Tag: federal budget

Here’s an Idea: Don’t Do Either!

One of the biggest pieces of news coming from President Obama’s budget preview is that he’d kill federal guaranteed student lending – in which the feds subsidize private lenders – and move everything to direct lending straight from the government. He promises that cutting out the middle man would save about $4 billion a year.

In the short term, that savings figure might be possible, though whether or not that is the case is likely to be hotly contested. Washington does spend a lot subsidizing loans so that they carry almost no risk to the lenders and are, hence, low-interest and abundant. Eliminating those subsidies could save some dough. That said, there is absolutely no reason to believe that making Washington the monopolist student lender will produce any long-term efficiencies. In fact, all it will do is ensure gigantic bloat, as is the case with any government monopoly.

A recent story in the New York Times, coupled with a blog entry I wrote in November, illustrates why neither guaranteed nor direct federal lending should ever be expected to produce efficient outcomes.

On the blog I wrote about how, in order to keep things rolling during the “credit crunch,” the Bush Administration was essentially going to buy up any student loans that lenders thought were too insecure. At the time, the Education Department kept declaring that whatever the feds ended up doing it would be “cost neutral” – we wouldn’t feel a thing as they kept banks and students in the money. I wondered, skeptically, how exactly that would be done, but couldn’t find anything explaining it. All I found were Education Department promises that it would be made clear…eventually.

It turns out, I was very likely right to be suspicious. As the Times reported on Wednesday:

The program is supposed to cost taxpayers nothing, but the Obama administration has asked for additional analysis.

“We have reviewed the analysis with the staff here, and we do not have confidence in the bottom line,” said a senior official at the White House Office of Management and Budget, who insisted on anonymity, citing administration policy. Referring to differences between agreements entered into by the departing Bush administration and public descriptions of the program, the official added, “The documents on their face raise serious questions about whether it’s cost-neutral.”

So it seems likely that the government essentially lied to America. “Oh yeah – ‘cost neutral.’ Sorry. We thought you wouldn’t notice.”

What this little episode illustrates is something we frankly already knew: Government officials will happily deceive us if that’s what it takes to enact policies that they think will make them look good, especially in the short term (meaning, until the next election). With that in mind, whether the feds are working with a middle man or giving students the money directly, it almost certainly doesn’t matter: money will be lost, and probably in much bigger amounts than the public will be led to believe.

So what is government to do about student loans? Nothing! Washington should get out of the loan business and leave promising students and profit-seeking lenders to find each other in pursuit of mutual gain. (A student with high earning potential? A bank looking to make some bucks? Why, it’s a perfect match!) Then we wouldn’t have to choose between the frying pan and the fire, nor would we continue to encourage tons of people to pursue college educations they don’t need, can’t handle, or both. In other words, we’d return both some sanity and taxpayer justice to the world of college finance.

New Mandatory Savings Plan?

I haven’t seen any media attention paid to it yet, and I don’t recall the president mentioning it in his speech Tuesday night.  Regardless, p.37 of today’s budget blueprint calls for “Making Saving for Retirement Easier as the Economy Recovers.” Although it sounds innocuous, I believe the contents could be cause for alarm:

“Over the long-term families need personal savings, in addition to Social Security, to prepare for retirement and to fall back on during tough economic times like these. However, 75 million working Americans—roughly half the workforce—currently lack access to employer-based retirement plans. In addition, the existing incentives to save for retirement are weak or non-existent for the majority of middle and low-income households. The President’s 2010 Budget lays the groundwork for the future establishment of a system of automatic workplace pensions, on top of and clearly outside Social Security, that is expected to dramatically increase both the number of Americans who save for retirement and the overall amount of personal savings for individuals. research has shown that the key to saving is to make it automatic and simple. Under this proposal, employees will be automatically enrolled in workplace pension plans—and will be allowed to opt out if they choose. Employers who do not currently offer a retirement plan will be required to enroll their employees in a direct-deposit IRA account that is compatible with existing direct-deposit payroll systems. The result will be that workers will be automatically enrolled in some form of savings vehicle when they go to work—making it easy for them to save while also allowing them to opt out if their family or individual circumstances make it particularly difficult or unwise to save. Experts estimate that this program will dramatically increase the savings participation rate for low and middle-income workers to around 80 percent.”

Here are my concerns just off the top of my head:

Obviously, it represents yet another government encroachment upon individual liberty.  While employees would be “allowed” to opt out, employers would not.  More ominously, while there is no mention of government subsidization of individual plans or forced contributions by employers, how long will it take for activists and their congressional allies to go down those roads?  I can already envision hordes of politicians bemoaning the inability of low- and moderate-income workers to direct any portion of their wages toward their accounts.  And don’t just think this will be limited to leftist politicians.  When I worked for the U.S. Senate a conservative senator once asked me to design a mandatory savings plan for all citizens in which the government and employers would “contribute.”

I guess the bright side here is that the administration is implicitly acknowledging that Social Security isn’t the wonderful retirement nest egg defenders have wanted us to believe.  I also can’t help but chuckle at the political reintroduction of savings as being beneficial.  Over the past year we’ve been repeatedly warned that savings is bad and spending is good.  Anyhow, this issue is going to be one to watch going forward.

Obama’s $1.3 Trillion Tax Hike

Here are some notes on the tax proposals in the new federal budget:  (See Table S-6; All figures are 10-year totals)

  • There are $770 billion in “tax cuts for families and individuals.”  However, the fine print on page 129 shows that $326 billion of that is actually spending, or the “refundable” portion of the tax changes. That leaves a net $444 billion in tax cuts for individuals.
  • The budget would impose a $646 billion tax increase from new “climate revenues,” which would create a burden on families in the form of higher energy prices.  Thus, there is a net tax hike on “families” of about $202 billion, even aside from the income tax increases at the top end.
  • Income tax increases on those with higher incomes total $637 billion. Note that these hikes land on both individual filers and the huge number of small businesses that file through the individual system.
  • Other tax hikes on businesses total a net $183 billion.
  • Finally, Obama proposes to limit deductions for higher earners to raise $318 billion.
  • Thus, President Obama proposes to hike taxes by a net $1,340 billion, or about $1.3 trillion, over the next decade. That’s the last thing we need to recover from recession and to compete in the global economy in coming years.

Obama Budget Irresponsibility Inconsistency

Page 14 of the President’s FY2010 budget “blueprint” contains a section called “Fiscal Irresponsibility” that deserves scrutiny:

“Another manifestation of irresponsibility is the large budget deficits we are inheriting. These deficits, over time, will harm economic growth and impose burdens on our children and grandchildren.”

True.

“Between 2000 and 2008, real Government outlays increased at a 3.6 percent annual average rate, three times the 1.2 percent annual average rate between 1992 and 2000…Furthermore, the amount of debt held by the public has nearly doubled to $6.4 trillion from 2001 to 2008. We are now living with the fallout of this deep fiscal irresponsibility.”

True.

“Unfortunately, we are also inheriting the worst economic crisis since the Great Depression—which will force us to increase deficit spending temporarily as we try to jumpstart economic growth.”

Time-out.  The administration accurately states that federal spending and debt have increased at a detrimental pace this decade.  Then it says we’re in the worst economic crisis since the Great Depression. 

And the solution to the economic downturn caused in part by too much spending and debt is to increase deficit spending and further run up the national debt?  By the administration’s own logic, shouldn’t we be experiencing economic growth with all the deficit spending it “inherited?”

How to Spend a Trillion Dollars without Waste and Fraud

You can’t.

And the federal government knows it. On Tuesday,

Neil Barofsky, the special inspector general for the $700 billion Troubled Asset Relief Program, told a House subcommittee that the government’s experiences in the reconstruction of Iraq, hurricane-relief programs and the 1990s savings-and-loan bailout suggest the rescue program could be ripe for fraud….

Gene Dodaro, acting comptroller general of the U.S., told the subcommittee that a reliance on contractors and a lack of written policies could “increase the risk of wasted government dollars without adequate oversight of contractor performance.”

With the government having already allocated $700 billion for TARP, and $787 billion for “stimulus,” and President Obama now calling for $635 billion for health care and a federal budget soaring to $3.6 trillion – well, you’d think two government reports on the likelihood of fraud and waste would be news. But this testimony didn’t make the New York Times or the Washington Post. There was a small inside story in the Wall Street Journal.

One of Greg Mankiw’s readers worked on the new Department of Homeland Security and reported recently:

you cannot juice up a government agency’s budget by tens of billions (or in the case of the stimulus package, hundreds of billions) and expect them to be able to process the paperwork to contract it out, much less oversee the projects or even choose them with any kind of hope for success. It’s like trying to feed a Pomeranian a 25 lb turkey. It’s madness. It was years before DHS got the situation under control and between the start and when they finally assembled a sufficiently capable team of lawyers, contracting officials, technical experts and resource managers, most of the money was totally wasted.

Linda Bilmes, coauthor with Nobel laureate Joseph Stiglitz of The Three Trillion Dollar War: The True Cost of the Iraq Conflict, analyzes the massive problems in three somewhat smaller government projects — the Iraqi reconstruction effort, Hurricane Katrina reconstruction, and the Big Dig artery construction in Boston — and finds that “in any organization that starts to increase spending very rapidly there are risks of waste, fraud and inefficiency.”

Saying “nobody messes with Joe” is not a solution to the inevitability of waste and fraud when an unaccountable bureaucracy is spending trillions of other people’s dollars.

President Obama’s Budget: Higher Taxes & Bigger Government

“As soon as I took office, I asked this Congress to send me a recovery plan by President’s Day… Not because I believe in bigger government – I don’t. Not because I’m not mindful of the massive debt we’ve inherited – I am.”
     –President Obama to congressional joint session, February 24

President Obama said some encouraging words about federal spending in his first major speech as president, but the budget released by his administration today reveals a substantial disconnect between his rhetoric and his policy.

Americans have a fundamental choice to make in coming months: Do they want President Obama and Congress to impose huge increases in the size of government, perhaps as dramatic as occurred in the 1930s and 1960s?

Apart from defense, federal spending has hovered around 16.5 percent of the economy since 1980, through both Democratic and Republican administrations. But under President Obama, nondefense spending is soaring to 23 percent of the economy this year and will remain at historic high levels in the future.

Even after current stimulus spending is supposed to end, nondefense spending is expected to be more than 19 percent of the economy – or 25 percent more than the size of government during the later Clinton years.

Americans need to decide whether they want the European-sized government that President Obama is promising – with all its damaging effects on individual freedom and economic growth – or whether they want to return to the greater prosperity of the smaller-government Clinton years.