Tag: concentrated benefits and diffuse costs

The Defense Lobby, Americans for Tax Reform, and the Texas Chainsaw Massacre

Bloomberg’s Roxana Tiron reports that Congress is nearing a deal to postpone some of the most contentious provisions of last year’s Budget Control Act (BCA) until March 2013, or later. This is good news for the Aerospace Industries Association (AIA), which has been lobbying since late last year to undo at least that portion of the BCA that pertained to the Pentagon’s budget (i.e. that portion that threatens to cut most deeply into its members’ profits).

Although the mechanics of sequestration’s across-the-board cuts are problematic, the scale of the Pentagon build-down would be modest by historical standards. And yet, the mere suggestion that sequestration might actually occur has sent the industry into apoplexy. The AIA’s campaign has included the release of a new report claiming that the BCA cuts could result in over 1 million lost jobs, and warnings that hundreds of thousands of workers would be receiving pink slips just a few days before the November elections.

In short, sequestration is a horror show, a Texas Chainsaw Massacre, and the AIA’s public relations effort is designed to scare the wits out of the audience. “Sequestration,” explains Della Williams, the chief executive of Fort Worth-based Williams-Pyro Inc., “is surgery with a chain saw.”

But just as some people aren’t easily scared by campy slasher flicks, there are still a few people in Washington—especially Grover Norquist, President of Americans for Tax Reform (ATR)—who are cheering for the guy with the chainsaw.

The two sides squared off in separate events last Thursday. At the Bloomberg Government Defense Conference, AIA President Marian Blakey, Reps. Norm Dicks (D-WA) and Randy Forbes (R-VA) and Sens. Carl Levin (D-MI) and John McCain (R-AZ) called for bipartisan compromise on taxes in order to fund further Pentagon spending increases. Judging from the number of times that speakers invoked his name, Norquist posed a greater threat to national security than China or Iran. Levin, in particular, scorned ATR’s famed taxpayers’ pledge, and suggested that it was largely responsible for the impending catastrophe.

Norquist is characteristically unfazed by all this special interest pleading for more money. While Blakey and her congressional friends were attempting to rally the troops and rustle up more money, Norquist was reaffirming his opposition to higher taxes—including the closing of tax loopholes that generate more revenue—at a meeting on Capitol Hill. There is no Pentagon budget escape hatch in ATR’s pledge. If the defense industry wants more, it will have to get it from elsewhere in the budget.

The fight over sequestration, taxes, and the defense budget reveals text book cases of two perennial public policy realities: the politics of concentrated benefits, diffuse costs; and the economics of the seen vs. the unseen.

With respect to the first case, the defense industry, broadly defined, benefits disproportionately from Pentagon spending. And that industry can count many interested parties within its coalition. In addition to the defense companies, including the executives and the shareholders, there are also the workers’ at these firms (often represented by a union). Then there are the mayors and local officials who represent communities that are home to defense firms.

Given what is at stake, it is understandable that all of these groups have amped up their lobbying efforts to fend off sequestration. To take just one example, a single F-35 will cost, on average, nearly $125 million ($112.5 million for the aircraft, plus another $22 million for the engine). Prime contractor Lockheed Martin spent $15 million on lobbying in 2011 and is expected to spend even more this year. Such expenses can easily be justified to investors and shareholders if they are seen as protecting the company’s cash cow.

Individual taxpayers, by contrast, have little incentive to organize, and even less incentive to pool their money to fight against the AIA. The cost of the F-35, spread around to every taxpayer, amounts to about a dollar (if we just count the 122 million people who paid federal income taxes). Generally speaking, people do not scrutinize where every tax dollar goes; indeed, payroll tax withholding causes Americans to ignore what they pay in monthly taxes.

A few groups, including Norquist’s ATR, try to offset this imbalance of interests, and they have been reasonably successful. But Norquist’s pledges would be worthless if voters didn’t agree with him. But many do. In this poll (.pdf), for example, half of all respondents were opposed to having their taxes go up in order to pay for higher Pentagon spending.

The AIA’s other line of attack—the claim that substantial cuts in military spending will have a devastating impact on the economy, resulting in a million or more lost jobs—reveals the age-old broken-window fallacy. The AIA wants people to focus on that which is seen—defense workers who are laid off—and to ignore any consideration of how the economy as a whole will be better off if the resources that had previously gone to building planes and rockets are allocated elsewhere in the economy. These transitions are certainly difficult and painful for the individuals and firms involved, but they can be expected, all other factors being equal, to have salutary aggregate effects, especially over the long term. I’ll have more to say on that point later this week, drawing on my previous study of San Diego in the late 1950s, the early 1990s and the early 2000s.

In the meantime, I encourage you to read a succinct explanation of the broken-window fallacy from Henry Hazlitt’s Economics in One Lesson. And, if you’re really motivated, consider reading a less succinct, but more colorful, discussion of the phenomenon by Hazlitt’s intellectual forefather, the French philosopher Frédéric Bastiat.

Cross-posted from the Skeptics at the National Interest.

Obama’s War Spending Cap

Along with Chares Knight of the Project on Defense Alternatives, I have just published commentary on the National Interest’s website about President’s Obama’s proposed $450 billion nine-year cap on war spending. We argue that a war cap—better yet a war tax—is a good idea, but this particular proposal is nearly useless.

For one, it is unlikely to become law. The White House has shown little interest in pushing for it. Meanwhile, Republicans are already bashing the president for possibly shortchanging troops amid a war. And even if it does become law, the cap is unlikely to matter. By the time the cap has any effect, economic recovery may have slackened Congress’s appetite for austerity. With the president’s support, Congress may undo the cap or evade it by claiming an emergency, especially if any new war has begun. The bottom line is that there is no effective fiscal restraint here.

As is often the case, the promise of savings tomorrow serves mainly to distract us from their absence today. If the White House wanted thrift rather than its appearance, it would push an annual war spending cap.

The argument in favor of a war cap or tax follows from the arguments the late Bill Niskanen made against the (starve the beast) claim that cutting government revenue will cut government spending:

It is most implausible that reducing the current tax burden of federal spending would reduce the amount of federal services that voters demand. Orthodox price theory…is unambiguous in concluding that reducing the price of a good or service increases the amount demanded. Reducing the current tax burden of federal spending has much the same effect as a price control, increasing the amount demanded relative to that supplied from current revenues.

Just as people don’t value what they don’t pay for, democracies won’t correctly value policies with hidden or deferred costs. That prevents the competing interests from being weighed carefully, screwing up debate and policy outcomes.

Policies producing diffuse costs and concentrated benefits exacerbate this problem. As I have occasionally written (once with Bill), U.S. defense policies, including wars, fall into that policy category. Americans face few personal consequences when their government makes war. Few of us fight, and danger from fiascos is remote. Much rhetoric to the contrary notwithstanding, the survival of our freedoms or way of life is no longer at stake in our wars. Our volunteer professional military bears great risk in war of course, but professional norms prevent it from publicly complaining much. War’s cost for most of us is slightly higher taxes, subsidized by debt. We can support war casually.

A war cap or war tax would somewhat mitigate this problem. A tax encourages taxpayers to consider the value they are getting for that money. A cap heightens competition for resources within the government and thus among Congressmen and interest groups, which ought to sharpen debate. That won’t prevent dumb wars, but it ought to help.

 

‘1099’ Repeal Speaks Volumes About ObamaCare

From my latest Kaiser Health News op-ed:

When 34 Senate Democrats joined all 47 Republicans last week to repeal ObamaCare’s 1099 reporting requirement, their votes confirmed what their talking points still deny: ObamaCare will increase the deficit, no matter what the official cost projections say…

This public-choice dynamic [of concentrated benefits and diffuse costs] is why the Congressional Budget Office, the chief Medicare actuary, and even the International Monetary Fund have discredited the idea that ObamaCare will reduce the deficit. It is one of the principal reasons why, as Thomas Jefferson wrote, “The natural progress of things is for liberty to yield, and government to gain ground.” In other words, the game is rigged in favor of bigger government.

It also explains why the Obama administration is sprinting to implement ObamaCare in spite of a federal court having struck down the law as unconstitutional. The White House needs to get some concentrated interest groups hooked on ObamaCare’s subsidies – fast.

Read the whole thing here.

The Budget Hearing Scam

Colbert King, the Washington Post’s Pulitzer-winning columnist, has a pretty good handle on how D.C. mayor-elect Vincent Gray’s call for “more public input” on the budget would work out in practice:

The council is elected to make decisions, not to take polls. What’s more, people know a set-up when they see it. Gray’s scenario, intentionally or not, is a prescription for raising taxes. Here is how it would work:

Council members, with the elections safely behind them, produce a deficit-closing term sheet that reads like a doomsday manifesto. It describes deep cuts in areas likely to produce the most screams: public safety, education, health care, workforce reductions, arts and culture, etc.

That is followed by council hearings at which long lines of witnesses representing nonprofit advocacy groups and employee unions produce gripping testimony that predicts untold pain and agony resulting from the projected program and payroll cuts.

Following the hearing, which stretches late into the night or the next morning, the lawmakers conclude, reluctantly of course, that there is strong “public” opposition to cuts in government and that they, as conscientious legislators, have no alternative but to keep the government at its current size and, instead, close the deficit with tax increases on middle- and high-income D.C. wage-earners.

King, a longtime close observer of D.C. politics, is describing an example of the general problem of concentrated benefits and diffuse costs – every government program has a few beneficiaries who will show up to defend it, while the taxpayers who will pay for each of these programs have much less incentive to devote time and money to opposing proposals for spending.