Archives: 08/2012

IPAB: Yes, It Can

In today’s Washington Post, columnist Bob Samuelson writes:

Then there’s the Independent Payment Advisory Board (IPAB), a body of 15 experts charged with limiting Medicare spending if it passes certain targets. But the law handcuffs IPAB. It can’t increase patient cost-sharing, restrict benefits, modify eligibility requirements or — in any one year — cut spending by more than 1.5 percent, reports the Kaiser Family Foundation.

All four of those assertions about supposed limitations on IPAB’s powers are false, as Diane Cohen and I explain here.

Defund REAL ID

Lots of other stories have dominated the headlines lately, so people have paid little attention to news that House and Senate leaders have settled on a plan to fund the government for the first half of fiscal 2013 through a continuing resolution.

Senator Reid’s press release states that the agreement “will avoid a government shutdown while funding the government at $1.047 trillion.” If only that were true. The president’s most recent budget estimates that federal outlays will be something more like $3.8 trillion.

Whatever the case on the total figures, this is a good time to be asking just what will be in that six-month extension of government funding. And I’m particularly interested in whether it will continue to fund our national ID law, the REAL ID Act.

Not being a dialed-in appropriations lobbyist, all I have to go on are the proposals for Department of Homeland Security spending that the House and Senate have put together. Those proposals are H.R. 5855, the Department of Homeland Security Appropriations Act, 2013, and S. 3216, the Department of Homeland Security Appropriations Act, 2013. Both bills spend about $450 per U.S. family on the operations of the DHS.

Poring through the bills and committee reports, I find REAL ID funding in a pot of over $1.7 billion administered by FEMA in its “State Homeland Security Grant Program.” The House Appropriations Committee says the money should be divided among many different programs “according to threat, vulnerability, and consequence, at the discretion of the Secretary of Homeland Security.” Considering what little REAL ID does for security, the Secretary could zero out REAL ID. But this is unlikely to happen.

I find no mention of REAL ID in the Senate bill, though there is a similar pot of money that I assume might fund REAL ID implementation in the states. Precious dollars that local bureaucrats feel utterly obligated to chase after.

With REAL ID funding becoming an also-ran in the world of homeland security grants, its long, slow decline continues. But I have no capacity to calculate the amounts going to REAL ID implementation. That’s nicely hidden in the opacity and arcana of federal government grant-making.

Were I asked what to put in the upcoming continuing resolution, I would simplify things dramatically. I would recommend that REAL ID be stripped from the “State Homeland Security Grant Program.” Zeroed out. Nada. Nothing. In fact, I would add REAL ID to the cluster of Provided’s and Provided further’s that make appropriations bills so hard to read:

Provided further, that no funds shall be used to implement section 204 of the REAL ID Act of 2005 (49 U.S.C. 30301 note).

The country rejects having a national ID. The government is under tight budgetary constraints. The policy that kills two birds with one stone is to entirely defund the national ID law, barring any federal expenditures on its implementation. If Congress can’t see fit to repeal the law, the DHS can issue another blanket extension early next year when a new faux implementation deadline for the national ID law arrives.

How to Judge Paul Ryan’s Fiscal Conservatism

A front-page story in Saturday’s Washington Post carries the headline, “Ryan’s funding requests blur image as deficit hawk” (different online). That is, Rep. Paul Ryan has sought federal funding for projects in his district, even when he has voted against the relevant spending program, such as President Obama’s $787 billion “stimulus” bill. But I don’t think that’s the best way to judge a congressman’s fiscal conservatism. The question is, did he vote against excessive spending? Did he work in committee, with his colleagues, and in the national debate to end programs and cut spending?

Sure, it might be best if fiscal conservatives crossed their arms and refused to participate in the standard congressional practice of seeking federal funds for one’s own district or state. But that’s not likely to happen in a political world where members of Congress assume that “bringing home the bacon” is essential to reelection. (Political scientist James L. Payne argued in his book The Culture of Spending that in fact members don’t have to do that to get reelected, and he pointed to people like Sen. William Proxmire [D-WI], author of the book Uncle Sam: The Last of the Bigtime Spenders, who made their careers as opponents of pork and waste. But most political consultants would reject such advice.)

I recall Sen. Phil Gramm, who actually switched parties and resigned from Congress (and then successfully got his seat back as a Republican) in the pursuit of spending restraint. He said, ”If we should vote next week on whether to begin producing cheese in a factory on the moon, I almost certainly would oppose it…On the other hand, if the government decided to institute the policy, it would be my objective to see that a Texas contractor builds this celestial cheese plant, that the milk comes from Texas cows, and that the Earth distribution center is located in Texas.” Not exactly a candidate for the next edition of Profiles in Courage, but I understand the realpolitik calculation.

Ron Paul puts earmarks for his district in spending bills, then votes against the bills, which nevertheless pass overwhelmingly. Again, not exactly worth a gold star, but he does consistently vote against spending bills.

So Paul Ryan voted against the stimulus bill and then sought stimulus funds for his Wisconsin district. I think the more important thing is that he voted, worked, spoke out, and campaigned against a bill that he called a “wasteful spending spree.” Even though he’d have fought Phil Gramm tenaciously about where the milk for that cheese factory on the moon should come from.

As I say, the test for a fiscal conservative is how he votes on budget-busting bills. And there, Paul Ryan has a real problem. Consider his votes during his 14 years in Congress and particularly during the 8 years of the Bush administration:

FOR the No Child Left Behind Act (2001)
FOR the Iraq war (2002)
FOR the Medicare prescription drug entitlement (2003)
FOR Head Start reauthorization (2007)
FOR Economic Stimulus Act (January 2008)
FOR extending unemployment benefits (2008)
FOR TARP (2008)
FOR GM/Chrysler bailout (2008)
FOR $192 billion anti-recession spending bill (2009)

That is the record that could “blur [his] image as deficit hawk.”

Fiscal conservatives in Congress really ought to refuse to participate in the pork process. But members who have passed one of the few congressional acts to actually push back against spending, used their presidential campaigns to push the Republican party toward fiscal conservatism and inspired the rise of the tea party, or developed a budget plan that would arguably bring the rate of spending increase down from stratospheric to merely exorbitant should get some credit for that.

Geithner Favors Fannie Mae Debtholders over Taxpayers … Again

You have to give Treasury Secretary Tim Geithner some credit for spin: today the Treasury announced “Further Steps to Expedite Wind Down of Fannie Mae and Freddie Mac.” The only problem is that the steps announced largely put the taxpayer at greater risk in order to protect holders of Fannie and Freddie debt.

Essentially, the Treasury has amended its agreements with Fannie and Freddie so that the companies no longer have to pay a fixed dividend to the U.S. taxpayer, but instead “every dollar of profit” from the companies to the taxpayer. The problem is that the Government Sponsored Enterprises (GSE) have never had a year where their profits would have covered the dividend payments, so while we can debate if the taxpayer will recover anything from the GSEs, shifting to just collecting profits definitely means the taxpayer’s potential recoupment is lower.

The GSE’s regulator, the Federal Housing Finance Agency (FHFA) was at least a little more honest in its announcement of the changes, stating that, “as Fannie Mae and Freddie Mac shrink, the continued payment of a fixed dividend could have called into question the adequacy of the financial commitment contained in the PSPAs.”  Read “financial commitment” to mean protecting debtholders from loss.

How does the change protect debtholders over taxpayers? It reduces the ability of FHFA to place Fannie or Freddie into a receivership, under which FHFA could impose losses on creditors. Under Section 1145 of the Housing and Economic Recovery Act, FHFA has the discretion of appointing a receiver if one the GSEs displays an “inability to meet obligations,” which would include dividend payments. By essentially taking away that lever from FHFA, Treasury has greatly reduced any chance of a receivership. Sadly, I believe a receivership was the only thing that would force Congress to also deal with Fannie and Freddie. Treasury’s actions have been a massive win for the broken status quo.

Don’t let the rest of the Treasury announcement fool you. Yes, Treasury has both agreed to reduce the GSEs’ portfolios and to require the GSEs to submit an “annual taxpayer protection plan,” but both of these efforts are little more than fig-leafs to cover Treasury’s protection of GSE creditors at the expense of taxpayers. After all, the first commandment in the Geithner bible, as witnessed during the 2008 bailouts, is that debtholders shall take no losses, regardless of the expense to the taxpayer.

An Update on Different Pentagon Spending Plans

On Monday, I posted a lengthy entry here comparing the different plans for military spending: the current Obama administration/OMB baseline, CBO’s latest estimate for sequestration, Mitt Romney’s plan to spend four percent of GDP on the Pentagon’s base budget, and Paul Ryan’s plan.

I should have taken a bit more time checking my numbers, because I ended up comparing apples to oranges (or 050 to 051, in budget-wonk-speak).

Thankfully, the ever-watchful Carl Conetta at the Project on Defense Alternatives spied the error, and set me straight. The gap between the Ryan plan and the current baseline (President Obama’s plan) is less than I had previously reported. The gap between the Ryan plan and the Romney plan is larger. The new numbers, and a revised chart are enclosed below.

I have had to make some inferences, so Governor Romney has some wiggle room. Romney’s surrogates have clarified other aspects of his plans for military spending, most recently here, but I still don’t know what is included when he says he will have a “goal of setting core defense spending—meaning funds devoted to the fundamental military components of personnel, operations and maintenance, procurement, and research and development—at a floor of 4 percent of GDP.” And no one seems to know how soon he intends to achieve that goal.

He could claim that the four percent goal should be applied to the entire “national defense” category (aka 050), which includes nuclear weapons spending within the Department of Energy, for example. This amounts to about a $25 billion difference annually. He could also include mandatory spending within the Pentagon’s budget, another $9 billion a year, on average.

The bottom line remains unchanged, however: Paul Ryan would spend more than President Obama on the military; Mitt Romney would spend much more. To his credit, Ryan has specified other spending cuts in domestic programs to ensure that his plan doesn’t add to the deficit or require higher taxes. Romney has not.

As before, I anxiously await additional clarification on how Romney plans to make up the difference.

Details, in constant 2012 dollars, for the period 2013-2022:

  • Obama/OMB Baseline (051, discretionary):  Total $5.163 trillion
  • Sequestration per CBO (051, discretionary): Total $4.659 trillion; $504 billion in savings
  • Ryan plan (051, discretionary): Total $5.321 trillion; $158 billion in additional spending
  • Romney 4 percent in four years: Total $7.015 trillion; $1.852 trillion in additional spending
  • Romney 4 percent in eight years: Total $6.868 trillion; average $687 billion/year; $1.704 trillion in additional spending

Slumping Money Supply (Not Austerity) Plunges Hungary Into Recession

Hungary is in a recession, again. According to the chattering classes, as well as many analysts and financial reporters, fiscal austerity is the cause of Hungary’s slump.

Nonsense. Hungary’s recession results from its slumping money supply.

When monetary and fiscal policies move in opposite directions, the economy will follow the direction taken by monetary (not fiscal) policy – money dominates. For doubters, just consider Japan and the United States in the 1990s. The Japanese government engaged in a massive fiscal stimulus program, while the Bank of Japan embraced a super-tight monetary policy. In consequence, Japan suffered under deflationary pressures and experienced a lost decade of economic growth.

In the U.S., the 1990s were marked by a strong boom. The Fed was accommodative and President Clinton was super-austere – the most tight-fisted president in the post-World War II era. President Clinton chopped 3.9 percentage points off federal government expenditures as a percent of GDP. No other modern U.S. President has even come close to Clinton’s record.

The money supply picture for Hungary seemed to be looking up until late 2011 (see the accompanying chart). Indeed, Hungary’s money supply had nearly returned to its trend-rate level, when it peaked in November 2011. Then, in the course of just over a month, things took a turn for the worse.

First, Moody’s downgraded Hungary’s debt to junk status, and soon thereafter, S&P and Fitch followed suit. Then, the EU and IMF walked out on debt restructuring talks, citing concerns over proposed constitutional changes, which threatened the Hungarian central bank’s independence. Just days later, their fears were confirmed, as the Hungarian Parliament passed the controversial law, merging the central bank with the Financial Supervisory Authority. And, to top it off, Hungary unexpectedly cancelled part of its December debt auction.

When the dust settled, confidence in Hungary’s financial system had been shattered. Despite a 15.9% increase in the supply of state money, the total money supply had plummeted by 4.2% (from November 2011 to January 2012). As the accompanying table shows, this decline in the total money supply was driven by a 9% drop in the all-important bank-money component of the total.

Hungary’s money supply has yet to recover from this perfect monetary storm. And, as if that wasn’t enough, Hungary recently adopted a damaging financial transactions levy.

Money and monetary policy trump fiscal policy. Until Hungary gets its money and banking houses in order, its economy will continue to wallow in recession.

Yes, Nationalizing Facebook Is a Nonstarter

The other day, I was asked to review a draft slate of pro-innovation proposals that might be put before the next presidential administration (regardless of who heads it). I went down the list, typing again and again, “Education policy is not a federal role.”

The rather amateurish list was packed with ideas for injecting book-learnin’ into our economy. It betrayed little awareness of how our constitutional republic is structured, including the absence of federal authority over education. I guess some books are better than others

It occurred to me as I typed that people coming after me to look over the innovation proposals might think I was an idiot.

“Look right there! There is a federal Education Department. Don’t deny it!” they might say.

When I say education policy is not a federal role, I am saying something normative, about how things should be. As a present-day literal matter, there is rather obviously a federal role in education. And the sooner we restore authority to localities and especially parents, the better.

That how-things-could-be lens, though, is how to look at a self-described “thought experiment” on Slate called “Let’s Nationalize Facebook.”

It would be better to have a national privacy commissioner with real authority, some stringent privacy standards set at the federal level, and programs for making good use of some of the socially valuable data mining that firms like Facebook do. … Facebook would have to rise to First Amendment standards rather than their own terms of service. The company could be regulated the way public utilities often are.

It’s thinking far more magical than my statements about education policy.

Were Facebook nationalized, its privacy problems would not evaporate. They would double. The obscure (and, for some, concerning) uses Facebook makes of data in commerce would be joined by secret uses of data and equivocal denials by military spymasters.

Would Facebook be prevented from “serving authoritarian interests”? Tell that to the activist/whistleblower who has been driven into the arms of Ecuador, of all countries, because he fears extradition to the United States.

Public utility regulation of social media has already been made mincemeat. Nationalizing Facebook is indeed a nonstarter.

“If only we elected the right people,” our friends on the left seem to think, “things would be better. If only our elected officials dedicated their lives to careful balancing of our precious American values, if we got a real regulator in there, if only they didn’t come under outside pressure…” If only, if only, if only.

It is quite conceivable to have some wise and neutral authority make better decisions about how every organ of society might operate. I think this dream is what brings our friends on the left to believe so strongly in increasing government control over society.

The thing is, it is quite impossible for that wise and neutral authority ever to exist.

We can go to the aphorisms—“Power tends to corrupt, and absolute power corrupts absolutely”; we can go to school: the public choice school of economics, specifically; or we can go to the lessons of history to show that there is not a beneficent government in the kitchen, lovingly brewing coffee for you, when you wake from your ‘democratic’ dream.

My dream of having education policy restored to its rightful place with localities and families is more likely—well, I’ll put it this way—less unlikely than a powerful, all-seeing, yet benign central government.