Topic: Tax and Budget Policy

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?” 

‘Breathtaking’ Waste and Fraud in Hurricane Aid

That’s the front-page headline in today’s New York Times. Eric Lipton begins this way:

Among the many superlatives associated with Hurricane Katrina can now be added this one: it produced one of the most extraordinary displays of scams, schemes and stupefying bureaucratic bungles in modern history, costing taxpayers up to $2 billion.

A hotel owner in Sugar Land, Tex., has been charged with submitting $232,000 in bills for phantom victims. And roughly 1,100 prison inmates across the Gulf Coast apparently collected more than $10 million in rental and disaster-relief assistance.

There are the bureaucrats who ordered nearly half a billion dollars worth of mobile homes that are still empty, and renovations for a shelter at a former Alabama Army base that cost about $416,000 per evacuee.

And there is the Illinois woman who tried to collect federal benefits by claiming she watched her two daughters drown in the rising New Orleans waters. In fact, prosecutors say, the children did not exist.

The tally of ignoble acts linked to Hurricane Katrina, pulled together by The New York Times from government audits, criminal prosecutions and Congressional investigations, could rise because the inquiries are under way. Even in Washington, a city accustomed to government bloat, the numbers are generating amazement.

Some of us are impressed but not exactly amazed. When an institution with no incentive for cost-cutting, and little risk of anyone being fired or demoted for malfeasance, sets out to spend money on the principle “It’s going to cost whatever it’s going to cost,” then you can expect plenty of waste, fraud, and abuse.

I noted last September that

Congress passed a $51.8 billion Katrina relief bill on the very day the Associated Press released a study of where the $5 billion small-business relief money after 9/11 went. It found that the funds went to a South Dakota country radio station, a Virgin Islands perfume shop, a Utah drug boutique, and more than 100 Dunkin’ Donuts and Subway shops–“companies far removed from the devastation.” Fewer than 11 percent of the loans went to companies in New York and Washington.

The more things change, the more they remain the same. Big boxes of government money will not be spent wisely. That’s why it’s a good idea to keep as many of society’s resources in the private sector as possible. Private owners have incentives to cut costs, save money, and have more money to spend later. Employees of private companies know that they could be fired for waste and malfeasance, and they know that their company (or even their nonprofit) could go out of business if its costs aren’t managed. Those incentives are almost entirely lacking in the government sector, where resources are acquired coercively and no one has his or her personal funds at stake.

The logical result? “Breathtaking … stupefying … amazing” amounts of boondoggles and bungles.

Foolishness High as an Elephant’s Eye…

Kudos to the New York Times for Sunday’s article critically examining the United States’ dubious infatuation with ethanol. A sample:

For all its allure, though, there are hidden risks to the boom. Even as struggling local communities herald the expansion of this ethanol-industrial complex and politicians promote its use as a way to decrease America’s energy dependence on foreign oil, the ethanol phenomenon is creating some unexpected jitters in crucial corners of farm country.

A few agricultural economists and food industry executives are quietly worrying that ethanol, at its current pace of development, could strain food supplies, raise costs for the livestock industry and force the use of marginal farmland in the search for ever more acres to plant corn… .

But many energy experts are also questioning the benefits of ethanol to the nation’s fuel supply. While it is a renewable, domestically produced fuel that reduces gasoline pollution, large amounts of oil or natural gas go into making ethanol from corn, leaving its net contribution to reducing the use of fossil fuels much in doubt.

The article is not without its faults; for instance, it gives an uncritical airing of the opinion that American agriculture should be used for “food first, then feed” for livestock, “and last fuel.” (If the economics are such that demand for ethanol is more intense than the demand for corn chips, then why shouldn’t U.S. corn go to ethanol? Of course, that’s an enormous “if.”) Still, the NYT article is a very welcome departure from the claptrap on ethanol offered by other media.

Clive Crook on the Massachusetts Plan

Clive Crook writes (note: link probably will expire in a month),

How to do national health reform worthy of the name? First, and most important, create a level playing field tax-wise for individuals and firms, so that nobody has a financial incentive to prefer employer-provided insurance to the individually purchased kind. You could do this by extending Connector-style tax relief to all taxpayers, or by abolishing it for employers. Abolition would be better. It would raise a lot of revenue (which will be needed in my plan) and would jolt people into changing their insurance arrangements.

Second, the free-rider problem makes the case for an individual mandate compelling, in my view. Massachusetts is right about that. And the mandate, in turn, makes health subsidies for the poor, which would be desirable in any case, unavoidable… . But to avoid the enormous problems of enforcing and administering the mandate … give everybody a voucher sufficient to buy stripped-down, Connector-style coverage.

Third, impose one other global restriction on insurance companies: If they offer a policy to anyone, they must offer that same policy to everyone, regardless of age, sex, current health, and other risk factors. Again, the Connector has provisions of this kind. This would preserve the risk-pooling feature of private insurance, while still allowing vigorous competition on price and offering.

I strongly disagree with the third point. As I pointed out here, it is these sorts of regulations that aggravate the problem of the uninsured in the first place. Force insurance companies to offer the same policy to everyone at the same price, and naturally health insurance will be a bad deal for young, low-risk people. Like Massachusetts, you will end up with a problem of such people being uninsured. As I said in my talk, the Massachusetts plan at best solves a problem that was created by regulation in the first place. Listen to the talk.