Archives: October, 2010

This Week in Government Failure

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

Fear Can Affect Thinking, But Not This Time

In his Washington Post op-ed this morning, “Obama Underappreciation Syndrome,” Charles Krauthammer mocks President Obama’s latest explanation for his, and his party’s, low popularity. “[W]e’re hard-wired not to always think clearly when we’re scared. And the country is scared,” explains the president.

This is rich loam for derision. “Opening a whole new branch of cognitive science – liberal psychology – Obama has discovered a new principle: The fearful brain is hard-wired to act befuddled, i.e., vote Republican.”

Krauthammer rightly takes the campaigning president to task. But he scopes his critique a bit broadly. It’s pretty close to uncontroversial that the logic centers of the brain shut down when certain stimuli produce a fright response. That’s good. Leaping at the sight of a snake was an important part of surviving in the thousands of years before ambulances and anti-venom.

But not all stresses produce this response, and President Obama is misapplying the fright response to the current climate of unemployment, expanded government control of society, and galloping spending and debt. The fear response doesn’t explain Democrats’ unpopularity.

But it does explain other parts of our policy discourse. There is at least a good argument—one we featured in our book Terrorizing Ourselves—that fear preempts careful, rational cogitation about some risks. The existence of another human animated to kill you in ways you can’t predict can interfere with the mental responses we need to secure both ourselves and the blessings of liberty. There may be chronic fear-based habits; the brain grows to meet the demands of its host.

But none of this relates to the economic and political stresses of today or the related woes of the Democratic Party. Rather, it is economic and political conditions that voters are responding to, in a manner that is by no means illogical or pathological.

This Just In: People Engaged in Politics!

The New York Times devotes major space today to a story disclosing campaign spending by the U.S. Chamber of Commerce. They have uncovered some pretty shocking stuff. Apparently the Chamber of Commerce is raising money from businesses to fund campaign ads. The Times has the goods:

[A] review of the nearly 70 chamber-produced ads found that 93 percent of those that have run nationwide that focus on the midterm elections either support Republican candidates or criticize their opponents.

What is the world coming to? An organization can raise money and use it to support or criticize candidates for office? It’s almost like we have freedom of political speech in the United States. Shocking stuff.

The New York Times may not like freedom of speech much for those who disagree with its editorial line, but I am happy we have freedom of the press as well as of speech. The freedom of the press means I can get additional information about the funding of the current election.

The Wall Street Journal reports that the American Federation of State, County and Municipal Employees (AFSCME), a leading union of government employees, has raised and will spend the most money on the mid-term election. More shocking stuff!

AFSCME is spending money to support Democrats who in turn will be expected to tax and spend to add or to save … jobs for public employees! I thought businesses were the only organizations that engaged in self-interested politics. Apparently not.

But AFSCME has the right to raise and spend the $90 million, and so did George Soros, and so does every misguided and hapless person and organization that for some reason disagrees with me about everything. Freedom of speech does not mean the “freedom” to agree with me or the New York Times.

In sum, the silly season is upon us as election day looms. Be prepared for more “news reporting” about the demons that are “undermining our democracy.” And give thanks that we don’t have to depend on just one source of news or speech in coming to judgment on those who hold political power.

Earmarked for Corruption

Florida Times-Union reporter Matt Dixon deserves kudos for his detailed exposé of Congresswoman Corrine Brown’s (D-FL) corruption-tainted earmarking. Since 2008, Brown has sought millions for a non-profit in Jacksonville that employs a lobbying outfit that just happens to have Brown’s daughter Shantrel on its staff.

Brown and her daughter have tried to secure $1.1 million for “streetscape improvements and renovations” at a plaza leased by the non-profit. Rep. Brown is currently requesting a direct appropriation of $1 million for it, but interestingly says on her website that “I certify that neither I nor my spouse has any financial interest in this project.” Okay, but what about her daughter?

As the article explains, this isn’t the first time the Browns have collaborated at taxpayer expense:

The Community Rehabilitation Center is not the only client of her daughter’s that Brown has helped.

In 2006, she traveled to the Republic of Georgia shortly before natural gas importer Itera had stopped supplying portions of the country with gas due to $6 million in non-payments. Over an eight-month period that year, Itera paid Shantrel Brown and one other Alcalde and Fay lobbyist more than $80,000 to work on “international debt issues,” lobbying reports indicate.

The Russian company, which has its U.S. headquarters in Jacksonville, has filed 31 separate federal lobbying reports since 2005. It used Shantrel Brown only during the eight months in 2006.

In a separate 1999 incident involving her daughter, Brown was investigated by an ethics subcommittee after a $50,000 Lexus purchased by African banker Karim Pouye wound up registered in Shantrel’s name. Corrine Brown had lobbied to keep Pouye’s boss, West African millionaire Foutanga Dit Babani Sissoko, out of federal prison after he was accused of stealing $240 million from a bank in the United Arab Emirates. The money wound up in Miami bank accounts controlled by Sissoko. The subcommittee took no action, but in its written report was critical of the Lexus.

According to the article, the non-profit had $4.6 million in total revenue in 2009. Of that amount, $2.1 million came from Medicaid and another $1.6 million came from “government contributions.” Where the money is going should raise eyebrows:

In [2008 and 2009], employee salaries made up nearly 40 percent of the center’s overall expenses. In 2008, $1.6 million of the center’s $4.5 million in total expenses was tied to salaries. The following year, the salary number jumped to $1.8 million of the center’s total $4.5 million in expenses. It is unclear how many employees the Community Rehabilitation Center employed during those years.

As a Cato essay on special-interest spending explains, earmark apologists are wrong when they argue that earmarks aren’t a big deal since they constitute a tiny portion of overall federal spending:

The problem is that earmarking has contributed to a general erosion of fiscal responsibility in Washington. Earmarks have exacerbated the parochial mindset of most members of Congress, who spend their time appeasing state and local interest groups rather than tackling issues of broad national concern. Many politicians complain about the soaring federal deficit, yet their own staff members spend most of their time trying to secure earmarks in spending bills.

Corrine Brown takes this parochial mindset to a new level by using her power to enrich her own family at taxpayer expense.

FCC and its Technological Advisory Council: Shut Them Down and Use the Money to Reduce Debt

The Federal Communications Commission has established a new advisory group called the “Technological Advisory Council.” Among other things, it will advise the agency on “how broadband communications can be part of the solution for the delivery and cost containment of health care, for energy and environmental conservation, for education innovation and in the creation of jobs.”

This is an agency that is radically overspilling its bounds. It has established goals that it has no proper role in fulfilling and that it has no idea how to fulfill. As we look for cost-cutting measures at the federal level, we could end the pretense that the communications industry should be regulated as a public utility. Shuttering the FCC would free up funds for better purposes such as lowering the national debt or reducing taxes.

The IRS’s Tax Rate on Google’s Foreign-Source Income Is 2.4 Percentage Points Too High

There’s been considerable attention to the news that the IRS only managed to grab 2.4 percent of Google’s overseas income. As this Bloomberg article indicates, many statists act as if this is a scandal (including a morally bankrupt quote from a Baruch College professor who thinks a company’s lawful efforts to lower its tax liability is “evil” and akin to robbing citizens).

Google Inc. cut its taxes by $3.1 billion in the last three years using a technique that moves most of its foreign profits through Ireland and the Netherlands to Bermuda. Google’s income shifting – involving strategies known to lawyers as the “Double Irish” and the “Dutch Sandwich” – helped reduce its overseas tax rate to 2.4 percent, the lowest of the top five U.S. technology companies by market capitalization, according to regulatory filings in six countries. …Google, the owner of the world’s most popular search engine, uses a strategy that…takes advantage of Irish tax law to legally shuttle profits into and out of subsidiaries there, largely escaping the country’s 12.5 percent income tax. The earnings wind up in island havens that levy no corporate income taxes at all. Companies that use the Double Irish arrangement avoid taxes at home and abroad as the U.S. government struggles to close a projected $1.4 trillion budget gap and European Union countries face a collective projected deficit of 868 billion euros. …U.S. Representative Dave Camp of Michigan, the ranking Republican on the House Ways and Means Committee, and other politicians say the 35 percent U.S. statutory rate is too high relative to foreign countries. …Google is “flying a banner of doing no evil, and then they’re perpetrating evil under our noses,” said Abraham J. Briloff, a professor emeritus of accounting at Baruch College in New York who has examined Google’s tax disclosures. “Who is it that paid for the underlying concept on which they built these billions of dollars of revenues?” Briloff said. “It was paid for by the United States citizenry.”

Congressman Dave Camp, the ranking Republican (and presumably soon-to-be Chairman) of the House tax-writing committee sort of understands the problem. The article mentions that he wants to investigate whether America’s corportate tax rate is too high. The answer is yes, of course, as explained in this video, but the bigger issue is that the IRS should not be taxing economic activity that occurs outside U.S. borders. This is a matter of sovereignty and good tax policy. From a sovereignty persepective, if income is earned in Ireland, the Irish government should decide how and when that income is taxed. The same is true for income in Bermuda and the Netherlands.

From a tax policy perspective, the right approach is “territorial” taxation, which is the common-sense notion of only taxing activity inside national borders. It’s no coincidence that all pro-growth tax reform plans, such as the flat tax and national sales tax, use this approach. Unfortunately, America is one of the world’s few nations to utilize the opposite approach of “worldwide” taxation, which means that U.S. companies face the competitive disadvantage of having two nations tax the same income. Fortunately, the damaging impact of worldwide taxation is mitigated by a policy known as deferral, which allows multinationals to postpone the second layer of tax.

Perversely, the Obama Administration wants to undermine deferral, thus putting American multinationals at an even greater disadvantage when competing in global markets. As this video explains, that would be a major step in the wrong direction. Instead, policy makers should junk America’s misguided worldwide system and replace it with territorial taxation.

In Which the French Are Explained, but They Remain Mistaken

The French youth are rioting over retirement ages, and I’ve seen it claimed that they’re failing to act in their own interests. More generous retirements have to be paid for by someone, and that “someone” will have to be the young workers. Why on earth are they shooting themselves in the foot like this? Why aren’t they acting in their class (err, age cohort) interests?

One of my favorite authors, Theodore Dalrymple, writes:

The lycéens’ demonstrations against the increase in the retirement age seemed to me something of a failure of the Cartesian critical spirit on which the French pride themselves… Whose labor, after all, do these lycéens imagine will pay for all of the unfunded pension obligations of the French state, as pensioners live longer and longer? Where do they imagine the money will come from?

He has a point here, but his explanation falls a bit short:

What probably accounts for the strikes is a mixture of combativeness—the prejudice that being against something is inherently superior, morally speaking, to being for it—and a desire for a day off from school.

Combativeness, sure. Nothing ever happens in France without someone going on strike. And nothing really important happens without a general strike. Now, the leaders do tend to be students, so I can’t dismiss the day off school hypothesis out of hand. But let’s at least look at the students’ own professed motives. Here’s what one of them had to say:

“If the reform passes, we’ll have even fewer chances to find work, we young people, because the jobs will be freed up more slowly.”

The impulse is both subtler and more ridiculous than Dalrymple realizes. It’s our old friend, the lump of labor fallacy: Force the oldsters into retirement, and it’s like a jobs program for everyone else. There is only so much labor to go around – not like jobs are ever created, you know – so we’d better be sure we get our fair share of it. Or so the theory goes. The protest signs, insofar as they communicate anything worth repeating, have often read “Place aux jeunes!” – Make room for the young! – or similar.

Not that this approach to economics makes any sense, either theoretically or practically. Putting someone out of work faster means he’s not producing anymore, which makes the economy worse off on the whole. And “his” job won’t necessarily stick around, because retirement is often the least painful time at which to eliminate a position entirely. Today’s workers aren’t likely to be trained for the same types of work as their parents and grandparents, and they shouldn’t necessarily want to be. The lump of labor fallacy imagines a world frozen in time, not one of dynamism and growth.