Topic: Tax and Budget Policy

Is Government Debt a Problem?

Based on what’s happened in Greece and other European nations, we know from real-world evidence that even nations from the developed world can spend themselves into debt trouble.

This has led to research that seeks to pinpoint when debt reaches a dangerous level.

Where’s the point where investors stop buying the debt? Where’s the point when interest on the debt becomes too much of a burden?

Most famously, a couple of economists crunched numbers and warned that nations may reach a tipping point when debt is about 90 percent of GDP.

I was not persuaded by this research for two reasons.

First, I think it’s far more important to focus on the underlying disease of too much government, and not get fixated on the symptom of too much borrowing. If I go see a doctor because of headaches and he discovers I have a brain tumor, I want him to address that problem and not get distracted by the fact that head pain is one of the symptoms.

Second, there are big differences between nations, and those differences have a big effect on whether investors are willing to buy government bonds. The burden of debt is about 240 percent of GDP in Japan and the nation’s economy is moribund, for instance, yet there’s no indication that the “bond vigilantes” are about to pounce. On the other hand, investors are understandably leery about buying Argentinian government debt, even though accumulated red ink is less than 40 percent of economic output.

So what about America, where government borrowing from the private sector now accounts for 82 percent of GDP? Have we reached a danger point for government debt?

Bureaucracy, Boondoggles, and Bad Behavior

In catching up on news about the federal government today, I noticed that articles fit into three categories: bureaucracy, boondoggles, and bad behavior. On any given day, it seems, the Washington Post and other outlets have new tales of BB&BB to report. No wonder most Americans want to cut federal spending.

Let’s look at the latest on BB&BB:

Regarding bureaucracy, you can’t find a better illustration that David Fahrenthold’s article in the Washington Post last Sunday. He describes an underground cavern in Pennsylvania where 600 government workers process federal pension paperwork with the use of 28,000 old-fashioned file cabinets. The paper-based process works the same way that it did four decades ago, and it takes just as long. Efforts to computerize it have failed over and over.

Regarding boondoggles, the cost of a new D.C. building for the Consumer Financial Protection Bureau has tripled to $145 million, reports the Washington Examiner. Meanwhile, a huge new D.C. headquarters for the Department of Homeland Security (DHS) is overbudget by $1 billion. When President George W. Bush created DHS in 2002, he promised that it would “improve efficiency without growing government” while cutting out “duplicative and redundant activities that drain critical homeland security resources.”

Also this week, a House committee learned that numerous Veterans Affairs’ building projects across the country are overbudget by hundreds of millions of dollars. It appears that Edwards’ Law of Government Cost Overruns is as immutable as Murphy’s Law.

Regarding bad behavior in the federal government, it’s never ending. The Air Force found out that dozens of its officers at a nuclear base have been cheating on proficiency tests and breaking other rules. And this week the Secret Service reaffirmed its reputation as the Animal House of police forces when an agent in the Netherlands for a presidential visit was found passed-out drunk in a hotel hallway.

If anything can go wrong in government, it will go wrong—and we’re all paying for it.

More on cost overruns here. Thanks to Nick and Pierre-Guy for help.

Privatizing the Royal Mail

Britain privatized its Royal Mail in 2013, proceeding with an initial public offering of shares that raised about $2.7 billion. The government pursued the reform because the company faced falling mail volume, and it needed to reduce costs and increase innovation. Similar issues face the U.S. Postal Service.

The Financial Times has named the reformer leading the privatized Royal Mail its “Person of the Year.” Below is an excerpt about Moya Greene from FT’s story. I have two questions: i) Why don’t we get reforms or reformers like this in Washington? ii) Why are American leaders so comparatively timid in embracing market-based reforms?

Ask anyone who knows Moya Greene, the Canadian chief executive who last year steered Royal Mail, the UK’s 500-year-old postal service, into the private sector, and the same phrases come up. “She’s relentless, a force of nature, a tough lady,” says one admirer.

It took a determined personality to get this behemoth, with £9bn of revenues and 150,000 staff, into a healthy enough state to be floated on the London Stock Exchange, where it went straight into the FTSE 100 index. The goal of privatising Royal Mail had defeated governments for 40 years.

Greene, 59, has been Royal Mail’s chief executive for almost four years, the first woman and first non-Briton to run it since Henry VIII established a “master of the posts” in 1512. Her previous role heading Canada’s postal service – and as a civil servant overseeing the privatisation of that country’s railway and deregulation of its airline and ports systems – gave her the necessary blend of industrial and political experience.

With this British privatization—and past ones—people have quibbled with some of the details. But, all in all, privatization in Britain has been hugely successful. Prime Minister Cameron should be applauded for having the guts to build on the privatization reform legacy of Thatcher, Major, and Blair.

Meanwhile on this side of the pond, Republican Darrell Issa is having trouble getting his own nominally conservative party to accept even small changes to the broken government postal system. Perhaps he could kick-start reforms by inviting Moya Greene to give testimony to his high-profile committee.

For more on postal privatization, see here.   

The Federal Spying Budget

The latest revelations regarding the NSA’s bulk data collection illustrate the vastness of the government’s spying apparatus. That vastness costs taxpayers a lot of money.

The cost of the federal spy budget used to be secret, which was a bizarre thing for a government that is supposed to be of the people, by the people, and for the people. But in recent years, policymakers have taken a step toward transparency and released figures on total intelligence spending.

The federal spy budget consists of spending on the National Intelligence Program (NIP) and the Military Intelligence Program (MIP). The Federation of American Scientists has summarized the data. In 2013 the NIP and MIP cost $68 billion. (For 2015, the administration is requesting $46 billion for the NIP and $13 billion for the MIP.)

Even by Washington standards, $68 billion is a lot of money. The chart shows that the spy budget is two-thirds as large as the $96 billion Americans spend on state and local policing activities. And the spy budget is far larger than spending on state and local fire activities ($42 billion), the NASA budget ($17 billion), and the National Park Service budget ($3 billion). (Police and fire data are for 2011; NASA and Park Service data are for 2013.)

What do the NIP and MIP spend so much money on? I assume it’s mainly the wages and benefits of their skilled workers, plus lots of spending on computers, drones, and other technology.

Frank Underwood Wants a Subsidy

House of Cards is a Netflix television series about a powerful, manipulative politician who gets what he wants with little regard for the public good. Here’s an example:

“House of Cards” star Kevin Spacey is booked to appear in Annapolis on Friday night as the fate of a tax credit that has benefited the production of his Netflix series hangs in the balance.

Gerard E. Evans, an Annapolis-based lobbyist for the show, has invited the entire Maryland General Assembly to a local wine bar to meet the two-time Academy Award winner who plays the scheming Vice President Frank Underwood in the series. An invitation describes the event as “an evening of Annapolis, D.C. and Hollywood.”…

The visit is scheduled just a few days after the Senate voted to increase the amount the state can spend next year, to $18.5 million, on a tax credit that rewards movie and television production companies that choose to film in Maryland. “House of Cards” has been the biggest beneficiary in recent years.

The House of Delegates has yet to act on the bill, with about two and a half weeks remaining in this year’s 90-day legislative session in Maryland. Evans said he has been encouraged by recent meetings with House Speaker Michael E. Busch (D-Anne Arundel) and other key delegates.

A few weeks before the second season of “House of Cards” debuted online, the show’s production company sent letters to Busch and Gov. Martin O’Malley (D) making clear they could film elsewhere if the debate over the tax credit didn’t end well.

It’s hard to imagine a better example of rent-seeking, crony capitalism, and conspiracy between the rich, the famous, and the powerful against the unorganized taxpayers. A perfect House of Cards story.

The Tax Foundation has been covering film tax credits in general and the House of Cards saga in particular. The Mackinac Center has been campaigning against Michigan’s film tax credits, and Gov. Rick Snyder has tried to rein in the program. But it’s hard to beat Frank Underwood.

 

Death Of An Honest Taxman

The New York Times notes the death at age 100 in Atlanta of Randolph Thrower, “a Republican lawyer who headed the IRS under President Richard M. Nixon from 1969 to 1971 before losing his job for resisting White House efforts to punish its enemies through tax audits.” When White House staffers began pressuring Mr. Thrower to apply hostile tax scrutiny to the Administration’s critics, including journalists and Senators, he assumed President Nixon had no knowledge of what was happening and requested a meeting with the chief executive so as to warn him. Instead he was summarily fired, with the White House putting out the story that Thrower had departed “for personal reasons.”

In White House tapes and memos released in later years, Nixon described the situation differently. “May I simply reiterate for the record that I wish Randolph Thrower, commissioner of the Internal Revenue Service, removed at the earliest feasible opportunity,” he wrote on Jan. 21, 1971, five days before the White House announced that Mr. Thrower was stepping down.

That May, as the administration continued to look for a successor to Mr. Thrower, Nixon made clear what kind of IRS commissioner he wanted. “I want to be sure he is a ruthless son of a bitch,” he was recorded as saying, “that he will do what he is told, that every income tax return I want to see I see” and “that he will go after our enemies and not go after our friends.”

It’s a good thing Nixon isn’t in power any more.

Government Infrastructure Is Inefficient Everywhere

An op-ed in the Wall Street Journal today indicates that Edwards’ Law of Cost Overruns is an international standard. If a politician says that a project will cost $100 million, it will end up costing $200 million or more.

The WSJ piece by Bent Flyvbjerg and Atif Ansar examines the results of an Oxford University study looking at 245 dam projects around the world. The projects had a “dismal track record” in terms of sticking to their promised budgets. The “actual construction costs of large dams are globally on average 96 percent higher than their budgets,” say Flyvbjerg and Ansar. That means a doubling, which is right in line with Edwards’ Law.

Rachel Maddow has drawn the lesson from Hoover Dam that big government projects are really great. But Flyvbjerg and Ansar describe a more typical government project: “Brazil’s Itaipu Dam was built in the 1970s. It cost nearly $20 billion, 240 percent more in real terms than predicted and it impaired Brazil’s public finances for three decades.”

I’ve written in detail about the history of U.S. government dam building, which has been chock-full of economic and environmental mismanagement. One reason for large cost overruns is that policymakers lie or conceal. I wrote that the Bureau of Reclamation “began constructing the Grand Coulee Dam with $63 million in funding from Congress, but it later became clear that the agency had a $270 million project in mind.” And I wrote regarding Jerry Brown’s father that “in pushing for approval of the huge State Water Project in California in 1959, Gov. Pat Brown kept throwing out a bogus cost estimate of $1.75 billion, even though he knew it would cost far more, as he later admitted.”

Liberals, such as Maddow, who hunger for big government infrastructure projects would cure their misguided lust by reading Cadillac Desert. Written by an environmentalist, I think it is one of the best public policy books of recent decades.

I’ve written about government cost overruns here, partly drawing from Flyvbjerg’s excellent research on the topic.