Topic: Tax and Budget Policy

U.S. Economic Misery — or Delusion?

Opponents of trade liberalization are painting themselves into a corner. They repeat endlessly that rising imports and trade deficits are bad for the U.S. economy and American workers. Imports and the trade deficits they fuel supposedly reduce U.S. employment and wages and impoverish American households as we borrow more and more and sell off the family jewels to support consumption. And since imports and trade deficits keep expanding, our economy must be getting worse, right?

Wrong. This morning the Labor Department reported that the U.S. unemployment rate fell again last month, to 4.5 percent, which must be full employment by anybody’s definition. Almost 100,000 net jobs were added in February, despite cold weather that crimped construction. Those job gains come on top of a revised net gain of 372,000 jobs in December and January, bringing net employment growth in the past four years to 6.5 million. Today’s report also confirms that real wages continue to rise for American workers.

Adding to the favorable picture, the Federal Reserve Board reported yesterday that the net household wealth of American families in the last quarter of 2006 reached a record $55.6 trillion. And that is net wealth: what we own after subtracting mortgage, consumer and other debts. Our net wealth is up 43 percent in the past four years, driven by increases not only in home values but also stock prices.

Granted, our infinitely complex, $13.5 trillion economy will have its ups and downs, but the current reality simply does not square with the politically tainted picture of economic misery and hopelessness being portrayed by certain critics of trade.

Should Michigan be Re-Named Western France?

There is ample competition for the dubious honor of being the state heading in the wrong direction at the fastest rate. California, New Jersey, Connecticut, and New York all can stake a claim to this prize. But Michigan politicians certainly are striving for recognition in this contest, and the Governor is leading the charge. As explained by the Wall Street Journal, she has been on a destructive tax-and-spending spree:

Re-elected last year, Ms. Granholm recently rewarded the voters by announcing some $1 billion in new fees and tax increases. …She would tax trucking, shopping, smoking, hunting, fishing, drinking beer and liquor, using a cell phone and, yes, even dying. …the levies are part of what has become a vicious cycle for Michigan: Poor growth causes lower revenues, so raise taxes, which leads to even poorer growth, so raise taxes again. The state has lost some 362,000 jobs since 2000 and the jobless rate in December was 7.1%, second highest in the country… The national rate is 4.6%. …per capita income in the state fell to its lowest level in 75 years in 2005, relative to the national average. …her budget would…pay off the teachers unions that support her with a new $178 per pupil spending increase, most of which would be absorbed by the bureaucracy and never see a classroom. This continues the state’s lack of spending restraint; between 1995 and 2007 Michigan spent an aggregate $14 billion above the rate of inflation and state population growth, according to a Mackinac study. …according to the Governor’s own Financial Advisory Panel, the state has amassed a $35 billion unfunded liability in its public-school health and retirement benefits. The state spends a whopping $1,200 per student per year on teacher and administrator benefits.

Medicare Rx: Let the Sickie-Dumping Begin

When Republicans created the Medicare prescription drug entitlement, I warned that the private drug plans would take steps to avoid sick seniors and enroll only healthy ones. Since the plans receive the same amount per senior, the healthy ones are a cash cow while the sickies are a liability.

It seems that the sickie-dumping has begun.

The Hill reports that one private drug plan, Sierra Health Services’ SierraRx, noticed that a lot of new and very costly enrollees were formerly enrolled in Humana Health Services’ Complete plan. Sierra alleges that Humana urged maybe 4,000 to 7,000 of its sickest enrollees to switch to SierraRx. According to the article:

Humana counters that it merely passed along information to its customers about a competing product that might better suit their needs, and said federal regulators approved its actions….

“Our goal was to make sure these people continued to have access to prescription coverage,” Humana’s director of media and public relations, Dick Brown, said. Humana also asserts that CMS approved the script the company used for these calls.

Brown would not explain, however, whether the company contacted each of the more than 400,000 Complete customers with the same information or if Humana targeted the calls to a subset of these beneficiaries  such as those with the highest drug costs, as Sierra implied.

Did they? Didn’t they? Was it intentional? Wasn’t it? Really, who cares. It doesn’t matter if the drug plans deliberately dump the sickies, because Part D will reward such behavior even if it’s unintentional.

That’s why the last chapter has not been written on the cost of Part D. The drug plans can play avoid-the-sickies for a while. But when enough plans lose that game, there won’t be many places for the sickies to go. Their expected utilization will be built into the projected costs of all drug plans, which means that younger workers will have to shell out more to fund the program. It also means that healthy seniors will have to shell out more — but they’ll scream so much that Congress will probably pass even more of the cost on to younger workers, either through tax hikes or price controls on prescription drugs.

Strap yourselves in. It’s going to be a wild ride.

Edwards’s 2-to-1 Budget Law

How should government officials decide on whether to fund big projects such as fighter aircraft, highways, bridges, and other types of infrastructure?

First, they should check the Constitution to see whether they are legally allowed to spend on the object in consideration.

Second, they should assume that the item will cost at least twice as much as initial estimates indicate. There should be a 2-to-1 hurdle when the price tag of a project is being considered.

Government purchases of military hardware, highways, energy projects, space equipment, and other items often cost 50% or 100%, or more (see here and here), above what politicians originally promise.

Let’s be conservative and say that a 50% cost overrun is typical, such that we can expect a new $1 billion project to actually cost taxpayers $1.5 billion. But as economists often point out, paying for $1.5 billion in government spending will cost taxpayers much more than $1.5 billion because of the “deadweight losses” or inefficiency costs created by extracting taxes from the private sector with a complex and high-rate system.

How much more? Harvard’s Martin Feldstein thinks deadweight losses might be $1 for each added dollar of taxes. But let’s be conservative and say it’s only 50 cents on the dollar. So government projects impose deadweight losses of 50% on costs that are likely to balloon at least 50%. 

The bottom line is that when America’s taxpayers hear that politicians want to spend, say, $10 billion on a new scheme, they should assume that they will face an ultimate financial hit of $22.5 billion. And that’s conservative!

Soaring Cost Overruns

Last week, we found out that new combat ships for the Navy will cost taxpayers at least 59% more than promised.

Today, the Washingon Post reports that upgraded Air Force cargo planes will cost taxpayers at least 35% more than originally promised.

Are such cost overruns some sort of unfortunate accident? Or are they a routine scam perpetrated by an iron triangle of federal officials, companies feeding off the government’s teat, and members of Congress with taxpayer-financed activities in their districts? 

Examine the record of overspending in the table here and decide for yourself.

‘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.