Tag: subsidies

Federal Aid to States Is Too Popular

The Economist’s Free Exchange blog asks: “[W]hy isn’t federal aid to states more popular, and popular enough to get through Congress, given that nearly every American lives in one?”

I would ask the blog’s author: How much more popular would he like it to be? As the following charts show, federal aid to state and local governments has catapulted to record levels.

As I’ve discussed elsewhere, Medicaid has been driving the growth in federal subsidies to state and local governments. But other areas, such as education, income security, and transportation, have also seen substantial increases.

Subsidizing state and local government is quite popular with federal, state, and local policymakers and associated special interests. It’s doubtful the average citizen is aware that so much of their state’s spending is derived from their federal tax dollars. However, I suspect that most folks (who aren’t on the take) would frown upon the concept of sending money to Washington only to have politicians send it back to the states via the federal bureaucracy. While there may be popular support for many of the state programs funded with federal dollars, citizens need to understand that federal subsidization of state and local government has fueled unhealthy government growth at all levels.

Senator Bunning’s Unappreciated Gifts

Sen. Jim Bunning (R., Ky.) blocked “extended” unemployment benefits beyond their scheduled expiration on February 27. That thwarted bill would also have put off, again, a scheduled 21 percent cut in Medicare payments to physicians. Democrats were outraged. But why?

Bunning just wanted to use leftover “stimulus” money to pay for the benefits. Why not? Such transfer payments accounted for over 80 percent of stimulus spending last year.

Besides, as Federal Reserve policymakers noted, the evidence is overwhelming (see here and here) that extending unemployment benefits from six months to nearly two years has raised the unemployment rate by a percentage point or two. I’ve waited since 1991 for someone to prove I’m wrong about that. Nobody has, because nobody can.

If the maximum duration of jobless benefits were trimmed by 13 to 20 weeks (which is all that’s at stake), they would still be far more extended than ever before. But the unemployment rate by the time of this November’s elections would be much lower than otherwise. Would Democrats prefer to go into the elections with an unemployment rate near 10 percent or a rate below 9 percent?

As for Medicare, slashing payments to physicians is the Democrats’ favorite way of paying for expanding Medicaid enrollment and health-insurance subsidies for the non-poor. If they really think that will work, how can they possibly object to saving money sooner rather than later?

[Cross-posted at The Corner]

ObamaCare 3.0: Higher Implicit Taxes, Quicker Death Spiral

In a recent paper, I showed that the health care legislation passed by the House and Senate would impose punitive implicit tax rates on low- and middle-income workers.  Those bills would also result in higher health insurance premiums over time because they would create large financial incentives for healthy people to drop coverage and only purchase it when they become sick.

The health care proposal that President Obama released yesterday essentially splits the difference on most areas of disagreement between the two bills.  But a preliminary analysis shows that ObamaCare 3.0 would make these perverse incentives even worse.  Families of four earning $22,000 under the Senate bill (100 percent of the federal poverty level) or $30,000 under the House bill or the Obama plan (133 percent FPL) would face the following effective marginal tax rates as they climb the economic ladder:

  • Senate bill - Average: 62 percent.  High: 73 percent.
  • House bill -  Average: 74 percent. High: 82 percent.
  • Obama plan - Average: 72 percent. High: 90 percent.

In other words, over broad ranges of income, families of four would see their take-home pay rise by an average of 28 cents of each additional dollar earned.  In some cases, it would rise as little as 10 cents for each additional dollar earned.  Using smaller changes in income reveals the Obama plan would create EMTRs as large as 200 percent or higher.  That is, earning more money would leave many families worse off financially.

In addition, by requiring insurers to cover all applicants without regard to illness, each of these health plans would remove any penalty on waiting until you are sick to purchase coverage.  Therefore – even after accounting for all relevant taxes, subsidies, and penalties – these plans would create large financial incentives for healthy people to drop out of the market, which would cause premiums to rise for those who remain.  That would in turn encourage more healthy people to drop out, which would cause premiums to rise further, and so on.  Those perverse incentives are much worse under the Obama plan than under the House or Senate bills.  Here are the maximum financial incentives to drop coverage that each plan would create for families of four:

  • Senate bill: $8,000
  • House bill: $7,800
  • Obama plan: $9,900

By increasing the financial incentives to drop coverage, the Obama plan would cause private insurance markets to unravel even faster than the House and Senate bills would.

Obama Commands the Impossible

Today’s New York Times reports that President Obama has “ordered the rapid development of technology to capture carbon dioxide emissions from the burning of coal,” as well as mandating the production of more corn-based ethanol and financing farmers to produce “cellulosic” ethanol from waste fiber.

You’ve got to like the president’s moxie.  Faced with his inability to pass health care reform and cap-and-trade, he now chooses to command the impossible and the inefficient.

Most power plants are simply not designed for carbon capture.  There isn’t any infrastructure to transport large amounts of carbon dioxide, and no one has agreed on where to put all of it.  Corn-based ethanol produces more carbon dioxide in its life cycle than it eliminates, and cellulosic ethanol has been “just around the corner” since I’ve been just around the corner.

However, doing what doesn’t make any economic sense makes a lot of political sense in Washington, because inefficient technologies require subsidies–in this case to farmers, ethanol processors, utilities, engineering and construction conglomerates, and a whole host of others.  Has the president forgotten that his unpopular predecessor started the ethanol boondogle (his response to global warming) and drove up the price of corn to the point of worldwide food riots? Hasn’t he read that cellulosic ethanol is outrageously expensive? Has he ever heard of the “not-in-my-backyard” phenomenon when it comes to storing something people don’t especially like?

Yeah, he probably has.  But the political gains certainly are worth the economic costs.  Think about it.  In the case of carbon capture, it’s so wildly inefficient that it can easily double the amount of fuel necessary to produce carbon-based energy.  What’s not to like if you’re a coal company, now required to load twice as many hopper cars?  What’s not to like if you’re a utility, guaranteed a profit and an incentive to build a snazzy, expensive new plant?  And what’s not to like if you’re a farmer, gaining yet another subsidy?

State of the Union Fact Check

Cato experts put some of President Obama’s core State of the Union claims to the test. Here’s what they found.

THE STIMULUS

Obama’s claim:

The plan that has made all of this possible, from the tax cuts to the jobs, is the Recovery Act. That’s right – the Recovery Act, also known as the Stimulus Bill. Economists on the left and the right say that this bill has helped saved jobs and avert disaster.

Back in reality: At the outset of the economic downturn, Cato ran an ad in the nation’s largest newspapers in which more than 300 economists (Nobel laureates among them) signed a statement saying a massive government spending package was among the worst available options. Since then, Cato economists have published dozens of op-eds in major news outlets poking holes in big-government solutions to both the financial system crisis and the flagging economy.

CUTTING TAXES

Obama’s claim:

Let me repeat: we cut taxes. We cut taxes for 95 percent of working families. We cut taxes for small businesses. We cut taxes for first-time homebuyers. We cut taxes for parents trying to care for their children. We cut taxes for 8 million Americans paying for college. As a result, millions of Americans had more to spend on gas, and food, and other necessities, all of which helped businesses keep more workers.

Back in reality: Cato Director of Tax Policy Studies Chris Edwards: “When the president says that he has ‘cut taxes’ for 95 percent of Americans, he fails to note that more than 40 percent of Americans pay no federal incomes taxes and the administration has simply increased subsidy checks to this group. Obama’s refundable tax credits are unearned subsidies, not tax cuts.”

Visit Cato’s Tax Policy Page for much more on this.

SPENDING FREEZE

Obama’s claim
:

Starting in 2011, we are prepared to freeze government spending for three years.

Back in reality: Edwards: “The president’s proposed spending freeze covers just 13 percent of the total federal budget, and indeed doesn’t limit the fastest growing components such as Medicare.

“A better idea is to cap growth in the entire federal budget including entitlement programs, which was essentially the idea behind the 1980s bipartisan Gramm-Rudman-Hollings law. The freeze also doesn’t cover the massive spending under the stimulus bill, most of which hasn’t occurred yet. Now that the economy is returning to growth, the president should both freeze spending and rescind the remainder of the planned stimulus.”

Plus, here’s why these promised freezes have never worked in the past and a chart illustrating the fallacy of Obama’s spending claims.

JOB CREATION

Obama’s claim:

Because of the steps we took, there are about two million Americans working right now who would otherwise be unemployed. 200,000 work in construction and clean energy. 300,000 are teachers and other education workers. Tens of thousands are cops, firefighters, correctional officers, and first responders. And we are on track to add another one and a half million jobs to this total by the end of the year.

Back in reality: Cato Policy Analyst Tad Dehaven: “Actually, the U.S. economy has lost 2.7 million jobs since the stimulus passed and 3.4 million total since Obama was elected. How he attributes any jobs gains to the stimulus is the fuzziest of fuzzy math. ‘Nuff said.”

Mayors Want More Federal Money

Hundreds of city leaders are in Washington for the winter meeting of the U.S. Conference of Mayors. Considering that winter weather in our nation’s capital is about as warm as Barney Frank’s personality, there’s only one reason for the mayors to meet there: grovel for more federal hand-outs.

From the New York Times:

Saying that last year’s $787 billion economic stimulus plan has failed to ease urban unemployment, the nation’s mayors are asking the federal government for a second wave of stimulus money.

If you don’t succeed the first time, apparently you should fail, fail again. Charleston’s mayor, Joseph P. Riley Jr., says that “most economists” believe more federal stimulus spending is the “only thing” that can reduce unemployment. Most Keynesian economists—such as Mark Zandi and Paul Krugman—perhaps, but the broader profession is actually divided on the issue.

The mayors are upset that they “are being deprived of the federal aid owed to them.” To be fair, they are referring to the fact that formulas used to allocate federal surface transportation funds in the stimulus bill went disproportionately to non-metro areas. But this only serves to illustrate why it’s inefficient for citizens to be taxed by the federal government only to have the money returned to state and local governments through some politicized mechanism. State and local governments should fund their own transportation needs. But mayors are all too happy to receive the “free” money from Washington than funding their spending through the more transparent method of taxing their own constituents.

It takes a tremendous amount of gall for some officials and analysts to argue that the federal government is depriving state and local governments of resources. Donald Kettl, the dean of the School of Public Policy at the University of Maryland, made such a claim in the December issue of Governing. The chart shows that federal subsidies to state and local government have been going through the roof:

Instead of wasting time and money trying to get federal taxpayers to make their political careers easier, the nation’s mayors should focus on solving their own problems, which as a Cato essay on HUD community development programs notes, are often a result of poor policies:

The reality is that no amount of federal money can overcome the local hurdles to growth in cities such as Detroit—including political corruption and destructive tax and regulatory policies. Indeed, just like international development aid, federal aid to the cities likely increases corruption and stalls much-needed local reforms.

With the federal government running huge deficits, it cannot afford to fund ineffective and often wasteful local development projects. Community development is a local concern, and only local leaders and businesses using their own funds can make sound cost-benefit decisions on projects. By providing local leaders with handouts from Washington, we simply encourage them to make irresponsible decisions. At the same time, experience has shown that federal politicians use local projects as political tools that are disconnected from sound economics.

How ObamaCare Would Keep the Poor Poor

Suppose you’re a family of four at or near the federal poverty level.  Under current law, if you earn an additional dollar, you get to keep around 60-70 cents.

Under the House and Senate health care bills, however, you would get to keep maybe 38 cents.  Or 26 cents.  Or maybe just 18 cents.

The following graph (from my recent study, “Obama’s Prescription for Low-Wage Workers: High Implicit Taxes, Higher Premiums”) shows that under the House and Senate bills, the combination of (1) a mandate tax and (2) subsidies that disappear as income rises would impose implicit tax rates on poor families that reach as high as 82 percent over broad ranges of income.

This graph actually smooths out some rather bumpy implicit tax rates that spike as high as 174 percent.

In the 1980s and 1990s, the public saw that too-generous government subsidies can actually trap people in a cycle of poverty and dependence.  President Obama and his congressional allies seem not to have learned that lesson.