Archives: 08/2010

Dishonest British Budgeting…Just Like We Do It in America

According to news coverage, United Kingdom Prime Minister Cameron is imposing deep and savage budget cuts. I was interviewed by the BBC recently, for instance, and asked whether 25 percent spending reductions were too harsh. And here’s an excerpt from a New York Times story that is very representative of the news coverage.

Like a shipwrecked sailor on a starvation diet, the new British coalition government is preparing to shrink down to its bare bones as it cuts expenditures by $130 billion over the next five years and drastically scales back its responsibilities. The result, said the Institute for Fiscal Studies, a research group, will be “the longest, deepest sustained period of cuts to public services spending” since World War II. …Public-sector unions are planning a series of strikes. Charities — which Mr. Cameron has said should take over some of the responsibilities now held by the state — say that they are at risk of collapse because they are so dependent on government money. And the chief executive of the Supreme Court, the country’s highest, said she did not know whether the court would be able to function at all if its budget were cut by 40 percent.

To be blunt, this type of analysis is completely false. There are no budget cuts in the United Kingdom, at least in terms of total government spending. Instead, the politicians are measuring cuts against some imaginary baseline, which is the same scam that happens in Washington. So if spending increases by 4 percent instead of 7 percent, that is characterized as a 3 percent budget reduction. The chart shows what is happening with overall government spending in the United Kingdom. Notwithstanding phony stories about budget cuts, spending in Prime Minister Cameron’s first year is climbing by more than 4 percent – twice as fast as needed to keep pace with inflation.

This doesn’t mean that Cameron isn’t doing anything right. There is a two-year pay freeze for bureaucrats, for instance, which is at least a small step in the right direction. But the Tory-Liberal Democrat coalition is not a good role model for those who want limited government and fiscal responsibility. There are promises of spending restraint in future years, but those belong in the I’ll-believe-it-when-I-see-it category. Spending is supposed to increase by less than 1 percent in next year’s budget, for instance, but politicians are very good with tough talk of fiscal discipline in future years. But if we judge them by what they’re doing today rather than what they’re claiming will happen in the future, Cameron’s policies leave much to be desired.

The tax side of the fiscal equation is even more depressing. There is small reduction in the corporate tax rate, but otherwise there is considerable bad news. The new government is leaving in place the new 50 percent top tax rate imposed by Gordon Brown as an election-year class-warfare gimmick. It is boosting the capital gains tax rate from 18 percent to 28 percent. And it increased the VAT rate from 17.5 percent to 20 percent.

More on the Expansion of ‘Human Rights’

POLITICO Arena asks a second question today:

Is Arizona Gov. Jan Brewer right to complain about the Obama State Department’s inclusion of Arizona’s new immigration law in its report to the U.N. on human rights conditions in the U.S.?

My response:

Quite apart from Gov. Brewer’s complaint, the Obama State Department’s first report on human rights conditions in the U.S., submitted to the U.N. Human Rights Council last week pursuant to a U.N. mandate that members conduct self-assessments every four years, reads like a politically correct campaign brochure, touting everything from the administration’s stimulus spending to ObamaCare to financial reform legislation as promoting “human rights.”

We’re told, for example, that America falls short on “fairness, equality, and dignity” in such areas as education, health, and housing. And what’s the evidence? Among other things, it’s that unemployment for blacks and Hispanics is higher than for whites, that there’s racial and ethnic disparity in home ownership rates, and that “whites are twice as likely as Native Americans to have a college degree.” Or consider this claim: “Asian-American men suffer from stomach cancer 114 percent more often than non-Hispanic white men.” That’s a “human rights” problem?  

What the administration has done here is conflate real human rights – the rights protected under the U.N. Convention on Civil and Political Rights, to which the U.S. is a party – with specious “rights” – the claims found in the Convention on Economic, Social and Cultural Rights – which the Senate has refused to ratify. And all of this is submitted in a doument to be scrutinized by such human rights exemplars on the council as Russia, China, Saudi Arabia, and Cuba.  

After the U.S. ambassador walked out of the predecessor U.N. Commission on Human Rights in 2004, following the admission of Sudan to the commission in the midst of ethnic cleansing in Darfur, we did not join the commission’s replacement in 2006, the new U.N. Council on Human Rights, not wanting to lend that body any credibility. Last year, however, the Obama administration joined the council – part of its outreach to the world. Enough said.

OSHA and a Chimney Rebuilder

Bill McClellan, the excellent St. Louis Post-Dispatch columnist, had a must-read column the other day telling the story of Gary Heffernan, a 35-year veteran of the tuckpointing (masonry repair) business, and his recent run-in with an inspector from the federal government’s Occupational Safety and Health Administration (OSHA). The inspector wrote up Heffernan with thousands of dollars in fines, though no one had been injured and the business’s only other employee – Heffernan’s nephew – had not complained. The violations? I won’t spoil the suspense, but they included, to name one, letting the nephew work on a chimney without posted warnings of the toxic dangers of sand. [Whole column here.]

Regulatory ordeals like Heffernan’s may soon become much more frequent and more likely to imperil business survival, under proposed legislation that would greatly expand OSHA’s authority [GovTrack/Thomas; Chamber letter in opposition]. Here’s a description from J.L. Wilson of Associated Oregon Industries:

HR 5663, also known as the Miner Safety and Health Act of 2010, included dramatic changes to OSHA’s enforcement procedures, penalties, abatement and whistleblower provisions. The proposed changes were extremely costly to implement, difficult to administer, created more conflict in the workplace, and encouraged lawsuits. For example, HR 5663 imposed new and vague standards for criminal liability, including felony criminal sanctions against “any company officer or director” for “knowing” violations of OSHA. The bill; however, provided no definition of “knowing,” nor did it provide any limitation or guidance on which “officers or directors” could face criminal charges.

Notice the bill’s misleading name, intended to capitalize on much-publicized recent disasters in underground mines; despite this terminology, the bill would impose broad new federal regulation in workplaces of every other sort as well. And note that although Wilson used the past tense in his account, the bill is very much alive: following hearings before the House Education and Labor Committee it cleared the committee late last month and now heads for the House floor.

Tyson’s Keynesian Confusion

UC-Berkeley Professor, and former Clinton economic advisor, Laura Tyson lays out why she believes we need a second stimulus.   Her op-ed is a worthwhile read for understanding the basic assumptions behind modern Keynesian thinking.

Foremost among those assumptions is a belief we are in a recession due to “a collapse in private demand.”    In Professor Tyson’s world, if only everyone would buy more, everything would be OK (starts to sound a lot like President Bush in 2002).  But what exactly has been going on with private demand?  Judged by private personal consumption expenditures, it is actually up and higher than at any point during the boom, after reaching bottom in the Spring of 2009.

The following chart, from the St. Louis Federal Reserve, nicely illustrates the direction in private demand.

So if Tyson’s narrative that weak demand is holding back employment is false, or at least incomplete, then what is holding back unemployment?  In a word:  Investment.

Unlike consumption, which has largely rebounded, investment today is about 20% below its peak.  Of course we should keep in mind, that peak was a bubble.  The good news is that investment in such things a equipment and software, are slowly, but steadily, climbing back.  The real drag on investments is from the construction industry, particularly residential, which is still down about 50% from its peak. 

What most of this suggests to me is that unemployment is being driven mainly by a mismatch between skills of the unemployed and available job openings.  You simply cannot, overnight, turn a construction worker into a nurse or computer programmer.  Tyson seems to half-way recognize this when she argues for stimulus to be directed into education, although she only seems to be talking about future skills mismatch and ignores the mismatch facing the economy today.  For if increased aggregate demand is all we need today to reduce unemployment, then wouldn’t the same hold true for future unemployment, removing the need for educational funding?

At the end of the day, what we need to get employment increasing is to create an environment where business feel confident to invest.

A Party Thumb On the Primary Scale?

Today Politico Arena asks:

Should national party organizations stay out of primaries?

My response:

Political parties are, strictly speaking, private entities. Therefore, they’re free to insinuate themselves into primary contests, or not. But as they do, so they will be judged.

Haley Barbour was absolutely right, therefore, to say that national party organizations shouldn’t endorse (ordinarily, incumbents) in primaries – much less assist one candidate over others. To the extent they do, they confirm the view of many Americans that the political class is more interested in preserving power – its own – than in governing for the common good under constitutional principle.

Do we need any better evidence than the way Republicans ran from the term limits plank in the Contract with America after they took over Congress in 1995? Oh, I forgot, there is better evidence: the way Democrats never even paid lip service to term limits.

Free Parking Revisited

Two weeks ago, I responded with dismay to George Mason University economist Tyler Cowen’s op-ed against free parking. This led to a variety of responses in the blogosphere, none of which address my point. Instead, they all argue against the minimum-parking requirements found in many zoning regulations.

In particular, Cowen himself points to a study that found that Los Angeles’ minimum-parking requirements forced some developers to build more parking than they would have without such requirements. But Cowen’s op-ed was titled, “Free Parking Comes at a Price,” not “Minimum-Parking Requirements Come at a Price.” The op-ed was based on a book by Donald Shoup titled The High Cost of Free Parking, not The High Cost of Minimum-Parking Requirements.

Nothing I wrote defended minimum-parking requirements. Instead, I pointed out that, even without such requirements, most businesses still provide free parking for their employees and customers. It is one thing to oppose minimum-parking requirements as an unnecessary form of government regulation. It is another thing to favor government regulation mandating that private businesses charge for parking.

That certainly seems to be what Cowen favors. His article concluded, “if we’re going to wean ourselves away from excess use of fossil fuels,” then “imposing higher fees for parking may make further changes more palatable by helping to promote higher residential density and support for mass transit.” There are a lot of fallacies in those statements. Will higher residential density significantly reduce use of fossil fuels? Probably not. Will support for mass transit significantly reduce use of fossil fuels? Probably not. Even if you believe we excessively use fossil fuels, do indirect tools such as “imposing parking fees” make sense when more direct tools are available? Certainly not.

Claims that parking is subsidized would carry a lot more weight if 5 percent of the people drove and the other 95 percent had to pay 75 percent of the cost. Those are, in fact, the ratios for transit (less than 5 percent of American workers take transit to work but fares cover less than 25 percent of transit costs), which Cowen wants to promote. With driving, the numbers are practically reversed: discounting air travel, more than 90 percent of travel is by car and auto drivers pay more than 90 percent of the costs of driving.

I suspect someone has made the case for minimum-parking requirements: without such requirements, businesses might try to externalize some of their costs by letting someone else provide parking for them. But let’s ignore that. Cities should get rid of zoning codes that have minimum-parking requirements. (Cities should get rid of zoning codes period.) Cities should charge market rates for on-street parking and any publicly owned off-street parking. But even if these things happen, private businesses will still provide free parking to their employees and customers in many areas – in fact, practically everywhere outside of old downtowns.

Note: My previous post on this subject quoted Cowan quoting Donald Shoup saying, “On average [in the U.S.] a new parking space has cost 17 percent more than a new car.” I commented that this was ridiculous. Someone sent an email saying that Shoup actually estimates there are four parking spaces for every car, and the combined cost of those spaces is more than the average car. Without searching Shoup’s 733-page tome to check his arithmetic, I am still not certain why this is important.

Most people who buy homes want to room to park their cars. People also need room to park at work and elsewhere. Should we only have one bathroom for every four houses because the average bathroom is in use only a couple of hours every day? Is it a waste that almost every home in the country has a kitchen, when there are plenty of kitchens in restaurants (not to mention many workplaces) as well? Then why is it a waste that homes, as well as offices, stores, and other businesses, have parking?

Bernanke on Monetary Policy

Every August, the Federal Reserve Bank of Kansas City sponsors a conference on monetary policy. It is the most valued invitation of the year for central bankers and Fed watchers. The Fed Chairman typically presents his views on monetary policy and the economy, and his talk inevitably makes headlines. (A select few reporters are invited.)

This year, Ben Bernanke promised the Fed will do whatever it takes to aid the faltering U.S. recovery, and most of all to prevent deflation. The problem for the Fed Chairman is that the central bank is plainly running out of options, as some had the cheek to observe. He suggested the Fed could do more of the same (purchase long-term securities), or try something new and untested (tweak the interest rate it pays on bank reserves).

Bernanke also suggested a third option, plus offered some professorial speculation on another. Taken together, these suggest the Fed may be prepared to chart a dangerous course.

In its policy statement, the Federal Open Market Committee has promised to keep interest rates low “for an extended period.” Bernanke suggested (as the third option) that the FOMC might make it clear that rates will remain low for an even longer period than markets are currently expecting. Within the Committee, there have been calls for caution and to remove the “extended period” language from the statement. These have been led by Thomas Hoenig, president of the KC Fed and host of the conference. By suggesting the only option was lengthening the period of low interest rates, Bernanke delivered the back of his hand to his host and the other inflation hawks on the FOMC.

Bernanke then mused about suggestions by some economists that perhaps the Fed should set an inflation target – that is, promise to deliver higher inflation rates to stimulate the economy. Fed chairmen do not engage in abstract speculation about policy, and to raise the inflationary option gave it place above all other possibilities. Bernanke hastened to add that there was at present no support for such a policy within the FOMC, and it “is inappropriate for the United States in current circumstances.”

In other words, the Fed chairman is thinking about an inflationary policy and, if circumstances change and he can build support within the FOMC, he is willing to implement it. When central bankers speculate in public about the possibility of an inflationary monetary policy, the currency is in jeopardy and the country in peril.