Topic: Tax and Budget Policy

It’s Not My Fault They’re Kissing

My friend Blake Hounshell (he’s actually a friend, not “my friend” in the Washington sense) has a post up at FP Passport observing President Bush’s and Saudi dictator King Abdullah’s latest canoodling. In that post, Blake argues that

if you’re a gasoline-consuming American, you’re deeply complicit in this marriage, too. So laugh all you want at Bush, but he kisses Saudi cheek for thee—just as U.S. presidents have done for decades.

To which I would respond “baloney!” There’s nothing about the fact that we–or Europe, or China, or Japan–consume oil that mandates that we play kissy-poo with Abdullah or anybody else. There are a few theories why we would want to kiss up to the Saudis, and none of them hold water. The first is that the Saudis, who control 25% of the world’s proven oil reserves, make production decisions based on political relationships rather than economic considerations, and therefore when we kiss up to them, we increase the likelihood that they’ll make production decisions that are in our interests (and in contravention of their own). Like now, for example, the president is pleading that OPEC members increase production so as to tamp down the price of gasoline in the U.S.

As my colleague Jerry Taylor is wont to point out, however, “no amount of ‘get tough’ rhetoric or ‘pretty please’ diplomacy has ever affected OPEC production decisions, despite what American politicians would have you believe.” So that theory needs reworking.

There’s also the belief that we need to keep a close relationship with the Saudis to shore up our position in the region and resume the pursuit of our *ahem* traditional goal in the region of “promoting stability.” But this theory, too, leaves a lot to be desired. Our traditional posture in the Middle East has essentially amounted to a transfer payment from U.S. taxpayers to the Saudi Royal Family and the oil companies it runs. (Kuwait and the GCC countries, too.) Essentially we cover a substantial amount of the cost that it takes to defend these countries from prospective predators. But one has to ask “What would the Arabs do in the absence of an American security commitment?” 75% of the Saudi government’s revenue comes from oil. 45% of the country’s GDP comes from oil. Are we to assume that, absent a U.S. security commitment, the Saudi royal family is just going to cower in a defensive crouch and leave that money on the table for any rogue actor in the region to swoop in and take? Seems unlikely. The royal family seems much more interested in preserving itself and expanding its wealth than that.

To the contrary, it seems more likely that they would spend more, and get more serious about defending themselves from outside threats. Now, one could make the argument at this point that the Arabs in recent years have not proved themselves to be particularly formidable opponents on the battlefield, which is persuasive to a point. But even if, say, Iran made the remarkably rash move of launching a war against Saudi Arabia, Saudi’s defense budget dwarfs Iran’s and Saudi’s military technology is decades ahead of Iran’s. Even if they were to begin losing a conventional conflict against (hypothetically, again) Iran, standoff forces like long-range U.S. bombers could zoom in to restore the status quo ante without batting an eyelash.

So I’m left wondering why, exactly, it’s American gasoline consumers who are forcing U.S. presidents to suck up to Abdullah and the Saudi Royal Family. Any theories are hereby welcomed. In the meantime, please do give a read to Eugene Gholz’s and Daryl Press’s Policy Analysis titled “Energy Alarmism: The Myths that Make Americans Worry about Oil” for much more detail, and data that informed my arguments above.

Ethanol Program Milks Consumers Dry

Have you noticed how the price of milk has shot up in the past year? A big chunk of the blame lies with Congress and the ethanol program.

In its effort to promote the fantasy known as “energy independence,” the U.S. Congress favors the ethanol industry with a 51-cent-per-gallon exemption from the federal gasoline tax, and a 54-cent-per-gallon tariff on imported ethanol. By artificially stimulating the domestic ethanol industry, the program has created an insatiable demand for corn, driving up feed grain costs for dairy farmers, leading to higher prices for milk.

I’ve often disagreed with Sen. Chuck Schumer (D-N.Y.) on trade issues, especially his threat to slap tariffs on imports from China, but on this issue, the senator has positioned himself as the American consumer’s best friend. According to a story this week in the New York Daily News:

“Ethanol has increased the average American’s grocery bill $47 since July,” said Sen. Chuck Schumer, citing figures from Iowa State University.

Schumer (D-N.Y.) is pushing for an immediate end to the 54-cent-per-gallon tariff on ethanol imports as a way to increase the supply of the federally mandated fuel additive, reduce pressure on the corn market and bring down milk prices.

“Bring the cheaper ethanol in, reduce the price of corn, and then reduce the price of milk,” he said.

The senator is on to something. While were at it, let’s eliminate remaining U.S. tariffs on imported shoes, clothing, sugar, rice, cheese and, yes, milk.

Irrational Voters

Analyzing exit polls from last week’s New Hampshire primary, E.J. Dionne observes in today’s Washington Post that “an astonishing 42 percent of McCain’s voters disapproved of the Iraq war”

Maybe Bryan Caplan is onto something?

On a related note, Sen. McCain boasts of his fiscal conservatism, and one of his most reliable applause lines on the campaign trail comes from his strident criticism of wasteful government spending. His favorite example is the infamous “bridge to nowhere” in Alaska, one of thousands of earmarks tucked into the 2006 transportation bill. As McCain tells it, the bridge would have cost $233 million to build and would have served about 50 people. (David Boaz spelled out the gory details here. There were actually going to be two bridges costing a total of $454 million. In September 2007, Alaska officials dropped plans to build the bridge, but kept the money.)

To take nothing away from that particularly egregious misuse of taxpayer funds, it is worth noting that the war in Iraq is costing at least $10 billion a month, with some estimates placing the total costs closer to $12 or $13 billion. In other words, in one month’s time, we are spending the equivalent of 42 $233 million bridges. I doubt that we need that many bridges, and I’d much prefer that they be paid for by user-fees, but presumably some of these would go to somewhere?

The voters who oppose the Iraq war but who support the leading advocate for the war seem to be saying that fiscal conservatism stops at the water’s edge. Then again, it could just be cognitive dissonance.

Robert S. McIntyre’s “Fuzzy Math”

Robert S. McIntyre, the tireless crusader for higher taxes, had a letter in Saturday’s Washington Post under the title “Fuzzy Math.” Usually McIntyre is directing his ire at the “fuzzy math” of supply-siders and other fiscal conservatives, such as this pdf about Senate Republicans. This time, however, he wrote in to point out an error in the Post’s political data. But was it an error? Here’s McIntyre’s letter:

Fuzzy Math

On Jan. 4, reporting the results of the Iowa caucuses, you said, “Sixty percent of Republican caucusgoers described themselves as evangelicals, according to entrance polls. Those voters went for Huckabee over Romney by more than 2 to 1.” [That article here.] Meanwhile, you also reported that Mike Huckabee received 34 percent of the total GOP vote. This seems impossible.

Even if Huckabee didn’t get a single non-evangelical vote, his two-thirds-plus share of 60 percent of the voters would give him more than 40 percent of the total vote.

Can you explain this?

– Robert S. McIntyre

McIntyre seems to be befuddled by a simple conceptual error. He’s assuming that Huckabee and Romney were the only two candidates, in which case two-thirds of 60 percent of the voters would indeed be 40 percent of the total vote. But in fact, Huckabee and Romney together got only 60 percent of the total vote. So let’s sort through the numbers. The entrance poll surveyed 1600 Republican voters. Of those, we’re told that 60 percent, or 960, were evangelicals. As this Los Angeles Times graphic of the entrance polls shows, Huckabee beat Romney 46-19 among those voters, which suggests he got about 442 evangelical votes among those polled. (And about 35 percent of evangelical voters voted for someone other than Huckabee or Romney.) That’s about 28 percent of the 1600 total voters. Huckabee got only 14 percent of the non-evangelical Republicans polled, or about 90 people. Add the 90 to the 442, and you get 532, or 33.25 percent of the voters surveyed. Which is pretty close to the 34.4 percent that Huckabee got in the actual caucuses.

McIntyre’s error should have been obvious to the Post’s editors. I don’t know why newspapers should publish letters to the editor that contain obvious errors. Would they publish a letter that said “You misspelled Reagan; it should be Raegan”? I doubt it.

Of course, what’s more interesting is that this simple conceptual error about elementary arithmetic comes from a leading “liberal” expert on tax policy, quoted regularly in major newspapers about the interpretation of complex income tax data. Let’s hope he understands those intricate and abstruse data better than he does simple political polls.

What Ends Recessions?

With the economy slowing and fears of recession percolating, the Bush White House and both Democrat and Republican lawmakers are talking about possible stimulus legislation to get the economy moving. Before they pass anything, and before the press and the public get all excited about “bold,” bipartisan action, we should ask ourselves whether stimulus packages are helpful in ending recessions.

The definitive historical review of U.S. government responses to recession is Christina and David Romer’s 1994 NBER Macroeconomics Annual paper “What Ends Recessions?” [$]. The Romers examine each U.S. recession from the end of World War II to the article’s publication date (that is, the recessions of 1954, 1958, 1960, 1970, 1975, 1980, 1982, and 1991) and determine what government actions were taken in response and how successful those actions were.

Government response to recessions comes in three forms: monetary policy (the Federal Reserve’s Open Market Committee lowers interest rates to spur investment and borrowing), automatic fiscal policy (the automatic increase in government spending during recessions that results from increased unemployment insurance claims, welfare disbursements, etc.), and discretionary fiscal policy (the adoption of stimulus packages that contain increased government spending and/or tax cuts).

The track records for both FOMC action and the automatic stabilizers are strong, the Romers show. Both kick in quickly when recessions begin, and the economy turns around fairly soon afterward.

Stimulus packages have a much shoddier record, however: they take months to move through Congress, and additional months to implement — long after the recession has come and gone. Moreover, many of the specific actions initiated by stimulus packages are hardly stimulatory — extending unemployment benefits or launching major government construction programs requires several months to several years (and sometimes even decades) before the federal monies hit the economy.

A look at the various proposals now floating around Washington show that a 2008 stimulus package will be more of the same.

Saturday, New York senator Charles Schumer used the weekly Democrat radio address (who listens to those things, anyway?) to outline his party’s stimulus package proposal, which would use a temporary (and likely tiny) tax cut for the middle class, coupled with “longer-term investments such as in clean energy and infrastructure” — not exactly the stuff of effective economic stimulus.

President Bush’s proposed stimulus package focuses on tax cuts. The package includes a proposal to move up an already-approved income tax cut (President Eisenhower made a similar move — with some effectiveness — in his stimulus package for the 1954 recession) and abolish taxes on stock dividends. The centerpiece of the Bush proposal, however, is the permanent adoption of his 2001 and 2003 tax cuts that are set to expire in 2010 and 2011 — a desirable proposal but also not the stuff of economic stimulus in 2008.

If I were a cynic, I’d say these proposals indicate that neither congressional Democrats nor the Bush White House is really interested in stimulating the economy to ward off recession. Instead, I might believe that the Dems and the Bushies are just trying to look like they’re doing something about the economy during an election year when, in fact, they want to use the risk of recession as cover to adopt policies that they’ve wanted to adopt all along and to funnel money to special interests. But then, if I were a cynic, I’d say that Congress and the White House used 9/11 as an excuse to adopt just about every bad, police-state idea that’s been floating around D.C. bureaucrats’ offices for a decade. If I were a cynic…

The good news is that the two government tools that are effective at combating recession are already at work. The automatic stabilizers are in play and the FOMC has cut interest rates significantly since October. Fed Chairman Ben Bernanke has indicated that more cuts are forthcoming as long as recession risks are elevated.

Thus, I have to agree with this excellent Washington Post editorial on recession-fighting: Congress and the White House should leave recession-fighting to the Fed and the automatic stabilizers, and still their stimulus package excitement.

Energy Price Controls in China

From our “never thought I’d live to see the day file,” Chinese Prime Minister Wen Jiabao announced yesterday that China would freeze energy prices as a means of combating inflation and appeasing public anger over escalating fuel prices. Well, been there, done that. If past is prologue, don’t expect a happy ending to this story.

More Statism from Sarkozy

France’s President is supposed to be a conservative, but most of his proposed policies are designed to increase the size and burden of government. The latest example is a proposal for more taxes - including levies on the Internet - to finance France’s government-run television network. Perhaps this is the French version of compassionate conservatism? Tax-News.com reports:

French President Nicolas Sarkozy, in a speech on Tuesday, unveiled new proposals for an internet-based tax, as part of a range of new levies to fund France’s state broadcasters. …Sarkozy outlined plans [for] a tax on internet connections, mobile phone usage and a levy on the advertising revenues of commercial television stations. Sarkozy promised that any tax on internet users would be “infinitesimal”, but his idea is controversial, and some observers see the plan as taxing the new media to help fund the old. France would also stand out as one of the only countries to raise revenues from taxing internet access, something which other governments have so far shied away from.