Topic: Tax and Budget Policy

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.

White House Helicopter Fleet

Did you know that the White House has a fleet of 19 helicopters? The Washington Post today discusses efforts to replace this fleet of aging Sikorsky’s with 21 new vehicles yet to be procured. The fleet is used by the president, vice president, and cabinet secretaries.

The size of the helicopter fleet seems excessive. For one thing, I understand that cabinet secretaries have become mere minions to presidential aides, so I’m surprised that they would generally need access to such high-cost transportation.

The Post story focuses on the $3.2 billion flushed down the drain the last time the White House tried to replace its helicopter fleet:

The last time the Pentagon tried to upgrade the president’s coolest ride — the fleet of helicopters that drop him at his doorstep on the South Lawn of the White House — it didn’t go well. Costs doubled. Delays sparked ridicule, then outrage. And President Obama, then just a few weeks in office, said it was “an example of the procurement process gone amok” before defense officials killed the program outright.

It was an embarrassing debacle that cost $3.2 billion and produced no usable helicopter, turning an iconic symbol of presidential power into an illustration of government waste and incompetence … 

In the wake of the Sept. 11, 2001, attacks, replacing the helicopters — which fly under the call sign “Marine One” when the president is aboard — became a priority for the Pentagon. In 2005, a team led by Lockheed Martin won the contract, beating out Sikorsky, which built the helicopters currently used in the Marine One program.

But soon it became a case study in how not to build a helicopter, analysts say. The design became so overloaded with new requirements — to be able to hover longer and at high altitudes, travel great distances without refueling, and defend against missile attacks — it essentially became an impossible task. “Too many people had a seat at the table,” said Richard Aboulafia, an aviation analyst at the Fairfax-based Teal Group …

Risking Taxpayer Dollars on DOE Loan Guarantees

In February, I highlighted the Department of Energy’s issuance of a $6.5 billion loan guarantee to build a nuclear power facility in Georgia. At the time, the project was behind schedule with cost overruns, and the project’s owners had already secured private financing. Yet DOE issued the loan guarantee anyway.

Now we’ve learned that DOE’s actions were even more foolish than previously thought. DOE waived the credit fees charged to the company—which are meant to offset the risk to taxpayers—when it issued the loan.

According to the Washington Examiner:

“Developers of a Georgia nuclear project didn’t have to pay millions of dollars in fees designed to prevent risk for taxpayers when it secured $6.5 billion in loan guarantees from the Energy Department in February, the agency confirmed Tuesday to the Washington Examiner.

The DOE calculated a zero dollar “credit subsidy fee,” which protects taxpayers if developers default, for electric utility Georgia Power – a subsidiary of Southern Co. – and Oglethorpe Power Corp. to spur completion of two large, next-generation nuclear reactors at the Vogtle power plant in Waynesboro, Ga.”

This isn’t the first time that DOE has been criticized for the handling of its loan guarantee programs, and thus risking losses to taxpayers. In 2012, the Government Accountability Office said, “if DOE underestimates these costs [credit subsidies], taxpayers will ultimately bear the cost of default.” GAO said that DOE did not follow its own processes for handling applications “potentially increasing the taxpayer’s exposure to financial risk from an applicant’s default.”

Energy loan guarantee programs should be eliminated, but closing them doesn’t seem likely under the current administration. But you would think that even this administration would favor DOE following sound lending practices to try and minimize taxpayer losses.