Tag: subsidies

Distortions versus Outlays

My friend Gawain Kripke at Oxfam posted a very good blog entry yesterday on the proposed cuts to agriculture subsidies. In it, Gawain elaborates on a point that I made briefly in a previous post about Rep. Paul Ryan’s 2012 budget plan: that cutting so-called direct payments—those that flow to farmers regardless of how much or even whether they produce—is only part of the picture.

Here’s Gawain’s main point:

Most farm subsidies are price-dependent, meaning they are bigger if prices are low and smaller if prices are high. Prices are hitting historic highs for many commodities, which means the bulk of these subsidies are not paying out very much money. Over time, the price-dependent subsidies have been the bulk of farm subsidies. They also distort agriculture markets by encouraging farmers to depend on payments from the government rather managing their business and hedging risks.

So—these days there’s only about $5b in farm payments being made, and these payments are not considered as damaging in international trade terms because they are not based on prices…

Still, Congress will probably make some cuts. But these cuts won’t really be reform and won’t produce much long-term savings unless they tackle the price-dependent subsidies. Taking a whack at those subsidies could save taxpayers money later and make sure our farm programs don’t hurt poor farmers in developing countries. (emphasis added)

I will be delighted if direct payments are abolished, thereby saving American taxpayers about $5 billion a year. But we should not be content with that, nor should we fool ourselves that we have tackled the main distortions in agricultural markets. If the price- and production-linked programs are not abolished, too, then taxpayers and international markets will pay the price if/when commodity prices fall.

Wash. Post, CBS, NBC Should Disclose Receipt of ObamaCare Subsidies

It’s not an easy period for major media organizations, what with all this creative destruction revamping that sector of the economy.  So the Washington Post Co. couldn’t help but be pleased when it received a $570,000 bailout from ObamaCare’s Early Retiree Reinsurance Program.  That program allows the Obama administration to run up the national debt another $5 billion by doling out cash to corporations that provide retiree health benefits.   The CBS Corporation received more than $720,000.  General Electric, a part owner of NBC Universal, Inc., cleared nearly $37 million.

Since The Washington Post, CBS News, NBC News, and MSNBC have now received subsidies (the latter two indirectly) from this very controversial law, their reporters should disclose that fact to their audiences when reporting on ObamaCare.  A disclaimer like this should suffice: “The Washington Post Corporation has received subsidies under the health care law.”  That would be consistent with how NBC discloses its relationship with General Electric:

Oh, and kudos to the marketing whiz who decided to call all these ObamaCare spending programs “slush funds.”

Friday Links

  • What are Republicans doing to stop ObamaCare? Not much.
  • Conflating the Taliban with al Qaeda isn’t helping our foreign policy dialogue.
  • “Sitting in a Volt that would not start at the 2010 Detroit Auto Show, a GM engineer swore to me that the internal combustion engine in the machine only served as a generator, kicking in when the overnight-charged lithium-ion batteries began to run down.”
  • The new issue of Regulation looks at price gouging, soda taxes, the Durbin Amendment, and more.
  • Who should decide when we tap into strategic oil reserves: The president? Or market forces

Gingrich & Woolsey on Energy

The other day, The Wall Street Journal provided a public service by lambasting Newt Gingrich for his absurd speech to the ethanol lobby in Des Moines last month (money line:  ”Obviously big urban newspapers want to kill it because it’s working, and you wonder, ‘What are their values?’”).  Today, Gingrich and fellow ethanol-maven James Woolsey struck back in those very same pages.  In doing so, Gingrich provided yet more evidence that he’s intellectually unfit for office.

“It is in this country’s long-term best interest,” he said, ”to stop the flow of $1 billion a day overseas.”  Really?  So money sent overseas is gone forever.  News to me.  The only thing you can buy with dollars earned from oil sales to the U.S. is to buy things denominated in dollars or to exchange them so that someone else can.  And we sell a lot of stuff to foreigners that are denominated in dollars (treasury bills for one) and that money comes right back to the good old U.S. of A.

But put that aside.  If Gingrich really believes this, then why not just ban all imports all together?  Is that what the GOP is about these days - rank gooberism on trade?

And one other thing; the U.S. does not spend $1 billion a day on foreign oil.  It spends about half that; $530 million a day (in 2009 anyway).

“[I] co-produced a movie with my wife, Callista, ‘We Have the Power,’ that argued for an ‘all of the above’ energy strategy which would maximize all forms of domestic energy production.”  Apparently, being a pol means that one doesn’t have to pick and choose between investments a, b, or c.  We’ll just mandate everyone invest in everything that can attract a lobbyist. 
When you hear this stuff about an ”all of the above” energy strategy, what you’re hearing is a complaint that the Democrats aren’t subsidizing enough of the energy industry.  They are too tight-fisted with the public purse.  They are not ambitious enough in their planning.  And while Republicans bang the table for more, more, and more handouts to private corporations, liberals like Amory Lovins (prominent left-of-center energy guru) and Carl Pope (former head of the Sierra Club) call for zeroing out everyone’s subsidies and leaving the energy market the heck alone (at least when it comes to this matter).  It’s a mad, mad world.
 
“Nevertheless,” says Gingrich, ”the Journal attempts to equate my career-long commitment to increased American energy production with the anti-energy agenda of President Obama. This is a laughable charge, especially considering I have been one of the most vocal opponents of the president’s energy policies since he took office.”  Perhaps, but on this matter, Gingrich is attacking the administration from the Left.  
 
Even more amusing was James Woolsey’s lecture to the editorial board over what it means to be a conservative.   “We could not help wondering,” he asked along with his co-author, Gal Luft, ”why the Journal, despite its commitment to free enterprise, chose to attack Newt Gingrich for his call to open vehicles to fuel competition, which would cost auto makers under $100 per new car.”  Well Jim, a commitment to free enterprise is a commitment to allow enterprises to be free to produce whatever they want.  Of course, if Woolsey had read Gingrich’s speech to the ethanol lobby, he would not need to wonder - it’s about their sick, twisted values.
 
Nonetheless, Woolsey claims that such a mandate ”is perfectly in line with conservative economic principles.”  That may be true given what conservatives believe about economics.  But it’s not consistent with a principled support for a free market.
 
Finally, “Challenging Mr. Gingrich’s conservative bona fides based on his support for breaking oil’s virtual monopoly over transportation fuel is not only myopic but also the best gift the Journal can give OPEC.”  But … oil dominates the transportation market because it is a heck of a lot cheaper than any other fuel.  If it weren’t so much cheaper than ethanol, then we would have no need for such massive subsidies for the same.  The same goes for electric cars.  If and when that changes, oil’s “monopoly” will crumble.  Until then, taking oil out of transportation markets simply takes cheap fuel out of transportation markets.  It would be fun to watch a Gingrich/Woolsey ticket run on that.

RSC Silent on Farm Subsidies

Confirming my ongoing skepticism about the committment of self-identified fiscal conservatives, especially when it comes to cuts to programs that benefit their constituencies, Politico last night posted an excellent story about the Republican Study Committee’s silence on farm subsidies:

Net cash farm income for 2010 is projected to finish near $92.5 billion — a 41 percent increase even after subtracting payments from the government. Yet conservatives are almost tongue-tied, as seen last week with the Republican Study Committee’s proposal to eliminate relatively modest subsidies for an organic food growers program without mentioning the nearly $5 billion in much larger government direct payments to farm country — including to the home districts of many of the RSC’s members.

Indeed, 24 of the RSC’s estimated 165 members hail from the House Agriculture Committee, and total annual direct payments to their districts run more than $1.09 billion a year, according to a POLITICO review of data compiled by the Environmental Working Group.

Farm groups aren’t exactly in a rage to offer up their programs for reform, but the National Association of Wheat Growers at their winter board meeting last week gave us plenty of evidence, as if more were needed, that support for the status quo is solid. An interesting nuance is their argument that, if they do “contribute” to deficit reduction, they won’t be “giving” more than anyone else, thank you very much:

NAWG supports the policy that if federal agriculture programs are subject to budget cuts to achieve deficit reduction, then the same percentage of cut should apply to all federal government programs.

While I might think that almost all areas of the federal budget need be cut, I just don’t buy the argument that farm subsidies are no more damaging, and therefore shouldn’t be cut more, than any other areas of government intervention. The federal government, in my opinion, has a role to play in limited and defined areas of public life.  I strongly disagree with the NAWG’s implication that farm subsidies are just as important/necessary as, say, public funding for national defense or for the control of infectious disease.

State Corporate Welfare Programs Under Fire

One positive outcome of the recession, as the states struggle to find revenue to spend, is that state subsidies to businesses are facing increased scrutiny.

This week the New York Times reported that states are looking at reducing or ending programs that hand out taxpayer money to television and movie producers. In Pennsylvania, some last-minute handouts from outgoing governor Ed Rendell are under fire, including a $10 million state grant to rehabilitate a former Sony plant for new tenants. According to the Commonwealth Foundation’s Nate Benefield, this is the fourth time Pennsylvania taxpayers have subsidized the site:

Sony moved out in 2007, despite getting more than $40 million in corporate welfare under Gov. Robert P. Casey to come to Pennsylvania, then another $1 million grant under Rendell to stay in the state—a mere two years before shutting down its plant.

Before Sony, the site was occupied by Volkswagen, which got $70 million in state aid in the 1970s under Gov. Milton Shapp. This was touted as a great success – until Volkswagen moved out in 1987, after 10 years of operation.

Pennsylvania is merely renting jobs with this “economic development” spending, burdening other businesses with higher taxes. Hopefully, Gov. Tom Corbett can learn from the failed policies of the past and work on improving the state’s economic climate rather than trying to pick winners.

New Pennsylvania governor Tom Corbett could learn a lesson from the Indiana Economic Development Corporation, which received another black eye this week. I’ve written previously on problems with the IEDC, which is the state’s corporate welfare arm. As a former budget official with the State of Indiana, I can attest that the IEDC’s string of embarrassments is as unsurprising as it is appalling.

On Tuesday, investigative report Bob Segall of WTHR-TV in Indianapolis released the latest in a series of reports on the IEDC’s exaggerated job creation claims. (Intrepid journalists take note: Bob and his team just received a prestigious Alfred I. duPont–Columbia University Award for their investigatory work on the IEDC.)

Bob took the findings of a recent audit and ascertained that Indiana governor Mitch Daniels and the IEDC haven’t been giving Hoosiers the full story.

From the report:

The “Summary of Incentive Program Review” prepared by audit firm Crowe Horwath examined 597 job-creation projects outlined in IEDC annual reports from 2005 to 2009. The projects were listed as “Indiana Economic Successes” that would bring new jobs to Indiana.

According to the report, those projects were expected to create 44,208 jobs by late 2010 and, based on the most recent information available to auditors, have so far resulted in 37,640 actual jobs — a realization rate of 85%.

But the state’s job realization rate is actually much lower than 85%, according to additional data reviewed by WTHR.

The numbers cited above are based solely on data for “reporting companies,” and they do not include job data for 200 other projects also listed as “Indiana Economic Successes” in IEDC annual reports. Including those projects, as well, the number of newly-created jobs the agency had anticipated to materialize by the end of 2010 is 57,088 (not 44,208), according to the report. Using that figure, IEDC’s job realization rate is 66%.

And nowhere does the audit report mention the 98,683 total new job commitments announced by IEDC from 2005 to 2009. Using that number — which IEDC and the governor have repeatedly promoted in their press releases, speeches and annual reports – the audit data suggests, so far, only 38% of jobs announced by IEDC have resulted in actual jobs. While that percentage is expected to increase in coming years (some of the companies are not expected to fulfill all of their job commitments for several more years), the overall numbers show IEDC’s real job realization statistics are much lower than the agency portrays to the public by citing far more limited data.

Two words in this selection from the report stand out: “press releases.” My observations of the IEDC from within the Daniels administration led me to coin the phrase “press release economics” to describe what Indiana government officials were really practicing.

Programs that hand out taxpayer money to businesses to lure or retain jobs are popular with state politicians, and Governor Daniels is no different. Better policies, like cutting business taxes across the board, require a willingness to expend substantial political capital without an immediate payoff. (I recently read that Daniels would sign a cut in the state’s high corporate tax rate if a proposal in the state legislature makes it to his desk. Daniels had turned down the idea of cutting the corporate rate while I was there, so the change of heart is curious but nonetheless welcome.)

Targeted business subsidies, on the other hand, are cheaper and generate immediate, favorable press. Unfortunately, this form of central planning is unsound as it merely transfers economic resources from taxpayers – including businesses – to businesses favored by government officials. And because government officials are inherently inferior to the market when it comes to directing economic activity, the results are far from ideal – and often downright counterproductive.

Five Lessons from Ireland

The news is going from bad to worse for Ireland. The Irish Independent is reporting that the Swiss Central Bank no longer will accept Irish government bonds as collateral. The story also notes that one of the world’s largest bond firms, PIMCO, is no longer purchasing debt issued by the Irish government.

And this is happening even though (or perhaps because?) Ireland received a big bailout from the European Union and the International Monetary Fund (and the IMF’s involvement means American taxpayers are picking up part of the tab).

I’ve already commented on Ireland’s woes, and opined about similar problems afflicting the rest of Europe, but the continuing deterioration of the Emerald Isle deserves further analysis so that American policy makers hopefully grasp the right lessons. Here are five things we should learn from the mess in Ireland.

1. Bailouts Don’t Work – When Ireland’s government rescued depositors by bailing out the nation’s three big banks, they made a big mistake by also bailing out creditors such as bondholders. This dramatically increased the cost of the bank bailout and exacerbated moral hazard since investors are more willing to make inefficient and risky choices if they think governments will cover their losses. And because it required the government to incur a lot of additional debt, it also had the effect of destabilizing the nation’s finances, which then resulted in a second mistake – the bailout of Ireland by the European Union and IMF (a classic case of Mitchell’s Law, which occurs when one bad government policy leads to another bad government policy).

American policy makers already have implemented one of the two mistakes mentioned above. The TARP bailout went way beyond protecting depositors and instead gave unnecessary handouts to wealthy and sophisticated companies, executives, and investors. But something good may happen if we learn from the second mistake. Greedy politicians from states such as California and Illinois would welcome a bailout from Uncle Sam, but this would be just as misguided as the EU/IMF bailout of Ireland. The Obama Administration already provided an indirect short-run bailout as part of the so-called stimulus legislation, and this encouraged states to dig themselves deeper in a fiscal hole. Uncle Sam shouldn’t be subsidizing bad policy at the state level, and the mess in Europe is a powerful argument that this counter-productive approach should be stopped as soon as possible.

By the way, it’s worth noting that politicians and international bureaucracies behave as if government defaults would have catastrophic consequences, but Kevin Hassett of the American Enterprise Institute explains that there have been more than 200 sovereign defaults in the past 200 years and we somehow avoided Armageddon.

2. Excessive Government Spending Is a Path to Fiscal Ruin – The bailout of the banks obviously played a big role in causing Ireland’s fiscal collapse, but the government probably could have weathered that storm if politicians in Dublin hadn’t engaged in a 20-year spending spree.

The red line in the chart shows the explosive growth of government spending. Irish politicians got away with this behavior for a long time. Indeed, government spending as a share of GDP (the blue line) actually fell during the 1990s because the private sector was growing even faster than the public sector. This bit of good news (at least relatively speaking) stopped about 10 years ago. Politicians began to increase government spending at roughly the same rate as the private sector was expanding. While this was misguided, tax revenues were booming (in part because of genuine growth and in part because of the bubble) and it seemed like bigger government was a free lunch.

Eventually, however, the house of cards collapsed. Revenues dried up and the banks failed, but because the politicians had spent so much during the good times, there was no reserve during the bad times.

American politicians are repeating these mistakes. Spending has skyrocketed during the Bush-Obama year. We also had our version of a financial system bailout, though fortunately not as large as Ireland’s when measured as a share of economic output, so our crisis is likely to occur when the baby boom generation has retired and the time comes to make good on the empty promises to fund Social Security, Medicare, and Medicaid.

3. Low Corporate Tax Rates Are Good, but They Don’t Guarantee Economic Success if other Policies Are Bad – Ireland used to be a success story. They went from being the “Sick Man of Europe” in the early 1980s to being the “Celtic Tiger” earlier this century in large part because policy makers dramatically reformed fiscal policy. Government spending was capped in the late 1980 and tax rates were reduced during the 1990s. The reform of the corporate income tax was especially dramatic. Irish lawmakers reduced the tax rate from 50 percent all the way down to 12.5 percent.

This policy was enormously successful in attracting new investment, and Ireland’s government actually wound up collecting more corporate tax revenue at the lower rate. This was remarkable since it is only in very rare cases that the Laffer Curve means a tax cut generates more revenue for government (in the vast majority of cases, the Laffer Curve simply means that changes in taxable income will have revenue effects that offset only a portion of the revenue effects caused by the change in tax rates).

Unfortunately, good corporate tax policy does not guarantee good economic performance if the government is making a lot of mistakes in other areas. This is an apt description of what happened to Ireland. The silver lining to this sad story is that Irish politicians have resisted pressure from France and Germany and are keeping the corporate tax rate at 12.5 percent. The lesson for American policy makers, of course, is that low corporate tax rates are a very good idea, but don’t assume they protect the economy from other policy mistakes.

4. Artificially Low Interest Rates Encourage Bubbles – No discussion of Ireland’s economic problems would be complete without looking at the decision to join the common European currency. Adopting the euro had some advantages, such as not having to worry about changing money when traveling to many other European nations. But being part of Europe’s monetary union also meant that Ireland did not have flexible interest rates.

Normally, an economic boom drives up interest rates because the plethora of profitable opportunities leads investors demand more credit. But Ireland’s interest rates, for all intents and purposes, were governed by what was happening elsewhere in Europe, where growth was generally anemic. The resulting artificially low interest rates in Ireland helped cause a bubble, much as artificially low interest rates in America last decade led to a bubble.

But if America already had a bubble, what lesson can we learn from Ireland? The simple answer is that we should learn to avoid making the same mistake over and over again. Easy money is a recipe for inflation and/or bubbles. Simply stated, excess money has to go someplace and the long-run results are never pleasant. Yet Ben Bernanke and the Federal Reserve have launched QE2, a policy explicitly designed to lower interest rates in hopes of artificially juicing the economy.

5. Housing Subsidies Reduce Prosperity – Last but not least, Ireland’s bubble was worsened in part because politicians created an extensive system of preferences that tilted the playing field in the direction of real estate. The combination of these subsidies and the artificially low interest rates caused widespread malinvestment and Ireland is paying the price today.

Since we just endured a financial crisis caused in large part by a corrupt system of housing subsidies for Fannie Mae and Freddie Mac, American policy makers should have learned this lesson already. But as Thomas Sowell sagely observes, politicians are still fixated on somehow re-inflating the housing bubble. The lesson they should have learned is that markets should determine value, not politics.