Archives: 02/2011

Dilma Announces Spending Cuts in Brazil

The new Brazilian government of President Dilma Rousseff has announced spending cuts of 50 billion reais (approximately $30 billion) this year. This amounts to approximately 1.3% of the country’s estimated GDP for 2011. Despite good intentions, that is still a very timid effort in curbing the size of government in Brazil: Total government spending (including state and local levels) runs at almost 40% of GDP.

Perhaps the timidity of the proposal is explained by the fact that curbing the size of government is not the motivation for the spending cuts. Nor is it to avoid a looming fiscal crisis. Brazil’s estimated budget deficit for 2010 was 2.3% of GDP; not good, but still a far cry from the fiscal woes of Europe or the U.S.

Dilma’s reason for cutting spending lies in the helplessness of Brazil’s Central Bank in containing the rise of the real without harming the economy. The real has appreciated against the dollar by 38% in the last two years (thanks in large part to Ben Bernanke’s policies at the Fed).  Efforts to contain this appreciation by intervening in the foreign exchange market and building up reserves led to a rise in inflation, which closed at 5.9% last year. The Central Bank has raised interest rates in order to curb inflation, but at 11.25% they are already too high and constitute a heavy burden on Brazil’s productive sector. Moreover, high interest rates are a magnet for foreign money seeking high returns, which drives up the value of the real even further.

Cutting government spending wouldn’t seem like the favored policy alternative of a left-wing technocrat such as Dilma Rousseff. However, it is the best way to bring down interest rates and control inflation under the present circumstances. It remains to be seen if the cuts do the trick, but they are certainly a positive sign from Brazil’s new president.

Secretly Happy Colleges Should Mean Overtly Angry Taxpayers

Yesterday, House Republicans introduced their preliminary list of spending cuts, cuts that were, they declared, ”to go deep.” Unfortunately, coming in at just $74 billion, they were about as deep as onion skin. After all, the total federal budget is well over $3 trillion, and the national debt now exceeds $14 trillion

The relatively lilliputian size of the proposed cuts should give any taxpayer major queasiness over Republicans’ desire to truly rein in government. But if that doesn’t scare you, this report from Inside Higher Ed absolutely should:

Shhh. Don’t tell, and they’ll never admit it publicly. But college officials are (very quietly) feeling okay – at least for now – about how Congressional Republicans would treat the programs that matter most to higher education in their first whack at the federal budget.

Why should ivory tower denizens be secretly peppy, and taxpayers openly upset? Because the House GOP pretty much left higher ed funding untouched, despite the fact that the ivory tower is soaking in putrid, taxpayer-funded waste. Quite simply, the federal government pours hundreds of billions of dollars into our ivy-ensconced institutions every year, but what that has largely produced is atrociously low graduation rates; at-best dubious amounts of learning for those who do graduate; ever-fancier facilities; and rampant tuition inflation that renders a higher education no more affordable to students but keeps colleges fat and happy.

I’ve said it before and I will say it again: If federal politicians won’t significantly cut ”education” spending – spending that has done next to nothing to increase actual learning – then they are not serious about reining in the deficit or cutting government down to size. They are still, sadly, much more concerned about appearing to “care” about education than doing what needs to be done.

Why Ryan-Rivlin Beats ObamaCare on Costs — and Spending

Washington Post blogger Ezra Klein asks of Rep. Paul Ryan’s (R-Wisc.) Medicare voucher proposal (co-authored with former Congressional Budget Office director Alice Rivlin):

Why are the cost savings in his bill possible, while the cost savings in the Affordable Care Act aren’t?…when it comes to the ACA, Ryan firmly believes that seniors will quickly and successfully force Congress to reverse any reforms that degrade their Medicare experience. That’s a fair enough concern, of course. What’s confusing is why it isn’t doubly devastating when applied to Ryan-Rivlin.

Set aside that Klein violates Cannon’s First Rule of Economic Literacy: Never say costs when you mean spending.  And that he uses the word “affordable” to describe ObamaCare.

There are two reasons why the Medicare spending restraints in the Ryan-Rivlin proposal are more likely to hold than those in ObamaCare.

First, ObamaCare’s restraints amount to nothing more than ratcheting down the price controls that traditional Medicare uses to pay health care providers.  Structuring Medicare subsidies in this way – setting the prices that Medicare pays specific providers – makes it very difficult to lower those prices, because the system itself creates huge incentives for providers to organize and lobby to undo those restraints.  As I explain more fully in this op-ed from September 2010, Medicare vouchers would change that lobbying game by reducing the incentives for provider groups to expend resources in the pursuit of higher Medicare spending.  That gives the Ryan-Rivlin restraints a much better shot at surviving.  (Seriously, it’s a pretty cool feature.)

Second, Klein predicts a backlash against Medicare vouchers because he says it amounts to “giving seniors less money to purchase more expensive private insurance.”  The notion that Medicare is less costly than private insurance is pure, uninformed nonsense.  Medicare and a “public option” are attractive to the Left precisely because such programs hide the full cost of their operations from enrollees and taxpayers.  It is a virtue of vouchers that they would reveal to Medicare enrollees the actual prices of the coverage and services they demand, because that information will spur enrollees to be more cost-conscious when selecting a health plan and consuming medical services.  That, in turn, will force insurers and providers to compete on the basis of cost to a degree never before seen in this nation, competition that will generate the sort of cost-saving innovations that Jim Capretta discusses here.

Both of these reasons boil down to the truism that nobody spends other people’s money as carefully as they spend their own.  We’ll make a lot of progress in this country when the Left realizes how much damage they’ve done by ignoring that truism.

Slashing Popular Programs Contest

House Republicans proposed some (tiny) spending cuts this week and the Obama administration will likely propose some (tiny) cuts next week in the federal budget.

So get ready for a barrage of slasher stories! National Journal started us off yesterday with the headline “WH Slashes Heat for the Poor.”

Coming down the pike are dozens of stories about how policymakers are planning deep, vicious, and inhumane cuts that will undermine the foundations of the republic. A 5 percent cut to a program that has risen 50 percent in recent years will not be a simple “trim,” but a brutal, gouging “slash.”

Every single one of the upcoming cuts will be to “popular” programs. So policymakers will propose a $1 million cut to mohair subsidies, and the headline will be “Congress Slashes Popular Mohair Program.”

In reality, government spending has soared over the last decade, but I don’t want to spoil the fun. So let’s enjoy the coming crop of over-the-top slasher stories, and treat them as a genre of modern publishing art.

I propose a “Slasher Story of the Month” contest for February. Send me an email if you see a great slasher story, and I’ll get my crack assistant, Amy, to analyze the rhetorical content. The winning story will have the most frequent uses of “slash” and “popular” to describe the programs that the godless heathens in Congress and the White House plan to ransack and decimate.

(Bonus points for any editorial cartoon showing Attila the Hun with the word “GOP” on his helmet hacking away at a defenseless child with “nutrition subsidies” on her shirt).

The 1993 Clinton Tax Increase Did Not Lead to the Budget Surpluses of the Late 1990s

Proponents of higher taxes are fond of claiming that Bill Clinton’s 1993 tax increase was a big success because of budget surpluses that began in 1998.

That’s certainly a plausible hypothesis, and I’m already on record arguing that Clinton’s economic record was much better than Bush’s performance.

But this specific assertion it is not supported by the data. In February of 1995, 18 months after the tax increase was signed into law, President Clinton’s Office of Management and Budget issued projections of deficits for the next five years if existing policy was maintained (a “baseline” forecast). As the chart illustrates, OMB estimated that future deficits would be about $200 billion and would slightly increase over the five-year period.

In other words, even the Clinton Administration, which presumably had a big incentive to claim that the tax increase would be successful, admitted 18 months after the law was approved that there was no expectation of a budget surplus. For what it’s worth, the Congressional Budget Office forecast, issued about the same time, showed very similar numbers.

Since the Clinton Administration’s own numbers reveal that the 1993 tax increase was a failure, we have to find a different reason to explain why the budget shifted to surplus in the late 1990s.

Fortunately, there’s no need for an exhaustive investigation. The Historical Tables on OMB’s website reveal that good budget numbers were the result of genuine fiscal restraint. Total government spending increased by an average of just 2.9 percent over a four-year period in the mid-1990s. This is the reason why projections of $200 billion-plus deficits turned into the reality of big budget surpluses.

Republicans say the credit belongs to the GOP Congress that took charge in early 1995. Democrats say it was because of Bill Clinton. But all that really matters is that the burden of federal spending grew very slowly. Not only was there spending restraint, but Congress and the White House agreed on a fairly substantial tax cut in 1997.

To sum things up, it turns out that spending restraint and lower taxes are a recipe for good fiscal policy. This second chart modifies the first chart, showing actual deficits under this small-government approach compared to the OMB and CBO forecasts of what would have happened under Clinton’s tax-and-spend baseline.

Abolish Federal Job Training Programs

A report from the Government Accountability Office finds that the federal government administers 47 different employment and job training programs at a cost to taxpayers of about $18 billion. The GAO excluded another 51 programs that could be considered as providing job training assistance, such as student loan subsidies.

The takeaway from the report is that there is a lot of duplication, and thus excess bureaucracy and inefficiencies. Moreover, the GAO says that “little is known about the effectiveness of most programs.” Nonetheless, Congress unflinchingly funds these programs even though the GAO has been issuing reports with similar findings since the 1990s.

Coinciding with the GAO report, Sen. Tom Coburn (R-OK) released a paper that singles out 25 particularly egregious examples of federal job training programs abusing taxpayer dollars. It’s the sort of thing that government apologists will dismiss as “anecdotal,” but when it comes to government programs, where there is smoke, there is usually fire. And if the anecdotes help undermine support for such unwarranted federal interventions, all the better.

One problem I have with Coburn’s paper is that it concludes with recommendations that amount to rearranging the deck chairs on the Titanic (e.g., consolidate programs, narrow program objectives, and better target funds). Coburn says that these programs need better “program metrics.” However, I was once responsible for program metrics as a budget official in the state of Indiana, and I can attest that politics render such endeavors a fool’s errand.

Coburn’s paper is at its best when he cites James Bovard’s observation that the government doesn’t need to be involved in job training:

As aptly considered by scholar James Bovard, the government has taken on a role more appropriately filled by the private sector. Bovard writes, “The fallacy underlying all job training programs is that the private sector lacks the incentive to train people for jobs. This is like assuming that farmers don‘t have an incentive to buy seed, or that auto manufacturers lack incentive to seek out parts suppliers. Businessmen naturally prefer that all the factors of production – including labor – be readily available. But where there is a shortage of skills and demands for services, there will be an incentive to train.”

The American Society for Training and Develop estimates that “U.S. organizations spent $125.9 billion on employee learning and development in 2009.” In addition, there are untold private options for job seekers: headhunters, counselors, recruiters, temporary work agencies, career fairs, internet resources, charities, and various civic organizations.

As Coburn correctly puts it:

The federal government could best help displaced workers by opening foreign markets to U.S. goods and services and creating an atmosphere that attracts and retains investment and productivity in the U.S. This can be accomplished in part by reducing unnecessary regulatory burdens on small businesses and employers, and ensuring stable and predictable government policies so employers can make short- and long-term investment and management decisions.

Fixing the Economy Demands More Than a Stroll across Lafayette Park

President Obama’s visit with the Chamber of Commerce this week has infuriated the anti-business Left.  But short of expropriation and nationalization, what doesn’t? 

Robert Reich and NPR and the scribes at the Huffington Post just don’t get it.  Their man may be in the White House, but business holds the keys to the kingdom.  Whether the president’s priority is job creation or reelection, nothing matters more than sustained economic growth. And without business having confidence that policy in the United States will become more hospitable and predictable, investment and job creation will remain tepid.

The president doesn’t have nearly the leverage assumed in the delusions of groups like Public Citizen, which wrote: “What America needs is not olive branches to giant corporations but controls over the companies that sank the economy.”  Back here in reality, businesses have options.  Many can choose to produce and operate in other countries, where the economic environment may be more favorable.  In that regard, globalization has produced a veritable Galt’s Gulch, which serves as an important check on bad economic policy.  Governments are now competing with each other to attract the financial, physical, and human capital necessary to nourish high value-added, innovation-driven, 21st century economies.  Gratuitously punitive anti-business policies will only chase away the companies that the president exhorts to invest and hire.

According to a survey of 13,000 business executives worldwide, conducted by the World Economic Forum, 52 countries have less burdensome regulations than the United States.  Add to that the fact that the United States has the highest corporate tax rate among all OECD countries and it becomes less mysterious why U.S. businesses shift more operations abroad.

As I wrote in a December 2009 Cato paper:

Governments are competing for investment and talent, which both tend to flow to jurisdictions where the rule of law is clear and abided; where there is greater certainty to the business and political climate; where the specter of asset expropriation is negligible; where physical and administrative infrastructure is in good shape; where the local work force is productive; where there are limited physical, political, and administrative frictions.

This global competition in policy is a positive development.  But we are kidding ourselves if we think that we don’t have to compete and earn our share with good policies.  The decisions we make now with respect to our policies on immigration, education, energy, trade, entitlements, taxes, and the role of government in managing the economy will determine the health, competitiveness, and relative significance of the U.S. economy in the decades ahead.

The president is beginning to get it – though grudgingly.  He acknowledges the burdens of excessive and superfluous regulations and bureaucracy (remember his SOTU story about the jurisdictions entangled in the salmon’s journey from salt water to fresh water to the smoker?).  The president has hinted that he would like to see the corporate tax rate lowered.  He knows that businesses have options to invest, produce, and hire abroad—and that oftentimes U.S. policy chases them there.  But, so far, rather than push policies to encourage domestic investment, production, and hiring, the president has done the opposite, while demonizing businesses that follow the incentives to go abroad.

The president’s position during his exchange at the Chamber of Commerce was that he has made concessions to business by moving toward the center on tax and trade policy, and that now it is time for business to show good faith by investing and hiring.  But Obama’s small steps toward the center come after two years of sprinting to the left on economic policy.  After ObamaCare, Dodd-Frank, taxpayer bailouts, unorthodox and legally-questionable bankruptcy procedures, subsidies for select industries, Buy American and other regulations governing how and with whom “stimulus” dollars could be spent, and the administration’s tightening embrace of industrial policy, businesses want a more quiet, less intrusive, less antagonistic, predictable policy environment before they will feel comfortable playing the role Obama wants them to play.

Until that happens, the president shouldn’t expect torrents of investment and hiring from the business community.