editor Chris Edwards explained more about the site:
Plus, keep track of where your tax dollars are going by following DownsizingGovernment.com on Twitter (@DownsizeTheFeds) and Facebook.
“Keep Your Subsidies off My Ovaries”
In my recent Cato paper, “All the President’s Mandates: Compulsory Health Insurance Is a Government Takeover,” I explain that if Congress compels Americans to purchase health insurance, it would “inevitably and unnecessarily open a new front in the abortion debate, one where either side—and possibly both sides—could lose.”
Slate’s William Saletan explains how the pro-choice side could lose:
This week, the Senate finance committee is considering amendments that would bar coverage of abortions under federally subsidized health insurance. Pro-choice groups are up in arms. After all, says NARAL Pro-Choice America, “In the current insurance marketplace, private plans can choose whether to cover abortion care—and most do.” If Congress enacts subsidies that exclude abortion, “women could lose coverage for abortion care, even if their private health-insurance plan already covers it!“…
The argument these groups make is perfectly logical: If you standardize health insurance through federal subsidies and coverage requirements, people might lose benefits they used to enjoy in the private sector. But that’s more than an argument against excluding abortion. It’s an argument against health care reform altogether.
Saletan also explains why pro-life and pro-choice positions on Obama’s health plan are irreconcilable:
To get what they consider neutrality, pro-choicers have to make pro-lifers pay indirectly for abortions. And to keep what they consider clean hands, pro-lifers have to make abortion coverage federally unsupportable and therefore, in a subsidy-dependent system, commercially nonviable.
Rather than an argument against all health care reform, I’d say this is an argument against reforms that expand government subsidies or otherwise give government the power to choose what kind of insurance you purchase. Fortunately, there are better ways to reform health care.
Filed under: Cato Publications; General; Health, Welfare & Entitlements
Geithner Ignores Bailout History
Perhaps the biggest problem with the Obama plan to “reform” our financial system is the impact it would have on the market perception surrounding “too big to fail” institutions. In identifying some companies as “too big to fail” holders of debt in those companies would assume that they would be made whole if those companies failed. After all, that is what we did for the debt-holders in Fannie, Freddie, AIG, and Bear. Both former Secretary Paulson and Geithner appear under the impression that moral hazard only applies to equity, despite debt constituting more than 90% of the capital structure of the typical financial firm.
Geithner believes he’s found a way to solve this problem – he’ll just tell everyone that there isn’t an implicit subsidy, and there won’t be a list of “too big to fail” companies. Great, why didn’t I think of that. After all, the constant refrain in Washington over the years that Fannie and Freddie weren’t getting an implicit subsidy really prepared the markets for their demise.
Even more bizarre is Geithner’s assertion that the government can force these institutions to hold higher capital, maintain more liquidity and be subjected to greater supervision, all without anyone knowing who exactly these companies are. Does the Secretary truly believe that these companies’ securities disclosures won’t include the amount of capital they are holding? Whether there is an official list or not is besides the question, market participants will be able to infer that list from publicly available information and the actions of regulators.
One has to wonder whether Geithner spent any of his time at the NY Fed actually watching how markets work. Before we continue down the path of financial reform, maybe it would be useful for our Treasury Secretary to take a few weeks off to study what got us into this mess. We’ve already been down this road of denying implicit subsidies and then providing them after the fact. Maybe it’s time to try something different.
That Costly Mandate
The Wall Street Journal notes that Sen. Max Baucus’s allegedly moderate health care plan “would increase the cost of insurance and then force people to buy it, requiring subsidies. Those subsidies would be paid for by taxes that make health care and thus insurance even more expensive, requiring even more subsidies and still higher taxes.” Other than that, it’s not so bad. The Journal also digs up a great graphic produced by the 2008 presidential campaign of a little-known Illinois senator named Barack Obama:
And speaking of health care mandates and how much they’re going to cost young people, as the Washington Post was yesterday, I just had lunch with Clark Ruper, program manager for Students for Liberty, who told me he’d be on the Newshour with Jim Lehrer on PBS tonight. In the interview he told them that as a young healthy person he has voluntarily chosen not to purchase health insurance and instead invests in his own savings. And he thinks a lot of young people make such choices and don’t want a government mandate requiring them to buy government-approved insurance. Check it out tonight on PBS.
Filed under: Government and Politics; Health, Welfare & Entitlements
Response to Matthew Yglesias re: Uncle Sam’s $4 Million Bike Rack
In response to my criticism of the new federally-financed $4 million bike center set to open at Union Station in Washington, DC, Think Progress blogger Matthew Yglesias says:
I look forward to the day when the Cato Institute does a blog post denouncing each and every publicly financed parking lot or garage in the United States of America.
I’ll take that bait…sort of…
I denounce each and every federally financed parking lot or garage in the United States of America on non-federal property. I’m one of those quaint individuals who recognizes that the Constitution grants the federal government specific enumerated powers. Using federal tax dollars to finance local parking garages, lots, bike centers and racks is not one of the powers granted to the federal government. So let me rephrase my statement from yesterday: Look, I harbor no animosity against [car drivers], but under what authority — legal or moral — does the federal government tax me in order to build [parking garages or lots] for parochial, special interests?
By the way, for an excellent study on the problems with federal subsidies to state and local government, please see my colleague Chris Edwards’ “Federal Aid to the States: Historical Cause of Government Growth and Bureaucracy.”
Here are a few additional random thoughts…
I know so-called “progressives” like Yglesias don’t lose sleep over how much money the federal government spends, but $4 million to park a hundred or so bikes? As Chris Moody noted to me today, if bike security is the major issue, why not pay a guard $12 an hour to stand watch?
Isn’t it possible, just possible, that a bike center with even more racks could have been built for a lot less? Isn’t that the question that people like Yglesias, who want more people on bikes and less in cars, should be asking?
I don’t see anything inherently governmental about building and operating parking garages or bike centers. The absolutely sorriest, most poorly run parking garage system I’ve ever experienced is the one managed by the State of Indiana where I used to work. I recall an overcrowding situation — exacerbated by lousy management — in which the solution put forward was to just build another garage. Hey, someone else is going to pay for it so who cares, right? I often tell people that young libertarians should spend a couple years working in the bowels of government in order to reinforce their belief system with hands-on experience. I’m starting to think “progressives” and other unwavering fans of all-things-government should do the same.
Funding ACORN
The ACORN scandal provides a good opportunity for citizens concerned about profligacy in Washington to explore some of the tools available to find out where their tax money goes.
A good place to start your research is the Federal Audit Clearinghouse on the Census website. All groups receiving more than $500,000 a year from the government are required to file a report. Just type in “ACORN” as the entity and the system pops up the group’s filings. My assistant John Nelson summarized the federal programs and amounts received by ACORN in recent years:
2003
Housing Counseling Assistance $1,168,388
Community Development Block Grants $388,273
Home Investment Partnership $8,000
Self-Help Homeownership Opportunity $204,082
Fair Housing Initiatives Program $85,000
Total $1,853,743
2004
Housing Counseling Assistance $2,209,009
Community Development Block Grants $221,007
Home Investment Partnership Program $21,092
Self-Help Homeownership Opportunity $127,183
Fair Housing Initiatives Program $105,000
Total $2,683,291
2005
Housing Counseling Assistance $2,605,558
Community Development Block Grants $367,560
Self-Help Homeownership Opportunity $153,082
Fair Housing Initiatives Program $140,917
Total $3,267,117
2006
Housing Counseling Assistance $1,955,074
Self-Help Homeownership Opportunity $59,541
Rural Housing and Economic Development $47,619
Fair Housing Initiatives Program $150,000
Community Development Block Grants $238,809
Total $2,451,043
2007
Housing Counseling Assistance $1,813,011
Self-Help Homeownership Opportunity $46,608
Rural Housing and Economic Development $30,504
Fair Housing Initiatives Program $60,000
Community Development Block Grants $372,950
Total $2,323,073
My colleague, Tad DeHaven, has discussed why these HUD programs that funded ACORN ought to be abolished completely.
Subsidy information is also available from IRS Form 990, which is filed by all non-profit groups and compiled at Guidestar and other websites. I am not an expert on this data, but Velma Anne Ruth of ABS Community Research has done a detailed analysis, which she kindly sent to me. She finds that federal funding for ACORN was about $1.7 million in 2008 and about $2.2 million in 2009.
Finally, a user-friendly website to research recipients of federal grants and contracts is www.usaspending.gov.
ACORN’s share of overall federal subsidies is tiny, but as thousands of similar organizations have become hooked on 1,800 different federal subsidy programs, a powerful lobbying force has been created that propels the $3.6 trillion spending juggernaut. ACORN’s own website touts its lobbying success in helping to pass various big government programs. So cutting off ACORN is a start, but just a small start at the daunting task of cutting back the giant federal spending empire.
Have the Democrats Outsmarted the Republicans on Health Care?
In their attempt to defeat Obamacare, Republicans have focused their criticism on the public option, painting it as the most objectionable feature of existing proposals. Senator Max Baucus, (D-Mont.), has now proposed a plan without the public option. This leaves the Republicans in an awkward position, especially since Baucus’s plan is projected to cost less than earlier proposals.
If Republicans oppose the Baucus plan, they surely risk the ire of voters who will be told during the mid-term elections, “The Republicans blocked a plan that would have covered the uninsured and reduced the deficit.”
The problem is, the public option was never the crucial issue; instead, it was the mandate to purchase insurance. Once government mandates insurance coverage, it gets to define what constitutes insurance, which means it can ban pre-existing condition clauses and the like. The mandate also”justifies” large subsidies for insurance, to avoid non-compliance with the mandate. So, an individual mandate, which the Baucus plan includes, implies a rapid takeover of the entire health care system by the federal government.
Something like the Baucus plan will pass. It will either cost far more than existing projections, if government administrators fail to impose the restrictions on reimbursements that generate the projected cost savings, or it will involve massive rationing of care.
The Democrats played it perfectly. The Republicans got sucker-punched.
C/P Libertarianism, from A to Z
Filed under: General; Government and Politics; Health, Welfare & Entitlements
Deficits, Spending, and Taxes
The White House and the CBO announced this week that:
The nation’s fiscal outlook is even bleaker than the government forecast earlier this year because the recession turned out to be deeper than widely expected, the budget offices of the White House and Congress agreed in separate updates on Tuesday.
The Obama administration’s Office of Management and Budget raised its 10-year tally of deficits expected through 2019 to $9.05 trillion, nearly $2 trillion more than it projected in February. That would represent 5.1 percent of the economy’s estimated gross domestic product for the decade, a higher level than is generally considered healthy.
What is the right response to these deficits?
One view holds that most current expenditure is desirable — indeed, that expenditure should ideally be much higher — so the United States should raise taxes to balance the budget. Taxes are a drag on economic growth, however, and unpopular with many voters, so this view presents politicians with an unhappy tradeoff.
The alternative view holds that a substantial fraction of current expenditure is undesirable and should be eliminated, even if the revenue to pay for it could be manufactured out of thin air. To be concrete:
- Medicare and Medicaid encourage excessive spending on health care.
- The invasions of Iraq and Afghanistan encourage hostility to the U.S. and thereby increase the risk of terrorism.
- Drug prohibition generates crime and corruption.
- Agricultural subsidies distort decisions about which crops to grow, and where.
- And much, much more.
So, under this view, the United States can have its cake and eat it too: improve the economy and reduce the deficit without the need to raise taxes.
This approach is not, of course, politically trivial, since existing expenditure programs have constituencies that will fight their elimination.
But thinking about these two views of the deficits is nevertheless useful: it shows that discussion should really be about which aspects of government are truly beneficial, not just about the deficits per se.
$12 Billion: Coming to a Community College Near You
The Obama administration insists that we have to “educate our way to a better economy,” and in a proposal expected today will call for a $12 billion effort to graduate 5 million more students from community colleges over the next decade. The administration justifies this by noting that many of the jobs projected to grow fastest in coming years will require some postsecondary education. The Bureau of Labor Statistics, however, projects (scroll down to “Education and Training” in the link) that the jobs that will have the highest overall growth will mainly require on-the-job – not college – training. Of course, it’s quite possible that the main goal of Obama’s proposal is not really to improve the economy (a highly dubious proposition regardless of motive) but to get more dollars to community-college employees, an interest group that seems to be growing in clout.
All of which begs the question: When are we going to see the change in education that this president promised, instead of the same old, simplistic bromides about more degrees and more money that ultimately takes valuable resources away from taxpayers and gives it to ivory-tower types? When are we going to stop seeing the easy money and access policies that have fueled the out-of-control tuition skyrocket; severely watered down what a college degree means; and led the nation to produce many more college graduates than we have jobs for? And couldn’t employers provide the on-the-job training that will be crucial for most new jobs a lot more effectively if they didn’t have to send their money to Washington, where politicians will waste it in pursuit of worthless degrees?
Of course they could. But if that were to happen, it would be much harder for politicians to appear to care – to be “doing something” – and that is what really matters in Washington.
A New Regulation I Can Support
Normally I would be happy to leave labelling decisions to retailers and manufacturers, but here’s a proposal for a new mandatory labelling scheme that I can get behind.
James Gibney, a reporter from the Atlantic, called me last week to ask some questions about dairy supports. He was preparing a blog post to propose a new labelling idea that might help break the frustrating stranglehold that the farm lobby has over U.S. agricultural policy. Here’s James’ idea:
To wit, every product whose ingredients benefit from a subsidy should include the following language on the label:
“This product has been subsidized by the U.S. government at taxpayer expense. For more information, please visit usda.gov.”
And every product that benefits from tariff protection should have the following language on the label:
“This product is protected from foreign competition by U.S. import tariffs. Its price is higher as a result. For more information, please visit usitc.gov.”
I like it. For more on Cato’s work on agricultural policy, see here and here.
States “Creating” Jobs – One Corndog at a Time
A couple weeks ago, I blogged about the foolishness of press release economics: states “creating” jobs by handing out taxpayer money to select businesses. I concluded by saying that “journalists should be on the lookout for more press-release economics schemes coming from the states as revenues remain tight and politicians become desperate to demonstrate they’re “doing something.” Journalists should examine a state’s tax structure when a taxpayer giveaway is announced to see if perhaps the governor is masking economic-unfriendly fiscal policies.”
Sure enough, the Pew Center’s Stateline.org has an article up detailing the efforts of state governors dealing with the recession by giving businesses taxpayer money to “create” jobs. Of course, it would make more sense for a state to simply reduce the tax and regulatory burden on a businesses looking to expand or relocate operations within its borders. But then state politicians might miss out on the short-term benefit of issuing fluffy press releases that are particularly helpful when a state is bleeding jobs.
Stateline notes that “You’d never know Michigan has the nation’s highest unemployment by visiting the Michigan Economic Development Corporation’s Web site, which trumpets a string of successes in recent months that have resulted in thousands of jobs in a state battered by the decline of auto manufacturing.” And in neighboring Indiana, the state’s economic central planners are celebrating the “creation” of 50 jobs at a corndog and fritter manufacturer. Anyone familiar with Hoosier waistlines knows there’s no shortage of corndogs in the state to justify taxpayers having to subsidize their production.
However, Stateline reports that Wisconsin officials are targeting Minneapolis-St. Paul manufacturers with a study that shows relocating to west central Wisconsin would save the Minnesota businesses millions of dollars due to lower worker’s compensation costs, corporate income taxes, and property taxes. Whatever else Wisconsin’s economic development bureaucrats are up to, this is the right idea.
Kennedy’s Health Bill: A First Look
A draft of Sen. Ted Kennedy’s health care reform bill is finally available, and it is difficult to overstate how far he would move us to a government-run health care system. An initial read-through reveals among the key provisions:
- An individual mandate, requiring that every American purchase a “qualified” insurance plan. (Sec. 161(a)) The mandate will be enforced through the tax code with Americans required to pay a penalty if they fail to comply. In an extraordinary delegation of congressional authority, the Kennedy bill would give the Secretaries of Treasury and Health and Human Services the power to determine what this penalty should be. Individuals would be required to submit information on their insurance status over the previous year to the Secretary of HHS, along with “any such other information as the Secretary may require.” (Sec. 6055(b)(2) and (3)). Individuals who already have insurance could keep it. However, if they changed plans (or presumably changed jobs), their new insurance would have to meet the definition of “qualified.”
- A “pay or play” employer mandate requiring employers to provide all workers with health insurance and pay a minimum amount of the premium, or pay a tax (Sec 162). Again, the amount of the new tax is left to the discretion of the Secretaries of HHS and Treasury. Some small employers would be exempt from the mandate, but the size of those firms remains TBA. (Sec. 3113(g)) Companies with fewer than 250 workers would be forbidden to self-ensure. (Sec. 2720)
- A new federal bureaucracy, the Medical Advisory Council, which would determine what benefits will be required to be part of your “qualified” insurance plan. (Sec. 3103(h) and (i)). Lest anyone think Congress won’t get involved. The Council’s decisions can be disapproved by Congress if, say, they don’t mandate inclusion by a favored provider group or disease constituency. (Sec 3103(g)).
- Massive new federal subsidies. Medicaid would be expanded to individuals earning 150 percent of the poverty level, and the federal government would pay all incremental costs of the increased enrollment. (Sec 152.) Single, childless adults would become eligible for Medicaid. Even more egregious, individuals and families with incomes between 150-500 percent of the poverty level ($110,250 for a family of four) would be eligible for subsidies on a sliding scale-basis.(Sec. 3111(b)(1)(A-G)).
- Insurers would be required to accept all applicants regardless of their health (guaranteed issue) and forbid insurers from basing insurance premiums on risk factors (Community rating). There does not appear to be any exception for lifestyle factors, such as smoking, alcohol or drug use, diet, exercise, etc. Thus, not only will the young and healthy be forced to pay higher premiums to subsidize the old and unhealthy, but the responsible will be forced to pay more to subsidize the irresponsible.
- A “public option” operating in competition with private insurance (Section 31__). How this plan would be funded, the level of premiums, etc. is left mostly TBA. In response to criticism, the Kennedy bill does require that the public plan pay providers 10 percent above Medicare reimbursement rates. (Sec 31__(B)). That would still allow for a considerable degree of cost-shifting to private insurance. And, we should recall that such promises are ephemeral. When Medicare began, proponents promised it would reimburse at the same rate as insurance. That promise didn’t last long.
- States would be prodded to set up “gateways,” similar to Massachusetts’ “connector.” (Sec 3104(a)) If a state fails to do so, the federal government will set one up for them. (Sec. 3104(d)) The federal government would provide grants to states to help them set up these gateways. The amount of the grants is, you guessed it, left to the discretion of the Secretary of HHS. Gateways may also fund their operations by assessing a surcharge on insurers. Sec. 3101(b)(5)(A)/
- A new federal long-term care program (Sec 171).
Kennedy does not include any estimate of how much his plan would cost, nor any proposal for how to pay for it.
More details will undoubtedly emerge, but it is very clear that the Kennedy plan would put one-sixth of the US economy and some of our most important, personal, and private decisions firmly under the thumb of the federal government.
Should You Vote on Keeping Your Local Car Dealership?
There are lots of reasons Washington should not bail out the automakers. Whatever the justification for saving financial institutions — the “lifeblood” of the economy, etc., etc. — saving selected industrial enterprises is lemon socialism at its worst. The idea that the federal government will be able to engineer an economic turnaround is, well, the sort of economic fantasy that unfortunately dominates Capitol Hill these days.
One obvious problem is that legislators now have a great excuse to micromanage the automakers. And they have already started. After all, if the taxpayers are providing subsidies, don’t they deserve to have dealerships, lots of dealerships, just down the street? That’s what our Congresscritters seem to think.
Observes Stephen Chapman of the Chicago Tribune:
The Edsel was one of the biggest flops in the history of car making. Introduced with great fanfare by Ford in 1958, it had terrible sales and was junked after only three years. But if Congress had been running Ford, the Edsel would still be on the market.
That became clear last week, when Democrats as well as Republicans expressed horror at the notion that bankrupt companies with plummeting sales would need fewer retail sales outlets. At a Senate Commerce Committee hearing, Chairman Jay Rockefeller, D-W.Va., led the way, asserting, “I honestly don’t believe that companies should be allowed to take taxpayer funds for a bailout and then leave it to local dealers and their customers to fend for themselves.”
Supporters of free markets can be grateful to Rockefeller for showing one more reason government shouldn’t rescue unsuccessful companies. As it happens, taxpayers are less likely to get their money back if the automakers are barred from paring dealerships. Protecting those dealers merely means putting someone else at risk, and that someone has been sleeping in your bed.
The Constitution guarantees West Virginia two senators, and Rockefeller seems to think it also guarantees the state a fixed supply of car sellers. “Chrysler is eliminating 40 percent of its dealerships in my state,” he fumed, “and I have heard that GM will eliminate more than 30 percent.” This development raises the ghastly prospect that “some consumers in West Virginia will have to travel much farther distances to get their cars serviced under warranty.”
Dealers were on hand to join the chorus. “To be arbitrarily closed with no compensation is wasteful and devastating,” said Russell Whatley, owner of a Chrysler outlet in Mineral Wells, Texas.
Lemon socialism mixed with pork barrel politics! Could it get any worse? Don’t ask: after all, this is Washington, D.C.
Filed under: Finance, Banking & Monetary Policy; Government and Politics; Tax and Budget Policy
Injustice of State Subsidies
My colleague Chris Edwards made a good point yesterday in his post on the injustice of federal subsidies. The wrangling between the states to haul in the federal largesse is wasteful, and getting worse. But the underlying issue in the article Chris cites — a state using taxpayer money to lure a company away from another state — is another wasteful activity that is all too common.
Instead of competing with other states to attract industry by lowering taxes and reducing regulations, it seems most state governors prefer a politically opportunistic method I call “press release economics.” Here’s how it works:
A state “economic development” agency offers an out-of-state company (or even an out-of-country company) tax breaks and/or direct subsidies to locate some or all of its business operations in that state. Most likely, the business would have located there anyhow due to myriad factors including demographics, transportation logistics, and workforce capabilities. Sometimes several states will engage in a “bidding war” to get a business to set up shop within their borders. The governor of the “winning” state will then issue a press release citing the new jobs and capital his administration has just brought to the state. The locating company usually tells the press that the winning state’s package helped seal the deal. The company and the governor’s press staff then typically arrange a photo-op at an orchestrated ground-breaking ceremony for the new facilities.
If a state is already bleeding jobs, as is often the case in the current economy, such press releases and photo-ops can be a political coup. Moreover, the governor will have given up, or foregone, relatively little in tax revenue in comparison to, say, cutting the state corporate income tax. This also leaves the governor with more money to spend on various vote-buying programs. I’m picking on governors, but the legislature generally prefers the press-release economics route for similar reasons. And if you’re a governor, why risk the headache of engaging the legislature in a fight over reducing corporate taxes, unemployment taxes, or any other tax — including personal income taxes and sales taxes — that effect industry when you can take the easy win?
Am I too cynical? Actually, I had first-hand experience with this issue when I worked in state government. My suggestion that the governor eliminate or reduce the state’s high corporate income tax rate, and “pay for it” — at least in part — by getting rid of the state’s corporate welfare apparatus, was routinely ignored for the reasons I cited above. That one would be hard-pressed to find support among the economics profession for the state corporate welfare give-away game means little to the majority of policymakers and their minions who naturally favor short-term political gain over long-term economic gain. That other companies already located within the state are stuck paying the regular tax rate, and are thus put at a competitive disadvantage, is a secondary or non-concern as well.
Another issue that I won’t delve into here is the fact that these giveaways often blow up in a state’s face when the locating company ends up not producing the jobs it promised and/or it relocates to another state or country after pocketing the free taxpayer money. Anyhow, journalists should be on the lookout for more press-release economics schemes coming from the states as revenues remain tight and politicians become desperate to demonstrate they’re “doing something.” Journalists should examine a state’s tax structure when a taxpayer giveaway is announced to see if perhaps the governor is masking economic-unfriendly fiscal policies.
Note: South Carolina Gov. Mark Sanford proposed late last year to do exactly what I recommended: eliminate the state’s corporate income tax, offset in part by the elimination of corporate tax incentives. There is hope.
Injustice of Federal Subsidies
Ohio lawmakers are hot under the collar about federal stimulus dollars possibly helping Georgia bid away one of its big employers. Here’s the Dayton Daily News:
NCR’s news release touting its decision to move jobs from Dayton to the Atlanta, Ga. suburbs includes one factoid that has Ohio lawmakers in a fury: The City of Columbus, Ga. plans to use federal stimulus dollars to buy a building and construct another to accommodate the 870 manufacturing jobs expected to come to the that Atlanta suburb. ‘The fact that economic stimulus dollars were used to move an Ohio company to Georgia at taxpayer expense is an outrage,’ said state Sen. Jon Husted.
Added U.S. Rep. Pat Tiberi, R-Columbus: “Federal stimulus money is being used to create winners and losers among workers in different states and that’s just not right; it’s dirty.”
All I can say to both parties is that’s what you get for building an imperial city on the Potomac and spending the last few decades destroying the constitutional principle of federalism. As I’ve described in this study, regional warfare over federal subsidies has escalated in recent years. It’s horribly wasteful, and it’s getting worse.
The Economic Case for Health Care Reform
There’s an old Yiddish saying that, “If my bubba had wheels she’d be a trolley.” So goes the logic of the Obama administration in their paper released yesterday, “The Economic Case for Health Care Reform.” Their claim is that reducing health care costs would help the economy. Yes, if health care costs were reduced it would likely help the economy, though we should remember that the health care industry is part of the economy.
There is nothing in Obamacare, however, that will reduce costs. In fact, expanding coverage may cause costs to rise. One study by MIT’s Amy Finkelstein suggests that the prevalence of insurance itself has roughly doubled the cost of health care. So, if Obama succeeds in expanding insurance coverage, it’s very likely to increase the cost of care.
Take Massachusetts for example. Three years ago, Massachusetts governor Mitt Romney signed into law one of the most far-reaching experiments in health care reform since President Bill Clinton’s ill-fated attempt at national health care. Proponents promised the reforms would reduce health care costs, suggesting the price of individual insurance policies would be reduced by 25-40 percent. In reality, however, insurance premiums rose by 7.4 percent in 2007, 8-12 percent in 2008, and are expected to rise 9 percent this year. This is compared to a nationwide average increase of 5.7 percent over the same three years. Nationally, on average, health insurance for a family of four costs $12,700; in Massachusetts, coverage for the same family costs an average of $16,897.
In fact, since the bill was signed, health care spending in the state has increased by 23 percent. Thus, despite individual and employer mandates, the creation of an insurance connector and other measures that increase insurance regulations, Massachusetts has failed to bring costs down.
President Obama and Congressional leaders have endorsed expanding coverage in similar ways to Massachusetts. The proposals would undoubtedly make it easier for some people to get coverage, but would also raise insurance costs for the young and healthy, making it more likely they would go without coverage. This leaves two choices: revert to the individual mandate (President Obama opposed the mandate as a candidate) or increase subsidies to try to cut costs to young and healthy individuals, thereby adding to the already substantial cost of the proposed plans.
Ultimately, controlling costs requires someone to say “no,” whether the government (as in single-payer systems with global budgets), insurers (managed care) or health care consumers themselves (by desire or ability to pay). In reality, any health care reform will have to confront the fact that the biggest single reason costs keep rising is that the American people keep buying more and more health care.
Energy Mismanagment
Try as they might, supporters of big government spending cannot make federal programs work very well. The Department of Energy, for example, has been plagued by mismanagement, cost overruns, and scandals for decades.
Today, the Washington Post reports on the poor performance of DoE’s environmental clean-up programs. As I reviewed in the linked essay, these enormously costly programs have been plagued by mismanagement for at least 25 years. Last week, Lou Dobbs lambasted DOE’s National Ignition Facility in California for its huge cost overruns (Hat Tip: Harrison Moar).
I summarize these costly projects and other DoE boondoggles here. With bipartisan support for increases to energy subsidies, we can expect a raft of bipartisan boondoggles developing over coming months and years.
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