Topic: Tax and Budget Policy

Deja-vu All Over Again

The Wall Street Journal reports today (subscription barrier) that Philadelphia’s experiment with contracting out the operation of public schools to private providers is in jeopardy. Despite showing improvement since the contracting arrangement was introduced six years ago, a budget crunch is now being used as an excuse by district officials to demand that the program be shut down.

This is EXACTLY what happened to the school management firm Education Alternatives Inc. in Baltimore during the early 1990s. EAI was awarded a contract to run some of the city’s schools, the city subsequently spent itself into insolvency, refused to pay EAI what it was owed, and unilaterally cancelled its contract. I wrote about it all here.

For both practical and political reasons, contracting arrangements like these are dramatically inferior to real market reforms like universal education tax credits or school vouchers. Under these arrangements, schools are still bound by districts’ collective bargaining agreements, and sometimes even remain employees of their districts rather than of the private management firms. Students often continue to be assigned to schools based on their place of residence, rather than having a choice, so instead of creating an educational marketplace these programs simply subcontract the existing monopoly.

Politically, such programs are under constant threat of termination on the slightest pretext – usually budgetary as in the cases mentioned above. For any school choice program to create real, lasting market forces, funding has to be attached to the children and not pass through political or bureaucratic hands before making it to schools. The ideal such program is a tax credit (see link above) that avoids having education funds collected by the state in the first place, while still ensuring universal access to the marketplace.

Regulatory Burden Reaches Record Level

George W. Bush has been a big spender, but he also is increasing the burden of government in other ways. As explained in a piece for Investor’s Business Daily, government red tape has climbed to all-time highs:

…there is much more to government’s reach in the economy than direct spending. The costs to the public of complying with federal health, safety, environmental and economic regulations appear nowhere in the federal budget. Economist Mark Crain’s research for the U.S. Small Business Administration finds that in 2006 regulatory compliance cost Americans $1.14 trillion. Astoundingly, that approaches half of last year’s total federal spending of $2.6 trillion, and exceeds 9% of U.S. GDP… Agencies publish regulations in the Federal Register, the daily depository of all federal rules and regulations. In 2006, the Register swelled to 74,937 pages, the second-highest level in history (the highest was 2004). Within those pages, agencies issued 3,718 final rules. …the 60-plus federal departments, agencies, and commissions are at work on 4,052 more rules. Of these, agencies report 139 are “economically significant,” which means they will cost at least $100 million — often far, far beyond — while 787 are expected to affect small businesses. …Almost 4,000 new rules every year is a lot of “regulation without representation.”

Labor Union Members Protest against Pro-Growth Reforms in Czech Republic

Even though neighboring flat tax nations such as Slovakia are growing faster and creating more jobs, the labor movement in Prague is protesting reforms that would improve the Czech Republic’s competitiveness. The International Herald Tribune reports on this self-destructive impulse:

Around 15,000 labor union members protested in downtown Prague Saturday against the government’s proposed tax reforms and cuts in welfare spending. …If approved, a 15-percent flat tax on personal income would be introduced in 2008. Currently, the personal tax rate ranges from 12 percent to 32 percent, depending on income. The corporate tax rate would be cut from 24 percent to 19 percent by 2010. The draft also includes cuts in social benefits, unemployment benefits, maternity leave payments and health care spending. The labor unions claimed that only the wealthy would benefit from the proposed changes.

Europeans Leading on Postal Privatization

While many European governments deserve criticism for their high tax rates and destructive welfare states, sometimes America is the nation that is lagging when it comes to free market reform.

Corporate tax rates are one example, since every European nation has a lower rate than America. Social Security reform is another area, since many European nations have funded systems based on personal accounts.

And, as the Wall Street Journal explains, the Europeans are also beating America when it comes to postal reform. Several nations already have eliminated government monopoly systems and others are heading in that direction, though backwards nations such as France are trying to block continent-wide liberalization:

Bulgaria, Estonia, Finland, Sweden and the U.K. have opened their postal markets completely; Germany and the Netherlands have said they plan to do so soon. Brussels began liberalization efforts back in 1997 and a 2002 law envisioned an open postal market by January 1, 2009.

Yet five years after that tentative deadline was set, and with 18 months still to go, the likes of France’s La Poste complain that they need more time to prepare. It’s unclear what exactly they will be able to accomplish in those extra two years that they couldn’t manage in the first dozen.

One safe bet is they’ll continue piling up easy profits to use in new businesses they’ve started. To take one example, La Poste, Deutsche Post and others have used the proceeds from their letters monopolies — a €90 billion business in Europe — to open banks.

In the meantime, consumers increasingly have to break the bank just to send a letter. In the 10 members of the EU-15 that haven’t completed or planned postal liberalization, the average stamp price rose by 7 European cents, or about 18%, between December 2001 and February 2007, according to data from the Free and Fair Post Initiative. In the five countries that have liberalized, the average price fell by 2 cents, or about 4%. Studies show that full market opening, including cross-border competition, could drive prices down by as much as 20% to 25%.

Earmarks

As annual spending bills wind their way through Congress this year, there are ongoing battles over earmarked funding for members’ pet projects.

To get a sense of what the battle is about, check out this newly released list of earmarks in the House Interior appropriations bill.

People scour such lists looking for embarrassing bridges to nowhere in Alaska and indoor rainforests in Iowa.

But the real issue is federalism, not earmarks. Many of these funding projects are not federal responsibilities at all. Look at all the local sewer facilities on the list under the EPA. Why can’t Seattle, Buffalo, and other cities fund their own toilet pipes?

Of course, they can. But the idea of federalism has disappeared from public discussion in an orgy of state and local lobbying of compliant Washington politicians. For history and analysis of this issue, see here

(Oh, wait a minute, take that back — my guy Jim Moran (D-VA) scored $700K to clean up Four Mile Run beside where I live in Northern Virginia. Nice job Jim! You’ve got my vote!) 

My 56-Word Review of SiCKO

SiCKO was a very funny film, and I praise Michael Moore for starting the conversation and pointing out many horrors of the U.S. health care system. 

But from a policy standpoint – and I say this more in sadness than in anger – SiCKO was so breathtaking a specimen of ignorant propaganda that it would make Pravda blush.