Tag: obama budget

The Old Infrastructure Excuse for Bigger Deficits

Washington Post columnist/blogger Ezra Klein recently echoed the latest White House rationale for additional “stimulus” spending for 2013-15 and postponing spending restraint (including sequestration) until after the 2014 elections. Klein argues for “a 10- or 12-year deficit reduction plan that includes a substantial infrastructure investment in the next two or three years.” In other words, a “deficit-reduction plan” that increases deficits until the next presidential election year.

Citing Larry Summers (who similarly promoted Obama’s 2009 stimulus plan while head of the National Economic Council) Klein says, “There’s a far better case right now for being an infrastructure hawk than a deficit hawk.”

“Deficit hawks tend to [worry that] … too much government borrowing can, in a healthy economy, begin to “crowd out” private borrowing. That means interest rates rise and the economy slows… That’s not happening right now. In real terms — which means after accounting for inflation — the U.S. government can borrow for five, seven or 10 years at less than nothing… . That’s extraordinary. It means markets are so nervous that they will literally pay us to keep their money safe for them.”

If low yields on Treasury and agency bonds simply reflected investor anxiety (unlike stock prices),  rather than quantitative easing, then why has the Federal Reserve been spending $85 billion a month buying Treasury and agency bonds? Despite those Fed efforts, Treasury bond yields have lately been moving up rather smartly – even on TIPS (inflation-protected securities). The yield on 10-year bonds rose by a half percentage point since early May. It is not credible to assume, as Summers does in a paper with Brad DeLong, that today’s yields would remain as low as they have been even in the face of substantially more federal borrowing for infrastructure. Even the Fed’s appetite for Treasury IOUs has limits. 

A second worry of deficit hawks, according to Klein and Summers, “is a moral concern about forcing our children to pay the bill for the things we bought… .These are real, worthwhile concerns. But in this economy, both make a stronger case for investing in infrastructure than paying down debt.”  Paying down debt?!  Nobody is talking about paying debt. That would require a budget surplus.  The debate is only about borrowing slightly less (sequestration) or substantially more (Obama).

The Summers-Klein argument for larger deficits is that interest rates are very low, so why not borrow billions more for a “substantial investment” in highways, bridges and airports?  Summers says, “just as you burden future generations when you accumulate debt, you also burden future generations when you defer maintenance.”  This might make sense if there was any link between government tangible assets and federal liabilities.  In reality, though, this smells like a red herring. Politicians always say they want to borrow more to build or rebuild highways and bridges.  But this is not how borrowed money is spent, particularly when it’s federal borrowing.

Accumulation of federal debt since 2008 − including the 2009 stimulus plan − had virtually nothing to do with investment. Nearly 90 percent of the  2009 “stimulus” was devoted to consumption – $430.7 billion in transfer payments to individuals, more than $300 billion in refundable tax credits, $18.4 billion in subsidies (e.g., solar and electric car lobbies), more pay and perks for government workers, etc. Stanford’s John Taylor shows that even the capital grants to states − ostensibly intended for infrastructure projects − were used to reduce state borrowing and increase transfer payments such as Medicaid.

In the National Income and Product Accounts (NIPA), the closest thing we have to a measure of “infrastructure” is government investment in structures.  Federal borrowing in the NIPA accounts rose from $493.5 billion in 2008 to $1,177.8  in 2010, yet total federal, state and local investment in structures was unchanged − $310.1 billion in 2008 and $309.3 billion in 2010. Such investment was lower by 2012, but not because federal borrowing was “only” $932.8 billion that year.  

NIPA accounts show only a $12.9 billion federal investment in nondefense structures in 2012 and $8.5 billion for defense structures. By contrast, transfer payments accounted for 61.7 percent of federal spending in 2012, consumption for 28.2 percent, interest 8.5 percent and subsidies 1.6 percent.   Consumption is mostly salaries and benefits. Transfer payments did include more than $607 billion in grants to states and localities in 2011, according to a new CBO study, but 81.7 percent of such grants were for health, income security and education, leaving only 10 percent for transportation. Transportation accounted only 3.2 percent of total federal spending in 2012 and nine percent of “discretionary” spending.

In short, direct federal infrastructure investment plus grants to states add up to only a little over $80 billion out of a budget that exceeds $3.5 trillion. If federal borrowing had anything to do with $80 billion a year in federal infrastructure spending, then we wouldn’t have been borrowing about a trillion a year for the past four years. 

Klein’s rephrasing of Summers’ rerun of the 2009 “infrastructure” excuse is not a plausible argument for increased federal debt. It is, at best, an argument for ending the chronic misuse of borrowed money to pay for transfer payments and government consumption so that we could prudently reallocate a greater share to transportation infrastructure.  

 

Obama’s Hospital Admission

My latest, at National Review Online:

Buried deep within President Obama’s $3.77 trillion budget is a tiny little proposal to increase Medicaid spending by $360 million. In a budget as large as this one, $360 million is scarcely worth mentioning. It amounts to less than one-hundredth of one percent of total outlays. But this 0.01 percent is worth mentioning, because it proves the president’s health-care law will not work…

With this proposal, President Obama has admitted that:

1. The PPACA is not likely to reduce uncompensated care in 2014…

2. The PPACA won’t reduce the deficit…

3. Hospitals can stop crying poverty…

4. States don’t need to expand Medicaid to protect hospitals.

The Washington Post reports that rescission of the DSH cuts “could make it a bit easier for states not to expand the Medicaid program. If they know the additional dollars are coming in, there’s a bit less worry about turning down the Medicaid expansion funds.” At the same time, the president has undercut expansion supporters by admitting that expanding Medicaid will not reduce uncompensated care.

The president’s budget shows that the brave state legislators who have been fighting the Medicaid expansion in states like Ohio and Florida were right all along — and it makes expansion supporters, like Governors Rick Scott (R., Fla.) and John Kasich (R., Ohio), look rather silly.

This relatively small spending item is a big admission that the president’s health-care law simply won’t work, and it should provide encouragement to state officials who are still resisting the massive increase in deficit spending, government bureaucracy, and health-care costs the PPACA embodies.

Read the whole thing.

President’s Budget Lacks Seriousness, Vision

The measure of our seriousness in helping children learn is not simply the number of dollars we spend, but rather the care and thought we invest in allocating them, and our openness to changing course when the evidence demands it. The education provisions of the President’s budget, released today, lack both seriousness and vision.

The FY 2014 budget overview emphasizes three educational initiatives: preschool for all, STEM and innovation, and school infrastructure.

As foreshadowed in his State of the Union address, President Obama proposes to federally subsidize statewide preschool programs. This approach seems designed to deal with the mounting evidence that the federal government’s own preschool programs, Head Start and Early Head Start, have essentially no lasting benefits. Though candidate Obama once said he would terminate ineffective programs, his latest budget retains them both, and actually grows Early Head Start. Additionally, the new budget would subsidize PreK programs like those in Oklahoma and Georgia that advocates have long touted as “high quality.” The evidence on those programs is, however, rather mixed. Relative to the national average, Oklahoma has seen modest declines on the 4th grade NAEP tests while Georgia has seen modest gains—and the declines are larger than the gains. A broader review of the evidence by early education expert Russ Whitehurst of Brookings finds the same lackluster results overall. 

Not only are these statewide programs failing to show a pattern of lasting and substantial benefits thus far, the addition of federal subsidies will likely impede efforts to improve them. Federal education dollars at the pre-college level always come with strings attached—strings that accumulate over time. That is likely to exert a homogenizing pressure on state pre-K offerings, eliminating variation and thereby preventing us from learning which approaches are effective and which are not.

On STEM, the President is keen to fund the hiring of 100,000 new Science, Technology, and Math teachers. But America does not have a teacher quantity problem, we have a teacher effectiveness problem. Over the past 40 years, we’ve grown the number of public school employees 11 times faster than enrollment [i.e., we’ve doubled the number of staff to serve only 8.5 percent more students]. This has added $200 billion annually to the cost of American public schooling, and two million of the three million new hires were instructional staff, so it’s not simply a problem of bureaucratic bloat. And yet, despite all those new teachers and teachers’ aides, achievement at the end of high school is largely flat as are real graduation rates.

In other words, our public schools have shown themselves incapable of harnessing the talents of these millions of additional educators. The solution is not to hire yet more teachers into that system, it is to liberalize the education sector, bringing it back within the free enterprise system. Only when schools have both the freedoms and incentives to make the most of their teaching staffs, will we see educators’ talents marshaled effectively.

Finally, President Obama’s proposed new infrastructure spending focuses only on the symptom (crumbling school facilities) and ignores its cause (mismanagement). I’ve analyzed school survey data on the condition of facilities and found that public schools are in a much worse state of repair than private schools, despite the fact that private schools spend far less per pupil, on average. The question is WHY are public schools in a worse state of repair, given that they spend more? According to a federal government report, it’s because districts repeatedly defer necessary routine maintenance. These deferrals increase the cost of maintaining school facilities and accelerate the deterioration of buildings and equipment. In other words, they postpone the ounce of prevention until the pound of cure becomes unavoidable—and they do this because they don’t have to pay for the cure. Once again, bringing schools back within the free enterprise system would provide administrators with the incentives to maintain their facilities so as to avoid the financial hit of costly repairs and replacements—a hit that they can now pass on to taxpayers at no cost to themselves or their careers.

Regrettably, seeing the root causes underlying our educational woes is beyond the vision of the present administration.

Swap Debt Limit for ‘Cut and Cap’

Gross federal debt just hit $14 trillion and will soon reach the legal limit of $14.3 trillion. House Republicans are wondering what spending reforms they can extract from the Democrats for their support of a debt-limit increase.

I propose a “Cut and Cap” strategy. The GOP should insist on the $100 billion in initial cuts they promised, and also demand passage of a legal cap on overall federal spending. A simple form of such a cap would specify that total federal outlays cannot rise more than inflation plus population growth each year. If it did, the law would require that the president sequester, or cut, spending across-the board to meet the limit.

The chart illustrates the power of such a cap. The top line shows total spending as projected under President Obama’s budget. The president has spending growing at an average annual rate of 5.6 percent between 2013 and 2020, which is absurdly high given that we are running trillion-dollar deficits. The bottom line shows spending capped at 3 percent annual growth, which is roughly the sum of expected population growth and inflation.

Even with the modest goal of limiting spending growth to 3 percent, the results would be dramatic over time. Spending in 2020 would be $1 trillion less than the president is projecting—$4.6 trillion rather than $5.6 trillion. As a share of GDP, spending would be 19.2 percent instead of Obama’s projected 23.5 percent. That would put the budget close to balance as revenues will be about 18.5 percent of GDP in 2020 with current tax cuts in place.

The chart assumes that the cap and the $100 billion of cuts are put in place right away. However, because Obama’s budget assumes that spending is flat for the next two years as “stimulus” spending peters out, the cap wouldn’t really start biting until 2014.

I’ve discussed a spending growth cap in more detail here and here. One nice feature of such a cap is that any spending cuts achieved would be locked-in as the spending limit would ratchet downward to the new lower budget level. So the House Republicans should insist on “Cut and Cap” this year, and then keep on cutting after that.