Topic: Tax and Budget Policy

A Decent but Underwhelming Jobs Report

The headlines from today’s employment report certainly seem positive.

The unemployment rate has dropped to 6.3 percent and there are about 280,000 new jobs.*

But if you dig into the details of the latest numbers from the Bureau of Labor Statistics, you find some less-than-exciting data.

First, here is the chart showing total employment over the past 10 years.

Total Employment

This shows a positive trend, and it is good that the number of jobs is climbing rather than falling.

But it’s disappointing that we still haven’t passed where we were in 2008.

Indeed, the current recovery is miserable and lags way behind the average of previous recoveries.

But the really disappointing news can be found by examining the data on how many working-age people are productively employed.

The Bureau of Labor Statistics has two different data sets that measure the number of people working as a share of the population.

Here are the numbers on the labor force participation rate.

Labor Force Participation

As you can see, we fell down a hill back in 2008 and there’s been no recovery.

The same is true for the employment-population ratio, which is the data I prefer for boring, technical reasons.

Emplyment Population Ratio

Though I should acknowledge that the employment-population ratio does show a modest uptick, so perhaps there is a glimmer of good news over the past few years.

But it’s still very disappointing that this number hasn’t bounced back since our economic output is a function of how much labor and capital are productively utilized.

In other words, the official unemployment rate could drop to 4 percent and the economy would be dismal if that number improved for the wrong reason.

* Perhaps the semi-decent numbers from last month are tied to the fact that Congress finally stopped extending subsidies paid to people for staying unemployed?

DoD’s Misaligned Incentives

The Department of Defense procurement problems are extensive. Last week, my colleague Chris Edwards discussed a failed DoD attempt to replace the president’s helicopter fleet. The project was canceled after several years due to large cost overruns and schedule delays, which ended up wasting $3.2 billion.

Now, a new report by the Government Accountability Office (GAO) provides further insights into the DoD’s troubled procurement processes. GAO tracked the progress of 80 weapons systems, which have total projected costs of $1.5 trillion. Combined, all of these projects have gone over budget by a huge $448 billion. Furthermore, 42 percent of them had cost overruns greater than 25 percent.

Many of them are also well behind schedule. GAO estimates that the average project is 28 months behind schedule, up from 23 months in fiscal year 2011.

The GAO report does highlight some small improvements with DoD’s handling of the projects, albeit with a caveat: “the enormity of the investment in acquisitions of weapon systems and its role in making U.S. fighting forces capable, warrant continued attention and reform.”

Aside from huge cost overruns, the GAO also details numerous other problems within the DoD procurement process. For one thing, DoD officials face incentives that are often misaligned with taxpayer interests. Some of these incentives call for DoD officials’ close relationships with contractors, and constant demands by senior officials and policymakers for new and better technology.

The “funding dynamics” within the DoD is another problem. The agency’s officials, unlike their counterparts in private industries, are functionally rewarded for over-budget projects according to the report:

There are several characteristics about the way programs are funded that create incentives in decision-making that can run counter to sound acquisition practices… In DoD, there can be few consequences if funds are not used efficiently. For example, as has often been the case in the past, agency budgets generally do not fluctuate much year to year and, programs that experience problems tend to eventually receive more funding to get well. Also, in DoD, new products in the form of budget line items can represent revenue. An agency may be able to justify a larger budget if it can win approval for more programs. Thus, weapon system programs can be viewed both as expenditures and revenue generators.

Once weapon system procurements get underway, it is very unlikely that they will be canceled before completion. So for projects that turn into white elephants, Congress and Defense officials tend to throw good money after bad.

The GAO also notes that, unfortunately for taxpayers, these issues are not new: “while some progress has been made, too often GAO reports on the same kinds of problems with acquisition programs today that it did over 20 years ago.” In testimony before Congress yesterday, Frank Kendall, the under secretary of defense for acquisitions, said, “I’ve seen any number of attempts to improve defense acquisition. My view is many of the things we have tried have had little discernible impact.”

Major procurement reforms are clearly needed at the Defense Department. But until that happens, misaligned incentives within Congress and the DoD will continue to waste billions of taxpayer dollars.

All Aboard the Privatization Train

With the expiration of the current federal highway bill in a few months, the infrastructure issue is heating up. Newspapers are ginning up interest with stories about deficient and falling down bridges (e.g. here and here).

Diane Rehm kindly invited me to her NPR show this morning to discuss how we should move ahead with financing infrastructure. I pointed to the advantages of devolving funding to state governments and the private sector. America should embrace the global movement towards privatization and public-private partnerships for highways, bridges, airports, and other facilities.

Even Japan—previously known for its pork-barrel infrastructure spending—is beginning to embrace privatization, notes this piece at NextCity.org (h/t Nick Zaiac):

Over a 15-year period starting in 1987, the Japanese government undertook one of the most ambitious privatizations in history, moving its most heavily traveled railways from public ownership into private hands. The privatization of Japanese National Railways – whose assets on Honshu (Japan’s main island) were split into three separate companies (JR East, Central and West, each centered around one of Japan’s three major metropolitan areas) – was a roaring business success. JR East, which runs commuter, intercity and Shinkansen lines in Tokyo and the surrounding region, doubled its revenue over the 15-year period, cut its payroll by a third, upped its per-capita passenger-miles by two-thirds, all while cutting the number of accidents by nearly 60 percent and keeping fares more or less flat.

Now Osaka, Japan is looking to repeat the magic, but this time on its city subway network – which, if successful, would be the first government subway system in the country to be sold off.

… The move follows on the heels of the sale of another one of the prefecture’s railways, the … Semboku Rapid Railway.

… Not to be outdone, the Tokyo Metropolitan Government is considering selling its 46.6 percent stake in Tokyo Metro.

Minimum Wage Increase Not the Answer in Hawaii

According to reports, lawmakers in Hawaii agreed to a four-step increase in the minimum wage from its current level of $7.25, rising to $10.10 by 2018. This increase would make them just the third state to impose a double digit minimum wage, along with Connecticut and Maryland. Proponents of the increase point to the high cost of living on the island, and say that, without this increase, low-wage workers will be consigned to living in poverty. They also point to the low unemployment rate in the state as a sign that the labor markets could absorb the increased minimum wage without significant job loss. These arguments fail to look at who the proposed increases would actually affect and do not properly account for the adverse effects this legislation could have on some segments of the population.

Despite claims to the contrary, relatively few Hawaiians would benefit from the increase. For one, the median wage for many sectors that are targeted by minimum wage legislation is already above the $10.10 goal: the median wage for bellhops in 2012 was $10.12, for cashiers it was $10.41 and for amusement and recreation attendants it was $11.87. Older, more experienced workers more likely to support a family are more likely to earn above the median wage, and thus be unaffected by the minimum wage hike.  According to testimony before the state legislature, only around 14,000 people worked at the current minimum wage or less in 2012, but even this might overstate how many people would benefit from the increase; many of these workers were teenagers or secondary earners, after accounting for this, the number of full-time workers who are also the head of household falls to 3,700. Depending on which poverty measure you look at, there are between 173,000 and 231,000 people in poverty in Hawaii, so the tiny proportion of families that could benefit from the increase is little more than a drop in the bucket when looking at their broader poverty problems. The plight of these people is not trivial, but introducing broad ineffective policy that introduces distortions into the entire labor market is not the answer.

While it is true that topline unemployment rate (4.7 percent over the past four quarters) is significantly lower than the national average (7.1 percent), as is often the case, looking solely at a headline statistic leaves out many of the nuances needed to understand the context. When people not attached to the labor force or involuntary working part time for economic reasons are accounted for, their unemployment rate rises to 11.3 percent, closer to the national average, so claims that the labor market is strong enough to absorb the distortions of the minimum wage increase are not true.

Let’s See What DATA Can Do

The New York Times reported at the top of page one yesterday on the $4.1 million in payments that a single physical therapist in Brooklyn got from Medicare in 2012. It’s a shocking sum, and Medicare fraud is common in both physical therapy and the Brooklyn area. The therapist who received the money says that the billings are for his large, multi-office practice.

The point is broader: Reporters, medical trade association figures, investigators and researchers are poring over newly released data about Medicare spending. They’re strengthening public oversight and the public’s capacity to question this government program. It’s data that the American Medical Association and other industry groups fought against releasing. There is risk that the numbers will lead some to unfair conclusions, perhaps even in the case of this Brooklyn physical therapist, but the public oversight it brings to the Medicare program and the circumspection it brings to fraudsters and others will be more than worth it. Data is a powerful oversight tool.

That’s why I think it’s good news that the House of Representatives passed the DATA Act yesterday. The Digital Accountability and Transparency Act, introduced by Mark Warner (D-VA) in the Senate and Darrell Issa (R-CA) in the House, requires the federal government to adopt data standards for all federal spending and publish all of it online. This will permit the public to gather insights like the ones in that New York Times story across the vastness of the federal spending enterprise. It will make the diffuse cost of government a little more acute in the minds of many, positioning Americans to say specifically which spending should stop.

Change will not come instantly, and the legislation is not self-executing, but groups like the Data Transparency Coalition, a prime mover behind the legislation, appear poised to insist on full execution of the law. Implementation should not have the cost that the Congressional Budget Office estimated for it, and if it does, the billions saved thanks to availability of information to the public should justify the costs. If another “cost” of transparency is improvement of federal programs that should be eliminated, I think that beats the today’s status quo of having them on the books and failing.

The DATA Act is not a direct response to a 2008 Cato event asking the Obama administration to “Just Give Us the Data.” Indeed, the administration has been conspicuously unsupportive of transparency in this area, though transparency was a key campaign theme in President Obama’s first election. Cato studies in this area since then include “Publication Practices for Transparent Government” and “Grading the Government’s Data Publication Practices.” We’ll be repeating the grading study during the summer, though it’s doubtful the administration’s grades will improve by that time. We will use the data structures that the DATA Act requires in our Deepbills project, which shines light on Congress’s proposals, including its plans for spending.

I Thought Liberals Favored Diversity?

Frequent stories in the Washington Post describe failures in federal management and programs (e.g. here and here). There are also frequent stories about efforts to further centralize power in Washington. The ambitions are endless, even though the failures keep piling up.

From a Saturday story on education:

The Obama administration is making a second attempt to regulate the way the country prepares its classroom teachers, saying training programs should be held accountable to improve the quality of K-12 teachers.

Education Secretary Arne Duncan said that his department will propose regulations for teacher training programs this summer and seek public input in a process that should result in final rules in a year.

Some professions have standardized systems and national exams to ensure consistency … But teacher preparation programs vary from school to school, and each state sets its own licensing requirements. Most programs are run by universities, but some are run by nonprofit groups or school districts. They each have their own standards of admission and completion requirements.

In a nod to democracy, Secretary Duncan says that he will seek “public input” for his new national rules. But ultimately his department intends to bludgeon the education system into conformity with the threat of denying federal funds.

This story is a microcosm of the continual expansion in the federal aid system, which I’ve argued is a main cause of the erosion in American freedoms over the past century. The growth in the aid-to-state system—which has more than 1,100 programs—has undermined efficient, responsive, and frugal government in the United States.

With a track record of failures, wasteful paperwork, and stifling regulations, it is hard to believe that policymakers would want to expand the aid system further. But there is a continually barrage of proposals for increased federal aid spending and top-down regulations coming from Democrats.

Liberal Republicans such as George W. Bush have also been culpable in expanding central power through aid programs. And it was John Boehner who helped Bush foist No Child Left Behind on us. Nonetheless, there is at least an ongoing debate within the Republican Party about the wisdom of centralization.

As for the Democrats, they gush about “diversity,” “community,” and “democracy,” but their penchant for national top-down public policy is helping to destroy those very features of our free society.

Supply-Side Economics from the Founder of the Brookings Institution

“Within limits, the system of progressive taxation is defensible and effective.  Beyond a certain point, however, it dulls incentives, and may destroy the principal source of funds for new enterprises involving exceptional risks.”

–Harold G. Moulton (founder of the Brookings Instituion), Controlling Factors in Economic Development, The Brookings Institution, 1949, p. 292.