Topic: Regulatory Studies

CBO Report Reveals Spending Disaster

New projections from the Congressional Budget Office show that without reforms rising federal spending will fundamental reshape America’s economy, and not in a good way. Under the CBO’s “alternative fiscal scenario,” the federal government will consume an 86 percent greater share of the economy in 2035 than it did a decade ago (33.9 percent of GDP compared to 18.2 percent).

The CBO report and many centrist budget wonks focus more on the problem of rising federal debt than on rising spending. As a result, many wonks clamor for a “balanced” package of spending cuts and tax increases to solve our fiscal problems. But CBO projections show that the long-term debt problem is not a balanced one—it is caused by historic increases in spending, not shortages of revenues.

This chart shows CBO’s alternative scenario projections, which assume no major fiscal policy changes. All recent tax cuts are extended and entitlement programs are not reformed.

Let’s look at federal revenues first (blue bars). In President Clinton’s last year of 2001, revenues were abnormally high at 19.5 percent of GDP as a result of the booming economy. Over the last four decades, federal revenues as share of GDP have fluctuated around about 18 percent of GDP. The tech boom a decade ago helped generate large capital gains realizations. CBO data show that capital gains tax revenues were $100 billion in 2001, or 1 percent of GDP (see page 85). By contrast, the CBO expects capital gains taxes to be $48 billion in 2011, or just 0.3 percent of GDP (see page 93).

In 2011, revenues are way down because of the poor economy. Some people complain that the Bush tax cuts drained the Treasury, but note that revenues were 18.2 percent of GDP in 2006 and 18.5 percent in 2007, when the economy was growing and the Bush cuts were in place.

Looking ahead, the CBO projects that with all current tax cuts in place and AMT relief extended, revenues will rise to 18.4 percent of GDP by 2021, or a bit above the normal levels of recent decades. For 2035, the CBO assumes that revenues would be fixed at the same 18.4 percent, but their discussion reveals that “real bracket creep” would actually keep pushing up revenues as a share of the economy beyond 2021.

In sum, CBO projections reveal no shortage of revenues. The problem is on the spending side, as the red bars in the chart illustrate. As a result of the Bush/Obama spending boom, federal outlays soared from 18.2 under President Clinton to 24.1 percent this year. With no reforms to entitlement programs, outlays will be 33.9 percent of GDP by 2035, which is 86 percent higher than the Clinton level.

By the way, the CBO nets Medicare premiums out of outlays, which makes spending look a little smaller than it really is. Using gross Medicare spending, total federal outlays will be 35 percent of GDP by 2035.

Also note that CBO data (and other U.S. government data) low-ball government spending in other ways compared to OECD measurement standards. The OECD puts federal/state/local government spending in the United States at 41 percent of GDP in 2011. More than four out of ten dollars we earn are already being gobbled up by our governments.

If the federal government grows by 10 percentage points of GDP by 2035 per CBO, American governments will be consuming more than half of everything produced in the nation.

To fix the problem, see here.

IBM as a Metaphor for Economic Success

International Business Machines Inc. is celebrating its 100th anniversary as a company today. In this time of economic worry and uncertainty, it’s worth taking a moment to consider a few policy lessons we might glean from its longevity.

Unlike government agencies and programs, private-sector companies competing in a free market come and go. In an essay posted on the IBM web site, company officials noted:

Of the top 25 industrial corporations in the United States in 1900, only two remained on that list at the start of the 1960s. And of the top 25 companies on the Fortune 500 in 1961, only six remain there today.

How did IBM not only survive but thrive during a century that took us from horses and buggies to FaceBook and iPhones? In a word, adaptability. IBM’s management has been willing to change to meet the evolving demands of a competitive and open marketplace.

When I was researching a speech last year to retired IBM employees, I was struck by how the company has transformed itself. As I shared with the audience, IBM stands as a metaphor for the positive changes under way in our more high-tech and globalized economy:

As you all know, [IBM] has re-engineered itself from a hardware company to a provider of software and services. Today, nearly 60 percent of the company’s revenue comes from services compared to 38 percent a decade ago. Revenue from hardware has been cut in half, to 17 percent.

IBM’s gone global in a big way, too. Almost two-thirds of its revenue now comes from outside the United States. That compares to an S&P average of 47 percent. Emerging markets now account for 50 percent of its revenue growth. IBM is the biggest IT services company in India. For $100 million, it’s helping the northeast China city of Shenyang—one of its most polluted—clean up its air and reduce carbon emissions.

Politicians nostalgic for an America where the dominant companies were unionized, heavy-industry behemoths producing mostly for the domestic market should take note. As I argued at length in my 2009 book Mad about Trade (see chapters 3 and 4) and more concisely in an essay for Barron’s Weekly, America has become a globalized, middle-class service economy. As the success of IBM demonstrates, this is not something we should fear, or try to resist with trade barriers and industrial policy.

Sorry About Your Burning Village, But You Released the Dragon

There’s a lot of consternation over Education Secretary Arne Duncan’s threat that if Congress doesn’t quickly create and pass a new No Child Left Behind Act he will do it himself, issuing waivers galore for states that adopt as-yet unspecified, administration-dictated reforms. As Andy Rotherham writes in Time, everyone from AEI’s Rick Hess, to angry-teachers’ hero Diane Ravitch, seems to be outraged over the notion that the executive branch would simply bypass Congress because it thinks the legislators are moving too slowly.

What did they expect when they ignored the Constitution to begin with, forgetting that it gives Washington just a few, enumerated powers, and that meddling in education (save prohibiting discrimination and controlling the District of Columbia) is not among them? When they pushed for, or acquiesced to, Washington doing all sorts of things that it has no constitutional authority to do? When they essentially accepted that the Federal Government has unlimited powers? Did they expect federal politicians to suddenly remember they are supposed to be constrained only when they want to do things the educationists don’t like?

Unfortunately, most people in education policy pick and choose when they’ll invoke the Constitution based on whether or not they like what the Feds are doing or are proposing to do. In contrast, if in their presence you consistently state that education policymaking is not among Washington’s few and defined powers, and that the Feds must get out of education, they typically either ignore you; dismiss you with a rhetorical pat and smile like you are a cute, idealistic child; or condemn you as someone who hates children, the poor, teachers, enlightenment, the nation’s economic future, progress, or some combination thereof.

Well here’s the reality: Far too many educationists have helped let the dragon out of its cage. They have only themselves to blame when it burns down their village.

President Obama and the Auto Industry

Back from vacation, I’m catching up on things I missed last week. Dan Ikenson did a fine job on President Obama’s boasting about how he saved the automobile industry. But a few days later Glenn Kessler, the Washington Post’s “Fact Checker,” was more brutal:

We take no view on whether the administration’s efforts on behalf of the automobile industry were a good or bad thing; that’s a matter for the editorial pages and eventually the historians. But we are interested in the facts the president cited to make his case.

What we found is one of the most misleading collections of assertions we have seen in a short presidential speech. Virtually every claim by the president regarding the auto industry needs an asterisk, just like the fine print in that too-good-to-be-true car loan.

Here’s a sample of the specific analyses:

“GM plans to hire back all of the workers they had to lay off during the recession.”

This is another impressive-sounding but misleading figure. In the five years since 2006, General Motors announced that it would reduce its workforce by nearly 68,000 hourly and salary workers, creating a much smaller company. Those are the figures that generated the headlines.

Obama is only talking about a sliver of workers — the 9,600 workers who were laid off in the fourth quarter of 2008.

And that’s why President Obama’s speech was awarded Three Pinocchios.

Corrupt Obamacare Waiver Process Is Like a Scene from Atlas Shrugged

In a column about the revolving door between big government and the lobbying world, here’s what the irreplaceable Tim Carney wrote about the waiver process for folks trying to escape the burden of government-run healthcare.

Congress imposes mandates on other entities, but gives bureaucrats the power to waive those mandates. To get such a waiver, you hire the people who used to administer or who helped craft the policies. So who’s the net winner? The politicians and bureaucrats who craft policies and wield power, because this combination of massive government power and wide bureaucratic discretion creates huge demand for revolving-door lobbyists. It’s another reason Obama’s legislative agenda, including bailouts, stimulus, ObamaCare, Dodd-Frank, tobacco regulation, and more, necessarily fosters more corruption and cronyism.

This seemed so familiar that I wondered whether Tim was guilty of plagiarism. But he’s one of the best journalists in DC, so I knew that couldn’t be the case.

Then I realized that there was plagiarism, but the politicians in Washington were the guilty parties. As can be seen in this passage from Atlas Shrugged, the Obama Administration is copying from what Ayn Rand wrote – as dystopian parody – in the 1950s.

Nobody professed to understand the question of the frozen railroad bonds, perhaps, because everybody understood it too well. At first, there had been signs of a panic among the bondholders and of a dangerous indignation among the public. Then, Wesley Mouch had issued another directive, which ruled that people could get their bonds “defrozen” upon a plea of “essential need”: the government would purchase the bonds, if it found proof of the need satisfactory. there were three questions that no one answered or asked: “What constituted proof?” “What constituted need?” “Essential-to whom?” …One was not supposed to speak about the men who, having been refused, sold their bonds for one-third of the value to other men who possessed needs which, miraculously, made thirty-three frozen cents melt into a whole dollar, or about a new profession practiced by bright young boys just out of college, who called themselves “defreezers” and offered their services “to help you draft your application in the proper modern terms.” The boys had friends in Washington.

This isn’t the first time the Obama Administration has inadvertently brought Atlas Shrugged to life. The Administration’s top lawyer already semi-endorsed “going Galt” when he said people could choose to earn less money to avoid certain Obamacare impositions.

So if you want a glimpse at America’s future, I encourage you to read (or re-read) the book. Or at least watch the movie.

The Aid’s the Thing

The following is cross-posted from the National Journal’s Education Experts blog. This week’s topic: Whether new ”gainful employment” regulations for higher education are too little, too much, or just right:

I agree largely with Steve Peha – our policies and mindsets have made “college” synonymous with “job training,” and that has led to huge inefficiencies. But there is an even deeper problem: government aid, both to students and schools.

The most aggressive opponents of for-profit schooling to have posted thus far appear to agree that taxpayer-funded student aid is what for-profit institutions are after. No doubt the critics are, for the most part, right. But there is another side to this equation: The aid also enables students to choose proprietary schools, choices many aid recipients likely would not have made had they been using only their own money, or money they borrowed from people who willing lent it to them. So aid helps enrich proprietary schools, but it also hugely degrades the incentives of students to economize or fully scrutinize the choices before them.

College is a two-way street, and student aid has fueled out-of-control traffic going in both directions

But it gets worse. What has been perpetually ignored by far too many people who’ve been involved in the assault of for-profit institutions is that all sectors of higher education get massive subsidies, and all are performing very poorly.

Public colleges get huge subsidies directly from state and local governments, yet still saddle students – and aid-supplying taxpayers – with big bills. And how do they perform? Only about 55 percent of students at four-year public colleges finish their degrees within six years, while only about 21 percent – one-fifth! – of community college students complete their programs within 150 percent of expected time. And yes, there is a lot that these figures do not capture, but there is no way to look at these outcomes of public schools as anything other than atrocious.

And nonprofit private institutions? They get big tax benefits by virtue of being putatively nonprofit, and often accumulate major wealth as a result. But their six-year grad rates? Only 64 percent.

Once again, the root problem is that massive government subsidies induce students to spend far more – and think about their priorities far less – than they would were they using their own dough, or money someone voluntarily gave them. Moreover, all of our higher ed subsidies enable colleges to raise prices with near impunity, and expend cash on all sorts of things that make them hugely inefficient.

In light of all this, “gainful employment” is clearly no solution to our higher ed troubles. It is, at best, an over-hyped distraction.

We Don’t Need No Art in Kansas

At POLITICO this morning we find a long opinion piece by Matt Stoller, “Public Pays Price for Privatization,” summarized as “The real infrastructure trend in America today is privatizing what is left.” If that weren’t enough to give you the flavor of the piece, the bio line tells us that “Stoller worked on the Dodd-Frank financial reform law and Federal Reserve transparency issues as a staffer for Rep. Alan Grayson (D-Fla.). He is currently a fellow at the Roosevelt Institute.” Say no more – except, there’s more to say.

Stoller notes, among much else, that Kansas Gov. Sam Brownback just turned over arts funding to the private sector, making Kansas the only state without a publicly funded arts agency.” Don’t reel in horror; the cited Los Angeles Times article has already done it for you: “The governor erased state funding for arts programs, leaving the Kansas Arts Commission with no budget, no staff and no offices.” One imagines there will now be no art at all in Kansas.

Not surprisingly, Stoller extols the giant public works of the New Deal and after, which petered out in the 1970s, he says, after which “international competitiveness and environmental costs drove the logic of cost reductions into our political order. Today, we are still living in the Ronald Reagan-Paul Volcker era of low taxes, low regulations, low pay, low spending and high finance.” It seems not to have occurred to Stoller that perhaps the prior absence of “the logic of cost reductions” in our political order might have contributed to why, as he says, “the New Deal coalition melted in the 1970s.”

Art aside – that’s an easy case for defunding – Stoller does go on to criticize much of the “privatization” that’s taken place since – starting with Fannie Mae and Freddie Mac. He’s right there: These “private-public partnerships” are fraught with peril, not least by giving privatization a bad name, something he doesn’t consider. The idea of “public goods” is not meaningless, but the definition has to be strict, as economists know, and the means for privatizing ersatz “public goods” have to be clean. Given the vast public sector before us, we’ve got years of privatization ahead. Let’s hope it’s done right.