Topic: Government and Politics

California: Poster Child for Poor Fiscal Management

On Wednesday Gov. Arnold Schwarzenegger is releasing his revised budget proposal against a backdrop of a massive deficit.  In my op-ed in today’s San Francisco Chronicle, I lay out the background of the “fiscal crisis” in the state (too much spending) and point out a few specific programs the governor can terminate.  Enacting a spending limit and working to increase the use of public-private partnerships would be great, but this year’s budget debate highlights the need to also eliminate programs, cut spending (not merely spending growth) and refocus the state government on its core functions. 

Not from California?  Your state has also likely forgotten the lessons of the 1990s and may have its own “crisis” brewing. 

Eternal Vigilance, Inc.

The Style section of today’s Washington Post features a terrific article about the National Security Archive, the nonprofit group dedicated to unearthing goverment secrets. The privately funded group, about 35 strong, uses the Freedom of Information Act to collect about 75,000 documents a year, which staffers analyze and then post on the website. The Archive’s greatest hits (see, e.g., here and here) demonstrate that as Patrick Henry put it, one should “never depend on so slender a protection as the possibility of being represented by virtuous men.” Don’t trust: verify.

One of my favorite documents on the site is the Operation Northwoods Memo, prepared by the Pentagon in the wake of the Bay of Pigs disaster:

titled “Justification for U.S. Military Intervention in Cuba” [the memo] was provided by the JCS to Secretary of Defense Robert McNamara on March 13, 1962, as the key component of Northwoods. Written in response to a request from the Chief of the Cuba Project, Col. Edward Lansdale, the Top Secret memorandum describes U.S. plans to covertly engineer various pretexts that would justify a U.S. invasion of Cuba. These proposals - part of a secret anti-Castro program known as Operation Mongoose - included staging the assassinations of Cubans living in the United States, developing a fake “Communist Cuban terror campaign in the Miami area, in other Florida cities and even in Washington,” including “sink[ing] a boatload of Cuban refugees (real or simulated),” faking a Cuban airforce attack on a civilian jetliner, and concocting a “Remember the Maine” incident by blowing up a U.S. ship in Cuban waters and then blaming the incident on Cuban sabotage.

Sounds like tinfoil-hat stuff, I know, but thanks to FOIA and the National Security Archive, you can check for yourself [.pdf]. But if Dick Cheney and Donald Rumsfeld had had their way, you couldn’t. As top aides to Gerald Ford 34 years ago, they urged the president to veto amendments strengthening FOIA (he did, and Congress overrode his veto). The Archive has the documents on that too.

(cross-posted on

Politics Corrupts Everything

The president of West Virginia University, Michael Garrison, is hanging on after the school’s faculty voted 77 to 19 to demand his resignation. Faculty members are outraged that Garrison retroactively awarded an MBA to a friend, who is the daughter of Gov. Joe Manchin III. The Washington Post reports:

Garrison’s critics note that he is a former classmate of Bresch’s. He once worked as a lobbyist for Mylan Inc., where Bresch is an executive and whose chairman is one of WVU’s biggest donors. They also note that Garrison was chief of staff for former West Virginia governor Bob Wise (D).

The Post failed to add the detail that Garrison served on Manchin’s transition team when he succeeded Wise. So yes, when you hire a lobbyist and political operator to run a university, you can expect some favors for politically connected friends.

Antiwar Republicans Win in NC

Over at The American Conservative blog, Jim Antle points out that Rep. Walter Jones, an antiwar Republican incumbent, as well as another antiwar Republican, B.J. Lawson, won big in last night’s North Carolina primary.

Although the Republican establishment in Washington seems to have sacrificed every other governing principle at the altar of reckless militarism, it appears that a contingent of Republican voters haven’t. Maybe Bill Kauffman is onto something

Real Budget Reform

Senator John McCain and other budget reformers are right to rail against the institutionized corruption of federal “earmarking.” Earmarks are, however, just a small part of the massive bloat in the federal budget. Earmark reform is needed, but presidential candidate McCain needs to propose more fundamental budget reforms in the coming months.

Representatives John Campbell (R-CA) and Jeb Hensarling (R-TX) have just introduced an idea that McCain could champion: A constitutional cap on the overall federal budget. You can read the proposed amendment here, but essentially these House budget experts propose that annual federal spending growth should not exceed the long-run average growth in the U.S. economy, except with a two-thirds vote or a declared war.

I’ve proposed a similar budget cap that would be statutory, not constitutional, and thus easier to implement. See here and here.

Either way, the point for Mr. McCain (or Mr. Obama, if he is so inclined) is to promote some sort of overall cap on the budget to drive home that the government’s budget should not grow any faster than the average family’s budget. 

Uncle Sam Wants You

USA Today ran an article about the ever-expanding band of bureaucrats on all levels of government. Citing Bureau of Labor Statistics data, the author points to a new 76,800 bureaucrats added to payroll from January-March this year;

That’s the biggest jump in first-quarter hiring since a boom in 2002 that followed the 9/11 terrorist attacks. By contrast, private companies collectively shed 286,000 workers in the first three months of 2008.

For the most part, when a public employee is hired the full cost of their labor – including generous government pensions and health care coverage – is not accounted for upfront.  With the baby boomers starting to retire, the costs of maintaining the army of bureaucrats will only rise.  Tack on the large unfunded liabilities in government-provided defined benefit plans and retiree health plans, and you easily have a trillion-dollar problem

Most governors in “fiscal crisis” states will call for temporary hiring freezes that fail to address the core issue of reckless government expansion.  But watch for some states, like Tennessee, to take steps to cut costs by culling a small number of their taxpayer-funded workers.

‘The Amazing Hillary’

Hurry, hurry, hurry! Step right up, ladies and gentlemen, and see the Diva of Deception, the Impresario of Illusion — THE AMAZING HILLARY!! Watch her make the federal gas tax SEEM TO DISAPPEAR!! But in fact, you’ll still be paying the same price for gas! Even the media can’t figure out this trick!! She’s remarkable! She’s astounding! So hurry right in and see the First Lady of Legerdemain, the Mistress of Magic!

That’s what Hillary Clinton’s campaign managers should be barking about her joining John McCain in proposing to suspend the federal gasoline tax for the 2008 summer driving season. Says Candidate Clinton, the move would “immediately lower gas prices.”

What makes her proposal a true work of wizardry is that, she claims, it would not reduce government tax revenues. Whereas McCain says he would reduce government spending to make up for the lost tax money (an example of magical thinking?), Clinton would implement “a windfall profits tax on the big oil companies” to close the revenue gap.

Did you catch The Amazing Hillary’s trick? Did you see why consumers would still pay the same price for gasoline? No? OK, let’s watch the sleight of hand in slow motion:

The price of any good is ultimately set by just one factor: the equilibrium of supply and demand. If demand for a good increases, consumers will bid against each other to obtain it, driving up the price. The higher price encourages producers to supply more of the good and allows them to use costlier means of production. The higher price also incentivizes consumers to moderate their demand. This dynamic operates until a new equilibrium price is reached. Similar dynamics occur if demand falls, or if supply increases or falls.

Taxes affect prices by reducing the supply of a good. Most goods (including gasoline) can be furnished in a variety of ways from a variety of inputs. Some of those supply lines are more expensive than others, and producers will only operate lines that are profitable. If a tax takes away some of the revenue that producers receive for their goods, the producers will idle the lines that are unprofitable given the post-tax revenues. The decrease in supply will push up the price until it reaches a new equilibrium between supply and demand.

Let’s apply this specifically to gasoline. Gas can be produced from many different supplies of oil, ranging from cheap-to-extract-and-refine Saudi light crude to more-expensive Texas crude and oil pumped from shallow-water wells in the Gulf of Mexico, to even-more-expensive oil from deep-water wells, or from the frozen ground of Prudhoe Bay, or from the oil sands of Canada. That oil can then be transported by a variety of methods to different refineries with different operating costs. The resulting gasoline is then transported to consumers through countless routes in the global supply chain.

Gasoline suppliers, like all other suppliers, will use only the lines that are profitable and idle lines that are not. A tax on gasoline — assessed either as a sales tax or as a corporate excise tax — will reduce the profits of different supply lines. Some of those lines will become unprofitable and be idled by suppliers, reducing overall supply. The result is that consumers pay a higher price that should produce more supply, but suppliers receive lower revenue that prompts them to decrease supply. (The difference between what should be supplied at a given price and what actually is supplied underlies what economists refer to as a “deadweight loss.”)

Deadweight losses from taxation are undesirable, but they are tolerated because government provides important services. One of the virtues of the gas tax, specifically, is that it acts (ostensibly) as a user fee for roads and other services that motorists need. Now, there certainly are more efficient ways to finance roads, but the fuel tax isn’t half bad.

However, there is something wrong with assessing a tax but claiming that it’s not there. Candidate Clinton’s “trick” is to swap the gas tax for a special tax on oil companies. Because she intends for the windfall profits tax to generate the same revenue as the gas tax, the windfall profits tax will have the same effect on gasoline supply, demand, and price as the current gas tax. The only difference is that the gas tax is transparent to consumers while the windfall profits tax is not. Voilà — the gas tax seems to disappear, but gas prices stay the same and the government still gets its money.

Theoretically, there are ways to construct a windfall profits tax so that it doesn’t suffer this problem. One way would be to levy a one-time lump sum tax — that is, to pass legislation mandating that, in 2008, the oil companies will hand over a specific amount of dollars to the federal government regardless of profit or production levels. Another theoretical windfall profits tax would apply only to lines of supply that are low-cost and would remain profitable and continue to operate despite the tax. If either of those taxes were substituted for the current gas tax, it would lower gas prices and increase supplies by getting rid of the gas tax’s deadweight loss.

However, windfall profits taxes are much easier to construct in theory than in reality. The United States tried the “low-cost supply” tax in the 1980s and found that it produced little revenue but it had some unpleasant unintended consequences. Conversely, the lump sum tax would set off one amazing (and costly) legal and political battle.

So far, I can find no information on the design for Clinton’s windfall profits tax. Perhaps The Amazing Hillary has figured a way to make the tax work. More likely, it’s just hocus-pocus.

So, in the battle of presidential rivals, give McCain a little credit for having a less illusory gas tax proposal. But the real credit should go to Sen. Barack Obama, who has dismissed the idea entirely as a “short-term, quick-fix” proposal. What Obama said last week about the very small monetary gain of McCain’s call for suspending the tax also covers Clinton’s nicely: “A half a tank of gas — that’s [their] big idea.”