Archives: April, 2013

Government Spending Up, Private GDP Down

It drives a lot of us at Cato nuts to read news stories almost every day which simply assume that government spending is good for the economy. Any defense or nondefense spending restraint will hurt economic growth, it is assumed. Even a recent AEI study seemed to accept this Keynesian concept.

Government spending certainly helps the government-dependent parts of the U.S. economy. But most Americans live in the private economy, and so they might like to know how government budget actions affect the economy that they live in.

So let’s explore the spending-to-growth relationship with national income accounts data. I ran a simple regression with 60 years of data, 1953 to 2012. The variable I was trying to explain was real private GDP growth. Private GDP is total GDP less the government portion of GDP from Table 1.1.5. The explanatory variable was total (federal/state/local) government spending from Table 3.1. Both variables were converted to constant dollars using the GDP deflator.

The chart below shows the Excel plot of the results. The downward slope of Excel’s fitted trend line means that higher government spending growth in a year corresponds to reduced private GDP growth that year. For example, if real government spending growth was zero, private GDP would be expected to grow at 4.2 percent. If real government spending growth was 5 percent, private GDP growth would be expected to fall to 2.8 percent.

The Pentagon as a Jobs Program

One of the realizations that helped me to dispense of the neoconish foreign policy views of my youth is that for federal policymakers, the Pentagon is like a giant jobs program. Regardless of need, a military installation or armament factory can generally count on the unwavering support of the member of Congress who represents the district or state where the facility is located. 

On Monday, the Associated Press’s Richard Lardner provided a textbook example: over the past two years Congress has spent almost a half billion taxpayer dollars—and wants to spend another $436 million—upgrading Abrams tanks that experts and the Army itself say aren’t needed.

Who are some of the biggest congressional backers of the tank upgrading? Why, Republican “deficit hawks”! 

Keeping the Abrams production line rolling protects businesses and good paying jobs in congressional districts where the tank’s many suppliers are located. 

If there’s a home of the Abrams, it’s politically important Ohio. The nation’s only tank plant is in Lima. So it’s no coincidence that the champions for more tanks are Rep. Jim Jordan and Sen. Rob Portman, two of Capitol’s Hill most prominent deficit hawks, as well as Democratic Sen. Sherrod Brown. They said their support is rooted in protecting national security, not in pork-barrel politics. 

“The one area where we are supposed to spend taxpayer money is in defense of the country,” said Jordan, whose district in the northwest part of the state includes the tank plant.

Ah, yes, the “national security” excuse—probably the most cited justification by politicians to spend other people’s money since the ink dried on the Constitution.        

How to Engage with Cato on Social Media

In case you haven’t been following what the Cato Institute has been doing lately on social media, here’s an accessible list of all of Cato’s current projects across different social media platforms:

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Obama’s New Transportation Chief Wants Streetcars for Everyone

America’s transportation system will continue to grind to a halt under President Obama’s pick for transportation secretary, Anthony Foxx. Currently mayor of Charlotte, N.C., Foxx strongly supports streetcars and other obsolete forms of transit.

It is a measure of the glacial pace of America’s political system that Obama had nearly 16 months’ notice that current Secretary Ray LaHood planned to step down at the end of Obama’s first term, yet the president required another three months before finding a replacement. If the administration has anything to say about it, American travelers will move at the same glacial pace: the streetcars that Obama, LaHood, and Foxx want to fund are slower than most people can walk.

Transit advocates often point to Charlotte as an example of a successful lightrail line (more accurately described as a “low-capacity-rail line”). With success like this, I’d hate to see failure: the line cost more than twice the original projection; generates just $3 million in annual fares against more than $20 million in annual operations and maintenance costs; and collects of an average of just 77 cents per ride compared with nearly a dollar for other light-rail lines. Now Charlotte wants to extend the line even though a traffic analysis report predicts that the extension will dramatically increase traffic congestion in the corridor (see pp. 54-56).

Foxx believes rail transit “drives economic development,” says George Washington University Professor Christopher Leinberger approvingly. “The goal of any transportation system, especially rail transit, is not to move people,” Leinberger argues. “The goal is economic development at the stations.”

Anthony Foxx certainly believes that. “If we didn’t do streetcar,” he asked the Charlotte city council during a debate, “does anybody have an idea how we’re going to revitalize” downtown Charlotte?

Rail advocates claim that Charlotte’s low-capacity-rail line helped revitalize neighborhoods along the line. However, a study by transportation expert David Hartgen concluded that most of the billions of dollars of development that was planned along the line was never built. Of the developments that were built, most would have taken place without the line, Hartgen found, though not necessarily in exactly the same locations.

I’ve said this before and I’ll say it again: transportation spending generates true economic growth only if it results in lower-cost, faster, and/or more convenient movement of people and goods. Streetcars and low-capacity rail are more expensive, slower, and for all but a tiny number of people less convenient than the alternatives, whether buses or cars. Even if you reduce transit rider costs by subsidizing them to the hilt, someone has to pay the subsidies and that slows economic growth.

Foxx is blissfully unaware of this and we can expect him to continue LaHood’s policy of giving away as much money as possible for transit projects that are as expensive as possible and move few people while creating more congestion for everyone else.

More Questions for Secretary Sebelius

Given the growing concern even among Democrats that ObamaCare will result in a “huge train wreck” later this year, I have a few questions for Health and Human Services Secretary Kathleen Sebelius to add to my previous list:

  1. What happens if a federal court (say, the Eastern District of Oklahoma) issues an injunction barring HHS from making “advance payments of tax credits” in the 33 states with federal Exchanges?
  2. Has HHS done any planning for that contingency? If so, what are those contingency plans?
  3. If HHS has not, why not? Given that the Congressional Research Service and Harvard Law Review both say there’s a credible case that the PPACA forbids tax credits in the 33 states with federal Exchanges, how could HHS not have a contingency plan ready?

For more on how HHS is violating federal law by planning to issue advance payments of tax credits through federal Exchanges, read my Cato white paper, “50 Vetoes: How States Can Stop the Obama Health Care Law,” and my Health Matrix article (with Jonathan Adler), “Taxation Without Representation: The Illegal IRS Rule to Expand Tax Credits Under the PPACA.

The American Roots of Tax Aversion

In last Sunday’s Washington Post, Jennifer Rubin wrote that Republicans must move beyond their adoration of Ronald Reagan and recognize, among other modernizations, that

America will not return to the pre-New Deal era. Limited government, not small government, must be the aim. That requires low taxes, not taxes that never increase.

She wants Republicans to give up “the pledge” and be willing to raise taxes if that’s the prudent thing in any circumstance.

Republicans and conservatives and libertarians who don’t want to follow her advice could find some historical support just a few inches away on the same page of the “Outlook” section. Reviewer Walter Isaacson quotes this line from a new book on the origins of the Boston Tea Party and the American Revolution, Bunker Hill by Nathaniel Philbrick:

Rather than propose a means of raising revenue that they deemed fair, the colonials were more than happy to direct their considerable energies toward opposing whatever plan the British ministry put forward.

That is, the American revolutionaries didn’t feel obligated to help the British government raise all the money it wanted. They were satisfied to oppose what they regarded as unwarranted taxation.

Tax resistance: an American tradition since 1773. Or 1767. Or 1687.

What to Do about OPEC?

Cato hosted a policy forum last week (which you can watch in its entirety if you missed it the first time around) to discuss a new paper released by Security America’s Energy Future (SAFE).  The paper – written by long-time friends Andy Morriss and Roger Meiners – argues that there is a consensus among academics who have studied OPEC.  The consensus?  The cartel is responsible for less crude oil on the market than would otherwise be the case (which means higher prices than would otherwise be the case) and for the bulk of the price volatility we find in crude oil and, thus, gasoline markets.  “The international market for oil is not a free market” they conclude.  “The global oil market deviates in important ways from the competitive model and that these market anomalies have significant economic impacts and so are relevant for policy makers.”

While Morriss and Meiners would thus seem to invite politicians to act, they offered no agenda of their own.  That’s where SAFE comes in.  FedEx’s Fred Smith, who co-chairs SAFE’s Energy Security Leadership Council, argued at the forum that the federal government needs to respond to OPEC’s machinations by (1) achieving energy independence for North America (a goal I’ve been quite skeptical about in the past), (2) establishing tough energy efficiency standards for a whole host of goods, but most particularly, for U.S. automobiles via CAFÉ standards (an agenda that most economists would reject in favor of accurate price signals), and (3) subsidizing R&D in order to find alternatives to oil in transportation markets.  SAFE discusses this agenda more robustly in their “National Energy Strategy for Energy Security, 2013”.

SMU’s James Smith – one of the most prominent energy economists who works in this field – was on-hand to offer what I think was a compelling rebuttal to the central arguments forwarded by the Morriss and Meiners study.

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