Archives: 06/2012

False Consciousness Strikes Again

When political disaster strikes, the losers never say, “the people were against us.” No, defeat comes from the evil ones and their minions. “What [Gov. Walker’s victory] shows is the peril of corporate dollars in an election and the dangers of Citizens United,” said Dennis Van Roekel, president of the National Education Association, a school workers’ union. False consciousness strikes again.

Yet money appears to have little effect on the outcome. Begin with what was the same and what was different in 2010 and 2012. The two leading candidates for governor were the same. As Mr. Van Roekel points out, the spending was different this time: more money was spent and Walker’s allies spent more.

What was the same in 2010 and 2012 besides the candidates? Walker won in 2010 by 5.8 percent over the same opponent; he survived the recall yesterday by 6.9 percent. The money and efforts spent defending Walker increased his margin of victory by 1.1 percent which is noise in the overall scheme of things. The money had little effect on the distribution of votes.

This conclusion makes sense given that “nearly 9 in 10 people said they had made up their minds before May, according to exit poll interviews.” By the time the ads hit the airwaves, there were few undecided voters.

Yet something was different from 2010. The efforts do seem to have increased turnout significantly from (roughly) 2.1 million voters for the two major candidates to 2.5 million voters, almost a 20 percent increase. The conventional wisdom holds that “get out the vote” efforts affect turnout more than spending on advertising. It will be interesting to see what experts make of the increased turnout in Wisconsin.

Spending Cut Goal: 10% in Two Years

The new issue of International Economy has an article by Canada’s Liberal finance minister from the 1990s, Paul Martin, who succeeded in shrinking that country’s federal government. If a new President Mitt Romney wants to cut spending in Washington, Martin has some tips for him, such as cutting spending broadly, forecasting conservatively, and aiming to eliminate the deficit in a fixed time frame and sticking to it. (I’d also advise President Obama to follow the Canadian example, but he’s issued four budgets so far and seems to be more interested in following the Greek fiscal approach).

Paul Martin says:

I tabled the 1995 Budget in the House of Commons. No department of government escaped untouched. Transfers to the provinces for healthcare and education were reduced, public sector employment was cut by 20 percent, the Department of Transport was cut deeply, historic subsidies in the Department of Agriculture were eliminated, and spending in the Department of Industry was cut by 65 percent.

These were massive cuts, far greater than anything Canada had ever seen. Nor were the cuts simply reduction in the growth of future spending as is so often the case. These were absolute cuts in existing spending, such that by the end of the process the federal government’s expenditures as a percentage of GDP were lower than they had been at anytime in the previous fifty years.

From a libertarian perspective, Canada’s cuts weren’t actually “massive,” but for a Liberal government in a country with a population that had gotten used to government coddling, it was pretty impressive. As I noted in my recent article on Canada, Martin and his team cut the budget by 10 percent in just two years.

So my suggested goal for Romney and team if elected this Fall: at least match the Canadians and push for $380 billion of cuts out of otherwise expected spending in 2015 of $3.8 trillion. And do what the Canadians did: cut everything, including entitlements, aid to subnational governments, defense, business subsidies, farm subsidies, and much more in one big push. Many in Congress will resist of course, but presidents have their most leverage in the first year. Mitt will have nothing to lose but the country into a vortex of debt and economic despair if he doesn’t at least try.

To (Ironically) Avoid Sequestration, Congress Could Declare War

The Senate is back in session this week as the battle over military spending, and the prospect of sequestration, continues to sizzle. Last Friday the Office of Management and Budget concluded  that war funding—also known as Overseas Contingency Operations (OCO)—would not be exempted from sequestration, contradicting the Pentagon’s earlier claims. Predictably, this has angered the GOP and provided fodder for those who oppose military spending cuts on any grounds.

But war funding—$88.5 billion for FY 2013—should never have been considered separate from military spending. This is a practice, gradually accepted in the past 10-15 years, that distorts the size of the defense budget, making it appear smaller. It provides the illusion that Congress and the current administration are fiscally responsible.

The irony of current flap over OMB’s ruling is that Congress could undo sequestration if it simply declared war. In today’s Cato podcast, Benjamin Friedman, research fellow for defense and homeland security studies, explains that the federal code, going back to the 1980s, holds that a declaration of war will reverse sequestration. But Congress doesn’t declare war anymore; members routinely ignore their constitutionally mandated obligation. Those who are the most vocal opponents of sequestration—Rep. Howard “Buck” McKeon (R-CA) and others—have a tool at their disposal that they will never consider.

Listen to the podcast below to hear Friedman provide a primer on the battle over war funding (OCO), sequestration, and the defense budget bills.

Note to Larry Summers: The Government Borrows for Transfer Payments, Not Investment

“It is time for governments to borrow more money,” according to former treasury secretary Larry Summers.  He is not peddling this advice to Greece and Spain, but to countries like the United States and Japan that can still sell long-term bonds at very low interest rates. Summers urges the United States, in particular, to borrow more for “public investment projects” that are presumed to raise the economy’s future output. He offers the hypothetical example of “a $1 project that yielded even a permanent 4 cents a year in real terms increment to GDP by expanding the economy’s capacity or its ability to innovate.”

Even if such promising projects were easy to find, however, that is not the way the current government has been inclined to spend borrowed money. Despite all the rhetoric about “shovel-ready projects,” about 95 percent of the 2009 stimulus bill consisted of government consumption (salaries), refundable tax credits, and transfer payments which, as Robert Barro notes, “dilute incentives to work.”

Summers says, “Any rational chief financial officer in the private sector would see this as a moment to extend debt maturities and lock in low rates — the opposite of what central banks are doing.” Locking-in low borrowing costs would indeed make sense if the money from selling long bonds were used to retire short-term Treasury bills, but that would not involve borrowing more as Summers proposes.

For both government and households, it is certainly more prudent to use borrowed money to finance investments that will yield a stream of income in the future—either actual income (such as toll roads) or implicit income (the benefits from living in a mortgaged home).

Apostles of the Keynesian doctrine, such as Larry Summers, Paul Krugman, and Alan Blinder, invariably use hypothetical public works examples to make the case for more and more national (taxpayer) debt. Keynesian forecasting models, used by the Congressional Budget Office (CBO) to warn of the looming fiscal cliff and defend the fiscal stimulus of 2009, likewise assume the highest “multiplier” effect from tangible government investments.

In the real world of politics, however, Congress and the White House use borrowed money to placate constituencies with the most political clout. Federal spending on investment projects has essentially nothing to do with the huge 2009-2012 budget deficits (only 29 percent of which can be blamed on the legacy of recession, according to the CBO).

The Table shows that transfer payments and subsidies account for 63.8 percent of estimated spending in 2012, while federal purchases account for 28.4 percent. Also, most federal aid to states is for transfer payments like Medicaid.  Within federal purchases, only 7.6 percent of the spending ($152.5 billion) was counted as gross investment in the first quarter GDP report, and two thirds of that was military equipment and buildings. Net investment, minus depreciation, is smaller still.

If borrowing more for investment was a genuine political priority, rather than an academic conjecture, the government could do that by borrowing less for government payrolls, transfer payments, and subsidies.  At best, Larry Summers has made an argument for spending borrowed money much differently, not for borrowing more.

Will More Federal Debt Improve the U.S. Government’s Creditworthiness?

Writing in today’s Washington Post, former Obama economist Larry Summers put forth the strange hypothesis that more red ink would improve the federal government’s long-run fiscal position.

This sounds like an excuse for more Keynesian spending as part of another so-called stimulus plan, but Summers claims to have a much more modest goal of prudent financial management.

And if we assume there’s no hidden agenda, what he’s proposing isn’t unreasonable.

But before floating his idea, Summers starts with some skepticism about more easy-money policy from the Fed:

Many in the United States and Europe are arguing for further quantitative easing to bring down longer-term interest rates. …However, one has to wonder how much investment businesses are unwilling to undertake at extraordinarily low interest rates that they would be willing to undertake with rates reduced by yet another 25 or 50 basis points. It is also worth querying the quality of projects that businesses judge unprofitable at a -60 basis point real interest rate but choose to undertake at a still more negative rate. There is also the question of whether extremely low, safe, real interest rates promote bubbles of various kinds.

This is intuitively appealing. I try to stay away from monetary policy issues, but whenever I get sucked into a discussion with an advocate of easy money/quantitative easing, I always ask for a common-sense explanation of how dumping more liquidity into the economy is going to help.

Maybe it’s possible to push interest rates even lower, but it certainly doesn’t seem like there’s any evidence showing that the economy is being held back because today’s interest rates are too high.

Moreover, what’s the point of “pushing on a string” with easy money if it just means more reserves sitting at the Fed?

After suggesting that monetary policy isn’t the answer, Summers then proposes to utilize government borrowing. But he’s proposing more debt for management purposes, not Keynesian stimulus:

Rather than focusing on lowering already epically low rates, governments that enjoy such low borrowing costs can improve their creditworthiness by borrowing more, not less, and investing in improving their future fiscal position, even assuming no positive demand stimulus effects of a kind likely to materialize with negative real rates. They should accelerate any necessary maintenance projects — issuing debt leaves the state richer not poorer, assuming that maintenance costs rise at or above the general inflation rate. …Similarly, government decisions to issue debt, and then buy space that is currently being leased, will improve the government’s financial position as long as the interest rate on debt is less than the ratio of rents to building values — a condition almost certain to be met in a world with government borrowing rates below 2 percent. These examples are the place to begin because they involve what is in effect an arbitrage, whereby the government uses its credit to deliver essentially the same bundle of services at a lower cost. …countries regarded as havens that can borrow long term at a very low cost should be rushing to take advantage of the opportunity.

Much of this seems reasonable, sort of like a homeowner taking advantage of low interest rates to refinance a mortgage.

But before embracing this idea, we have to move from the dream world of theory to the real world of politics. And to his credit, Summers offers the critical caveat that his idea only makes sense if politicians use their borrowing authority for the right reasons:

There is, of course, still the question of whether more borrowing will increase anxiety about a government’s creditworthiness. It should not, as long as the proceeds of borrowing are used either to reduce future spending or raise future incomes.

At the risk of being the wet-blanket curmudgeon who ruins the party by removing the punch bowl, I have zero faith that politicians would make sound decisions about financial management.

I wrote last month that eurobonds would be “the fiscal version of co-signing a loan for your unemployed alcoholic cousin who has a gambling addiction.”

Well, giving politicians more borrowing authority in hopes they’ll do a bit of prudent refinancing is akin to giving a bunch of money to your drug-addict brother-in-law in hopes that he’ll refinance his credit card debt rather than wind up in a crack house.

Considering that we just saw big bipartisan votes to expand the Export-Import Bank’s corporate welfare and we’re now witnessing both parties working on a bloated farm bill, good luck with that.

Scott Walker’s Reforms Are a Good Start

All eyes are on Wisconsin today to see whether Governor Scott Walker’s budget and public-sector union reforms will be validated by the voting public. I applaud Walker’s reforms. But his reforms should be just the first step. Virginia took the next step two decades ago and completely repealed collective bargaining in the public sector.

I happened to hear conservative radio talker Chris Plante this morning discussing his support of Walker, but saying something like “But I’m not against collective bargaining rights in either the private sector or the public sector.”

Too many conservatives, and maybe even some libertarians, seem to buy the labor union line that collective bargaining is somehow a fundamental “right,” like the freedom of speech. It isn’t. Collective bargaining in both the private and government sectors is monopoly unionism. It represents a violation of the freedom of association.

Here’s what Charles Baird says on www.DownsizingGovernment.org:

The ideas embodied in the federal union laws of the 1930s make no sense in today’s dynamic economy. Luckily, constant change and innovation in the private sector has relegated compulsory unionism to a fairly small area of U.S. industry. But the damage done by federal union legislation is still substantial. Many businesses and industries have likely failed or gone offshore because of the higher costs and inefficiencies created by federal union laws, while other businesses may not have expanded or opened in the first place. So the damage of today’s union laws is substantial, but often unseen, in terms of the domestic jobs and investment that the laws have discouraged.

Davis-Bacon, the Norris-LaGuardia Act, and the National Labor Relations Act serve the particular interests of unionized labor rather than the general interests of all labor. These laws abrogate one of the most important privileges and immunities of American citizens—the rights of individual workers to enter into hiring contracts with willing employers on terms that are mutually acceptable. …

The principle of exclusive representation [collective bargaining], as provided for in the NLRA, should be repealed. Workers should be free on an individual basis to hire a union to represent them or not represent them. They should not be forced to do so by majority vote. Unions are private associations, not governments. For government to tell workers that they must allow a union to represent them is for government to violate workers’ freedom of association. Restrictions on the freedom of workers to choose who represents them should be eliminated.

Mike Leavitt as Governor

Mitt Romney has chosen liberal Republican Michael Leavitt to lead his presidential transition team. A lot of commentary focuses on his “Obamacare-lovin’” proclivities.

Leavitt also has a government-lovin’ record as governor of Utah from 1993 to 2003, according to Cato’s biennial Fiscal Policy Report Cards. Cato graded Leavitt five times, and his scores were pretty dismal:

2002: D

2000: D

1998: C

1996: C

1994: C

In the reports, Steve Moore and coauthors say such things as “Leavitt is a big spender extraordinaire” and “Leavitt has shown time and again that he is to the left of his party.”

Leavitt apparently favored lots more school spending, and opposed school vouchers.

The Cato reports also say that Leavitt supported a few paltry tax cuts, but blocked larger tax cuts from the legislature, while pushing for higher taxes on Internet users, cigarette consumers, and automobile owners through higher gas and car fees.

This is not good. Whether an administration chooses between pro- and anti-market policies many hundreds of times during its tenure depends upon the people chosen at the highest levels by incoming presidents. Even Ronald Reagan had many “enemies within” his administration that undermined his generally smaller-government approach to policy. Romney appears to be no Reagan, so liberals within his administration would probably have even more free range to cause trouble.

See here for Cato’s Fiscal Report Cards.