Topic: Tax and Budget Policy

Bush’s Big Government Legacy: DHS

In the months and years after the 9/11 disaster, federal policymakers did what they usually do after crises: they increased spending and seized more power. At the Bush administration’s urging, Congress created the Department of Homeland Security in 2002 as a complex amalgamation of 22 different federal agencies.

President Bush promised that DHS would “improve efficiency without growing government,” while creating “future savings achieved through the elimination of redundancies inherent in the current structure.” The DHS would promote “operational efficiencies,” “better asset utilization,” “targeted, effective programs,” etc, etc.    

It did not turn out that way. Bush’s promise of creating a lean, efficient DHS was just empty rhetoric. DHS’s budget tripled from $18 billion in 2002 to $57 billion by 2013  (Table 4.1). The DHS workforce expanded from a huge 163,000 employees in 2004 to an even larger 193,000 by 2013.

A small bit of good news is that taxpayers may be spared the costs of a planned DHS Taj Mahal. From the Washington Post yesterday:

The construction of a massive new headquarters for the Department of Homeland Security, billed as critical for national security and the revitalization of Southeast Washington, is running more than $1.5 billion over budget, is 11 years behind schedule and may never be completed, according to planning documents and federal officials.

It looks like gridlock was the taxpayers’ benefactor in this case:

…the capital region’s largest planned construction project since the Pentagon — has become a monumental example of Washington inefficiency and drift. Bedeviled by partisan brawling, it has been starved of funds by both Republicans and Democrats.

Bigness and centralization rarely lead to quality and efficiency in government. So let’s hope that this Bush-era project is laid to rest and that policymakers start focusing on those “future savings” that we were promised.

Washington Steers Investment Astray

Experience shows that green business subsidies are a green light for misallocation and inefficiency. Subsidy programs seem to prompt company leaders to think:

  • “Washington experts say this is a good idea. Let’s do it!”
  • “Yeehaw, we’re getting free money. Let’s blow the bank!”

Those sorts of thoughts seem to have steered Southern Company into building a very expressive boondoggle project in Mississippi. The clean coal plant is to include a complex carbon capture system with a 62-mile pipeline. The Washington Post reports:

The only thing the Kemper power plant is burning now is money. The plant has suffered almost every kind of cost overrun, beset by bad weather, labor costs, shortages and “inconsistent” quality of equipment and materials, and contractor and supplier delays. Southern said in April that it was raising the projected cost of the plant by $235 million, to a total of $5.5 billion, more than double the original estimate.

So the Kemper plant yielded to Edwards’ Law of cost overruns. When the government subsidizes large and complex projects, costs tend to double. The Southern plant “received a $270 million grant from the Energy Department and $133 million of federal investment tax credits — though by blowing a deadline, Southern will lose some tax benefits.”

The Post story mentions another company that was led astray by the pied piper of green subsidies:

The electric utility AEP, one of the largest U.S. emitters of greenhouse gases, built a pilot plant (half financed by the Energy Department) for capturing and burying CO2 from its Mountaineer plant in New Haven, W.Va. But the project was abandoned because it was too expensive.

There is one more failure mentioned by the Post: “… for years a proposed carbon capture and storage consortium called FutureGen, backed in part by federal funds, has failed to get off the ground.”

These projects indicate that when considering the waste caused by business subsidies, you cannot just tally up the federal cash out of the door. You also need to consider the private money following the government money as it is flushed down the drain.

Would You Prefer Cronyism or Paternalism With Your Government Potatoes?

Government has so many ignoble tendencies, it’s often difficult to guess which ones are driving any particular policy choice.  For example, how does the government decide which products are available for purchase using WIC benefits?  As reported today in DC political newspaper, The Hill:

A new rider to the 2014 funding bill for the Agriculture Department forbids the agency from excluding “any variety of fresh, whole, or cut vegetables, except for vegetables with added sugars, fats, or oils, from being provided as supplemental foods” under the Women, Infants and Children nutrition program

Rep. Mike Simpson (R-Idaho) is a lead sponsor of the language and can be expected to defend it from attacks during a full committee markup of the bill. 

The Agriculture Department excluded white potatoes from its list of approved items in 2009 because it argued they do not contain enough nutritional value and people shouldn’t be encouraged to buy them. Lawmakers fighting the exclusion are predominantly from the largest potato-growing areas such as Idaho and Maine.

I’m hopeful that Congress and the USDA will figure out just the right mix of paternalism and cronyism needed to ensure the effectiveness of federal food assistance programs.

More Infrastructure? Cut Business Taxes

Infrastructure is in the news as policymakers face a deadline to pass a new highway bill. President Obama visited the Tappan Zee Bridge yesterday and said that “rebuilding America … shouldn’t be a partisan issue,” and then cast blame on the Republicans.

The president is right that America ought to have better infrastructure. But the leaders of both parties are overlooking the most straightforward and powerful way to do it: slashing taxes on business investment.

Most of America’s infrastructure is provided by the private sector, not governments. In fact, private infrastructure spending—on factories, freight rail, cell phone towers, pipelines, refineries, and many other items—is more than four times larger than federal, state, and local government infrastructure spending combined. BEA Table 1.5.5 shows that gross private fixed investment in 2013 was $2.56 trillion, while investment by all levels of government was $606 billion.

Private investment was $2.05 trillion when you take out residential. And government investment was $448 billion when you take out defense. Thus, when infrastructure is measured this way, private investment is also more than four times larger than government investment.

Why do U.S. companies spend more than $2 trillion a year on infrastructure? They do it in the hopes of earning profits years down the road from often risky investments. The government stands in the way of these growth-generating investments by confiscating a large share of those profits with income taxes.

We have the highest federal-state corporate income tax rate in the world at 40 percent, which sends a strong signal to manufacturers, utilities, energy firms, and other infrastructure companies not to expand and upgrade their facilities. If policymakers want infrastructure, they should slash the federal corporate income tax rate from 35 percent to 15 percent, which is the rate in Canada after recent reforms.

Another reform is “capital expensing,” meaning allowing businesses to immediately deduct the cost of new fixed investments. That tax treatment would be a huge simplification, and it would end the anti-investment bias in our income tax system. In recent years, Congress has passed temporary and partial capital expensing measures, but we really need a permanent policy change so that businesses could plan for the long term.

Also, expensing should be expanded to include business structures, such as factory buildings, and not just business equipment as has been the case in recent years. The chart at the bottom shows that real U.S. investment in structures was hammered by the recession and still remains at disturbingly low levels (BEA Table 1.5.6).

Cost Overruns Fuel “Transportation Cliff”

Congress is currently debating options to solve the “transportation cliff.” Broadly, the federal government spends more on highways and transit than it collects in fuel tax revenue, which has depleted the Highway Trust Fund. One reason for the imbalance is the federal government’s inability to control costs on projects. Federal transportation projects frequently go over budget.

This morning’s Washington Post details a cost overrun in Congress’ back yard. Arlington County, just across the Potomac River from Washington, D.C., is building a 4.5 mile street car project. Costs are currently estimated at $358 million—up $100 million from original estimates and up $48 million from just last year. If the project goes ahead, federal taxpayers are on the hook for $140 million of the project’s costs.

This is just one of many examples of government transportation projects going over budget. Transportation cost overruns are not new. A Government Accountability Office report of federal highway projects found that a quarter of them went over budget. Costs of the infamous Big Dig in Boston grew from $2.6 billion to $14 billion.

A study by Danish economists in 2003 examined 258 large transportation projects across Europe and North America. Eighty-six percent of projects went over budget; the average cost overrun was 28 percent. Rail projects were the worst offenders, with an average cost overrun of 45 percent.

Why does this happen? In the United States, cost overruns are partly caused by the complex nature of transportation funding, which reduces political responsibility. The federal government collects much of the revenue, divides it up, and sends it back to the states. Grants are handed out mostly by formula, and the states are generally not rewarded for using the money in an efficient and frugal manner.

As a result, neither level of government has an incentive to control costs. When a project goes over budget, the federal government often points the finger at the state government and the state often returns the gesture. GAO frankly said that “this fragmented approach impedes effective decision making.”

Controlling spending on projects would help to close the $14 billion annual gap between spending and revenue in the Highway Trust Fund. Unfortunately, the new Senate highway bill actually increases spending, and it fails to address wasteful spending problems such as cost overruns.

A better approach is the TEA proposal by Sen. Mike Lee and Rep. Tom Graves, which would devolve most highway and transit spending to the states. State and local governments would have stronger incentives to control project costs if it were their own taxpayers footing the bill.

Cut Spending Because Government Hurting Nation

I have posted an updated plan to cut spending by one fifth and balance the federal budget. These cuts are not the only ones needed, but they are a mix of reasonable reforms spread broadly across the government.

A new poll discussed in Govexec.com finds that “Americans have more confidence in the abilities of individuals and local organizations to effect positive political and social change in this country than they do in the federal government … Fifty-eight percent of respondents said they believed the federal government was ‘mostly hurting’ the country with respect to the ‘major issues and challenges’ confronting America today.”

My fellow Americans, you have it exactly right. The enormous size of the federal government is harming the economy, society, individual freedom, and good governance in the nation. That is why spending cuts would be a good idea whether or not the federal government was running budget deficits.

Some economists claim that cutting government spending would hurt the economy, but that idea is based on faulty Keynesian theories. In fact, federal spending cuts would shift resources from often mismanaged and damaging government programs to more productive private sector activities, thus increasing overall productivity, output, and incomes.

The federal government’s fiscal mess is an opportunity to make reforms that would both spur growth and expand freedom. My new plan includes a menu of cuts to individual subsidies, business subsidies, so-called entitlements, aid to the states, and the military. There are also numerous activities that can be removed from the federal budget by privatization, such as air traffic control, passenger rail, and electric utilities.

These and other reforms are discussed further in essays at DownsizingGovernment.org.

Piketty Should Focus on Increasing the Scope of Markets, Not Expanding the Power of Government

In his best-selling book Capital in the Twenty-First Century (Harvard University Press), French economist Thomas Piketty is concerned with equality of outcome, not equality under a rule of law safeguarding one’s unalienable rights to liberty and property. 

He finds that inequality of income and wealth is increasing as the return on capital assets exceeds the growth of real GDP.  His policy for reducing inequality is to use the power of government to impose very high marginal tax rates on the incomes of the rich and near rich, and also impose an annual wealth tax.  His goal is “to put an end to such incomes.”

Piketty’s leveling schemes in the pursuit of “social justice” would undermine the primacy of property rights under the U.S. Constitution, adversely affect incentives to save and invest, stifle entrepreneurship, and slow economic growth. He seems more interested in penalizing the rich than in thinking of ways to create wealth by expanding opportunities for market exchange.