Topic: Tax and Budget Policy

Excessive Salaries for State and Local Bureaucrats

USA Today reports on the growing compensation gap between bureaucrats and workers in the productive sector of the economy. My colleague Chris Edwards already has documented how federal bureaucrats are overpaid, so the extravagant compensation for state and local bureaucrats is not very surprising

State and local government workers are enjoying major gains in compensation, pushing the value of their average wages and benefits far ahead of private workers, a USA Today analysis of federal data shows. The gap is widening every year, rising by an average $1.02 an hour last year and $2.45 an hour over the past three years.

…State and local government workers now earn an average of $39.50 per hour in total compensation, reports the Bureau of Labor Statistics (BLS). Private workers earn an average of $26.09 an hour. Benefits are a big reason for the gap.

…From 2000 to 2007, public employees enjoyed a 16% increase in compensation after adjusting for inflation compared with 11% for private workers. The nation has 20 million state and local government employees. About 116 million people work in the private sector.

The pay gap obviously is bad news for taxpayers, but the bigger issue may be the misallocation of labor. When compensation for bureaucrats is excessive, this encourages people to migrate into government jobs. This means that they are not in the private sector, producing value for their fellow citizens. This does not mean, to be sure, that every bureaucratic position is useless and every bureaucrat is lazy (I’ll resist the temptation to comment on DMV offices) and it does not mean that every private employee is a workaholic. But over the long run, the economy’s performance will suffer because labor is not being used productively.

Bush: The $3 Trillion Dollar Man

Here are some bullet points regarding the new federal budget to be released on Monday:

  • The Bush administration will introduce yet another irresponsible federal budget, which this year features a huge $400 billion deficit and spending that tops $3 trillion. Amazingly, President Bush was also in office when federal spending topped $2 trillion (back in 2002).
  • President Bush promises once again that the budget will be balanced sometime down the road, but he again uses phony accounting to make that claim. For one thing, he hasn’t accounted for future relief from the alternative minimum tax (AMT), which Congress will surely provide. Also, Bush has not included all the likely future Iraq war costs in his budget.
  • To his credit, President Bush proposes some savings to Medicare and Medicaid, two of the largest and fastest growing federal programs.
  • But to his discredit, the president asks for yet another large and unaffordable defense spending increase for 2009.
  • All in all, the new budget tops off eight years of remarkably spendthrift policies by President Bush. Over eight years, Bush has presided over a huge 67 percent increase in total federal outlays. The comparable figure for President Clinton’s eight years was just 32 percent.

Stealth Taxation at the Border

For decades, some of America’s most regressive taxes have lurked in the shadows of
U.S. trade policy.  Now the Bureau of Customs and Border Patrol is proposing to make those taxes an even greater burden on lower-income Americans and workers and farmers in poorer countries.

For over 15 years, CBP has maintained a “first sale” valuation policy that allows imports to be valued on the basis of the price of the first sale between the foreign producer and a middleman in cases where there are multiple, arm’s length transactions in the distribution chain.  The price of the first sale is presumably closer to the value of the cost of goods sold, since at most it would differ by the expenses and markup of only one more entity.  But CBP wants to change its valuation method to a “last sale” basis, which would reflect the price of the last transaction before the merchandise was imported into the United States.  Obviously, the last sale price reflecting the expenses and profits of more entities will, in most cases, be higher than the first sale price.  Thus, valuations, import assessments, and ultimately consumer prices, will likely increase.

CBP claims it wants to align its valuation policy with the policies of most U.S. trade partners, and according to a recent interpretation of the WTO Valuation Agreement, it is a perfectly acceptable—and in fact proper—method of valuation.  But its simply bad policy..  Tariffs are regressive; they are most regressive on necessities, like clothing and food; most clothing on Americans’ backs is imported; first sale valuation methodology is common among importers of clothing, and; consumer prices have already increased significantly over the past year.  Do we need consumers devoting big chunks of their “stimulus rebates” to higher import taxes?

On average, the U.S. tariff system is quite open.  Based on an analysis of U.S. imports in 2005, nearly 70 percent of all merchandise imports entered the United States duty-free and the average rate of duty (calculated as total duties collected over total import value) was around 1.4 percent.  (I cite 2005 because I did a comprehensive analysis of those data for a paper in 2006 that I have not yet repeated for subsequent years. The numbers I cite for 2005 are unlikely to be much different from 2007.)  That rate is pretty modest.  But it’s also misleading.

As is often the case, averages obscure important facts.  In this case the important facts are that most of the $23.2 billion in duties collected by Customs were assessed on imported clothing, shoes, and food products.  In fact, while clothing and footwear comprised 5.1 percent of the total value of imports, duties collected on clothing and footwear accounted for 42.3 percent of all duties collected.  Though the average duty overall was 1.4 percent, it was 7 percent on milk, cheese, eggs and other dairy products.  Have you noticed the huge jump in prices of these products at the grocery store in recent months (Sallie James has)?

Lower-income Americans spend a higher portion of their incomes on these necessities (food and clothing and shelter – don’t forget longstanding restrictions on steel, lumber and cement trade), and many of the products imported are produced in developing countries.  The 1.4 percent average tariff didn’t mean much to exporters in Macau, Cambodia, Bangladesh, Sri Lanka, Pakistan, Uruguay and the other six developing countries with average ad valorem duties in the double digits.  Imports from Cambodia accounted for 0.1 percent of total U.S. import value, but duties on Cambodian imports accounted for 1.2 percent of all duties collected.

U.S. tariff policy is already skewed heavily against lower-income Americans and poor workers around the world.  CBP’s proposal would make matters worse, which hardly seems consistent with the broader objectives of the Department of Homeland Security. 

The New Secretary of Agriculture Plays Lucy

My American friends tell me that there is a recurring scene in the Peanuts comics whereby Lucy says she will hold the football for Charlie Brown to kick before she whips it away.

I was reminded of that yesterday when the new boy in school, newly conferred Secretary of Agriculture Ed Schafer, dashed the hopes of all American consumers, Lucy-style, by implying [$] that the long-awaited open trade in sugar between the United States and Mexico (one of the last NAFTA provisions to come into effect) could be delayed.

Two weeks ago, the Sugar Alliance circulated a proposal to lawmakers that would effectively divide up the United States and Mexico’s (combined) market into a protected cartel. That would significantly impede what was planned to be free trade in sugar between the two countries and downward pressures on the U.S. price of sugar: currently the U.S. price is about double the world price, although it has been up to triple the world price in previous years because of trade barriers to cheaper sugar (see more here).

Sec. Schafer, at least according to the article, was willing to listen to the producers’ plan to manage the sugar trade and was quoted thusly:

If producers in two countries can agree on an approach, that’s better than two governments…trade is all about the producer and providing opportunities and opening markets…

No mention of us consumers paying for it all. And quite why Sec. Schafer believes the market needs managing (either by producers or government) is not made clear.

The Myopia Behind the Protectionism

There appears to be something in the protectionist genome that triggers obsessive factual cherry-picking. Genetics may explain the protectionist propensity for Malthusian sensationalism, too. Some of the folks at the U.S. Business and Industry Council provide the latest example.

In an article that ran in yesterday’s Pittsburgh Post-Gazette, erstwhile doomsayer Alan Tonelson and a colleague present their view that the “fiscal stimulus” will have limited impact because consumers have few alternatives to spending their checks on imports. They provide statistics showing the rising import share in major consumable goods categories to support their argument that even if consumers wanted to buy American, it is becoming close to impossible. As a result, the stimulus “benefits will leak overseas,” and the “near-term economic performance will be modest at very best.”

And, as sure as all roads lead to Rome, “failed trade policies deserve much of the blame” for allowing the “import tide [to grow] large enough to sandbag Washington’s best –laid stimulus plans?” Let me review critical assertions from the article and suggest some genetic tweaks (i.e., the truth).

Assertion 1: “[B]uying products (or services) made in the United States creates the biggest and quickest domestic growth bang per stimulus buck because it encourages companies to ramp up output and possibly build new facilities and hire more workers.”

But in fact…

…the fiscal stimulus package is unlikely to have any effect on output and investment. Even if Americans could only purchase domestic goods and services, suppliers would know that the uptick in demand was a short-term response to the stimulus, and not worthy of expanded investment and output.

Assertion 2: “American spending on imports would increase U.S. growth as well – by stimulating the wholesale and retail and transportation and warehousing sectors.”

Kudos for the half-truth, but…

… let me add that U.S. spending on imports helps American industries all along the supply chain – not just in the four sectors mentioned. U.S. design, advertising, marketing, legal and other professional services, and yes, manufacturing industries (like components, raw materials, and capital equipment suppliers) all partake of the benefits of import sales in the United States. Protectionists have difficulty comprehending that the world is no longer characterized by “our producers” against “their producers.” With proliferation of global supply chains, import sales support more profitable U.S. activities at both ends of the value chain (from product design and finance operations to logistics and advertising).

Assertion 3: “Higher profits and stock prices in these sectors [wholesale, retail, transportation, and warehousing] would help, too, by enriching American investors.”

Uh huh, but…

…didn’t John Edwards just drop out of the race because he couldn’t convince voters that there are two Americas? Indeed, higher profits and stock prices would benefit American investors, but the phrase “enriching American investors” is intended to connote “The Rich.” In fact, Americans across income groups hold stock or mutual funds.

Assertion 4: “Unfortunately, this smaller stimulus bounce is inevitable – and resulting growth will fall well short of politicians’ and voters’ expectations – because import levels have grown so high for so many types of manufactured products.”

Right, but more wrong because…

…a negligible stimulus bounce is inevitable, but it has nothing to do with imports. If imports were at the considerably lower levels that the authors implicitly prescribe, there wouldn’t be any discussion about a stimulus plan. Policymakers wouldn’t be panicking about a relatively mild slowdown after 25 years of nearly uninterrupted economic growth. Instead, without imports, our $14 trillion economy would be a considerably smaller economy, with anemic annual growth rates evocative of Japan—the bête noire of protectionists past. Our problem would be quite serious. Instead, the increasing volume of imports has inspired competition and U.S. productivity gains, which has delivered better prices, higher quality and more choices, while freeing up resources to invest or purchase U.S. and foreign goods and services.

Assertion 5: “In many major consumer goods categories … the rates of import penetration are much higher. For example, in 2006, nearly 96 percent of the men’s dress and sport shirts sold in the United States were imports. More than 90 percent of the non-athletic shoes came from overseas, along with nearly 90 percent of the women’s coats, and more than 86 percent of the women’s blouses.”

Good statistics that support a different conclusion because…

…even though Americans rely heavily on imported shoes and clothing (as evidenced by the stats), those products are subject to the highest duties in the U.S. tariff schedule. In fact, while clothing and footwear comprised 5.1 percent of the total value of imports in 2005, duties collected on clothing and footwear accounted for 42.3 percent of all duties collected. Not only are these tariffs some of the worst regressive taxes under U.S. law (lower-income Americans spend a higher percentage of their income on these necessities), but if you’re worried about “leakage” from the stimulus package then you should support abolishing those tariffs. What’s the sense in handing chunks of your allowance back to the government?

Protectionists tend to see the U.S. market as the reserve of U.S. producers, while simultaneously berating foreigners for protecting their own. But there is a strong linkage between imports and exports. If Americans don’t buy imports, foreigners can’t buy U.S. exports. If Americans spend large chunks of their stimulus checks on imports, U.S. manufacturers are sure to add to the record export (and output and profit) performance they’ve been experiencing over the past couple years.

John McCain: The Good, the Bad, and the Ugly

With his victory in Florida, Sen. John McCain has become the clear front runner for the Republican nomination. It’s worthwhile, therefore, to take a closer look at what kind of president he might be.

The Good: While Rush Limbaugh and Sean Hannity sometimes portray McCain as a virtual clone of Ted Kennedy, the fact is that he is a true fiscal conservative—certainly more of a fiscal conservative than, say, Mitt Romney. He is well known as an opponent of earmarks and pork barrel spending. But perhaps more importantly, he has long been an advocate of entitlement reform. He was early an ardent support of personal accounts for Social Security, and has pushed for serious Medicare reform, including means-testing. Almost alone among Republicans, he opposed the disastrous Medicare prescription drug benefit.

He has offered the best health care reform plan of any of the candidates. While Mitt Romney has embraced the basic tenants of HillaryCare, McCain would change the tax code to equalize the treatment between employer-provided and individually-purchased health insurance. This is a vital step in moving away from our employment-based health care system toward a more consumer-oriented system. And, he would allow the purchase of low-cost insurance across state lines, avoiding regulation and mandates.

During his time in the Senate, he has never voted for a tax increase. While he has taken much heat for voting against the Bush tax cuts, he now calls for making those tax cuts permanent (although he would retain a vestige of the estate tax at a reduced rate and increased exemption). And, McCain is right that cutting taxes has too often become an excuse for republicans to avoid the hard task of cutting spending. Cutting taxes reduces the pain of government spending (at least for now), allowing Congress to avoid difficult choices. While taxes need to be cut—and McCain supports a number of tax cuts including reductions in the business tax rates and capital gains taxes—future tax cuts should be linked with spending cuts. As I argue in my book, Leviathan on the Right, it’s the size of government, stupid.

He is a strong and unapologetic free trader.

The Bad: John McCain frequently makes Dr. Strangelove look like a peacenik. Its not just his desire to remain in Iraq “for a hundred years.” It’s his bellicosity toward every enemy and perceived enemy from Iran to North Korea. He’s a true believer in the neoconservative goal of remaking the world to fit our desires and beliefs. At best on foreign policy he would be a competent Bush. At worst, he appears a recipe for perpetual conflict.

On domestic policy, he has shown a disturbing predilection for elevating every personal pet peeve, from steroids in baseball to airplane service quality, to a federal issue. And, he has embraced heavily regulatory environmental policies and compulsory national service. Like George W. Bush, he tends to support federal power over federalism, executive authority over legislative, and generally leans toward the imperial presidency.

The Ugly: John McCain appears to have little more than contempt for the First Amendment and free speech generally. He is the principal author of a campaign finance bill that severely restricts political speech. Not content with those restrictions on political speech, he has continually sought to expand regulation to other groups. He has said that he “would rather have a clean government than one where, quote, First Amendment rights are being respected, that has become corrupt. If I had my choice, I’d rather have the clean government.” Any candidate who believes that respect for First amendment rights needs to be qualified by “quote,” raises serious concerns. Moreover, his general attitude appears to be that criticism of the government, the war, and in particular himself, is somehow unpatriotic.

Most worrisome of all appears to be McCain’s basic philosophy, which is unapologetically statist, as Matt Welch points out in his new book McCain: The Myth of a Maverick. McCain once said “each and every one of us has a duty to serve a cause greater than our own self-interest.” McCain believes that cause to be the good of the collective, often defined as the nation or the national community.

For believers in individual liberty and limited government, it’s a decidedly mixed bag. But, then again, aren’t they all?

State of the Earmarks

Last night’s State of the Union address didn’t contain much in the way of new policy proposals. As I note in a podcast (Subscribe!), this is largely a reflection of President Bush’s limited political capital because of his lame duck status, low approval ratings, and the Democratic majority in Congress.

But one issue Bush did indicate he will tackle is the rampant earmarking on Capitol Hill. Bush said he would take a couple actions on this front – and while these might be modest steps in the right direction, the results will be far from earth shattering.

First, Bush will “issue an Executive Order that directs Federal agencies to ignore any future earmark that is not voted on by the Congress.” This is good step and one that fiscal conservatives on Capitol Hill have been urging for years. The President can ignore certain earmarks because Congressional appropriators routinely exclude them from the legislative text of spending bills. Instead they “airdrop” many earmarks into conference reports at the last minute. These reports are not technically part of the law, but serve as accompanying documents to inform the Executive Branch of Congress’s intentions. Appropriators do this to circumvent transparency measures and make questionable earmarks immune to points of order or striking amendments by critical members. Because the Executive branch has always played along, it has never been necessary for Congress to act otherwise.

Until now.

With the new Executive Order in place, Congress will presumably be forced to include earmarks in legislative text rather than putting them in nonbinding conference reports. This will likely increase transparency to some degree, but it’s unlikely to have a significant impact on earmarks beyond that. Enough support resides in Congress to continue to earmark funds and easily defeat procedural hurdles along the way. Furthermore, Bush missed a huge opportunity here. He could have applied the Executive Order to the current 2008 fiscal year and wiped out thousands of earmarks in the process.

Bush also indicated that he would veto appropriations bills that do not reduce the number or cost of earmarks by 50 percent. This might encourage appropriators to cut earmarks per the president’s request. But there is a danger here – rather than shooting for a significant reduction in earmarks, Congressional leaders could instead dole out more money for members’ pet projects in order to build a vested voting block large enough to override a veto. In terms of passing the annual spending bills, this could be an easier path for Congress to follow, as most spending bills already pass with large majorities. The result could be a net increase in earmarks.

Still, President Bush has made a good faith effort toward improving the earmarking process. And by discussing earmarks during his final State of the Union address, he brought a national spotlight to the issue. But few significant improvements will occur until members of Congress stop coveting earmarks and voters stop returning earmarkers to Congress.