Topic: Tax and Budget Policy

Congress Promotes Abuse and Corruption

One story after another emerges about dysfunctional federal programs plagued by waste, fraud, and abuse. The core problem is that the government has grown so large that trying to make it function with efficiency and soundness has become impossible.

But Congress compounds the problem by creating programs that are ideal targets for crooks and scammers, and they resist repealing them even after years of scandal. The Earned Income Tax Credit, for example, has long suffered from an “improper payment” rate of more than 20 percent, which translates into throwing $10 billion of our hard-earned money down the drain every year. Whatever the policy arguments in favor of the program, that level of waste is hugely unfair to taxpayers and the program ought to repealed on this basis alone.

The Washington Post discusses another long-abused activity today—contract set-asides for small businesses. The article profiles how a Virginia businessman hit the jackpot with $1 billion of federal contracts by posing as a “disadvantaged” and “small” business under the Small Business Administration’s 8(a) program. The Post found that this Mercedes-driving owner of a luxury home is certainly not “disadvantaged,” and his business empire is not “small.”   

The whole thing is disgusting, and I suspect a congressional committee will hold an oversight hearing to pretend to be concerned about the case. But the SBA 8(a) program gets abused over and over, as do other federal preference activities, such as Alaska Native Corporations. All such preferences ought to be abolished, and the government should live up to the goal of “Equal Justice Under Law” engraved on the Supreme Court building.

Indeed the entire SBA ought to be abolished. The agency’s programs distort the economy and promote crony capitalism. Americans are sick of dysfunction in Washington, but if they want the government to operate with any degree of integrity and competence they should demand much less of it.

Energy Subsidies vs. Energy Progress

If we did a poll of free market economists about federal programs that are the most wasteful and ridiculous, energy subsidies would be near the top of the list. It’s not just that energy subsidies make no sense in economic theory, but also that there are so many news stories highlighting the folly that it’s hard to see why policymakers persist in wasting our money.

From the Washington Post on Friday:

The Department of Energy failed to disclose concerns about a green-technology company that won $135 million in federal funding but ended up filing for bankruptcy in September, according to a watchdog report released this week. DOE Inspector General Gregory Friedman noted that the firm, San Francisco-based Ecotality, is still due to receive $26 million from the agency for testing electric vehicles.

The Energy Department awarded the firm $100 million in 2009 Recovery Act funding for that initiative, in addition to a combined $35 million from a separate program to help pay for testing vehicles

Ecotality is among a number of failed firms that received stimulus funding through an Obama administration initiative to support green-technology companies during the recession. Solyndra, a Silicon Valley-based solar-panel maker, stands as perhaps the most high-profile example. The business collapsed after receiving more than a half-billion dollars in Recovery Act money. Other examples include Beacon Power , a Massachusetts-based company that received at least $39 million from the federal government, along with Michigan-based battery manufacturers LG Chem and A123, which landed grants worth $150 million and $249 million, respectively.

On Sunday, the Washington Post profiled the economic chaos, central planning, and wasteful lobbying generated by federal mandates for cellulosic ethanol:

Congress assumed that it could be phased in gradually, but not this gradually. This year refiners were supposed to mix about one billion gallons of it into motor fuel. So far, there has been hardly a drop. More than a dozen companies have tried and failed to find a profitable formula combining sophisticated enzymes and the mundane but costly and labor-intensive job of collecting biomass.

To reach the ethanol goals set by Congress, the government came up with a byzantine implementation plan. Each gallon of renewable fuel has its own 38-character number, called a “renewable identification number,” to track its use and monitor trading. There are different types of these RINs for different biofuels, including corn-based ethanol, cellulosic ethanol and biodiesel.

In February of each year, refiners who fail to provide enough renewable fuel to the blenders who mix ethanol and gasoline must buy extra RIN certificates. When companies have extra credits for renewable fuels, the RINs can be banked and sold in later years. If there are not enough renewable fuels overall, the price of RINs rises — and provides an incentive to produce more.

And in a related story on ethanol, the Post found:

Five years ago, about a dozen companies were racing to start up distilleries that would produce enough cellulosic ethanol to meet the congressionally mandated target of 16 billion gallons a year by 2022 … The Agriculture Department provided a $250 million loan guarantee for the Coskata plant. Today, most of the dozen contenders have gone out of business or shelved their plans.

Federal subsidies and mandates for ethanol and other energy activities are sadly causing the diversion of billions of dollars of capital to uneconomic uses. That’s the bad news.

But there is good news on the energy front, which comes from far outside of Washington. The Wall Street Journal last weekend profiled “the little guys,” the market entrepreneurs, who were behind the shale energy revolution:

The experts keep getting it wrong. And the oddballs keep getting it right. Over the past five years of business history, two events have shocked and transformed the nation. In 2007 and 2008, the housing market crumbled and the financial system collapsed, causing trillions of dollars of losses. Around the same time, a few little-known wildcatters began pumping meaningful amounts of oil and gas from U.S. shale formations. A country that once was running out of energy now is on track to become the world’s leading producer.

The resurgence in U.S. energy came from a group of brash wildcatters who discovered techniques to hydraulically fracture—or frack—and horizontally drill shale and other rock. Many of these men operated on the fringes of the oil industry, some without college degrees or much background in drilling, geology or engineering.

Thank goodness for the oddballs. And thank goodness for the market system that channels the brashness into creating growth for all of us, not just the favored few getting handouts from Washington.

The Sugar Program Is Central Planning

House and Senate negotiators are working out details of a big farm bill that may pass this year. No industry in America is as coddled as farming, and no industry is as centrally planned from Washington. The federal sugar program is perhaps the most Soviet of all. Here’s a sketch of the sugar program, which the supposedly conservative, tea party-dominated lower chamber may soon ratify:

  • Purpose. The federal sugar program is designed to enrich sugar producers, such as the wealthy Fanjuls, and rip off sugar consumers by keeping domestic prices artificially high. In recent decades, U.S. sugar prices have often been two or more times world prices. The federal government achieves that result by price guarantees, trade restrictions, production quotas, and ethanol giveaways.
  • Guaranteed Prices. The Department of Agriculture runs a complex loan program to support sugar prices. Essentially, the government promises to buy sugar from processors at a set price per pound. Processors can sell to the government, or they can sell in the marketplace if the (manipulated) market price is higher.
  • Trade Restrictions. Complex import barriers called “tariff rate quotas” help to maintain high domestic sugar prices. Imports are restricted to about one quarter of the U.S. market, and each foreign country (except Mexico) is allocated a particular share of imports.
  • Production Quotas. The government imposes quotas, or “marketing allotments,” on U.S. producers. The United States Department of Agriculture decides what total U.S. sugar production ought to be and then allots quotas to beet and cane sugar producers. Most sugar beet production is in Minnesota, Idaho, North Dakota, Michigan, and California. Most sugar cane production is in Florida and Louisiana.
  • Ethanol Giveaway. If prices fall below certain levels, the USDA is required to fire up a sugar-for-ethanol program to channel sugar away from the food industry.

The USDA is supposed to run the sugar program at no taxpayer cost, which makes the central planning even trickier. The agency must fiddle to adjust imports, quotas, and the ethanol giveaway to optimally fatten the wallets of sugar producers, while not allowing the domestic (manipulated) market price to fall so low as to impose taxpayer costs.

A possible wrench in the works of the current farm bill is that the sugar program is on track to cost taxpayers perhaps hundreds of millions of dollars this year (see here and here). So if conservatives in Congress vote for an unreformed sugar program this year, they would be not only voting for central planning, corporate welfare, higher consumer prices, harm to U.S. food manufacturers, and environmental damage, they would be voting for higher taxes as well.

The Congressional Research Service gives a brief overview of the central planning here. You can see that sugar beets are allotted exactly 54.35 percent of production (definitely not 54.34 or 54.36), and that federal planners have decreed that the just price (“loan rate”) for sugar cane is 18.75 cents per pound (not 18.74 or 18.76). 

The USDA has more on the program here. This table shows that the Fanjuls’ Florida Crystals company received a quota in 2013 of exactly 910,521 tons. So 910,521 is certainly too little and 910,522 is absolutely too much. Now if only the planners at HHS had used such precision in designing the Obamacare website! 

For more on the sugar racket, see here and here.

The Sickness of Government

People shouldn’t be surprised about the botched roll-out of Obamacare and all the damaging effects of the law that are now generating headlines. Over the decades, federal efforts to subsidize and manipulate the economy have failed over and over again.

That lesson has been driven home to me in researching Downsizing Government. Farm policies, for example, have been an ongoing boondoggle for more than eight decades. President Herbert Hoover’s Federal Farm Board blew $500 million trying to stabilize crop markets, but it did the opposite by inducing overproduction and depressing prices. Every farm bill since then—including the one moving through Congress right now—has been based on two very dumb ideas: that farm businesses need welfare and that agriculture needs government central planning.

I recently came across “The Sickness of Government,” (PDF) a 1969 essay by famed management theorist Peter Drucker. It is strikingly relevant to the problems we see in Washington today from Obamacare, to farm programs, to IRS abuse, to NSA spying. Unlike, say, Ayn Rand–who at the time was writing about government from the standpoint of individual freedom–Drucker was writing from the practical perspective that Big Government simply wasn’t working.

Here are some excerpts from Drucker, but his whole essay is worth reading:

ICYMI: FMCS

During the hullaballoo around the government shutdown, the Washington Examiner published a jaw-dropping series of stories about blatant waste in an obscure federal agency called the Federal Mediation and Conciliation Service. These stories shouldn’t be missed.

Reporter Luke Rosiak writes:

One federal employee leased a $53,000 take-home car with taxpayer money in apparent defiance of federal regulations and regularly billed the government for service at shops such as BMW of Fairfax.

Others charged the government monthly for family members’ cell phones and high-end TV packages and Internet at home — and even at second homes.

Managers freely made out checks to employees without requiring documentation of how it would be spent, giving $1,316 directly to one who said she was reimbursing herself for furniture she bought for a “home office” and using convenience checks to give workers bonuses.

Federal bureaucrats dole themselves these perqs in an agency where the median annual salary is already $120,000. Federal pay, of course, is something Chris Edwards has highlighted for a long time.

Rosiak’s stories on FMCS are worth a read. They’re worth more than that—like maybe some congressional oversight. Because internal oversight is failing.

“With three whistle-blowers gone,” he concludes, “there is little indication that the spending abuses have stopped.”

Big Government Wants in Your (Spare) Bedroom

It’s very expensive to visit many cities in the United States. New York City is perhaps the most expensive, not only because of the finite space in such a densely populated city, but because of numerous taxes on lodging and regulations like rent control that artificially create lodging shortages.

Nevertheless, there is still high demand to visit cities like New York and the market has found a way to make those visits more affordable. AirBnB is an online service that allows members to stay in people’s spare rooms, apartments, and homes in cities all over the world, often much more cheaply than the average hotel stay in the area.

New York State Attorney General Eric Schneiderman, however, is challenging the entrepreneurial innovation—probably under pressure from special interests who would like the government to stifle their competition. This is crony capitalism as usual. As we’ve seen here in DC, established businesses like brick and mortar restaurants and taxicab drivers use their connections to government to squeeze out competition like food trucks and the Uber personal car service that challenge the status quo.

Cato has long supported free markets, entrepreneurship, and innovations to make goods and services more affordable. Government overreach like General Schneiderman’s campaign punishes not only AirBnB hosts and travelers, but also the New York economy as a whole as fewer people will be able to visit New York. I was on Fox Business last night talking about this protectionist government overreach. You can watch that here:

Iceland, Switzerland, and the Golden Rule of Fiscal Policy

Being a glass-half-full kind of guy, I look for kernels of good news when examining economic policy around the world. I once even managed to find something to praise about French tax policy. And I can assure you that’s not a very easy task.

I particularly try to find something positive to highlight when I’m a visitor. While in the Faroe Islands two days ago, for instance, I wrote about that jurisdiction’s new system of personal retirement accounts.

And now that I’m in Iceland, I want to focus on spending restraint.

As you can see from this chart, lawmakers in this island nation have done a reasonably good job of satisfying the Mitchell Golden Rule over the past couple of years. Nominal economic output has been growing by 6.1 percent annually, while government spending has risen by an average of 2.8 percent per year.

Iceland Spending Restraint

If Iceland continues to enjoy this level of growth and can maintain this modest degree of fiscal discipline, the burden of government spending will soon drop below 40 percent of GDP.