Topic: Tax and Budget Policy

The Incredible Shrinking Deficit

The federal budget deficit projection for 2006 shrank to $296 billion (story here).  White House insiders are reporting that this is a good thing.

Compared to what?  Well, compared to last year’s deficit, of course.  Or compared to where the deficit was expected to go.  But being proud of an accomplishment like that is a bit like congratulating yourself for successfully not driving your car into a brick wall. 

Before anyone accuses me of being Eeyore incarnate, I’d like to note that the economy has been growing faster than many people expected, and surprises like that are always welcome.  That’s the main reason the federal government has collected so much revenue – and it’s unlikely that the Bush tax cuts didn’t have something to do with that.

Yet it’s hard to find much solace in data that also show the federal budget has grown by a staggering 45 percent during the Bush presidency so far.  (The national economy as measured by GDP has only grown by 30 percent.)  And you just might realize the good news is also the bad news.  On the one hand, the government collected more tax money.  On the other hand, the government collected more tax money. 

Government spending is still chewing on close to 21 percent of GDP.  That’s still bigger than the 18 percent it consumed when Bush took office.  In fact, that’s the biggest the budget has been in over 10 years – which is, conveniently, a point in history right before the Republican Revolution. 

If the federal budget had grown from the day George W. Bush was inaugurated at the same annual rate it had for the six years before he came to office, the federal budget would swallow only 17 percent of GDP today.  Balanced or not, seems to me a budget of that size would be much better than what we’ve got now.  Maybe we should stop the bidding there next year. 

In the meantime, the unfunded liabilities of federal entitlements have rocketed to over $85 trillion.  That’s obviously a much bigger number than the current year deficit.  And obviously a much bigger problem.  Yet you don’t seem to hear too much about that from policymakers anymore.

Okay, enough of the gloom.  You may now return to your regularly-scheduled happiness.

Porkers Get Prime Seats

This morning I attended President Bush’s speech on the release of the midsession budget review at the White House.  Bush first tied his tax cuts to the strong economic growth the nation is experiencing, and he was on solid ground. He then delivered some fine rhetoric about restraining spending and cutting special interest pork.  Perhaps his new budget and Treasury chiefs–Rob Portman and Henry Paulson–can actually get him to follow through on those frequently made promises.  But I would be more convinced if the White House hadn’t invited two of the Senate’s biggest pork barrelers–Ted Stevens and Conrad Burns–to sit right in the front row for the speech!  

Gray Power and State Tax Competition

At my neigborhood Fourth of July block party yesterday (in Fairfax County, Virginia), a 40-year resident gave a going-away speech to the crowd. She and her husband were sick and tired of the high state and local taxes in Fairfax and had looked into alternate warm states that had more pocketbook-friendly tax regimes. They settled on a small town in North Carolina. Interestingly, she appeared to be a hard-core Democrat.

Expect to hear lots more about comparative state tax rates as tens of millions of baby boomers begin retiring in coming years. 

Government Catch-22

The Washington Post reports today on the series of corruption scandals to hit Connecticut in recent years.

One scandal involved former Governor John Rowland, who was sentenced to jail for illegally accepting gifts. The Post quotes Rowland’s defense attorney lamenting that a new state legislature effort to crack down on corruption by imposing tighter rules will mean that “government will operate less efficiently.”

That illustrates a central conundrum of Big Government. Because today’s governments give away billions of dollars in contracts, grants, benefits, and loans they must have massive and complex bureaucratic rules to minimize the inevitable efforts to rip-off the taxpayer through fraud and corruption.

But all the red tape that is needed to prevent even the worst abuses results in the government working nowhere nearly as efficiently as private enterprise. Government bureaucrats, and anyone dealing with the government, spend an enormous amount of time and money filling out paperwork, but if you believe in big government programs, there is no way around that.

The only solution to excess bureaucracy and the chronic corruption in Washington and the states is to downsize government by moving activities to private competitive markets. See my book, Downsizing Government.

Our “Pig in a Poke” Farm Subsidies

Not content to lavish federal subsidies on farmers and landowners just because they grow certain agricultural crops, Congress is also in the business of subsidizing them even when they do NOT grow those crops. In a major expose, the Washington Post reports that the federal government pays out billions of dollars in subsidies to landowners based on past production of certain program crops, such as rice, even when the land is no longer used to grow the crops. As a result, federal farm subsidies are being paid to landowners who have no interest in farming. As the Post reported yesterday:

Nationwide, the federal government has paid at least $1.3 billion in subsidies for rice and other crops since 2000 to individuals who do no farming at all, according to an analysis of government records by The Washington Post.

Some of them collect hundreds of thousands of dollars without planting a seed. Mary Anna Hudson, 87, from the River Oaks neighborhood in Houston, has received $191,000 over the past decade. For Houston surgeon Jimmy Frank Howell, the total was $490,709.

Other federal farm programs offer “loan deficiency payments” to corn growers in Iowa and elsewhere when the price of corn falls below a certain minimum. Farmers collect the payments even if they eventually sell their corn at a higher, profitable price. According to a Post story today, the program has cost American taxpayers $4.8 billion in the current fiscal year, and $29 billion since 1998.

Federal farm subsidies are not only costly to the U.S. Treasury but they also distort global agricultural markets by encouraging overproduction. Those subsidies contributed to the demise of the current round of trade negotiations in the World Trade Organization. A Cato Institute study last year, titled “Ripe for Reform,” documented the many ways Americans are hurt by our own farm programs.

Of course, members of Congress from farm states refuse to give up these costly programs unless other countries agree to reform their own farm programs. As today’s Post story concludes: “Senate Finance Committee Chairman Charles E. Grassley (R-Iowa) has warned U.S. trade negotiators not to bow to foreign pressure unless they win major concessions for U.S. agriculture. ‘We’re not going to buy a pig in a poke,’ he said.”

“Pig in a poke” sounds like a fitting description of our own farm programs.

Whither the Budget Hawks?

Congressman Jeff Flake of Arizona is on a crusade against wasteful pork barrel spending. During the consideration of Congress’s annual spending bills, he introduced dozens of amendments that would defund ridiculous pork projects such as swimming pools, retail markets, and aquariums. He even brazenly targeted a pet project in Speaker Denny Hastert’s Illinois district.

You’d think Flake’s efforts would attract the support of the many self-proclaimed budget hawks in both major political parties. But you’d be wrong; his efforts have failed miserably, sometimes barely garnering support from a tenth of the House. 

His amendments haven’t even consistently drawn the vote of his colleagues in the Republican Study Committee — a group of more than 100 supposed fiscal conservatives. For instance, only about a third of RSC members supported Flake’s recent amendment to cut funding for the Southern and Eastern Kentucky Tourism Development Association.

The Blue Dog Coalition — a group of about 35 moderate to conservative House Democrats — has been even less frugal than the RSC. Though the coalition claims to advocate a balanced budget and fiscal restraint, only three of the Blue Dogs have consistently supported Flake’s efforts to cut pork spending.

Of course, pork only makes up a small fraction of the overall budget. But as Chris Edwards notes, it is illustrative of the reckless spending that pervades Congress, even amongst some of the supposed proponents of limited government.

Uncle Sam Wants to Sell You a Latte

In a college town like Madison, Wisconsin, I suspect you can’t throw a copy of Das Kapital without hitting a coffee shop or a drum circle.  But the federal government insists upon subsidizing that city’s grandé mocha makers.  (It hasn’t found a way to subsidize the drum circles … yet.)

First, some background:  Every year, the federal government socks taxpayer money into the Community Development Block Grant program.  According to the program’s website, the goal is to encourage “viable urban communities” and expand “economic opportunities” across the nation and, in particular, within “entitled communities.”   

This is done by funneling loan guarantees and direct grants to local businesses.  It’s considered a form of “economic development.”  Or, to translate from bureaucratese into plain English, it’s a form of grass-roots corporate welfare.   

In 2004 the CDBG program funded loan guarantees for projects such as the Tempe Market Place project in Arizona (described as “a retail facility anchored by six nationally known retailers”) to the tune of $7 million.  It gave guarantees in the amount of $1.9 million to the Noah Hotel project in Kingston, New York, to build a 50-room “boutique hotel,” with a 16,500-square foot ballroom, a restaurant, meeting rooms, and commercial retail space.  $2.5 million went to a downtown parking garage in Watsonville, California, and $2.2 million to the redevelopment of the 427-acre Colorado Industrial Park in Lorain, Ohio.

Now back to Madison, Wisconsin.  As the Mercatus Center’s Eileen Norcross explained today in testimony to Congress, last year the feds spent roughly $1.5 million on loan guarantees to help underwrite two coffee shops, a bakery, and a restaurant in that city, just to name a few. 

How do the HUD managers justify this sort of thing?  They claim the money helps “create” jobs for low- and middle-income residents.  And who do those residents happen to be?  As Norcross notes, they are college students who are classified as below the poverty line because the money they receive from their parents while attending school in Madison doesn’t count as income. 

So, if you’re a local business owner it sounds like a pretty good deal, eh?  Now you can open your doors in a college town and get loan guarantees from the government to hire the kind of employee (read: college students) you would have probably hired anyway.

Many members of Congress will ask, “How can we fix this program?”  Only a handful – including Sen. Tom Coburn of Oklahoma, the head of the subcommittee that held the hearing on CDBG this afternoon – ever ask, “Why do we even fund this stuff in the first place?”