Topic: Tax and Budget Policy

Brother, Can You Spare a Z$200,000 Note?

Hyperinflations would be almost comic if it were not for the misery they inflict on the people they affect. In the misruled African country of Zimbabwe, the inflation rate of the Zimbabwean dollar has reached an annualized rate of 13,000 percent. According to a story Thursday in the Financial Times, an IMF official predicts the annual rate could be heading towards an incredible 100,000 percent.

One sure sign of a hyperinflation is that the central bank must issue new currency notes in ever higher denominations so that people won’t have to carry bags or wheelbarrows of money around to make everyday purchases. Sure enough, the government of Zimbabwe is now wrestling with that very question. According to the FT story:

The launch yesterday of a new large-denomination bank note of Z$200,000—worth [US$13] at the official exchange rate and [US$1.30] at the more realistic parallel rate—underlines the disarray. The central bank had wanted to issue a Z$500,000 note, but a bank official said this was vetoed by the finance ministry because senior staff thought such a large denomination would have reinforced an impression that inflation was out of control.

At a 13,000 percent rate, that cat is probably already out of the bag.

Federal Pay: Shoot the Messenger

Fedsmith.com ran a commentary today about the new data I cited on average federal worker compensation.

Most of the 31 comments on my blog and the commentary so far are hostile, and many take a “shoot the messenger” approach. Folks, it’s not my data. I didn’t use “fuzzy math” or “twist” the data. The data comes straight from the U.S. Bureau of Economic Analysis.

Yes, averages are only one indicator of pay gaps. But is it justified that the federal average has grown so much more quickly than the private sector average? Why should fringe benefits in the government workforce be so much more generous than in the private workforce?

And shouldn’t we have a “government of the people” rather than a class of elite overlords increasingly separated from the realities of taking risks, being fired, facing salary cuts in downturns, and having to work hard to get pay raises?

Another Government Shutdown?

In Wednesday’s OpinionJournal.com Political Diary, John Fund writes that House minority whip Roy Blunt told reporters that he believes President Bush will deliver on his threat to veto the budget bills currently working their way through Congress. And with enough Republicans on record agreeing to uphold the veto, Blunt suggests we might end up witnessing a government shutdown later this year.

As you might recall from the mid-1990s, a federal government shutdown does not mean that every federal agency stops whatever it is they are doing. It’s only the non-essential ones that grind to a temporary halt – and, yes, there is an official definition of what constitutes essential government functions: mainly law enforcement and defense. That Congress continues to fund everything else is what keeps policy wonks like me busy.

Maybe Blunt’s statements are the opening gambit in a political game of chicken. There might be little interest in a government shutdown among the Democratic leaders in Congress. So the follow-up to an upheld Bush veto would likely be a compromise stop-gap measure (like a “continuing resolution” that puts the government on auto-pilot for the rest of the fiscal year) that results in much less spending than would otherwise occur in the course of an unimpeded appropriations cycle.

In either case, those of us who prefer divided government might have another example to add to our growing “Great Moments in Gridlock” list.

Is Federal Pay Too High?

Chris Edwards writes below that the gap between federal pay and private-sector pay continues to widen, with federal employees now making more than twice as much as private employees. Meanwhile, a congressional committee is holding hearings on whether federal employees are underpaid or overpaid. Do you think they’ll hear testimony about why federal employees make twice as much as private-sector workers? Or about the fact that federal quit rates are far lower than private-sector quit rates, suggesting that most federal employees are pretty satisfied?

Bad News for Karl Marx

If there is a heaven (or, more appropriately, if there is a hell), Karl Marx must be in a sour mood. The Berlin Wall has disappeared. Communism is dead every place other than Cuba, North Korea, and certain faculty lounges. And now, former Soviet colonies are abandoning his concept of discriminatory taxation and instead adopting simple and fair flat tax regimes. A Czech article discusses the flat tax revolution, which is proceeding in spite of complaints from Western Europe’s uncompetitive welfare states:

Karl Marx might be shocked to see who’s doing what with tax systems in Central and Eastern Europe these days. After all, it’s the capitalist West that won’t abandon progressive tax systems, which Marx championed in The Communist Manifesto, while the former Soviet bloc countries are lining up to buck their old ideological fountainhead by moving to a … single tax rate for nearly all earners, regardless of income. Nowhere has this flat tax caught on more swiftly than in Central and Eastern Europe, where nine of world’s 13 countries to have adopted the system are located. It’s a reform movement that started in 1994 with Estonia, gained momentum when Russia saw a 25-percent increase in state revenue from personal income tax after implementing a 13-percent flat tax in 2001, and culminated with Slovakia’s much-lauded adoption of a single 19-percent rate on income, corporate, and valued added tax three years later. …

Few, if any, of the reforms in Central and Eastern Europe meet the definition of a true flat tax because they include deductions, exemptions, and other exceptions. … Several Western European leaders complain that the lower tax rates … give the newer European Union states an unfair advantage in attracting business.

We Accept the Challenge

Robert Samuelson gets one thing wrong in his Newsweek/Washington Post column this week: Cato isn’t a conservative think tank. At least, I think it would be odd to call scholars “conservative” when they criticize the war in Iraq, the Patriot Act, the growth of executive power, the war on drugs, the holding of American citizens without habeas corpus, the federal marriage amendment, the late lamented sodomy laws, and the general attempts by both right and left to impose their moral values on all Americans through government.

But he’s right on his main point: The growth of entitlement spending, especially for the elderly, is not only a looming fiscal disaster but a fundamental shift in the nature of American government. He proposes

that some public-spirited sugar daddy (the MacArthur Foundation? Warren Buffett?) sponsor a short book. A possible title: “Facing Up to an Aging America.” Six leading think tanks would be invited to participate: three liberal – the Brookings Institution, the Center on Budget and Policy Priorities, and the Urban Institute– and three conservative: the American Enterprise Institute, the Cato Institute and the Heritage Foundation.

We accept. We’ve been writing about the entitlements crisis since 1980 or thereabouts. We’d be glad to join other research institutions in a grand public debate about how big we want government to be and what its appropriate responsibilities are.

New Federal Pay Data

The Bureau of Economic Analysis just released its annual data on employee compensation by industry. (See tables 6.2, 6.3, 6.5, and 6.6).

The new data for 2006 show that 1.8 million federal civilian workers earned an average $111,180 in total compensation (wages plus benefits). That is more than double the $55,470 average earned by U.S. workers in the private sector.

Looking just at wages, federal workers earned an average $73,406, which is 60 percent greater than the $45,995 average earned by private sector workers.

Average federal pay has soared in recent years, growing much faster than private sector pay between 2001 and 2005. However, federal pay growth slowed in 2006, while private sector pay accelerated. As a result, average compensation for federal civilians grew 4.0 percent in 2006, compared to the average in the private sector of 4.2 percent.

Hopefully, federal pay increases will continue slowing to help relieve the soaring taxpayer costs of federal workers. I’ve proposed freezing federal pay to help reduce the deficit and privatizing expensive activities such as air traffic control.

The BEA data show that compensation for federal civilian workers cost taxpayers $203 billion in 2006, up from $145 billion in 2001 when President Bush took office. (The costs of military compensation have grown even more rapidly, from $98 billion in 2001 to $156 billion in 2006).

The acceleration of federal compensation is clear in the figure below covering 1990-2006.

Source: Chris Edwards, Cato Institute, based on Bureau of Economic Analysis data

For further information, see

http://www.cato.org/pub_display.php?pub_id=6611

http://www.cato.org/pubs/tbb/tbb-0605-35.pdf

(Data note: The BEA data for number of employees is measured in full-time equivalents.)