Archives: 04/2013

Privatize the TVA

Perhaps President Obama has been reading about Margaret Thatcher’s policy successes. He is apparently considering selling off the federal government’s Tennessee Valley Authority. This is a great idea. As this story notes, it would allow the struggling electric utility more flexibility in dealing with the many challenges it faces.

While Democrats are often more socialistic on economic policy than Republicans, Democratic President Bill Clinton was a modest privatizer. He proposed selling off four federal electric utilities in his 1996 budget (see page 149), and he did manage to complete the sale of the Alaska Power Administration. And, as I note in this essay, he also privatized the federal helium reserve in 1996, the Elk Hills Petroleum Reserve in 1997, and the U.S. Enrichment Corporation in 1998.

This time around, Democratic President Obama may run into opposition from socialistic Republicans. Sen. Lamar Alexander has already griped that Obama’s TVA plan is “one more bad idea in a budget full of bad ideas.” But I’d suggest that the president push ahead and outflank the supposedly free-market GOP but proposing sell-offs of the Postal Service, Amtrak, Western power dams, and the Army Corps of Engineers.   

David Boaz reminds me that former Cato chairman Bill Niskanen was barred by Congress for even looking into TVA reform when he was on President Reagan’s CEA. So this is a sensitive issue, and it will be interesting to see how far Obama’s efforts get before the Lamar Alexanders in Congress block him.

SecDef Should Tackle Personnel Costs

Yesterday, Secretary of Defense Chuck Hagel went before the House Armed Services Committee to answer questions about President Obama’s proposed FY 2014 military budget. The request for $526.6 billion for the base DoD budget is $3.9 billion lower than the 2012 enacted level. While this reduction is a positive step, it doesn’t go far enough given the nation’s fiscal state and changing military requirements, and it exceeds the spending caps mandated by the 2011 Budget Control Act by $55 billion.

For more insight on the budget numbers and what this means politically, see my colleague Ben Friedman’s excellent post from yesterday. I want to focus on an area of the budget that cries out for reform: rising personnel costs.

During his testimony, Hagel reiterated the need to rein in such costs, echoing themes from his speech last week at the National Defense University. The president’s budget aims to reduce these costs by cutting end strength, limiting the size of pay increases (to 1 percent), and making “benefit adjustments” to TRICARE. Such adjustments are critical to the department in the long term.

A political battle over these types of reductions is all but certain; however, some members of Congress—perhaps most—will resist. This is unfortunate, especially for fiscal conservatives who understand the need to reform entitlements like Medicare, Medicaid, and Social Security, yet fail to see the need to contain skyrocketing costs in personnel and benefits at DoD. The arguments are the same: the current path is unsustainable; reforms are needed or the costs will consume the rest of the budget; and if you implement the reforms sooner, they can be more incremental and less disruptive to the troops. But then again, farsightedness isn’t Congress’s strong suit.

Personnel costs, which account for approximately 32 percent of the budget request (over 45 percent when civilian pay and benefits are included), need to be addressed. The administration has proposed cutting conventional forces—mainly from within the Army and Marine Corps—by 100,000. Hagel has mentioned reducing the civilian workforce, but he hasn’t outlined specifically how he would downsize the “world’s largest back office.”

As Ben Friedman points out, it is also important to keep in mind that the $526.6 billion base budget request does not accurately represent the total cost of national defense. For instance, Overseas Contingency Operations (OCOs)—war funding—is a separate request. Many believe that as we draw down in Afghanistan, OCO funding will come down. But Gen. Martin Dempsey, chairman of the Joint Chiefs of Staff, explained in yesterday’s hearing that those costs are likely to remain fairly steady for the next few years. Despite the fact that many budget projections count the drawdown in Afghanistan as “savings,” the United States will remain in Afghanistan for years to come.

When you factor in the budgets of other the defense-related items—nuclear weapons management under the Department of Energy, the intelligence community, the Department of Homeland Security, and Veteran Affairs—total spending on national defense soars to over $900 billion.

There is plenty of room for further cuts in this massive total, especially if we rethink what we ask our military to do. Shedding security commitments and unnecessary missions would allow for a budget that reflects our level of security. But the administration can start by addressing the costs relating to personnel. Otherwise, the future does not look bright for Pentagon budgets. 

A Tax Haven Primer for the New York Times

I could only use 428 words, but I highlighted the main arguments for tax havens and tax competition in a “Room for Debate” piece for the New York Times.

I hope that my contribution is a good addition to the powerful analysis of experts such as Allister Heath and Pierre Bessard.

I started with the economic argument.

[T]ax havens are very valuable because they discourage anti-growth tax policy. Simply stated, it is very difficult for governments to impose and enforce confiscatory tax rates when investors and entrepreneurs can shift their economic activity to jurisdictions with better tax policy. Particularly if those nations have strong policies on financial privacy, thus making it difficult for uncompetitive high-tax nations to track and tax flight capital. Thanks to this process of tax competition, with havens playing a key role, top personal income tax rates have dropped from an average of more than 67 percent in 1980 to about 42 percent today. Corporate tax rates also have plummeted, falling from an average of 48 percent to 24 percent.

…Lawmakers also were pressured to lower or eliminate death taxes and wealth taxes, as well as to reduce the double taxation of interest, dividends and capital gains. Once again, tax havens deserve much of the credit because politicians presumably would not have implemented these pro-growth reforms if they didn’t have to worry that the geese with the golden eggs might fly away to a confidential account in a well-run nation like Luxembourg or Singapore.

Since I didn’t have much space, I couldn’t go into much greater detail. Below the jump is a video that elaborates on the economic benefits of tax havens, including an explanation of why fiscal sovereignty is a big part of the debate.

International Trade in Online Medical Services

The hard-working Cato interns pointed me to this article discussing a constitutional challenge to restrictions on the online provision of veterinary services:

A retired Texas veterinarian has filed a federal lawsuit challenging state regulations that bar him from evaluating animals and giving veterinary advice over the Internet.

Since 2002, Ronald Hines, 69, of Brownsville, Tex., has used his website to provide veterinary advice—sometimes for free and sometimes for a flat $58 fee. Sometimes his clients are overseas with limited access to veterinary services. He gets lots of questions from people who find wounded birds and want to nurse them to health. Over the course of his career, he developed an expertise with monkeys, and said he still gets a lot of monkey questions.

Last month, the Texas veterinary board suspended Hines’ license for a year after finding that his Internet practice violates state laws. Texas regulations require a vet to establish a “veterinarian-client-patient relationship,” and they explicitly state that such a relationship cannot be established solely through the telephone or Internet.

Hines’ lawyers at the Arlington, Va.-based Institute for Justice say the rule infringes on their client’s free-speech rights and is an unreasonable restriction on the profession.

Jeff Rowes, an attorney with the institute, said the case could set a precedent in fields that extend well beyond veterinary medicine. He noted that telemedicine continues to be an emerging field and that regulations restricting Internet speech could affect a number of professions, including law, psychology and investment advice.

More details here, here and here.

Duplicative Government Programs Are a Symptom of the Problem

The Government Accountability Office has released its third annual report on fragmented, overlapping, or duplicative federal programs and activities. Proponents of making the government more efficient view the findings as an opportunity to achieve cost savings. While there’s obviously nothing wrong with the government spending less money than it has to, the goal should be to permanently shut the trains down – not just try to get them to run on time. 

Some examples: 

  • The GAO says “Enhanced collaboration between the Small Business Administration and two other agencies could help to limit overlapping export-related services for small businesses.” The federal government shouldn’t be subsidizing export promotion for commercial interests, period. (See here and here.) 
  • The GAO says “Federal agencies providing assistance for higher education should better coordinate to improve program administration and help reduce fragmentation.” The federal government should not be subsidizing higher education, period. (See here.) 
  • The GAO says, “To achieve up to $1.2 billion per year in cost savings in the Federal Crop Insurance program, Congress could consider limiting the subsidy for premiums that an individual farmer can receive each year, reducing the subsidy for all or high-income farmers participating in the program, or some combination of limiting and reducing these subsidies.” Federal crop insurance subsidies and all farm subsidies should be abolished, period. (See here and here.) 
  • The GAO says, “Federal support for wind and solar energy, biofuels, and other renewable energy sources, which has been estimated at several billion dollars per year, is fragmented because 23 agencies implemented hundreds of renewable energy initiatives in fiscal year 2010—the latest year for which GAO developed these original data.” The federal government shouldn’t subsidize renewable energy (or traditional sources of energy), period. (See here.)

There have been numerous attempts to “reinvent government,” “streamline the bureaucracy,” etc, over the decades as the government has expanded in size and scope. Perhaps the GAO report will spur another. But while the initiatives change, the result is always the same: we still end up stuck with a bloated Leviathan that continues to have its snotty nose in every facet of our lives. 

As I often point out, waste always comes with government the same way a Happy Meal always comes with a toy and drink. There is duplication and waste in the federal government because it has become massive and there are virtually no limits on what politicians can spend money on. 

I’m not suggesting that government waste should be ignored. Indeed, examples of waste should be held up as reasons to terminate entire government agencies and programs. But I believe that a myopic fixation on “eliminating duplication and waste” is itself a waste. That’s because duplication and waste are merely symptoms of the real problem of big government. 

Americans Deserve to See Federal Role in National Tests

The drive to impose uniform curriculum standards on the nation’s schools has been one of stealth, and at times, seemingly intentional deception. Most egregious has been the mantra of Common Core proponents that the effort has been “state-led and voluntary,” despite Washington coercing state adoption through the Race to the Top program and No Child Left Behind waivers; standards creators encouraging just such federal “incentives”; and Washington selecting and funding the two groups creating the tests to go with the standards. And now, more than a week after the U.S. Department of Education announced the creation of a “technical review” panel to assess the assessments, it seems increasingly certain that the panel’s work will be done behind closed doors.

At least one report asserts that the meetings will, indeed, be closed to the public. Education Week’s initial reporton the review says that the panel’s “feedback” will eventually be made public in “a yet-to-be-determined form,” but says nothing about the meetings themselves. Cato Center for Educational Freedom efforts to confirm the meeting status with the U.S. Department of Education have come up empty, with calls over two days either resulting in no information or simply going unanswered. At best, then, the meetings will be open to the public but ED has a terrible communications system. At worst the panel’s work will be completely under wraps save for some kind of final – and perhaps heavily filtered – report.

Either scenario is unacceptable. These tests are being funded by taxpayers, and the goal is ultimately to use them to assess the math and reading mastery of the nation’s children. Funders and families deserve to see what this review panel is doing, and shouldn’t have to pull telecommunications teeth to find out if and how they can do that. In addition, Common Core supporters have taken to painting opponents as paranoid, while at the same time denying or downplaying the federal government’s major role in pushing the Common Core. It would not be surprising were they to use the same tactics should Common Core opponents raise questions about the degree to which the Feds are influencing what is on the tests. The panel may well leave test content alone, but given the track record so far it is rational to fear the worst, especially when it seems the review panel is purposely being kept out of real sunlight.

Americans deserve to see all that the Feds are doing with this supposedly non-federal effort.

Obama’s 2014 Military Spending Request

The Obama administration $640.5 billion fiscal year 2014 request for military spending authority is predictably unrealistic and excessive. Still, political circumstance continues to drag the Pentagon toward fiscal restraint. 

That $640.5 billion includes $88.5 billion for war (a.k.a. overseas contingency operations), $526.6 for non-war spending in the Department of Defense, and another $25.4 billion spending outside DoD, mostly for nuclear weapons in the Department of Energy, which officially counts as “national defense” or budget function 050 spending. 

Those spending levels ignore the budgetary cap set by law and the political reality it reflects. The $552 billion requested in 2014 for non-war “national defense” spending exceeds by $55 billion the spending cap set by the 2011 Budget Control Act, as amended by the American Taxpayer Relief Act of 2012. Were Congress to enact the president’s budget and leave the cap in place, that total would be sequestered equally across “defense” spending categories, including the war. 

Even if Congress agrees to a grand bargain altering the caps, military spending will likely face additional cuts. Republican resistance to tax hikes and Democratic protection of entitlements mean that any deal they cut will likely again target discretionary spending, more than half of which goes to the military. Of course, Congress’ failure thus far to undo this year’s more onerous sequestration suggests that no deal is likely. An over-under on where the non-war Pentagon budget winds up for 2014 would be closer to $500 billion than $550 billion. 

In a certain light, there is some sacrifice here. The non-war DoD request of $526.6 billion is just $1.2 billion more than last year’s request. Factoring in inflation, it’s about a 1.5 percent cut. This budget would bring the portion of GDP going to the military to 4 percent, versus. 4.3 percent this year, according to the administration. And as Russell Rumbaugh points out, DoD’s projected spending over ten years is down $114 billion from a year ago. 

On the other hand, the request would be a substantial increase over the $493 billion that the Pentagon actually got from Congress this year, after sequestration (see page 10 here). Economic growth is the main reason that a declining portion of national wealth is going to the military. And the cuts scheduled over the decade would arrive mostly in its second half, when someone else is president, meaning that the cuts are basically imaginary

Additionally, the “placeholder” request of $88.5 billion in Pentagon funds for war—the same as last year—is suspiciously high. The administration says they will revise the request once they determine force levels in Afghanistan. But the president already announced plans to halve total U.S. troops there from 68,000 to 34,000 by next February. Even with the increased cost from exiting, the total cost should be far lower. The Pentagon is likely continuing to use the war budget to dodge caps and fund personnel and other non-war functions. Meanwhile, the administration still claims to support a ten-year cap on war spending. As Charles Knight and I explain here, that is a feckless gesture at a good idea. 

One reason why the Pentagon request is unrealistically and unnecessarily large is that it’s part of a struggle with Republicans over the shape of deficit reduction. The White House may be holding military spending cuts in reserve to offer as an alternative to tax increases that Republicans will refuse. Another, more fundamental, reason is that the administration remains wedded to the liberal internationalist species of the militarist consensus that sees U.S. military power as the linchpin to global stability, trade, and liberalization. Here are some newer arguments against that bipartisan consensus. Hopefully the new secretary of defense, Chuck Hagel, shares some of that skepticism and will demonstrate it once he has time to guide the budget. 

Given our safety, we should stop spending on the military as we did at the height of the Cold War. The Pentagon budget should comply with the spending cap by making choices among missions and goals, rather than clinging to existing alliances and ambitions. The cuts on offer are mostly efficiencies—they require doing the same things more cheaply. Some reforms of this kind, like the administration’s proposal to increase TRICARE fees and start another Base Realignment and Closure (BRAC) round, can save big bucks, though Congress will probably ignore them. Bigger cuts require larger choices. If, for example, we shed allies and the pretension that stability everywhere depends on our military presence, far deeper cuts to each service, especially the ground forces, are possible. We could cut a leg or two of the nuclear delivery-vehicle triad without sacrificing deterrence. One virtue of austerity is to encourage these sorts of overdue choices.