Archives: August, 2010

Sunlight Before Signing—-Pre-Posting Is Not OK

A regular, established practice of posting bills online when they’re sent him by Congress would fulfill President Obama’s Sunlight Before Signing promise, made to roars of applause on the campaign trail. It would allow Americans easy access to the most important part of what Congress and the president do.

But posting bills before Congress passes them, getting a jump on the five days of public review the president promised, seriously undercuts the value of Sunlight Before Signing.

This morning, Whitehouse.gov is displaying on its pending legislation page a link to “H.R. 1586 - To impose an additional tax on bonuses received from certain TARP recipients.” This bill has not been passed by both houses of Congress nor presented to the president.

H.R. 1586 is a “shell bill” that Congress has been batting back and forth, and it has covered various subject matters in its busy life. It indeed started out as a bill to tax the bonuses of executives in TARP-subsidized firms. When it passed the House, though, it had become the “Aviation Safety and Investment Act of 2010.” And this week it was amended in the Senate to contain a potpourri of spending and revenue programs. (WashingtonWatch.com cost estimate: $125 per U.S. family.)

Lets say a high schooler has been assigned by her teacher to monitor the bills President Obama receives from Congress. From the White House’s pending legislation page, she clicks on a link to find a bewildering hodgepodge of bill versions on the Thomas page for the bill. (Click on the image at right to see a screen capture.)

And none of the bill versions has passed Congress! Thomas, the Library of Congress’ legislative tracking service, tells visitors that the last bill listed is most recent. But the current version of the bill is item four of six, referred to as the “XXXXXXAct ofXXXX.” Thanks to Whitehouse.gov, our high schooler is misled into believing that President Obama will soon sign a tax on bonuses given to TARP-slurping executives when in fact a variety of other policies may soon pass.

The promise to post bills online for five days was a simple, common-sense transparency rule. It’s flabbergasting to find that it can’t be carried out in a simple, methodical way to give life to the idea that the people are entitled to oversee the government.

You get a bill from Congress, you post it. You wait five days, you sign it. Promise fulfilled! It’s not rocket science. Pre-posting is not OK.

We Aren’t Exaggerating When We Rail Against Threats to Economic Liberty

Oregon officials told a 7-year-old with a lemonade stand that she needed to obtain a temporary restaurant license or incur a fine.

I’m rendered speechless, but Josh Blackman exploits the “teaching moment”:

If you are generally opposed to any notion of the right to pursue an honest living, ask yourself, why does it bother you so much that this little girl cannot sell lemonade. Then, ask yourself what you think about other regulations that stifle the entrepreneur. This story does not tug on our heart strings simply because she is adorably selling lemonade for 50 cents a cup (suggested price) at a fair. It tugs on our heart strings because the state is unnecessarily clamping down on this little girl’s ability to make some money.

More from Tim Sandefur.

When Keynesians Attack

If I was organized enough to send Christmas cards, I would take Richard Rahn off my list. I do one blog post to call attention to his Washington Times column and it seems like everybody in the world wants to jump down my throat. I already dismissed Paul Krugman’s rant and responded to Ezra Klein’s reasonable criticism. Now it’s time to address Derek Thompson’s critique on the Atlantic’s site.

At the risk of re-stating someone else’s argument, Thompson’s central theme seems to be that there are many factors that determine economic performance and that it is unwise to make bold pronouncements about Policy A causing Result B. If that’s what Thompson is saying, I very much agree (and if it’s not what he’s trying to say, then I apologize, though I still agree with the sentiment). That’s why I referred to Reagan decreasing the burden of government and Obama increasing the burden of government — I wanted to capture all the policy changes that were taking place, including taxation, spending, monetary policy, regulation, etc. Yes, the flagship policies (tax reduction for Reagan and so-called stimulus for Obama) were important, but other factors obviously are part of the equation.

The biggest caveat, however, is that one should always be reluctant to make sweeping claims about what caused the economy to do X or Y in a given year. Economists are terrible forecasters, and we’re not even very proficient when it comes to hindsight analysis about short-run economic fluctuations. Indeed, the one part of my original post that causes me a bit of regret is that I took the lazy route and inserted an image of the chart from Richard’s column. Excerpting some of his analysis would have been a better approach, particularly since I much prefer to focus on the impact of policies on long-run growth and competitiveness (which is what I did in my New York Post column from earlier this week  and also why I’m reluctant to embrace Art Laffer’s warning of major economic problems in 2011).

But a blog post is no fun if you just indicate where you and a critic have common ground, so let me identify four disagreements that I have with Thompson’s post:

(1) To reinforce his warning about making excessive claims about different recessions/recoveries, Thompson pointed out that someone could claim that Reagan’s recovery was associated with the 1982 TEFRA tax hike. I’ve actually run across people who think this is a legitimate argument, so it’s worth taking a moment to explain why it isn’t true.

When analyzing the impact of tax policy changes, it’s important to look at when tax changes were implemented, not when they were enacted (data on annual tax rates available here). Reagan’s Economic Recovery Tax Act was enacted in 1981, but the lower tax rates weren’t fully implemented until 1984. This makes it a bit of a challenge to pinpoint when the economy actually received a net tax cut. The tax burden may have actually increased in 1981, since the parts of the Reagan tax cuts that took effect that year were offset by the impact of bracket creep (the tax code was not indexed to protect against inflation until the mid-1980s). There was a bigger tax rate reduction in 1982, but there was still bracket creep, as well as previously-legislated payroll tax increases (enacted during the Carter years). TEFRA also was enacted in 1982, which largely focused on undoing some of the business tax relief in Reagan’s 1981 plan. People have argued whether the repeal of promised tax relief is the same as a tax increase, but that’s not terribly important for this analysis. What does matter is that the tax burden did not fall much (if at all) in Reagan’s first year and might not have changed too much in 1982.

In 1983, by contrast, it’s fairly safe to say the next stage of tax rate reductions was substantially larger than any concomitant tax increases. That doesn’t mean, of course, that one should attribute all changes in growth to what’s happening to the tax code. But it does suggest that it is a bit misleading to talk about tax cuts in 1981 and tax increases in 1983.

One final point: The main insight of supply-side economics is that changes in the overall tax burden are not as important as changes in the tax structure. As such, it’s also important to look at which taxes were going up and which ones were decreasing. This is why Reagan’s 1981 tax plan compares so favorably with Bush’s 2001 tax plan (which was filled with tax credits and other policies that had little or no impact on incentives for productive behavior).

(2) In addition to wondering whether one could argue that higher taxes triggered the Reagan boom, Thompson also speculates whether it might be possible to blame the tax cuts in Obama’s stimulus for the economy’s subsequent sub-par performance. There are two problems with that hypothesis. First, a substantial share of the tax cuts in the so-called stimulus were actually new spending being laundered through the tax code (see footnote 3 of this Joint Committee on Taxation publication). To the extent that the provisions represented real tax relief, they were much more akin to Bush’s non–supply side 2001 tax cuts and a far cry from the marginal tax-rate reductions enacted in 1981 and 2003. And since even big tax cuts have little or no impact on the economy if incentives to engage in productive behavior are unaffected, there is no reason to blame (or credit) Obama’s tax provisions for anything.

(3) Why doesn’t anyone care that the Federal Reserve almost always is responsible for serious recessions? This isn’t a critique of Thompson’s post since he doesn’t address monetary policy from this angle, but if we go down the list of serious economic hiccups in recent history (1974-75, 1980-82, and 2008-09), bad monetary policy inevitably is a major cause. In short, the Fed periodically engages in easy-money policy. This causes malinvestment and/or inflation, and a recession seems to be an unavoidable consequence. Yet the Fed seems to dodge any serious blame. At some point, one hopes that policy makers (especially Fed governors) will learn that easy-money policies such as artificially low interest rates are not a smart approach.

(4) Thompson writes, “Is Mitchell really saying that $140 billion on Medicaid, firefighters, teachers, and infrastructure projects are costing the economy five percentage points of economic growth?” No, I’m not saying that and didn’t say that, but I have been saying for quite some time that taking money out of the economy’s left pocket and putting it in the economy’s right pockets doesn’t magically increase prosperity. And to the extent money is borrowed from private capital markets and diverted to inefficient and counter-productive programs, the net impact on the economy is negative. Thompson also writes that, “Our unemployment picture is a little more complicated than ‘Oh my god, Obama is killing jobs by taking over the states’ Medicaid burden!’” Since I’m not aware of anybody who’s made that argument, I’m not sure how to respond. That being said, jobs will be killed by having Washington take over state Medicaid budgets. Such a move would lead to a net increase in the burden of government spending, and that additional spending would divert resources from the productive sector of the economy.

The moral of the story, though, is to let Richard Rahn publicize his own work.

Kagan’s Confirmation Could Be High-Water Mark for Big Government

Elena Kagan’s confirmation represents a victory for big government and a view of the Constitution as a document whose meaning changes with the times.  Based on what we learned the last few months, it is clear that Kagan holds an expansive view of federal power – refusing to identify, for example, any specific actions Congress cannot take under the Commerce Clause.  She will rarely be a friend of liberty on the Court.

It is thus telling that Kagan received the fewest votes of any Democratic nominee to the Supreme Court in history, beating the record set only last year by Sonia Sotomayor.  Even several senators who had voted for Sotomayor voted against Kagan, including Democrat Ben Nelson – as did Scott Brown, the darling of these high-profile Senate votes.

It was Scott Brown’s election, after all, that signaled that last year’s elections in Virginia and New Jersey were no fluke, that whether people lived in a Red, Blue, or Purple state, they were tired of bailouts, “stimulus,” re-regulation, and, especially, the government takeover of one-sixth of our economy.  This anger has only grown since then, making itself felt most recently in Missouri voters’ overwhelming (71-29) rejection of the individual health insurance mandate.

“Where does the government get the constitutional authority to do this?” the cry goes up across the land.  Elena Kagan won’t give a satisfactory answer but the American people are right to continue asking.

An Australian Lesson about Capital Gains Tax Rates and Revenues

A decade ago, amid much controversy, I persuaded the Australian government to cut the capital gains tax rate in half.

Stephen Kirchner, an economist from Australia’s leading think tank, the Center for Independent Studies, reviewed the results last November.

This a brief summary:

The introduction of capital gains tax discounts for individuals and funds as part of the 1999 Ralph business tax reforms has received a lot of bad press, but much of this commentary is ill-informed… .

Those who called for reform of Australia’s capital gains tax regime 10 years ago argued that the Ralph reforms would likely raise more revenue because of the increased incentive they provided for taxpayers to realise capital gains that would otherwise go untaxed. Supply-side economist Alan Reynolds predicted that the reforms would raise twice as much revenue in the long run. He was right. The capital gains tax share of Commonwealth tax revenue nearly doubled between the introduction of the Ralph reforms and 2006–07. In absolute terms, CGT revenue rose from $4.6 billion in 1998–99 to $17.3 billion in 2006–07. CGT revenue growth has been strongest among individuals, who received the larger discount of 50%, followed by funds, which received a 33% discount. The slowest CGT revenue growth has been from companies, which received no discount.

The data suggest that the Ralph CGT reforms have resulted in more tax revenue through increased realisations of capital gains. They have thus strengthened rather than weakened the ability of the tax system to serve equity objectives. The Ralph reforms demonstrate the basic supply-side insight that lower effective tax rates lead to faster growth in the tax base and tax revenue.

Grigori Rasputin Bailout

Sending billions of federal taxpayer dollars to teachers and other public school employees is the bailout that just won’t die. It’s been sliced, shot up in a firefight between Democrats, and even had a battle with food stamps, but it just can’t be killed!

Now, let’s be clear: This is not some wonderful crusade all about helping “the children.” It is pure political evil, a naked ploy to appease teachers’ unions and other public school employees that Democrats need motivated for the mid-term elections. It has to be, because the data are crystal clear: We’ve been adding staff by the truckload for decades without improving achievement one bit. Since 1970 (see the charts below) public school employment has increased 10 times faster than enrollment, while test scores have stagnated.

But suppose there were some rational reason to believe that we need to keep staffing levels sky-high despite getting no value for it. Lots of teachers’ jobs could be saved without a bailout if unions would just accept pay concessions like millions of the Americans who fund their salaries. But all too often, they won’t.

Sadly, this is all just part of the one education race that Washington is always running, and it absolutely isn’t to the top. It is the incessant race to buy votes. And guess what? Despite its reputation even among some conservatives, the Obama administration, just like Congress, is running this race at record speeds.

The Two GOPs

As the fall elections approach, two factions within the congressional GOP have emerged. The first faction, which generally controls the Republican leadership, is short-term oriented and just wants to return the GOP to power in Congress. Riding the wave of voter discontent over the government’s finances is a means to an end – the end being power.

The second, and considerably smaller faction, is more ideas driven and views the upcoming election as an opportunity to push for substantive governmental reforms. Whereas the “power first faction” offers platitudes about smaller government, the “ideas first faction” isn’t afraid to offer relatively bold suggestions for confronting the federal government’s unsustainable spending.

The ideas first faction is willing to publicly recognize that runaway entitlement spending must be reigned in and offer solutions to address the problem. Representatives Ron Paul, Michelle Bachmann, and Paul Ryan, for example, aren’t shying away from advocating a phase-out of the current Social Security system, which is headed for bankruptcy. In contrast, the power first faction lambasted Democrats for wanting to “cut Medicare” during the recent legislative battle over Obamacare.

In Ryan’s case, he has given the power first faction heartburn by pushing his “Roadmap for America’s Future,” which confronts the entitlement crisis head-on. Although Ryan’s Roadmap is not the ideal from a limited government standpoint, it’s a credible offering with ideas worth discussing. Even though the Ryan plan has received some favorable notice by the mainstream media, the power first faction would probably prefer Paul and his Roadmap went away.

From the Washington Post:

Of the 178 Republicans in the House, 13 have signed on with Ryan as co-sponsors.

Ryan’s proposals have created a bind for GOP leaders, who spent much of last year attacking the Democrats’ health-care legislation for its measures to trim Medicare costs. House Minority Leader John A. Boehner (R-Ohio) has alternately praised Ryan and emphasized that his ideas are not those of the party.

Ryan has not helped to make it easy for his leaders. He is a loyal Republican, but he is also perhaps the GOP’s leading intellectual in Congress and occasionally seems to forget that he is a politician himself.

At a recent appearance touting the Roadmap at the left-leaning Brookings Institution, someone asked Ryan why more conservatives weren’t behind his budget plan. “They’re talking to their pollsters,” Ryan answered, “and their pollsters are saying, ‘Stay away from this. We’re going to win an election.’”

His remarks illustrate the tension among Republicans over their fall agenda. Some strategists say the GOP should focus on attacking the Democrats; others want the party to offer a detailed governing plan.

Ryan’s ideas can be contrasted with those of the House Republican Conference Committee, which is a key power first organization. The HRCC just released a platitude-filled August recess packet for Republican House members to recite in talking to their constituents. Entitled “Treading Boldly,” the cover prominently features Teddy Roosevelt, which should immediately send chills down the spines of anyone believing in limited government.

The document is not “bold.” Take for example the five proposals to “Reduce the Size of Government”:

  • Freeze Congress’ Budget. This has populist appeal but does virtually nothing to reduce the size of government. The legislative branch will spend approximately $5.4 billion this year. That’s less than the federal government spends in a day.
  • Eliminate Unnecessary or Duplicative Programs. This proposal is so vacuous that even House Speaker Nancy Pelosi supports it. If the GOP isn’t willing to name a dozen or so substantial “unnecessary” programs to eliminate, then this promise can’t be taken seriously.
  • Audit the Government for Ways to Save. Yawn. Isn’t that what the $600 million Government Accountability Office does? The document says “Congress should initiate a review of every federal program and provide strict oversight to uncover and eliminate waste and duplication.” Nothing says “not serious” like calling for the federal government to eliminate “waste.” Waste comes part and parcel with a nearly $4 trillion government that can spend other’s people money on pretty much anything it wants to.

To be fair, there are sound proposals contained in the document such as privatizing Fannie Mae and Freddie Mac. But on the issue of entitlements, the HRCC punts:

The current budget process focuses only on about 40 percent of the budget and just the near-term – usually the next twelve months. We know that we have significant medium and long-term fiscal challenges fueled by the demographic changes in our country. The Government Accountability Office estimates that we have $76 trillion in unfunded liabilities. Rather than simply ignoring these challenges, Congress should reform its budget process to ensure that Congress begins making the decisions that are necessary to update our entitlement programs to secure them for today’s seniors and save them for future generations.

Had the Republicans not swept into office in 1994 on a promise to reduce government only to make it bigger, the power first faction’s “trust us” argument might be more credible. However, given that it already views the GOP’s ideas first faction as skunks at the party, voters who are expecting a new Republican congressional majority to downsize government might not want to hold their breath.