Topic: Tax and Budget Policy

It’s a Very Merry Christmas for Washington Insiders

Last year, while writing about the corrupt and self-serving behavior at the IRS, I came up with a theorem that explains day-to-day behavior in Washington.

Simply stated, government is a racket that benefits the D.C. political elite by taking money from average people in America

I realize this is an unhappy topic to be discussing during the Christmas season, but the American people need to realize that they are being pillaged by the insiders that control Washington and live fat and easy lives at our expense.

If you don’t believe me, check out this map showing that 10 of the 15 richest counties in America are the ones surrounding our nation’s imperial capital.

Who would have guessed that the wages of sin are so high?

D.C., itself, isn’t on the list. But that doesn’t mean there aren’t a lot of people living large inside the District.

Carbon Taxes vs. Carbon Subsidies

To address global warming, many economists advocate raising carbon taxes while lowering income taxes or other distorting taxes. This makes sense in principle—if global warming concerns are valid—but in practice the approach can easily generate more cost than benefit.

For those who believe global warming merits a policy response, therefore, the question is whether any policy change can generate greater benefit than cost.

The answer is yes: removal of existing carbon subsidies. As documented by economist Lucas Davis (Berkeley), many countries keep gasoline and diesel prices far below market levels, thus encouraging over-consumption. These subsidies harm economic efficiency, independent of global warming.

Other policies have the same features as carbon subsidies: they reduce economic efficiency and encourage over-consumption of energy. One example is the deductibility of mortgage interest, which means bigger houses and therefore higher heating and cooling bills. A second example is agriculture subsidies, which encourage production in inefficient locales that require energy-intensive techniques like irrigation.

Repeal of all such policies is thus a no-brainer. When policy is shooting the economy in the foot, the best response is less shooting, not new taxes to fund a bullet-proof shoe.

Bernanke’s View of Fiscal Policy

Federal Reserve chairmen are famous for their opaque but sophisticated-sounding comments designed to make it appear that they know more about the shape of the economy than they really do. But outgoing chairman Ben Bernanke’s direct and transparent assertions yesterday about fiscal policy also left me scratching my head.

In response to a reporter’s question about why the economy has not created more jobs:

Bernanke saw several of the usual reasons: the nature of the financial crisis, the housing bust and trouble in Europe. But he added one more. ‘On the whole, except for in 2009, we’ve had very tight fiscal policy,’ he said. ‘People don’t appreciate how tight fiscal policy has been.’

In the usual (and weird) Keynesian view of the economy, government deficits are stimulative while surpluses are “tight” or destimulative. The following chart (based on CBO) shows that in the four years after 2009, we had $4.4 trillion of federal deficit spending, or supposed Keynesian stimulus. Calling that “very tight fiscal policy” is absurd.

Edwards Chart

Low Job Satisfaction in the Federal Bureaucracy

Other than providing generous pay and fat pensions, many federal agencies are not great places to work, according to federal employees themselves on a new survey.

A Washington Post story summarized the OPM results:

 “The average government worker comes in 13 points below the average private-sector employee in terms of job satisfaction, according to the ‘Best Places to Work in the Federal Government’ report.

‘This is an ongoing train crash,’ said Max Stier, president of the Partnership for Public Service.

Hay Group, which collaborated on the data, found that job satisfaction in the private sector was not only higher than in the public sector, it even climbed since last year — from 70.0 to 70.7 points out of 100 — all while the government numbers fell.

Of the 10 questions that both public and private employees answered, government scored higher on only question: Do you like the kind of work you do?

On every other question, including how well colleagues cooperate and how well management keeps employees informed, private-sector workers gave their organizations higher marks.”

During the Bush years, government failures were explained away by liberal pundits as being the result of a Republican administration that (supposedly) did not believe in government. But the government-loving Obama administration has now been in office five years and federal employees are more dissatisfied than they have been in at least a decade.

Many liberal experts—such as these folks—will admit that the government bungles a lot of its activities. They usually call for reforms like more coordination, reduced overlap, and better leadership to solve the government’s mismanagement problems.

However, the government will never operate as effectively as private enterprise for many reasons. One is that government workplaces will always be buried under piles of rules and regulations that frustrate workers and stifle initiative. Another is that the government has rigid pay structures that don’t differentiate between the slackers and the hard workers. Ludwig von Mises discussed some of the fundamental differences between private enterprises and government bureaus in his book Bureaucracy seven decades ago. Little has changed since then, despite repeated efforts to “reinvent government.”

One reason why our federal government is a particularly poor performer is that it has become so large, complex, and immune to oversight. If Americans want Washington to work better, they should insist that it be downsized as much as possible. Some agencies should be abolished, such as the lowest scoring agency on the new survey, the Economic Development Administration, which is an unneeded pork barrel machine. Other agencies should be privatized, such as the low-scoring Transportation Security Administration.

Less would be more when it comes to government and its performance.

Republicans Join Democrats to Bust the Federal Budget

Last fiscal year Uncle Sam had some budget good news.  After running $1 trillion-plus deficits four years in a row, Washington had to borrow “just” $680 billion in 2013. 

True, that was the fifth highest deficit in history, 50 percent greater than the pre-financial crash record.  But it’s only the taxpayers’ money, so what’s the big deal? 

Now Republicans and Democrats have come together on Capitol Hill to increase both outlays and taxes.  Bipartisanship in action! 

That the Democratic Party wants to spend more is hardly surprising.  But the GOP has demonstrated yet again that its principal role in Washington is to hold the coats of Democrats who raid the Treasury.

The legislation adopted by the House drops sequestration, which actually trimmed federal outlays, and hikes spending over the next two years by $62 billion.  In return, Congress promises to lower the collective deficit over the next decade by $85 billion. 

The accord raises revenue, including $12.6 billion in airline taxes. There are a few spending reductions—kind of. 

As I point out in my latest Forbes online column:

in the same bill the House GOP voted to drop discretionary spending cuts for 2014 approved just two years ago.  Yet the new entitlement caps are slated to take effect after two presidential elections and four congressional elections.  Which means the reductions will never occur.

Of course, holding only the House means the Republican Party has to compromise, as it learned during the recent health care battle.  However, a budget fight would have been far easier.  The GOP merely had to support the fiscal status quo, sequester included, unless the Democrats offered equivalent alternative cuts. 

Earlier this year the Congressional Budget Office highlighted the stakes:  “Between 2009 and 2012, the federal government recorded the largest budget deficits relative to the size of the economy since 1946.”  The debt-GDP ratio “is higher than at any point in U.S. history except a brief period around World War II, and it is twice the percent at the end of 2007.”

Even More on Ryan-Murray Budget Deal

In the Wall Street Journal, Peggy Noonan calls the Ryan-Murray budget deal a “step in the right direction,” which echoes a claim by Rep. Paul Ryan. She says the deal “goes in the right general direction, not the wrong one.”

But how could a deal composed of spending and revenue increases possibly be the right direction when the government is already far too large? Noonan points to savings from “a little entitlement reform” that will “compound in the outyears.” She seems to be referring to planned health care provider cuts in 2022 and 2023, but those tiny trims are purely smoke and mirrors.

Noonan says “the deal breaks the caps for discretionary spending but fortunately leaves most of the sequester intact.” But that is not true for 2014, which is the only year that matters in a discretionary spending deal since appropriations is an annual process. Indeed, this deal proves that Congress can’t be trusted on caps or other sorts of promises for future discretionary spending restraint.

Before this deal, 2014 discretionary spending was to be sequestered $20 billion and capped at $967 billion. I had thought that GOP leaders would perhaps agree to put aside the $20 billion cut in exchange for some actual entitlement reforms. But the deal hikes 2014 spending to $1.012 trillion, or $45 billion above the current law amount. That’s not “moderate progress” as Noonan says, but a total GOP cave-in.

Noonan calls the deal a “confidence-building measure” that could “encourage both parties toward bigger agreements, such as tax reform.” In fact, approval of this tax-and-spending deal will blow the trust of fiscal conservatives that GOP leaders could negotiate any reasonable deal with Democrats on bigger issues such as tax reform. Rather than build confidence, this deal will undermine the confidence of conservative voters that Republican leaders are on their side. Sadly, this deal shows that today’s GOP leaders would probably be taken to the cleaners by the Democrats on a major tax or entitlement reform deal.

Other observations on this bad deal are here and here.

More on the Ryan-Murray Budget Deal

The Ryan-Murray budget deal is remarkably bad when you look at the details. If the Republican Party is supposed to be the fiscally conservative party, there is virtually nothing Republican in the agreement. The Democrats could have written the whole thing themselves. It raises spending and taxes, and reduces the deficit only in a jury-rigged scorekeeping kind of a way that won’t actually be realized.

This analysis by Republicans on the Senate Budget Committee (SBC) provides details. The last page shows the year-by-year numbers.

The deal raises spending $63 billion in 2014 and 2015, split between defense and nondefense programs. That is a lot of money even by Washington standards, and it effectively guts the Budget Control Act of 2011. At least it guts the authority of it; appropriators now know that if they whine and complain a bit, future-year spending caps will dissolve like butter under a hot knife.

In return for the spending hike, the deal creates $85 billion of savings on paper. According to the SBC analysis, $34 billion of those savings are actually revenue increases and $51 billion are spending reductions. So there are more spending hikes in this package ($63 billion) than claimed spending cuts ($51 billion). So this agreement makes government bigger, not smaller, even by its own accounting.

Here’s the most astounding thing: $47 billion of the $85 billion in claimed savings are scored to occur in 2022 and 2023. So the package hikes spending right now, but promises to deliver more than half of the offsetting savings a decade from now.

Most of the 2022 and 2023 savings ($28 billion) are supposed to come from putting caps on entitlement spending in those years. Senate Budget Committee Chairman Jeff Sessions says these savings are of “dubious validity,” but he is being polite. After all, we now know that Republicans won’t stick with caps when push comes to shove, so I would call those future caps “worthless.”

If we count the 2022 and 2023 entitlement savings as being worth zero, we are left with a budget package that hikes spending $63 billion, cuts other spending just $23 billion, and raises revenues $34 billion. With fiscal results like that, I’d take gridlock over bipartisan agreement any day.

For more on the budget deal, click here.