Topic: Government and Politics

Siding with the Heritage Foundation in the “Austerity” Fight with Paul Krugman and the Washington Post

By
Daniel J. Mitchell

I’m not reluctant to criticize my friends at the Heritage Foundation. In some cases, it is good-natured ribbing because of the Cato-Heritage softball rivalry, but there are also real policy disagreements.

For instance, even though it is much better than current policy, I don’t like parts of Heritage’s “Saving the American Dream” budget plan. It’s largely designed to prop up the existing Social Security system rather than replace the existing tax-and-transfer entitlement system with personal retirement accounts. And while the plan contains a flat tax, it’s not the pure Hall-Rabushka version. One of the most alarming deviations, to cite just one example, is that it creates a tax preference for higher education that would enable higher tuition costs and more bureaucratic featherbedding.

That being said, I’m also willing to defend Heritage if the organization is being wrongly attacked. The specific issue we’ll review today is “austerity” in Europe and whether Senator Sheldon Whitehouse of Rhode Island is right to accuse Heritage of “meretricious” testimony.

Let’s look at the details.

Earlier this month, Paul Krugman wrote that, “a Heritage Foundation economist has been accused of presenting false, deliberately misleading data and analysis to the Senate Budget Committee.” Krugman was too clever to assert that the Heritage economist “did present” dishonest data, but if you read his short post, he clearly wants readers to believe that an unambiguous falsehood has been exposed.

Krugman, meanwhile, was simply linking to the Washington Post, which was the source of a more detailed critique. The disagreement revolves around  whether Europeans have cut spending or raised taxes, and by how much. The Heritage economist cited one set of OECD data, while critics have cited another set of data.

So who is right?

Conn Carroll of the Washington Examiner explains that the Heritage economist was looking at OECD data for 2007-2012 while critics are relying on an OECD survey of what politicians in various countries say they’ve done since 2009 as well as what they plan to do between now and 2015.

Whitehouse believed he had caught Furth and The Heritage Foundation in a bald face lie. …There is just one problem with Whitehouse’s big gotcha moment: The staffer who spoon-fed Whitehouse his OECD numbers on “the actual balance between spending cuts and tax increases” failed to also show Whitehouse the front page of the OECD report from which those numbers came. That report is titled: “Fiscal consolidation targets, plans and measures in OECD countries.” Turns out, the numbers Whitehouse used to attack Furth for misreporting “what took place in Europe” were actually mostly projections of what governments said they were planning to do in the future (the report was written in December 2011 and looked at data from 2009 and projections through 2015). At no point in Furth’s testimony did he ever claim to be reporting about what governments were going to do in the future. He very plainly said his analysis was of actual spending and taxing data “to date.” Odds are that Whitehouse made an honest mistake. Senators can’t be expected actually to read the title page of every report from which they quote. But, considering he was the one who was very clearly in error, and not Furth, he owes Furth, and The Heritage Foundation an apology. Krugman and Matthews would be well advised to revisit the facts as well.

In other words, critics of Heritage are relying largely on speculative data about what politicians might (or might not) do in the future to imply that the Heritage economist was wrong in his presentation of what’s actually happened over the past six years.

So far, we’ve simply addressed whether Heritage was unfairly attacked. The answer, quite clearly, is yes. If you don’t believe me, peruse the OECD data or peruse the IMF data.

Now let’s briefly touch on the underlying policy debate. Keynesians such as Krugman assert that there have been too many spending cuts in Europe. The “austerity” crowd, by contrast, argues that strong steps are needed to deal with deficits and debt, though they are agnostic about whether to rely on spending reforms or tax increases.

I’ve repeatedly explained that Europe’s real problem is an excessive burden of government spending. I want politicians to cut spending (or at least make sure it grows slower than the productive sector of the economy). And rather than increasing the tax burden, I want them to lower rates and reform punitive tax systems.

The bad news is that Europeans have raised taxes. A lot. The semi-good news is that spending no longer is growing as fast as it was before the fiscal crisis.

In the grand scheme of things, however, I think Europe is still headed down the wrong path. Here’s what I wrote back in January and it’s still true today.

I don’t sense any commitment to smaller government. I fear governments will let the spending genie out of the bottle at the first opportunity. And we’re talking about a scary genie, not Barbara Eden. And to make matters worse, Europe faces a demographic nightmare. These charts, reproduced from a Bank for International Settlements study, show that even the supposedly responsible nations in Europe face a tsunami of spending and debt over the next 25-plus years. So you can understand why I don’t express a lot of optimism about European economic policy.

By the way, I’m not optimistic about the long-term fiscal outlook for the United States either. In the absence of genuine entitlement reform, we’ll sooner or later have our own fiscal crisis.

Topics: 
General, Government and Politics, International Economics and Development, Tax and Budget Policy

The Old Infrastructure Excuse for Bigger Deficits

By
Alan Reynolds

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.  

 

Topics: 
Finance, Banking & Monetary Policy, Government and Politics, International Economics and Development, Social Security, Tax and Budget Policy

Weirdest Scandal Ever: Foreign Knights Invade America

By
Ilya Shapiro

When Politico gave its usual run-down of the morning’s hot topics in health care on Wednesday, one extra special blurb caught my colleague Michael Cannon’s eye. Apparently a Dutch knight is working at the Centers for Medicare & Medicaid Services (CMS), a key federal agency in the Department of Health and Human Services.

On April 29, Sir Jay Merchant was knighted by Ambassador Rudolf Bekink on behalf of Queen Beatrix of the Netherlands. Merchant is the “international relations adviser” in the Office of the Administrator of CMS, which is the agency’s highest executive office.

While this may seem like just a neat factoid for inside-the-Beltway water-cooler amusement, there’s actually a constitutional problem that precludes this gallant story from having a fairytale ending. Article I, Section 9, Clause 8 (the “Emoluments” or “Titles of Nobility” Clause) states:

No Title of Nobility shall be granted by the United States: And no Person holding any Office of Profit or Trust under them, shall, without the Consent of the Congress, accept of any present, Emolument, Office, or Title, of any kind whatever, from any King, Prince, or foreign State. 

In other words, it’s illegal for someone holding a federal “office of profit or trust” to accept a knighthood or other noble title. And this isn’t some archaic provision that hasn’t been dusted off since knights wore suits of armor. Believe it or not–and nothing is unbelievable when it comes to Obamacare implementation–this isn’t the first time this issue has arisen. It’s not even the first time in the last decade!  

In 2007, for example, the FBI asked the Department of Justice for a legal opinion as to whether a member of the FBI Director’s Advisory Board held an “Office of Profit or Trust” under the Emoluments Clause, in the context of accepting travel reimbursements from foreign government. In his memorandum on the topic, Deputy Assistant Attorney General John Elwood (who wrote an article in the Cato Supreme Court Review just last year) concluded that an advisory board member doesn’t hold such an office “[b]ecause mere access to, or receipt of, classified information is not a delegation by legal authority of a portion of the sovereign power of the United States.”

But that was a different scenario than what we have with Sir Jay. He is a federal employee, listed among seven similar-ranking colleagues on the CMS employee directory. The Office of the Administrator is surely an “Office of Profit or Trust,” implementing and making decisions regarding Medicare, Medicaid, and other parts of the Social Security Act.

Read the rest of this post »

Topics: 
Government and Politics, Health Care, Law and Civil Liberties

Michael Carvin on Halbig v. Sebelius

By
Michael F. Cannon

Michael Carvin is the lead attorney in Halbig v. Sebelius, a legal challenge that various media report “could tear down major pieces of ObamaCare” or even “sink ObamaCare.”

Carvin will be discussing Halbig at a Cato policy forum on the case this coming Monday, June 17. Register to attend here.

Here he is discussing the case on Cavuto last month:

Topics: 
Government and Politics, Health Care, Law and Civil Liberties, Regulatory Studies

Justice Thomas Shows Again that the Federal Emperor Has No Constitutional Clothes

By
Ilya Shapiro

Yesterday’s unanimous Supreme Court opinion in American Trucking Associations v. City of Los Angeles is a run-of-the-mill federal preemption case, not inviting much attention. But the interesting bit isn’t Justice Kagan’s majority opinion. It’s Justice Thomas’s short concurrence. Thomas agrees that federal law trumps conflicting state/local law regarding certain regulations related to the Port of Los Angeles, but seizes on the plain language of the preempting statute to take a shot at the massive expansion of federal authority under a misreading of the Commerce Clause.

Justice Thomas focuses on a section of the relevant statute (the Federal Aviation Administration Authorization Act, or FAAAA–don’t ask why this covers ports) titled “Federal authority over intrastate transportation.” He denies that Congress possesses this authority: the Commerce Clause, part of Article I, section 8, only gives Congress the power to regulate commerce “among the several States.” Thomas can’t believe that Congress could have been granted power to legislate something so local as where trucks park once they leave the port (one of the regulations at issue in American Trucking):

Congress cannot pre-empt a state law merely by promulgating a conflicting statute–the preempting statute must also be constitutional, both on its face and as applied. As relevant here, if Congress lacks authority to enact a law regulating a particular intrastate activity, it follows that Congress also lacks authority to pre-empt state laws regulating that activity

The reason that Justice Thomas nevertheless concurs in the judgment here, however, is that Los Angeles waived any constitutional claims against the FAAAA, instead relying solely on statutory arguments (which correctly lost 9-0).

This isn’t the first time that Thomas upheld a federal law but noted federalism concerns that, as here, the plaintiffs didn’t raise (or didn’t preserve on appeal). In Gonzales v. Carhart, for example, Thomas concurred with a majority decision that sustained the federal Partial-Birth Abortion Ban Act against a challenge based on Roe v. Wade and Planned Parenthood v. Casey but noted that the issue of whether a federal abortion regulation “constitutes a permissible exercise of Congress’ power under the Commerce Clause is not before the Court. The parties did not raise or brief that issue; it is outside the question presented; and the lower courts did not address it.”

Justice Thomas’s opinions in these sorts of cases illustrate the misuse of the Commerce Clause given the Constitution’s careful enumeration of congressional powers. These brief, pointed concurrences show that our imperial government isn’t clothed in constitutional authority.

And they also have a direct use for legal practitioners. I wasn’t a “real” lawyer for that long before joining Cato, but here’s an easy practice tip: Don’t just assume that the federal government has the power to pass the law you don’t want applied to your client.

Topics: 
Government and Politics, Law and Civil Liberties, Regulatory Studies

Obama Keeps Losing Unanimously at Supreme Court

By
Ilya Shapiro

Faithful readers of this blog will have noticed that the government lost unanimously before the Supreme Court in yesterday’s quirky raisin case (which Ilya Somin points out is the government’s third unanimous property-rights loss in 15 months).  Even more keen Cato followers will have realized that this ruling comes on the heels of three other unanimous government losses this term, which I described in a Bloomberg View op-ed last week.  And my biggest fans (hi Dad!) will have remembered that this continues a seeming pattern – not sure if statistically significant, but does look anomolous – that I chronicled in a Wall Street Journal op-ed a year ago.

As I said last week,

These cases have nothing in common, other than the government’s view that federal power is virtually unlimited: Citizens must subsume their liberty to whatever the experts in a given field determine the best or most useful policy to be.

If the government can’t get even one of the liberal justices to agree with it on any of these unrelated cases, it should realize there’s something seriously wrong with its constitutional vision.

I wonder if I’ll get to write the same op-ed every year at this time.

Topics: 
Government and Politics, Law and Civil Liberties

Obamanomics and Big Government: Bad News for Young People

By
Daniel J. Mitchell

I periodically post TV interviews and the second-most-watched segment - edged out only by my debate with Robert Reich on Keynesian economics - was when I discussed how President Obama’s statist policies are bad for young people.

So there’s obviously some concern about the future of the country and what it means for today’s youth.

The Center for Freedom and Prosperity has examined this issue and taken it to the next level, cramming a lot of information into this six-minute video.

How Big Government Undermines Your Future

The video highlights four specific ways that government intervention disadvantages younger Americans.

1. Labor market interventions such as minimum wage mandates make it more difficult for young people to find employment and climb the economic ladder.

Government is even bigger in Europe...leading to even worse results for young people2. Obamacare harms young people by requiring them to pay substantially more to prop up an inefficient government-run healthcare system.

3. Young people are trapped in a poorly designed Social Security system and politicians such as Obama think the answer is to make them pay more and get less.

4. Government has created a major third-party payer problem in higher education, putting young people on a treadmill of ever higher tuition and record debt.

What makes this situation so surreal is that young people - as noted at the start of the video - are the one group who think the “government should do more”!

I hope you share this video with every young person you know and help them understand that statism is the enemy of hope and opportunity.

And maybe also show them this poster if they need some extra help grasping the problem.

Topics: 
Government and Politics, Social Security, Tax and Budget Policy

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