Topic: Tax and Budget Policy

More Evidence of FEMA Incompetence

Failure is rewarded in Washington, and the Federal Emergency Management Agency is a prime example. Its squandering of money after last year’s hurricane season was astounding even by government standards.

If Republicans had a shred of principles, they would have used the fiasco to argue that responding to natural disasters is not a proper role of the federal government. Instead, FEMA gets a bigger budget.

The Associated Press reports on new evidence of FEMA’s reckless stewardship of taxpayer funds: 

In the neighborhood President Bush visited right after Hurricane Katrina, the U.S. government gave $84.5 million to more than 10,000 households. But Census figures show fewer than 8,000 homes existed there at the time.

…The pattern was repeated in nearly 100 neighborhoods damaged by the hurricanes. At least 162,750 homes that didn’t exist before the storms may have received a total of more than $1 billion in improper or illegal payments, the AP found. The AP analysis discovered the government made more home grants than the number of homes in one of every five neighborhoods in the wake of Katrina.

…[T]he AP’s findings are similar to those of a February report by the Government Accountability Office, which found hurricane aid was used to pay for guns, strippers and tattoos. The GAO concluded that between $600 million and $1.4 billion was improperly spent on Katrina relief alone. In one neighborhood GAO scrutinized, at least one person gave an address as a cemetery. Records show FEMA gave 27,924 assistance grants worth $293 million in that neighborhood. The AP’s analysis shows only 18,590 homes existed, meaning up to $98 million in aid could have been disbursed improperly or illegally.

Unsurprising News from the Pentagon

The Washington Post reports yesterday on cost overruns for weapons procurement. “It is not unusual for weapons programs to go 20 to 50 percent over budget, the Government Accountability Office found.”

That’s for sure. As I’ve documented, it’s not unusual for weapons to more than double in cost. I’m talking about the F/A-22 Raptor, the V-22 Osprey, the CH-47F helicopter, the Patriot missile, and on and on. See here, and see the discussion in Downsizing the Federal Government.

The same pattern occurs in federal highway projects, energy projects, and many other government endeavors.

Part of the reason this occurs is that contractors and government officials have a quiet understanding that the initial cost numbers that are used to get projects launched should be low-balled. Both sides know that later on, after projects are underway, excuses can be found to raise the price tag. “The scope of work has expanded.” “We couldn’t have foreseen those additional problems.” “The mission requirements have changed.” “There are new regulatory requirements.”

It doesn’t really matter. Once the money is flowing to certain states and jobs are at stake, no member of Congress has an incentive to be frugal with taxpayer money. 

Not Overstated

Last year, Jagadeesh Gokhale and I estimated [pdf] that state and local governments were sitting on about $1.4 trillion of promised, but unfunded, health care costs for their workers.

The Economist kindly discussed our estimate in their November 18 issue, but noted: “Even if Messrs Edwards and Gokhale have overstated the problem …”

It turns out that we hugely understated the problem for at least one state. We had New Jersey down for $20 billion, but news from that state today indicates that taxpayers may get hit with a $78 billion tab for state worker health costs unless are reforms are made (or $8,500 for every resident of the state).

New at Cato Unbound: Alan Reynolds’ Income Distribution Heresies

In a speech yesterday, Federal Reserve Chairman Ben Bernanke worried that rising income inequality may make Joe and Joanne Lunchbox “less willing to accept the dynamism … so essential to economic progress,” which would be bad. ”Bernanke Warns of Economic Inequality,” Forbes’ headline tolls. 

Bernanke is evidently sold on what economists call the ”skill based technical change” hypothesis, which basically says that new technology has increased the productivity, and thus the wages, of high-skilled workers faster than it has for low-skilled workers. Bernanke sagely advises us not to look to globalization as the source of increasing inequality, and urges a broader diffusion of the kinds of skills that really pay off in today’s economy.

But is there actually something to be worried about? Is income inequality really widening at all? Are the incomes of the wealthiest increasing faster than those of the rest of us?

As it happens, those are the question of this month’s edition of Cato Unbound, “Interrogating Inequality,” which kicks off today!

It turns out these questions are a lot harder than they seem, and the answers turn on which set of government statistics — each with its own special biases — one consults. In this month’s lead essay, “Income Distribution Heresies,” Cato’s own Alan Reynolds — who set off a firestorm of controversy with a Wall Street Journal op-ed last month disputing the received wisdom about growing inequality — clarifies and refines his argument that massively increasing income inequality is an illusion. Replying to Reynolds, we’ll have the Brookings Institution’s Gary Burtless, University of Oregon economist and econ-blogger Mark Thoma, Cornell University inequality specialist Richard Burkhauser, and the Germano-Italian econo-duo Dirk Krueger and Fabrizio Perri, of the Universities of Pennsylvania and Minnesota (and the Minneapolis Fed), respectively.

So … is the specter of rising income inequality a statistical quirk or not? What’s really going on, income distribution-wise? Why not pay more attention to the wealth and consumption numbers, in any case? Only Cato Unbound readers will really be in the know.

Goldman Sachs Predicts Recession if Bush Tax Cuts Expire

The Congressional Budget Office predicts a budget surplus in 2012, but only because it assumes the Bush tax cuts expire in 2011 (a reasonable assumption) and that this will lead to a flood of new tax revenue (a very unreasonable assumption). A TCS Daily column by James Pethokoukis notes that this leads the Wall Street firm of Goldman Sachs to predict a recession in 2011:
Deficits are often used as reason for higher taxes, such as in 1993 and 1982. But to believe in higher taxes as sound economic policy in coming years, you also have to believe in the CBO’s cheery forecast that hundreds of billion of dollars in new taxes will have little or no effect on economic growth. Now you don’t have to be an acolyte of supply-side guru Arthur Laffer to find that sort of “static analysis” a little weird. Most Americans probably would. So, apparently, did the economic team at Goldman Sachs, the old employer of Robert Rubin, President Bill Clinton’s second treasury secretary. Thus the firm’s econ wonks decided to try and simulate the real-world effect of letting the Bush tax cuts expire at the end of 2010. Using the respected Washington University Macro Model, Goldman reset the tax code to its pre-Bush status, assumed all tax cuts expired, and watched how the economy reacted as 2011 began. What did the firm see? Well, in the first quarter of 2011 the economy dropped 3 percentage points below what it would have been otherwise. “Absent a tailwind to growth from some other source,” the analysis concludes, “this would almost surely mark the onset of a recession.”

The German “Brain Drain” Continues

While the tax competition debate usually focuses on capital flows, there is growing evidence that talented individuals are “voting with their feet” and leaving high-tax regimes. German and French taxpayers are among the most likely to emigrate, according to the New York Times, with Swtizerland and the United States being favorite destinations:

Benedikt Thoma recalls the moment he began to think seriously about leaving Germany. It was in 2004, at a New Year’s Day reception in nearby Frankfurt, and the guest speaker, a prominent politician, was lamenting the fact that every year thousands of educated Germans turn their backs on their homeland. …There has been a steady exodus over the years, but it has recently become Topic A in a land already saddled with one of the most rapidly aging and shrinking populations of any Western nation. With evidence that more professionals are leaving now than in past years, politicians and business executives warn about the loss of their country’s best and brightest. …The trigger for this latest bout of angst was the release last fall of new government statistics showing that 144,800 Germans emigrated in 2005, up from 109,500 in 2001. At the same time, only 128,100 Germans returned, a decline of nearly 50,000 from the year before. That made it the first year in nearly four decades that more people left than came home. Demographic experts also say the nature of the emigrants is changing. These are not just young unskilled workers like those who fled the economically blighted eastern part of Germany after the country was reunified in 1990 to work in restaurants in Austria or Switzerland. They are doctors, engineers, architects and scientists — just the sort of highly educated professionals that Germany needs to compete with economic up-and-comers like China and India. “It’s not a problem of numbers as much as brain drain,” said Reiner Klingholz, the director of the Berlin Institute for Population and Development. “What we desperately need in the near future are talented and qualified people to replace those who will retire in 15 to 20 years.” …Germany is not the only European country losing people. Nicolas Sarkozy, the conservative presidential candidate in France, recently held a rally in London, home to 300,000 French citizens living in Britain, urging them to return and “make France a great nation.” The number of French citizens living in Britain jumped 8.4 percent in 2005, according to government statistics. But the total number of French people living outside the country grew only 1.2 percent, or 15,300 people, roughly equivalent to Germany’s net loss of about 16,700 citizens. Caveats aside, there is plenty of anecdotal evidence that Germany has become less attractive for people in fields like medicine, academic research and engineering. Those who leave cite chronic unemployment, a rigid labor market, stifling bureaucracy, high taxes and the plodding economy — which, though better recently, still lags behind that of the United States. …While the European Union’s expansion has given Germans more options, their two favorite destinations are outside it: Switzerland and the United States.

Bush’s “Austere” Budget

“Bush Plan Reins in Domestic Spending” – Washington Post

“Bush budget to cut aid to Mich.” – Detroit News

Bush budget puts pinch on domestic spending” – Boston Globe

Reality check:

Federal Outlays from 2001 through 2006

Every year the headlines speak of budget cuts, and every year the federal budget rises. As I wrote two years ago:

There’s a conspiracy afoot to convince American taxpayers that President Bush has submitted a lean, mean budget for Fiscal Year 2006. The funny thing is, Democrats and Republicans are both in on it, and journalists are going along. A reality check is in order….

Democrats, Republicans, and journalists mostly agree that President Bush has submitted a lean, tight $2.57 trillion budget. Why? I think we have what dancers call a pas de deux going on here. Or maybe in honor of our Texas president and his aversion to all things French, we should just call it a Texas Two-Step: The president pretends to cut the budget, and Democrats pretend to believe him.

Both sets of politicians appeal to their bases that way. President Bush’s voters want to hear that he’s cutting the budget and saving tax dollars. The Democrats’ base of government employees and federal grant recipients want to see Democratic senators fighting budget cuts. When Kennedy and Clinton denounce Bush’s “devastating” budget cuts, their supporters become outraged at Bush. Meanwhile, Republican voters respond to such charges by becoming more supportive of Bush. They may have had some doubts about Bush’s commitment to fiscal conservatism, but the denunciations from Pelosi and her colleagues assuage those doubts.

Spending under President Bush has risen from $1.863 trillion in fiscal 2001 to a proposed $2.901 trillion in fiscal 2008. Not since Lyndon Johnson have we seen such rapid spending increases. But most of the responses to any new budget come from special interest groups–local governments, chiefs of police, Sallie Mae, AARP, veterans, environmentalists, health care providers, subsidized farmers–and they help to shape the perception that the budget is chopping programs.

Taxpayers would be better served if newspapers would run a nice clean graph–like the one above–with every budget story.