Topic: Tax and Budget Policy

No, There Are NOT Three Job Seekers for Every Job Opening

Unemployment benefits could continue up to 73 weeks until this year, thanks to “emergency” federal grants, but only in states with unemployment rates above 9 percent.  That gave the long-term unemployed a perverse incentive to stay in high-unemployment states rather than move to places with more opportunities.   

Before leaving the White House recently, former Presidential adviser Gene Sperling had been pushing Congress to reenact “emergency” benefits for the long-term unemployed.  That was risky political advice for congressional Democrats, ironically, because it would significantly increase the unemployment rate before the November elections.  That may explain why congressional bills only restore extended benefits through May or June.

Sperling argued in January that, “Most of the people are desperately looking for jobs. You know, our economy still has three people looking for every job (opening).”  PolitiFact declared that statement true.  But it is not true. 

The “Job Openings and Labor Turnover Survey” (JOLTS) from the Bureau of Labor Statistics does not begin to measure “every job (opening).”  JOLTS asks 16,000 businesses how many new jobs they are actively advertising outside the firm.  That is comparable to the Conference Board’s index of help wanted advertising, which found almost 5.2 million jobs advertised online in February.  

With nearly 10.5 million unemployed, and 5.2 million jobs ads, one might conclude that our economy has two people looking for every job (opening)” rather than three.  But that would also be false, because no estimate of advertised jobs can possibly gauge all available jobs.

Consider this: The latest JOLTS survey says “there were 4.0 million job openings in January,” but “there were 4.5 million hires in January.”  If there were only 4.0 million job openings, how were 4.5 million hired?   Because the estimated measure of “job openings” was ridiculously low. It always is.

IRS Shouldn’t Force Taxpayers Into Tax-Maximizing Transactions

While tax evasion is a crime, the Supreme Court has long recognized that taxpayers have a legal right to reduce how much they owe, or avoid taxes all together, through careful tax planning. Whether that planning takes the form of an employee’s deferring income into a pension plan, a couple’s filing a joint return, a homeowner’s spreading improvement projects over several years, or a business’s spinning-off subsidiaries, so long as the actions are otherwise lawful, the fact they were motivated by a desire to lessen one’s tax burden doesn’t render them illegitimate.

The major limitation that the Court (and, since 2010, Congress) has placed on tax planning is the “sham transaction” rule (also known as the “economic substance” doctrine), which, in its simplest form, provides that transaction solely intended to lessen a commercial entity’s tax burden, with no other valid business purpose, will be held to have no effect on that entity’s income-tax assessment. The classic sham transaction is a deal where a corporation structures a series of deals between its subsidiaries, producing an income-loss on paper that is then used to lower the parent company’s profits (and thus its tax bill) without reducing the value of the assets held by the commercial entity as a whole.

We might quibble with a rule that effectively nullifies perfectly legal transactions, but a recent decision by the U.S. Court of Appeals for the Eighth Circuit greatly expanded even the existing definition of “economic substance,” muddying the line between lawful tax planning and illicit tax evasion. At issue was Wells Fargo’s creation of a new non-banking subsidiary to take over certain unprofitable commercial leases. Because the new venture wasn’t a bank, it wasn’t subject to the same stringent regulations as its parent company. As a result, the holding company (WFC Holdings Corp.) was able to generate tens of millions of dollars in profits.

Chairman Ryan’s Budget: A Mixed Bag of Reforms

House Budget Committee Chairman Paul Ryan released his budget proposal yesterday, his last as committee chairman. This budget differs greatly from the budget request submitted by President Obama last month. Ryan would “cut” federal spending by $5.1 trillion over the next 10 years and calls upon Congress to pass pro-growth tax reform. However, Ryan’s budget is still a mixed bag from a small-government perspective.

Positive Reforms in Ryan’s budget:

  • Medicaid Block Grants: Ryan suggests block granting Medicaid to institute some fiscal sanity to this ever-growing program. This reform would reduce state government incentives to overspend and would allow them greater flexibility to innovate and cut costs. Federal spending would be reduced by $732 billion compared to baseline by this simple reform.
  • SNAP Block Grants: The Supplemental Nutrition Assistance Program (“food stamps”) would also be block granted, saving $125 billion over 10 years compared to baseline. SNAP and Medicaid block grant reforms would copy the successful approach of welfare reforms in the 1990s.
  • Medicare Premium Support: Repeating a proposal from his last several budgets, Ryan suggests changing Medicare to a premium-support model. Rather than federal spending going to health care providers, it would be directed toward health care consumers. That would hopefully generate incentives to reduce costs and improve quality. It would also allow seniors to pick the health plan that most closely matches their needs.
  • Repeals ObamaCare Spending: Ryan’s budget repeals ObamaCare’s spending components. This is his largest reduction, which would save taxpayers $2 trillion over the next ten years.

Downsides to Ryan’s budget:

  • Social Security Reform: Ryan’s budget does not tackle Social Security reform, leaving almost one quarter of the federal budget unchanged. He calls on the president and Congress to submit recommendations to reform the program, but does not submit any suggestions of his own.
  • Higher Revenue Baseline: Chairman Ryan calls for pro-growth tax reform within his budget; however, he adopts the Congressional Budget Office’s current revenue baseline. This would keep the extra revenues generated from the numerous tax hikes enacted over the last several years.
  • Delayed Reforms: Perhaps due to political concerns, many of Ryan’s reforms would not start for several years. His SNAP block grant would not begin for five years, and his Medicare premium support model would not start until 2024.
  • Keeps Higher Spending: In December, Ryan and Senate Budget Chairman Patty Murray agreed to increase discretionary spending levels for fiscal year 2014 and fiscal year 2015. This partly gutted the bipartisan Budget Control Act from 2011. Ryan’s budget retains the higher spending levels.

In sum, Ryan’s budget would not solve the government’s overspending problem. But it would be a good first step to reforming the federal behemoth.

Chairman Ryan’s Supposed Budget Slashing

Chairman Paul Ryan’s budget released today “cuts spending by $5.1 trillion over the next ten years,” the document claims. Similarly, the headline from the Washington Post says that Ryan’s budget “would slash $5 trillion over next decade.”

Yet looking at the details of Ryan’s proposal, the federal government will spend $1.5 trillion more in 2024 than it is expected to spend in 2014.

How can spending both be “slashed” and increased by $1.5 trillion? It’s because of the bizarre way that Washington discusses spending, which is known as baseline budgeting.

Here is a graph of Ryan’s proposed federal outlays.

 

The graph shows that under Ryan’s budget, federal spending increases every year.

But here is another graph showing Ryan’s spending compared to the Congressional Budget Office (CBO) baseline projection of spending made in February.

Notice the gap? That’s the $5 trillion that is “slashed” from the federal budget.

In Washington, all spending proposals are compared to the CBO’s baseline projections. The CBO releases these projections a couple times a year, which are based on their estimates of current federal law. Every proposal is then compared to this baseline. Inside-Washington discussions of spending cuts or increases are relative to CBO’s figures.

But this is a very different way of thinking about budgeting than used by families, who don’t assume that their income will go up automatically every year. Families prioritize, and they cut back when they need to make the books balance. Sadly, few proposals in Congress make tough trade-offs and cut actual levels of spending.

Chairman Ryan’s budget would spend $42.6 trillion over the next ten years. Opponents will say that Ryan’s budget slashes federal spending, while supporters will say that it includes large budgetary savings. The reality is that Ryan’s budget would increase spending at an annual average rate of 3.5 percent, or from $3.54 trillion in 2014 to $5.0 trillion in 2024. Only in Washington would that be considered substantial restraint, let alone slashing.

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.