Topic: General

ICYMI: FMCS

During the hullaballoo around the government shutdown, the Washington Examiner published a jaw-dropping series of stories about blatant waste in an obscure federal agency called the Federal Mediation and Conciliation Service. These stories shouldn’t be missed.

Reporter Luke Rosiak writes:

One federal employee leased a $53,000 take-home car with taxpayer money in apparent defiance of federal regulations and regularly billed the government for service at shops such as BMW of Fairfax.

Others charged the government monthly for family members’ cell phones and high-end TV packages and Internet at home — and even at second homes.

Managers freely made out checks to employees without requiring documentation of how it would be spent, giving $1,316 directly to one who said she was reimbursing herself for furniture she bought for a “home office” and using convenience checks to give workers bonuses.

Federal bureaucrats dole themselves these perqs in an agency where the median annual salary is already $120,000. Federal pay, of course, is something Chris Edwards has highlighted for a long time.

Rosiak’s stories on FMCS are worth a read. They’re worth more than that—like maybe some congressional oversight. Because internal oversight is failing.

“With three whistle-blowers gone,” he concludes, “there is little indication that the spending abuses have stopped.”

Iceland, Switzerland, and the Golden Rule of Fiscal Policy

Being a glass-half-full kind of guy, I look for kernels of good news when examining economic policy around the world. I once even managed to find something to praise about French tax policy. And I can assure you that’s not a very easy task.

I particularly try to find something positive to highlight when I’m a visitor. While in the Faroe Islands two days ago, for instance, I wrote about that jurisdiction’s new system of personal retirement accounts.

And now that I’m in Iceland, I want to focus on spending restraint.

As you can see from this chart, lawmakers in this island nation have done a reasonably good job of satisfying the Mitchell Golden Rule over the past couple of years. Nominal economic output has been growing by 6.1 percent annually, while government spending has risen by an average of 2.8 percent per year.

Iceland Spending Restraint

If Iceland continues to enjoy this level of growth and can maintain this modest degree of fiscal discipline, the burden of government spending will soon drop below 40 percent of GDP.

‘There Is No Such Thing as an Individual Mandate. It’s a Tax.’

That’s what Department of Justice attorney Joel McElvain said in open court last week. And thus the Obama administration reversed itself once again on whether the individual mandate is a tax. 

Relatedly, a Clinton-appointed federal judge has dealt a second blow to the IRS and the credibility of its defenders. He called one of the administration’s arguments ‘silly,’ and promised expedited consideration of the Obamacare challenge, Halbig v. Sebelius. Read all about these in my latest Darwin’s Fool post at Forbes.com.

Washington Recklessly Backs Small Allies

The United States has acquired the unfortunate habit of giving security commitments to small allies as avidly as American GIs distributed chocolate bars to European children during the waning days of World War II. But while the generosity of those American soldiers earned the gratitude of a war-weary population, Washington’s latest venture incurs serious risks. That is especially true when the United States supports a small client state in that country’s dispute with a much larger, more powerful neighbor.

In an article over at the National Interest Online, I discuss the latest example: the Obama administration’s increasingly blatant backing of the Philippines against China regarding conflicting territorial claims in the South China Sea. Instead of remaining quiet on the matter, as prudence would seem to dictate, Secretary of State John Kerry ostentatiously weighed-in at the East Asia Summit on October 10 in Brunei, implicitly backing Manila’s position. That episode is merely the latest in a series of actions since 2011 indicating an escalating U.S. commitment not only to the defense of the Philippines under a long-standing bilateral treaty, but support for that country’s stance with respect to the South China Sea.

Chinese leaders no longer try to conceal their annoyance regarding Washington’s bias against Beijing’s position. When asked about Kerry’s remarks, Foreign Ministry spokesperson Hua Chunying contended that “non-parties to the dispute should respect the efforts by relevant parties involved to peacefully solve the dispute” through direct negotiations, “instead of doing things that could harm regional peace and stability.” She added that “if some country really wants to safeguard peace and stability in the South China Sea, it should stop stirring up waves.”

It is usually a bad idea for a great power to back a small, volatile ally in a dispute with a much stronger neighbor. Such allies then have a tendency to adopt a bolder stance—sometimes even an irresponsible one—confident that their powerful patron has their back. The Georgian government’s provocative military actions in 2008 against the Russian-protected secessionist regime in South Ossetia seemed motivated in part by the mistaken belief that the United States and NATO would deter Moscow from retaliating. Fortunately, Georgia was not a member of NATO, despite the Bush administration’s wishes on that score, so the United States was not obligated to get involved in the Russian-Georgian war.

Washington does not have the same luxury, however, if a confrontation erupts between Russia and any of the small East European members of NATO. That is not merely an academic concern, since there are some festering issues, especially between Moscow and the tiny Baltic republics. U.S. leaders foolishly put America’s security on the line to defend “allies” that provide little, if any, military benefit to the United States.

Washington has done the same thing in East Asia in an even more dangerous setting. In addition to the alliance with the Philippines, there is the bilateral alliance with South Korea and a less explicit but very real commitment to Taiwan’s defense under the Taiwan Relations Act. The former could entangle the United States in a war on the Korean Peninsula, while the latter has an even greater potential than the Philippines tie to embroil the United States in a nasty confrontation with China.

The United States should enter into alliances only when the benefits to American interests clearly outweigh any potential costs and risks, but most of Washington’s commitments to small allies don’t even come close to meeting that standard. National security should not be treated as if it were akin to collecting stamps or coins. Acquiring and supporting allies for the sake of acquiring and supporting allies is not only wasteful, it’s dangerous.

Wise Words on Fiscal Sovereignty and Corporate Taxation (sort of) from Bill Clinton

I’ve always had a soft spot in my heart for Bill Clinton. In part, that’s because economic freedom increased and the burden of government spending was reduced during his time in office.

Partisans can argue whether Clinton actually deserves the credit for these good results, but I’m just happy we got better policy. Heck, Clinton was a lot more akin to Reagan that Obama, as this Michael Ramirez cartoon suggests.

Moreover, Clinton also has been the source of some very good political humor, some of which you can enjoy here, here, here, here, and here.

Most recently, he even made some constructive comments about corporate taxation and fiscal sovereignty.

Here are the relevant excerpts from a report in the Irish Examiner.

It is up to the US government to reform the country’s corporate tax system because the international trend is moving to the Irish model of low corporate rate with the burden on consumption taxes, said the former US president Bill Clinton. Moreover, …he said. “Ireland has the right to set whatever taxes you want.” …The international average is now 23% but the US tax rate has not changed. “…We need to reform our corporate tax rate, not to the same level as Ireland but it needs to come down.”

Kudos to Clinton for saying America’s corporate tax rate “needs to come down,” though you could say that’s the understatement of the year. The United States has the highest corporate tax rate among the 30-plus nations in the industrialized world. And we rank even worse—94th out of 100 countries according to a couple of German economists—when you look at details of how corporate income is calculated.

Crumbling Bridges

A Wall Street Journal story today begins “America’s road to recovery may face a costly detour due to a fraying transportation network. One in nine of the country’s 607,380 bridges are structurally deficient …”

Newspapers have been full of such infrastructure stories in recent years. Pro-spending lobby groups such as ASCE have certainly pumped-up public concerns. America’s highways are becoming more congested, and we should have a discussion about how to finance needed expansions in capacity.

But the popular “crumbling bridges” theme is a bit of a scam. Federal Highway Administration (FHWA) data does show that one in nine bridges are structurally deficient. However, the WSJ doesn’t tell its readers that the share of bridges that are deficient has been steadily declining for two decades, as the chart below reveals.

Bridge1

In 2012, 66,749 of the nation’s 607,380 bridges were structurally deficient, which is 11 percent, or one in nine, as the WSJ reports. But that’s down from 124,072 out of 572,629 bridges, or 22 percent in 1992, according to FHWA.

The general thrust of the WSJ story is correct that having an efficient transportation system aids economic growth. But falling down bridges isn’t the central problem, and hiking gas taxes and boosting federal spending isn’t the solution. Instead, we can spur growth and improve the efficiency of America’s infrastructure by moving as much of it as we can to the private sector.

The Boy Who Cried Wolf Was Eventually Right

“We are reaching end times for Western affluence,” warns economist Stephen King (insert obligatory horror joke here) in yesterday’s New York Times. King, who has authored a book entitled When the Money Runs Out: The End of Western Affluence, joins the ranks of economic Cassandras like Tyler Cowen and Robert Gordon, both of whom have made waves with pessimistic takes on the U.S. economy’s prospects. Like Cowen and Gordon, King couches his claims in overstatements that make it easier for skeptical readers to dismiss his arguments. Peel away the hype, though, and these growth pessmists are still fundamentally correct. The wolf really is at the door this time. In other words, the growth outlook really is darkening.

Cowen put the hype right in the title of his attention-getting book: The Great Stagnation, his term for the past 40 years or so. Of course, real GDP per capita has nearly doubled since 1973, so stagnation is obviously an inapt term. It’s true that productivity growth and growth in median incomes have slowed down, but The Moderate Slowdown is a pretty boring book title. Meanwhile, Gordon saw Cowen and raised him with the highly provocative and speculative argument that technological progress is largely exhausted and, therefore, the 250-year era of modern economic growth is winding down. You don’t have to be Raymond Kurzweil to find that contention unpersuasive.

Now King warns that Western affluence is coming to an end. Well it’s not: even if all growth stopped tomorrow, today’s advanced economies are affluent beyond the wildest dreams of yesteryear.

Push past the hype, though, and Cowen, Gordon, and King are making a point that really needs to be more widely understood: growth is getting harder for the U.S. economy, and there are strong reasons for thinking that growth rates over the next decade or two will fall short of the long-term U.S. historical average. As I explain in a new Cato paper released today, you don’t have to be a pessimist about the future of innovation to be pessimistic about the U.S. economy’s medium-term growth outlook. The main source of weakness lies in demographics: the 20th century saw big increases in both the percentage of the population in the workforce (thanks to the changing role of women in society) and the overall skill level of the workforce (thanks to a huge increase in formal schooling). The rise in schooling has slowed down considerably since 1980, and the labor force participation rate has actually been falling since 2000 (it’s now back to where it was in 1979). What were tailwinds for growth have turned into headwinds.

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