Tag: stimulus

Happy National Entrepreneurs’ Day?

President Obama has proclaimed today to be National Entrepreneurs’ Day. The president who has brought us regime uncertainty, more regulations, more government intrusion into the economy, more debt, and is proposing to raise taxes on productive businesses and individuals wants to celebrate entrepreneurship?

I was alerted to National Entrepreneurs’ Day via an email (not online) from the Department of Commerce’s Economic Development Administration. The EDA email makes it clear that the administration wishes to celebrate political entrepreneurship, not market entrepreneurship.

In his book, The Myth of the Robber Barons, historian Burton Folsom explains the difference:

A key point about the steamship industry is that the government played an active role right from the start in both America and England. Right away this separates two groups of entrepreneurs — those who sought subsidies and those who didn’t. Those who tried to succeed in steamboating primarily through federal aid, pools, vote buying, or stock speculation we will classify as political entrepreneurs. Those who tried to succeed in steamboating primarily by creating and marketing a superior product at a low cost we will classify as market entrepreneurs. No entrepreneur fits perfectly into one category or the other, but most fall generally into one category or the other. The political entrepreneur often fits the classic Robber Baron mold; they stifled productivity (through monopolies and pools), corrupted business and politics, and dulled America’s competitive edge. Market entrepreneurs, by contrast, often made decisive and unpredictable contributions to American economic development.

As Obama administration achievements, the EDA touts increased Small Business Administration subsidies and a smorgasbord of industrial planning contained in last year’s stimulus package:

The American Recovery and Reinvestment Act served as the cornerstone for this new foundation by pumping $100 billion into the economy to help us tackle some of the grand challenges of the 21st century in diverse fields from healthcare IT and health research, to clean energy, to smart grids, and high speed trains. Recovery Act investments are creating a virtuous cycle of investment, innovation, and job creation that have so far led to the creation of 3 million new jobs.

Wrong. The stimulus has fueled an unvirtuous cycle of political entrepreneurship in which business interests chase federal hand-outs for endeavors sanctioned by inside-the-Beltway planners. Political entrepreneurs have less incentive to innovate and are naturally reluctant to criticize the government because they don’t want to bite the hand that’s feeding them. As Chris Edwards puts it, they become “tools of the state.”

If the administration were really interested in promoting entrepreneurship, it would repudiate the anti-market policies it has pursued thus far. That’s obviously not going to happen, so it’s going to be up to congressional Republicans to repudiate their own history of supporting federal subsidies. In other words, the GOP’s re-found fondness for limited government rhetoric is going to have to actually be matched by action.

Another Tax-Hike Scheme from Another ‘Bipartisan’ Group of Washington Insiders

I’ve already commented on the proposal from the Chairmen of President Obama’s Fiscal Commission (including a very clever cartoon, if it’s okay to pat myself on the back).

Now we have a similar proposal from the so-called Debt Reduction Task Force. Chaired by former Senator Pete Domenici and Clinton Administration Budget Director Alice Rivlin, the Task Force proposed a series of big tax increases to finance bigger government. I have five observations.

  1. Notwithstanding a claim of $2.68 trillion of “spending cuts” during the 2012-2020 period, government gets a lot bigger during the decade. All of the supposed “cuts” are measured against an artificial baseline that assumes bigger government. In other words, the report is completely misleading in that spending increases get portrayed as spending cuts simply because government could be growing even faster. Interestingly, nowhere in the report does it show what total spending is today and what it will be in 10 years, presumably because the authors realized that the fiction of spending cuts would be hard to maintain if people could see real-world numbers showing the actual size of government now and in the future.

    This chart shows what it would actually take to balance the budget over the next 10 years – and these numbers assume all of the tax cuts are made permanent and that the alternative minimum tax is extended.

  2. The Task Force proposes a value-added tax, which is estimated to generate more than $3 trillion between 2012 and 2020. They call this new tax a “debt reduction sales tax” and I can just imagine the members giggling as they came up with this term. They may think the American people are a bunch of yokels who will get tricked by this language, but one can only wonder why they think making our tax system more like those in Europe will lead to anything other than more spending and less growth.
  3. The Task Force proposes to dramatically increase the scope of the Social Security payroll tax. Since this is something Obama called for in the campaign and also something endorsed by the President’s Fiscal Commission, this proposed tax hike should be viewed as a real threat. I’ve explained elsewhere why this is bad tax policy, bad fiscal policy, bad entitlement policy, and bad Social Security policy.
  4. To add “stimulus” to the package, the Task Force proposes a one-year payroll tax holiday. The good news is that they didn’t call for more spending. The bad news is that temporary tax cuts have very little pro-growth impact, especially if a tax cut will only last for one year. Unfortunately, the Task Force relied on the Congressional Budget Office, which blindly claimed that this gimmicky proposal will create between 2.5 million-7.0 million jobs. But since these are the geniuses who recently argued that higher tax rates boost growth and also claimed that Obama’s faux stimulus created jobs, those numbers have very little credibility.
  5. While the Task Force’s recommendations are unpalatable and misleading, there is a meaningful distinction between this plan and the Obama Administration’s fiscal policy. The Task Force assumes that government should get even bigger than it is today, but the Obama Administration wants government to grow at a much faster rate. The Task Force endorses massive tax hikes, but generally tries to avoid marginal tax rate increases that have especially large negative supply-side consequences. The Obama White House, by contrast, is fixated on a class-warfare approach to fiscal policy. One way of characterizing the different approaches is that the Task Force represents the responsible left while the Obama Administration represents the ideological left.

VIDEO: Joe Biden’s Weak Case for Government Meddling

Vice President Joe Biden believes that human progress depends almost entirely on government vision and government incentive. Donald J. Boudreaux, Cato Institute adjunct scholar and George Mason University economics professor, details why Biden is wrong both generally and in the specific case he touts:

Produced by Caleb O. Brown. Shot and edited by Evan Banks.

Debunking White House Pro-Tax Increase Propaganda

The White House recently released a video, narrated by Austan Goolsbee of the Council of Economic Advisers, asserting that higher tax rates on the so-called rich would be a good idea.

Since Goolsbee’s video made so many unsubstantiated assertions and was guilty of so many sins of omission, here’s a rebuttal video, narrated by yours truly.

This new Center for Freedom and Prosperity video includes the full footage of the White House production, so viewers can decide for themselves which side is correct.

Fed’s QEII Offers More Risk Than Reward

As the Federal Reserve Federal Open Market Committee (FOMC) meets today, it is widely expected that the Fed will announce a new round of quantitative easing (QE).  The first round began in March 2009, as the Fed started large-scale purchases of Fannie and Freddie debt and MBS.  The next round is expected to focus on purchases of long-dated US Treasuries.

The objective of QEII would be to reduce long-term interest rates, with the belief that such a reduction would spur investment and consumption, thus increasing employment.   Estimated impacts on rates range from zero to 80 basis points (80/100s of one percent).  

Given the large excess reserves in the banking system, it is likely that much of the monetary stimulus provided by QEII will simply be added to bank reserves, which would correspondingly have little to no impact on either lending or interest rates.  So its likely that we will get very little bang out of QEII.

Even if QEII did lower rates as much as some Fed leaders claim, the impact would still be relatively small, under one percent.  Given that mortgage rates have already fallen by that much over the last six months without changing the direction of the housing market, it is hard to see even a 1% decline in rates moving the economy.  Quite simply, the major problem facing the economy today is not high interest rates.

The real impact, and the greatest risk, of QEII is that it changes expectations of inflation.  It seems pretty clear that the Fed wants higher inflation than we have now.  QEII sends the signal that the Fed will do everything possible to create that additional inflation.  QEII also runs the real risk that the Fed ends up “monetizing the debt” - both reducing the political pressure to address our fiscal imbalances as well as undermining the dollar.  I see these risks as easily outweighing what little bump one might get from a few basis points decline in long-term interest rates.

High-Speed Pork

Washington Post columnist Robert Samuelson provides a blistering critique of the Obama administration’s plan for a national system of high-speed rail. Samuelson dismisses HSR as “pork-barrel” and “a perfect example of wasteful spending masquerading as a respectable social cause.”

The pork-barrel nature of HSR was underscored by last week’s politically-timed release of $2.5 billion by the Obama administration for rail projects across the country. From the news side of the Washington Post:

Eight days before midterm elections, embattled Democratic candidates cheered the release of billions in federal funds for high-speed rail projects from New Hampshire to California, saying they would help create jobs in their economically bruised states.

The Transportation Department notified lawmakers of the money on Monday and will make a formal announcement on Thursday. The timing of the announcement raised questions about whether the administration was trying to help some Democratic candidates.

The biggest winners of an estimated $2.5 billion pot of money were California and Florida, which have competitive governor, House and Senate races. But numerous other states scored as well.

California will get another $902 million to advance the design and construction of a high-speed rail system initially running from San Francisco to Los Angeles. The money is in addition to $2.25 billion in stimulus money that’s headed to California for high-speed rail.

Samuelson singles out the illogic of California HSR in particular. The state’s “budget is in shambles” he notes and it simply could not afford to fund the debt and operating subsidies that its proposed high-speed rail line would entail. And even if the money were there, it makes no sense for the government to spend billions of dollars on a mode of travel that would benefit so few individuals.

Federal taxpayers can’t afford high-speed rail in California or anywhere else. A Cato essay on high-speed rail points out that the cost of California’s HSR could be $81 billion and a national system could cost $1 trillion. Samuelson is right: the Obama administration’s HSR dreams “represent shortsighted, thoughtless government at its worst.”

The ‘Every Economist’ Myth

Just days after we rapped Rep. Betsy Markey (D-CO) for claiming that “every economist from the far left to the far right was saying the government needs to step in because there was absolutely no private sector investment,” Rep. Gerry Connolly (D-VA) tells the Washington Post,

You’re darn right I voted for the stimulus. Every economist, including [some] Republican economists … said, for God’s sake, don’t let it go off the cliff.

This is the myth that just won’t die. Markey and Connolly are echoing similar claims by President Obama, Vice President Biden, and even the notoriously unreliable Robert Reich. When Biden said it, Harvard economist Greg Mankiw asked if he was “disingenuous or misinformed” and pointed out:

That statement is clearly false. As I have documented on this blog in recent weeks, skeptics about a spending stimulus include quite a few well-known economists, such as (in alphabetical order) Alberto AlesinaRobert BarroGary BeckerJohn CochraneEugene FamaRobert LucasGreg MankiwKevin MurphyThomas SargentHarald Uhlig, and Luigi Zingales–and I am sure there many others as well. Regardless of whether one agrees with them on the merits of the case, it is hard to dispute that this list is pretty impressive, as judged by the standard objective criteria by which economists evaluate one another. If any university managed to hire all of them, it would immediately have a top ranked economics department.

When Robert Reich tried to claim that “economic advisers across the political spectrum support Obama’s plan,” I pointed out that that claim depended on exactly two names and that the Washington Post had demonstrated that neither of them was in fact a Republican supporter of the $787 billion stimulus bill.

In fact, of course, hundreds of economists went on record against the stimulus bill. The Cato Institute’s full-page ad with their names appeared in all the nation’s major newspapers. The ad and the economists were featured on dozens of television programs.

Which brings us back to the question that Mankiw asked of Biden and that I asked of Markey. Is Representative Connolly really unaware that there was vigorous debate among economists about the so-called stimulus bill, and that hundreds of economists expressed their opposition in every major newspaper? Connolly has lived in Washington his entire adult life. He spent 19 years on a Senate committee staff. He served for 14 years on the Fairfax County Board. He worked as vice president at two large government contractors. Is it possible that he doesn’t read the Washington Post – or the Wall Street Journal, or the New York Times, or Roll Call, the newspaper of Capitol Hill? If so, then maybe he really believes that “every economist, including Republican economists” endorsed the stimulus. Someone should ask him: misinformed or disingenuous?