Topic: Tax and Budget Policy

Obama’s Budget: Spending Too High, But Bush Was Worse

By
Chris Edwards

President Barack Obama’s new budget proposes to spend $3.78 trillion in 2014, which would be 27 percent higher than spending in 2008. President Obama believes in expansive government, and he is proposing a range of new programs, including subsidies for infrastructure, preschool, and mental health care.

However, total federal outlays increased substantially faster under President George W. Bush than they have under Obama so far. It is true that Obama’s spending ambitions have been restrained by House Republicans. But looking at the raw data, it appears that the last Republican president was more profligate than the current Democratic one.

The figure shows total federal outlays, but the data is adjusted to exclude the TARP bailout amounts for all years. The Congressional Budget Office now says (page 15) that TARP will end up costing taxpayers just $22 billion overall. Yet the official federal outlay figure for 2009 included $151 billion in estimated TARP costs. That number has since been re-estimated and mainly reversed out of later-year spending totals. Therefore, TARP must be removed from federal spending totals to avoid a distorted picture of budget growth.

The figure indicates that spending jumped from $1.86 trillion in 2001 to $2.98 trillion in 2008. That’s a 60 percent jump in seven years under Bush, which works out to an annual average growth rate of 7.0 percent. (All data cited here are for fiscal years).

Then comes 2009. Usually this year would be assigned to the outgoing president because the new president comes in part way during the year and typically does not make substantial changes to the current-year budget. But Obama took steps to immediately boost spending in 2009, including pushing through the giant stimulus bill. The CBO has reported that stimulus outlays were $114 billion in 2009.

In Bush’s last budget, he proposed that 2009 spending be $177 billion above the 2008 level, but the actual increase ended up being a massive $386 billion. So you can see that Obama and Congress were mainly responsible for the huge spending leap in 2009, not Bush.

So let’s assign 2009 to Obama and measure his spending from a base in 2008 ($2.98 trillion) to his newly proposed spending for 2014 of $3.78 trillion. Spending increased 27 percent over those six years, or 4.0 percent annually. That’s far too much, but still substantially less than the 7.0 percent growth rate under Bush.

Here is another comparison:

  • Spending growth in Bush’s first seven years: 8%, 7%, 6%, 8%, 7%, 3%, 9%.
  • Spending growth in Obama’s six years: 13%, 6%, 2%, -3%, 5%, 2%.

Partisan Republicans are probably tired of fiscal conservatives and libertarians complaining about Bush’s big spending, especially when Obama has done so much damage to limited government. But Republicans are fooling themselves if they think that the overspending problem has been confined just to the other party. The sooner people understand that overspending it is a deep and chronic disease with bipartisan roots, the sooner we can start finding a lasting cure.

Yesterday the New York Times profiled a conservative group that is embracing higher federal infrastructure spending, apparently at the behest of pro-spending lobby groups. And here is another conservative group in favor of more federal spending on infrastructure, and indeed, more central planning of it. But there is nothing the slightest bit “conservative” about nationalizing spending activities that can be done—and would be done better—by state governments and the private sector.

In sum:

  • Obama’s new federal budget—spends way too much.
  • Bush’s budgets—spent way too much and created a precedent for Obama.
  • Some conservative groups—not conservative on spending.
  • Believers in a small federal government—facing a huge challenge.
  • Federal spending—reduces freedom, damages growth, harms the environment, destroys federalism and diversity, misallocates resources, undermines individual responsibility, and is often wasteful and bureaucratic.
  • The Republic—threatened by a non-stop bipartisan spending spree.
  • Solutions to all this—can be found at www.DownsizingGovernment.org.
Topics: 
Government and Politics, Tax and Budget Policy

Still Looking for the Anti-Tea Party

By
David Boaz

Covering the budget fight and President Obama’s tepid and misleading budget proposal, NPR’s Scott Horsley reported this morning on opposition from the left:

We saw sort of the counterweight to the Tea Party on the right yesterday … protesting  outside the White House.

Big rally against budget constraints, eh? Like the Tea Party rallies such as this one?

Tea Party rally

Well, not exactly like the Tea Party rallies. According to various news stories, the rally was supported by numerous groups, including the AFL-CIO, MoveOn.org, the National Organization for Women, Progressive Change Campaign Committee, Democracy for America, and National Committee to Preserve Social Security and Medicare. Speakers included Sen. Bernie Sanders, liberal activist (and brother of former presidential candidate Howard Dean) Jim Dean, and at least two members of Congress. 

And here’s how the AP reported the results:

Liberal lawmakers from Congress and a coalition of like-minded groups rallied outside the White House on Tuesday, voicing frustration at the Democratic president they say has let them down by proposing cuts to Medicare and Social Security.

“If they vote to cut Social Security, they may not be returning to Washington,” Sanders told about 100 people who gathered with signs that read “No Chained CPI” and “We earned our Social Security.”

I’m not sure the president should have too much confidence in this “counterweight to the Tea Party.”

Topics: 
Government and Politics, Social Security, Tax and Budget Policy

Pennsylvania’s Solyndra

By
Tad DeHaven

Another government-subsidized solar energy company is headed to bankruptcy. The latest casualty is Flabeg Solar U.S. Corp, a subsidiary of a German company. Flabeg’s Pittsburgh plant has been shuttered and its employees laid off. 

In 2009, the Obama administration awarded Flabeg $10 million in federal green energy tax credits. Flabeg also reportedly received a $1 million federal grant. According to the Pittsburgh Tribune-Review, the state of Pennsylvania and Allegheny County kicked in another “$9 million in job creation grants, loans and other financial aid.” 

Flabeg apparently never had a chance to use the tax credits because it was never profitable, but federal taxpayers will likely be out $1 million for the grant. State and local taxpayers are unlikely to be as fortunate. And while taxpayers lose when government places a bad bet, the broader economy also loses when politicians redirect capital toward less productive uses (in this case, completely unproductive). 

Flabeg’s demise is a reminder that it isn’t just the federal government that’s shoveling corporate welfare. Not only do state and local government subsidize commercial interests, but the handouts are often coordinated with the feds. With Uncle Sam putting money in the pot, state and local governments can find the temptation to participate in a press release announcing the creation of X number of jobs irresistible. 

Just ask former Indiana Gov. Mitch Daniels (see here, here, and here). 

On a final note, the head of a Pennsylvania environmental group offered this reaction to the Flabeg news: 

The reason government steps into these cases is because they are too risky to get private capital…But as with private investments, some companies fail.

Yes, private investments do fail. But as I note in a paper on corporate welfare, “Businesses and venture capital firms make many mistakes as well, but their losses are private and not foisted involuntarily on taxpayers.” 

Topics: 
Energy and Environment, Tax and Budget Policy

Margaret Thatcher and the Battle of the 364 Keynesians

By
Steve H. Hanke

With the death of Margaret Thatcher, and the ensuing profusion of commentary on her legacy, it is worth looking back at an overlooked chapter in the Thatcher story. I am referring to her 1981 showdown with the Keynesian establishment—a showdown that the Iron Lady won handily. Before getting caught up with the phony “austerity vs. fiscal stimulus” debate, the chattering classes should take note of how Mrs. Thatcher debunked the Keynesian “fiscal factoid.”

According to the Oxford English Dictionary, a factoid is “an item of unreliable information that is reported and repeated so often that it becomes accepted as fact.” The standard Keynesian fiscal policy prescription for the maintenance of non-inflationary full employment is a fiscal factoid. The chattering classes can repeat this factoid on cue: to stimulate the economy, expand the government’s deficit (or shrink its surplus); and to rein in an overheated economy, shrink the government’s deficit (or expand its surplus).

Even the economic oracles embrace the fiscal factoid. That, of course, is one reason that the Keynesians’ fiscal mantra has become a factoid. No less than Nobelist Paul Krugman repeats it ad nauseam. Now, the new secretary of the treasury, Jack Lew (who claims no economic expertise), is in Europe peddling the fiscal factoid.

Unfortunately, the grim reaper finally caught up with Margaret Thatcher—but not before she laid waste to 364 wrong-headed British Keynesians.

In 1981, Prime Minister Thatcher made a dash for confidence and growth via a fiscal squeeze. To restart the economy, Mrs. Thatcher instituted a fierce attack on the British fiscal deficit, coupled with an expansionary monetary policy. Her moves were immediately condemned by 364 distinguished economists. In a letter to The Times, they wrote a knee-jerk Keynesian response: “Present policies will deepen the depression, erode the industrial base of our economy and threaten its social and political stability.”

Mrs. Thatcher was quickly vindicated. No sooner had the 364 affixed their signatures to that letter than the economy boomed. Confidence in the British economy was restored, and Mrs. Thatcher was able to introduce a long series of deep, free-market reforms.

As for the 364 economists (who included seventy-six present or past professors, a majority of the Chief Economic Advisors to the Government in the post-WWII period, and the president, as well as nine present or past vice-presidents, and the secretary general of the Royal Economic Society), they were not only wrong, but also came to look ridiculous.

In the United States, the peddlers of the fiscal factoid have never suffered the intellectual humiliation of their British counterparts. In consequence, American Keynesians can continue to peddle snake oil with reckless abandon and continue to influence policy in Washington, D.C., and elsewhere.

Topics: 
Cato Publications, Finance, Banking & Monetary Policy, General, Government and Politics, International Economics and Development, Tax and Budget Policy

According to Washington Post Exposé, People Who Utilize Tax Havens Are Far More Honest than Politicians

By
Daniel J. Mitchell

Using data stolen from service providers in the Cook Islands and the British Virgin Islands, the Washington Post published a supposed exposé of Americans who do business in so-called tax havens.

Since I’m the self-appointed defender of low-tax jurisdictions in Washington, this caught my attention. Thomas Jefferson wasn’t joking when he warned that “eternal vigilance is the price of liberty.” I’m constantly fighting against anti-tax haven schemes that would undermine tax competition, financial privacy, and fiscal sovereignty.

Even if it means a bunch of international bureaucrats threaten to toss me in a Mexican jail or a Treasury Department official says I’m being disloyal to America. Or, in this case, if it simply means I’m debunking demagoguery.

The supposedly earth-shattering highlight of the article is that some Americans linked to offshore companies and trusts have run afoul of the legal system.

Among the 4,000 U.S. individuals listed in the records, at least 30 are American citizens accused in lawsuits or criminal cases of fraud, money laundering or other serious financial misconduct.

But the real revelation is that people in the offshore world must be unusually honest. Fewer than 1 percent of them have been named in a lawsuit, much less been involved with a criminal case.

This is just a wild guess, but I’m quite confident that you would find far more evidence of misbehavior if you took a random sample of 4,000 Americans from just about any cross-section of the population.

Read the rest of this post »

Topics: 
Government and Politics, International Economics and Development, Tax and Budget Policy

Investigative Reporters Tackle the Small Business Administration

By
Tad DeHaven

When it comes to reporting on the Small Business Administration, it seems to me that most journalists simply assume that if a government agency exists to “help” small businesses then it must be good. So I was pleased to read a weekend piece from two investigative journalists with the Dayton Daily News that challenges the conventional wisdom on the SBA. 

As the reporters explain, the SBA’s main job is to back loans issued by private lenders to small businesses that couldn’t get financing on market terms. The result is that taxpayers end up holding the bag when these naturally riskier loans go bad. 

And quite a few go bad as this Cato essay on the Small Business Administration explains. 

Lenders have little skin in the game so for them it’s heads they win, tails they win. Thus it was shocking – absolutely shocking – that a representative from the SBA and the head of the Ohio Bankers Association provided the reporters with the most favorable quotes.  

The entire piece is worth reading, but the authors did a particularly good job of turning the spotlight on the racket that exists between the SBA, lenders, and national franchisors: 

Franchises are major consumers of SBA loans, according to the Daily News analysis — and sub sandwich franchises top the list. Subway and Quiznos franchises dominated the list of businesses borrowing the government guaranteed loans. Subway franchises took out at least 4,649 of the 7(a) loans since the beginning of 1990, the data show, while Quiznos took out 2,586. 

But the battle of the sub shops went in drastically different directions, according to the loan data. While Subway borrowed more than 2,000 more loans than Quiznos, its loan failure rate was about one-fifth of Quiznos restaurants. Only 4.8 percent of Subway franchise SBA loans were charged off as of the end of February, while almost a quarter — 23.4 percent — of Quiznos franchise loans ended in failure and were discharged to the Treasury. 

Quiznos also led all franchises with $43.5 million in defaulted loan guarantees that SBA had to pay the lending banks. Cold Stone Creamery was second with $29.6 million, followed by Days Inn with $16.9 million and Ramada Inn with $14.3 million.

The sub shops also dominate the nine-county Dayton region in numbers of SBA loans, but the disparity is even more stark. While Subway franchises took out more than twice as many 7(a) loans as Quiznos (35 to 16), only one Subway loan (2.9 percent) failed and was charged off compared to six (37.5 percent) of the Quiznos loans. 

Nationwide, the 50 franchises that cost the SBA the most totaled more than $411 million in discharged loans. 

Corporate franchisors such as Quiznos and Subway contract with individual owners to operate the business, but some corporations take a bigger share of the profits than others.

Quiznos’ cut from its operators makes it harder for them to be profitable, said Robert Purvin, chief executive officer for the American Association of Franchises and Dealers. 

“My bet is lurking behind every failure there is price gouging to the franchisee,” said Purvin. “We’ve been after SBA for years to make no loans to franchisors that are bad players.” 

He said the SBA is essentially subsidizing these big corporate franchisors because the loan money is often used to pay the franchise fees, royalties and sometimes payments on leases controlled by the franchisor. 

What does it say about the state of American capitalism that federal policymakers think it is necessary and proper for the government to subsidize the creation of more Subway shops? 

The defaults and wasted capital aside, it is a quote from the Ohio chapter of the National Federation of Independent Business that gets to the fundamental problem with government-backed lending: 

“Many small business owners see this as an unnecessary program of government intrusion, of picking winners and losers,” said Roger Geiger, Ohio chapter executive director of the National Federation of Independent Business. “They most certainly wonder how equitable it is when it’s their tax dollars being used to fund what could potentially be a competing business.”

As former Sen. Scott Brown (R-MA) demonstrated a couple of years ago, the average policymaker doesn’t grasp that there are major problems with the federal government picking winners and losers in the market. 

Or else they just don’t care. 

The inconvenient truth is that from the SBA’s inception it has existed for politicians to show that they “care” about small businesses. For politicians who support economic policies that are destructive to businesses small and large, demonstrating support for the SBA allows them to pretend otherwise. 

Topics: 
Tax and Budget Policy

Awaiting Obama’s Latest Budget Proposal

By
Tad DeHaven

For this libertarian policy analyst, the annual release of the president’s budget proposal is like the day after your team loses the Super Bowl: everyone’s talking about it, but you’d rather curl up in bed with a fifth of Old Grand-Dad.

Alas, it’s that time of year—albeit a couple months late. The budget won’t be released until next week, but some of the details have leaked out to the press. As Dan Mitchell notes, the Washington Post is “predictably regurgitating” the White House’s spin that the president’s latest budget will be an olive branch of sorts to Republicans.

Why?

The president will apparently propose modest measures to slow the growth in entitlement spending in exchange for more tax increases. That would raise hopes for what the Beltway class likes to refer to as the “grand bargain,” but for those of us who are looking for considerably less government in our lives it would hardly be cause for enthusiasm.

Nor are any of the other ideas being reported:

  • Sequestration would be replaced with an alternative deficit reduction package. Expect for that to be higher taxes combined with a promise to cut spending somehow, some day in the future.
  • Funding for a new pre-kindergarten program—because (not much of a) Head Start apparently isn’t enough.
  • Funding for some initiative to map the human brain. (I would advise against using a politician’s for the model.)

I’m guessing there will be a package of proposed rinky-dink spending cuts—a now-annual tradition started by the previous big spender in the White House. But, of course, overall spending would continue to grow and the government would still remain involved in every facet of our lives.

Topics: 
Tax and Budget Policy

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