Tag: economy

Debt Aggravates Spending Disease

USA Today’s Dennis Cauchon reports that ”state governments are rushing to borrow money to take advantage of cheap and plentiful credit at a time when tax collections are tumbling.” That will allow them to “avoid some painful spending cuts,” Cauchon notes, but it will sadly impose more pain on taxpayers down the road.

When politicians have the chance to act irresponsibly, they will act irresponsibly. Give them low interest rates and they go on a borrowing binge. The result is that they are in over their heads with massive piles of bond debt on top of the huge unfunded obligations they have built up for state pension and health care plans.

The chart shows that total state and local government debt soared 93 percent this decade. It jumped from $1.2 trillion in 2000 to $2.3 trillion by the second quarter of 2009, according to Federal Reserve data (Table D.3).

Government debt has soared during good times and bad. During recessions, politicians say that they need to borrow to avoid spending cuts. But during boomtimes, such as from 2003 to 2008, they say that borrowing makes sense because an expanding economy can handle a higher debt load. I’ve argued that there is little reason for allowing state and local government politicians to issue bond debt at all.

Unfortunately, the political urge to spend has resulted in the states shoving a massive pile of debt onto future taxpayers at the same time that they have built up huge unfunded obligations for worker retirement plans.

We’ve seen how uncontrolled debt issuance has encouraged spending sprees at the federal level. Sadly, it appears that the same debt-fueled spending disease has spread to the states and the cities.

Taking Over Everything

“My critics say that I’m taking over every sector of the economy,” President Obama sighed to George Stephanopoulos during his Sunday media blitz.

Not every sector. Just

This president and his Ivy League advisers believe that they know how an economy should develop better than hundreds of millions of market participants spending their own money every day. That is what F. A. Hayek called the “fatal conceit,” the idea that smart people can design a real economy on the basis of their abstract ideas.

This is not quite socialism. In most of these cases, President Obama doesn’t propose to actually nationalize the means of production. (In the case of the automobile companies, he clearly did.) He just wants to use government money and government regulations to extend political control over all these sectors of the economy. And the more political control achieves, the more we can expect political favoritism, corruption, uneconomic decisions, and slower economic growth.

Pakistan: More Aid, More Waste, More Fraud?

Pakistan long has tottered on the edge of being a failed state:  created amidst a bloody partition from India, suffered under ineffective democratic rule and disastrous military rule, destabilized through military suppression of East Pakistan (now Bangladesh) by dominant West Pakistan, dismembered in a losing war with India, misgoverned by a corrupt and wastrel government, linked to the most extremist Afghan factions during the Soviet occupation, allied with the later Taliban regime, and now destabilized by the war in Afghanistan.  Along the way the regime built nuclear weapons, turned a blind eye to A.Q. Khan’s proliferation market, suppressed democracy, tolerated religious persecution, elected Asif Ali “Mr. Ten Percent” Zardari as president, and wasted billions of dollars in foreign (and especially American) aid.

Still the aid continues to flow.  But even the Obama administration has some concerns about ensuring that history does not repeat itself.  Reports the New York Times:

As the United States prepares to triple its aid package to Pakistan — to a proposed $1.5 billion over the next year — Obama administration officials are debating how much of the assistance should go directly to a government that has been widely accused of corruption, American and Pakistani officials say. A procession of Obama administration economic experts have visited Islamabad, the capital, in recent weeks to try to ensure both that the money will not be wasted by the government and that it will be more effective in winning the good will of a public increasingly hostile to the United States, according to officials involved with the project.

…The overhaul of American assistance, led by the State Department, comes amid increased urgency about an economic crisis that is intensifying social unrest in Pakistan, and about the willingness of the government there to sustain its fight against a raging insurgency in the northwest. It follows an assessment within the Obama administration that the amount of nonmilitary aid to the country in the past few years was inadequate and favored American contractors rather than Pakistani recipients, according to several of the American officials involved.

Rather than pouring more good money after bad, the U.S. should lift tariff barriers on Pakistani goods.  What the Pakistani people need is not more misnamed “foreign aid” funneled through corrupt and inefficient bureaucracies, but jobs.  Trade, not aid, will help create real, productive work, rather than political patronage positions.

Second, Islamabad needs to liberalize its own economy.  As P.T. Bauer presciently first argued decades ago–and as is widely recognized today–the greatest barriers to development in poorer states is internal.  Countries like Pakistan make entrepreneurship, business formation, and job creation well-nigh impossible.  Business success requires political influence.  The result is poverty and, understandably, political and social unrest.  More than a half century experience with foreign “aid” demonstrates that money from abroad at best masks the consequences of underdevelopment.  More often such transfers actually hinder development, by strengthening the very governments and policies which stand in the way of economic growth.

Even military assistance has been misused.  Reported the New York Times two years ago:

After the United States has spent more than $5 billion in a largely failed effort to bolster the Pakistani military effort against Al Qaeda and the Taliban, some American officials now acknowledge that there were too few controls over the money. The strategy to improve the Pakistani military, they said, needs to be completely revamped. In interviews in Islamabad and Washington, Bush administration and military officials said they believed that much of the American money was not making its way to frontline Pakistani units. Money has been diverted to help finance weapons systems designed to counter India, not Al Qaeda or the Taliban, the officials said, adding that the United States has paid tens of millions of dollars in inflated Pakistani reimbursement claims for fuel, ammunition and other costs.

Writing blank checks to regimes like that in Pakistan is counterproductive in the long term.  Extremists pose a threat less because they offer an attractive alternative and more because people are fed up with decades of misrule by the existing authorities.  Alas, U.S. “aid” not only buttresses those authorities, but ties America to them, transferring their unpopularity to Washington.  The administration needs do better than simply toss more money at the same people while hoping that they will do better this time.

Weekend Links

  • Is public option a private insurer killer? Larry McNeely and Michael Cannon debate.
  • Podcast: Should the government have the power to punish you for speaking your mind? Many Americans think it should…so long as it’s people with whom they don’t agree.

Australian Trade Scholars Offer Perfect Cure for ‘Protectionitis’

Earlier this month, the Lowy Institute in Australia published a paper offering some very sound and, obviously, very timely advice about how to contain, and ultimately, eradicate protectionism. The paper is being circulated among the G20 delegations, who will undoubtedly discuss the topic of trade and protectionism in Pittsburgh next week. So for those of you interested in getting a sense of what will probably be the single best idea on (or at least near) the table at the G20 summit, I highly recommend this 20-pager.

The solution proposed by the authors boils down to a two-word phrase: “Domestic Transparency.” What is meant by that phrase is that “defeating protectionism begins at home.” And by that slogan, the authors mean that the key to reducing, and ultimately eliminating, protectionism is not external pressure from other countries, mercantilist trade negotiations, or filing trade complaints at the WTO, but rather greater awareness at home of the real costs of protectionism. I couldn’t agree more. (In fact better transparency is one of our recommendations in this paper).

When governments impose trade barriers at the behest of special interests, they usually justify that protectionism with diversionary rhetoric concerning some vague conception of the “national interest,” and the imperative of shielding domestic business from unfair competition and other vagaries of the globalized economy. That the protectionist measure itself—the product of special interests diverting productive resources from economic to political ends—forces involuntary and usually unknowing subsidization of those protection-seekers by the same citizens at large who are expected to buy into the national interest canard is a detail about which most people remain in the dark.

The central theme of the Lowy paper is that once people become informed about the costs of protectionism, not only to the broader economy, but in terms of what it means for their own personal budgets, politicians and lobbyists will find it much more difficult to concoct protectionist schemes.

That this paper is written by Australians is no accident. The Aussies have experience and credibility implementing a successful domestic transparency regime, which entailed the establishment of an independent authority (independent from the levers of government and business) to provide advice to governments that is “disinterested, open to public scrutiny, and formulated from the perspective of national welfare rather than the needs of particular producer groups.” The establishment of that agency (oddly named the “Industries Assistance Commission”—one of the authors, Bill Carmichael, is the former Chairman of the IAC) in 1974 and its successor agency (also oddly named the “Productivity Commission”) are widely credited with exposing the costs of protectionism to Australians, who subsequently supported dramatic waves of trade liberalization and have since been skeptical of efforts of industries to secure protection.

In this country, the U.S. International Trade Commission is an agency with a stable of economists that measures the welfare effects of trade liberalization and protectionism. While it may have the resources to conduct the analyses, it doesn’t have the independence. Regrettably, ITC studies are often subject to the whims of politics, particularly when the objectivity and facts in their reports don’t comport with politicians’ “expectations.” We need something similar to Australia’s domestic transparency institution in the United States, and in other countries, too.

G20 members should seriously consider the proposal in this excellent Lowy paper.

Bob McDonnell: The Modern Republican

This is from the Reagan administration’s deregulatory 1981 energy plan: “All Americans are involved in making energy policy. When individual choices are made with a maximum of personal understanding and a minimum of government restraints, the result is the most appropriate energy policy.”

Many modern Republicans claim devotion to Ronald Reagan’s ideas, but they often seem to forget about the “minimum of government” thing. The following points are from Republican Virginia gubernatorial candidate Bob McDonnell’s “More Energy, More Jobs” plan:

  • “McDonnell was the chief sponsor of legislation creating the Virginia Hydrogen Energy Plan.”
  • “McDonnell also supported grant programs for solar photovoltaic manufacturing, tax exemptions for solar energy and recycling property, and tax credits for solar energy equipment.”
  • “In order to protect Virginia’s citizens from the skyrocketing wholesale prices of electricity seen in other states, McDonnell brought together all the necessary stake holders to re-regulate electricity in Virginia.”
  • “Currently, Virginia is the second largest importer of electricity behind California.  This is unacceptable.”
  • “Bob McDonnell will establish Virginia as a Green Jobs Zone to incentivize companies to create quality green jobs. Qualified businesses would be eligible to receive an income tax credit equal to $500 per position created per year for the first five years.”
  • “The Virginia Alternative Fuels Revolving Fund was established to assist local governments that convert to alternative fuel systems … Bob McDonnell will expand the purpose of this fund to include infrastructure such as refueling stations, provide seed money and aggressively pursue additional grants.”
  • “Bob McDonnell will make Southwest and Southside Virginia the nation’s hub for traditional and alternative energy research and development…To assist with the attraction, building and operation of major energy facilities in Southside and Southwest Virginia, we will also support the establishment of the Center for Energy.”
  • “To help Virginia universities gain access to federal stimulus money, as Governor, Bob McDonnell will establish the Virginia Universities Clean Energy Development and Economic Stimulus Foundation.”
  • “As Governor, Bob McDonnell will leverage stimulus funding to incentivize individuals and businesses to conduct energy audits and encourage public private partnerships between small businesses and government.”

It’s true that McDonnell’s plan has some free market elements, and also that Ronald Reagan supported some wasteful energy boondoggles. However, the degree to which the modern Republican wants to micromanage and manipulate the energy industry is remarkable. McDonnell is almost setting out a Soviet five-year plan for a substantial part of the Virginia economy. For goodness sakes, he wants to treat Virginia like a separate country and try to fix the supposed problem that it is “importing” too much energy from other states!

It’s not just energy. Look at the top-down central planning ideas that McDonnell has for “creating jobs”:

  • “Expanding use of the Governor’s Opportunity Fund by roughly doubling the funding available and broadening Fund rules to allow companies that generate additional state and local tax revenue to qualify.”
  • “Appointing Lieutenant Governor Bolling to serve as “Virginia’s Chief Job Creation Officer” in the McDonnell/Bolling Administration.”
  • “Designating one Deputy Secretary of Commerce to Focus Solely on Rural Economic Development.”
  • “Providing a $1,000 tax credit per job to businesses that create 50 new jobs, or 25 new jobs in economically distressed areas.”
  • “Double the funding for the Virginia Tourism Corporation. Currently Virginia trails 14 states including West Virginia and Tennessee in tourism funding.”
  • “Increase funding for the Governor’s Motion Picture Fund by $2 million.”
  • “Providing a $1,000 tax credit per job to businesses that create 50 new jobs, or 25 new jobs in economically distressed areas.”

Again, McDonnell mixes some pro-market proposals in with these Big Government interventions. And his opponent, Creigh Deeds, is promoting his own interventionist schemes, many very similar to McDonnell’s.

In 1980, the difference between Jimmy Carter and Ronald Reagan on economic policy was clear. But today, we seem to have arrived at a point where it’s virtually impossible to tell the difference in economic platforms between a self-proclaimed conservative Republican and a liberal Democrat.

When Stimulus Is No Stimulus

The Obama administration has been touting its wasteful “stimulus” package as the answer to the recession.  Now that Uncle Sam has started his spending binge, John Cogan, John Taylor, and Volker Wieland assess the result.  Their conclusion:  for all of the money spent, the effort wasn’t much of a stimulus.

They write in the Wall Street Journal:

Direct evidence of an impact by government spending can be found in 1.8 of the 5.4 percentage-point improvement from the first to second quarter of this year. However, more than half of this contribution was due to defense spending that was not part of the stimulus package. Of the entire $787 billion stimulus package, only $4.5 billion went to federal purchases and $17.7 billion to state and local purchases in the second quarter. The growth improvement in the second quarter must have been largely due to factors other than the stimulus package.

Incoming data will reveal more in coming months, but the data available so far tell us that the government transfers and rebates have not stimulated consumption at all, and that the resilience of the private sector following the fall 2008 panic not the fiscal stimulus program deserves the lion’s share of the credit for the impressive growth improvement from the first to the second quarter. As the economic recovery takes hold, it is important to continue assessing the role played by the stimulus package and other factors. These assessments can be a valuable guide to future policy makers in designing effective policy responses to economic downturns.

If policymakers really want to stimulate the economy, they will stop prodigiously wasting money, unfairly redistributing people’s earnings, making the tax system ever more complex, and imposing job-killing regulations.  In other words, politicians will stop being politicians.