Topic: Tax and Budget Policy

‘Terror Porn’

The Homeland Security budget has become a business-as-usual way for politicians to steer tax dollars to contributors and supporters. But even though the budget is being allocated using traditional pork-barrel methods, the arguments for more homeland security spending are based on exaggerated claims that the money is necessary to thwart terrorism.

Veronique de Rugy, an American Enterprise Institute scholar and Cato adjunct, call these claims ”terror porn.” ABC News’ John Stossel quoted de Rugy as part of a recent report:

[T]he bureaucracy hypes terrorism to justify its pork. “Terror porn” is what economist Veronique de Rugy calls it. Why “porn”? “Because porn sells, [and] terrorism sells even better,” she says. “It’s great for politicians. They can campaign on the fact that they are protecting us. They also can campaign on the fact that they’re bringing more money to their states.”

Lots of small towns do get absurd grants for homeland security. Lake County, Tenn., a rural county with only 8,000 people, got nearly $200,000 in homeland-security money. …”I don’t know that terrorists will come, but I don’t know they won’t come,” Lake County Mayor Macie Roberson told us, smiling.

At least he didn’t do what Columbus, Ohio did: spend it on bulletproof vests for police dogs.

Inordinate fear of terrorism leads to more than just wasteful spending. Stossel also cites a study estimating that 1,000 people have died because they avoided air travel and instead relied on a much riskier mode of travel:

Of course, terrorism is a real threat. But fear kills people, too. A University of Michigan study found that an additional 1,000 Americans died in car accidents in the three months after Sept. 11, because they were afraid to fly. We need to keep risk in perspective.

Paging Dr. Smith…

In the Economix column of today’s New York Times, David Leonhardt commits health policy heresy:

there is no question that the country would be better off if everyone were covered. But the gaps in insurance aren’t the only problem with the medical system. They are not even the biggest problem.

You’ll have to read the column to learn what Leonhardt thinks The Biggest Problem is. But he points out that the market is moving to fix that problem without government direction.

Personally, I’m not sure that a government mandate is necessary to get hospitals to report quality data. (Malpractice insurers, are you listening?) But Leonhardt documents well how the Invisible Hand works even in health care.

European Politicians Continue Push for New Tax Powers

The tax burden in most European nations already is stifling growth and undermining competitiveness. Yet many European politicians – as well as the European Commission bureaucracy in Brussels – think that there should be a new pan-European tax. Currently, the European Union’s budget is financed by contributions from member states. This is bad enough, especially since it finances the highly protectionist and inefficient system of farm subsidies, but European politicians and bureaucrats doubtlessly would concoct even worse ways of spending money if they had their own tax. The EU Observer reports:

The commissioner argues that any new “own resources system” – where Brussels raises money directly – should be “simple and very transparent.” … One way of changing the EU’s financial system – supported by some in the European Parliament – would be introducing its own tax to replace member states’ donations. The idea came up several times after the bitter budgetary talks both in 2005 and previously in 1999, with for example senior French centre-right MEP Alain Lamassoure suggesting that the EU could levy a tax on SMS and email messages.

Overpaid Bureaucrats in Alabama

As Chris Edwards has shown, federal government bureaucrats are grossly overpaid. The same is true for government workers in Alabama. A report published by the Alabama Policy Institute finds that public sector workers gets 21 percent more compensation per hour than workers in the productive sector of the economy. But even this analysis understates the problem since many bureaucrats are involved in activities that are not legitimate functions of government: 

This report evaluates information available on Alabama state employee compensation, making comparisons to other states and to the private sector. Generally, the conclusion is that Alabama state employee pay is higher than in comparable states. More importantly, it is concluded that state employee compensation (that is, wages and employer-paid benefits) in Alabama is substantially higher than for equivalent employees in the private sector in the state. …an analysis of comparable state and private employees (equal education, equal skill), this discrepancy in pay is principally the result of the fact that the state, unlike the private sector, does not establish employee compensation using reliable market mechanisms. …State government employer-paid benefits are considerably higher than in the private sector. State government employee-benefit costs are estimated at 28.5 percent compared to wages and salaries. Private employee-benefit costs are estimated at 21.9 percent of wages and salaries. Thus, the employer-paid benefit factor for state employees is nearly one third higher than that of private employees. …State employees receive more paid time off than private employees in Alabama. On average, full-time state employees spend 10 percent fewer hours on the job for their compensation than private employees. State employees use more than twice as many annual sick days as private employees (10.2 compared to 4.4). It is estimated that state employees spend 1,726 hours per year at work. Private employees spend an average of 1,915 hours on the job. It is estimated that Alabama private employees are at work, on average, more than a month more each year than state employees (189 hours). Each month, the average state employee is paid for not working approximately two days that private employees would work. As a result, the average private employee is compensated $21.41 per hour worked. The average state employee is compensated $25.88 per hour worked, 21 percent more than the average private sector employee.

Europe is Falling Further behind the United States

Although some politicians argue that America should emulate Europe, that choice would mean lower living standards and less prosperity. A new study from Eurochambres reveals that Europe is decades behind the US in important measures of competitiveness. The study also calculates how long it would take Europe to catch up to America, but that assumes the US becomes stagnant. In reality, as the EU Observer reports, America is growing faster than Europe and the gap between the two is widening rather than shrinking:

The EU is 22 years behind the US on economic growth according to a new study, with several other economic indicators showing further gaps despite Europe’s ambitious reform agenda to be praised by leaders at this week’s summit.

A report by Eurochambers, the Brussels-based business lobby, published on Monday (5 March) argues that the US reached the current EU rate of GDP per capita in 1985 and its levels in employment and research investment almost 30 years ago.

…according to the Eurochambers study, the EU time lag behind the US has expanded further since 2003 when the group published its first report comparing the economic indicators on both sides of the Atlantic. …Authors of the study point out that if calculations included the latest newcomers of Bulgaria and Romania, the gap between the EU and US would be even larger… in a bid to start catching up with the US on key Lisbon indicators, Europe would have to perform better than the States, according to the Eurochambers study, while the latest results show the opposite: in 2006, the US registered an average GDP growth of 3.3 percent and the EU about 2.9 percent, the highest since 2000.

Russia Examining Corporate Tax Rate Reduction

Lower tax rates are not a solution to all Russia’s problems, but tax policy is moving in the right direction. Tax-news.com reports that the government wants to reduce the corporate tax rate to 20 percent. Even more impressive, policy makers seemingly understand that lower corporate tax rates will have a larger supply-side effect than a reduction in the value-added tax, demonstrating a better grasp of economics than nine-tenths of the US Congress. The story also notes that Russia has taken other positive steps, though it does not mention the 13 percent flat tax implemented in 2001: 

Russia may cut its corporate profit tax rate to 20% from 24% as part of a three-year tax policy plan, Deputy Finance Minister Sergei Shatalov stated last week. The government had previously been considering a further reduction in value added tax, currently 18%, to as low as 13%, but Shatalov said that a cut in corporate profit tax would be more likely to stimulate economic growth and boost levels of investment. …Putin has stated many times that while the government remains committed both to simplifying tax legislation and reducing the tax burden, tax reform must be balanced against needs of business, which requires certainty in the tax code. Since 2002, the Putin administration has reduced or abolished a number of taxes, including turnover tax, payroll taxes, sales tax, and value added tax. According to Putin, in 2005 Russia’s tax burden eased to 27.4% of GDP, from 28.7% in 2004.

Cost Overruns, Again

The Washington Post reported yesterday that the cost of new combat ships from Lockheed Martin and General Dynamics will likely be at least $350 million each, instead of the originally budgeted $220 million.

That 59 percent cost increase is routine for big federal procurements. The table below summarizes official government estimates of costs for various defense, energy, and transportation projects.

No doubt, what goes on with these projects is a “nudge nudge, wink wink” between federal officials and major contractors. The game involves key players on both sides low-balling initial costs in order to get project approval, and then having an informal agreement to let costs float up over time.

In this case, one cause of the combat ship cost increase, noted the Post, was that ”the Navy said its original cost estimate did not factor in some management costs.” How convenient!

A Sampling of Federal Cost Overruns
(Defense items in constant dollars; other figures in current dollars)
Project Estimated Cost and Date of Estimate
Original Latest or Actual
Transportation    
Boston “Big Dig” $2.6b (1985) $14.6b (2005)
Virginia Springfield interchange $241m (1994) $676m (2003)
Kennedy Center parking lot $28m (1998) $88m (2003)
Air traffic control modernization $8.9b (1998-2004) $14.6b (2005)
Denver International Airport $1.7b (1989) $4.8b (1995)
Seattle light rail system $1.7b (1996) $2.6b (2000)
     
Energy  
Yucca mountain radioactive waste $6.3b (1992) $8.4b (2001)
Hanford nuclear fuels site $715m (1995) $1.6b (2001)
Idaho Falls nuclear fuels site $124m (1998) $273m (2001)
National ignition laser facility $2.1b (1995) $3.3b (2001)
Weldon Springs remedial action $358m (1989) $905m (2001)
     
Defense (per unit in 2003 dollars)  
Global Hawk surveillance plane $86m (2001) $123m (2004)
F/A-22 Raptor fighter $117m (1992) $254m (2002)
V-22 Osprey aircraft $36m (1987) $93m (2001)
RAH-66 Comanche helicopter $33m (2000) $53m (2002)
CH-47F cargo helicopter $9m (1998) $18m (2002)
SBIRS satellite system $825m (1998) $1.6b (2002)
Patriot advanced missile $5m (1995) $10m (2002)
EX-171 guided munition $45,000 (1997) $150,000 (2002)
     
Other  
Capitol Hill visitor center $374m (2002) $559m (2004)
Kennedy Center opera house $18.3m (1995) $22.2m (2003)
Kennedy Center concert hall $15.1m (1995) $21.3m (1997)
Washington D.C. baseball stadium $435m (2004) $611m (2007)
International space station $17b (1995) $30b (2002)
FBI Trilogy computer system $477m (2000) $600m (2004)
Pentagon secret spy satellite $5b (n/a) $9.5b (2004)
Pentagon laser anti-missile system $1b (1996) $2b (2004)
Sources: Compilation by Chris Edwards based on GAO reports and Washington Post stories. Figures in $millions (m) or $billions (b).