Topic: Tax and Budget Policy

Debunking the Debunking of Dynamic Scoring and the Laffer Curve

Many statists are worried that Republicans may install new leadership at the Joint Committee on Taxation (JCT) and Congressional Budget Office (CBO).

This is a big issue because these two score-keeping bureaucracies on Capitol Hill tilt to the left and have a lot of power over fiscal policy.

The JCT produces revenue estimates for tax bills, yet all their numbers are based on the naive assumption that tax policy generally has no impact on overall economic performance. Meanwhile, CBO produces both estimates for spending bills and also fiscal commentary and analysis, much of it based on the Keynesian assumption that government spending boosts economic growth.

I personally have doubts whether congressional Republicans are smart enough to make wise personnel choices, but I hope I’m wrong.

Matt Yglesias of Vox also seems pessimistic, but for the opposite reason.

He has a column criticizing Republicans for wanting to push their policies by using “magic math” and he specifically seeks to debunk the notion - sometimes referred to as dynamic scoring or the Laffer Curve - that changes in tax policy may lead to changes in economic performance that affect economic performance.

He asks nine questions and then provides his version of the right answers. Let’s analyze those answers and see which of his points have merit and which ones fall flat.

But even before we get to his first question, I can’t resist pointing out that he calls dynamic scoring “an accounting gimmick from the 1970s” in his introduction. That is somewhat odd since the JCT and CBO were both completely controlled by Democrats at the time and there was zero effort to do anything other than static scoring.

I suppose Yglesias actually means that dynamic scoring first became an issue in the 1970s as Ronald Reagan (along with Jack Kemp and a few other lawmakers) began to argue that lower marginal tax rates would generate some revenue feedback because of improved incentives to work, save, and invest.

Now let’s look at his nine questions and see if we can debunk his debunking:

Government Waste Continues

Earlier this week, I noted that some Inspectors General provide insufficient oversight of federal government activities. They should be more aggressive in uncovering waste and abuse in federal agencies.  

Nonetheless, many Inspectors General issue helpful reports that alert Congress and the public to wrongdoing. Here is a sampling of recent reports showing the widespread mishandling of federal tax dollars:

  • Internal Revenue Service (IRS): Tax fraud by incarcerated individuals amounted to $1 billion in 2012, growing from $166 million in 2007. One inmate defrauded the government of $4 million over a 10-year period.
  • Department of Homeland Security (DHS): The Inspector General for DHS issued a new report highlighting 68 ways that the agency has wasted tax dollars. The list includes a $1.5 billion cost overrun for construction of the agency’s new headquarters, FEMA’s botched handling of relief for Hurricanes Katrina and Isaac, DHS employees claiming unearned overtime, and insufficient oversight of DHS’s procurement processes.
  • Housing and Urban Development (HUD): According to HUD’s Inspector General, New York City misspent $183 million it received from the federal government to rebuild hospitals following Hurricane Sandy. The city used the funds for employee pay and benefits, which were not allowable grant expenses.
  • Drug Enforcement Agency (DEA): Over the course of 20 years, the DEA allowed an individual running a Ponzi scheme to conduct onsite investment training for employees. The trainer, Kenneth McLeod, used the seminars to solicit clients for his bond investment fund, which promised risk-free returns of 8 to 10 percent. More than half of McLeod’s 130 investors came from the DEA. The Inspector General cites DEA for numerous oversight lapses including failing to verify McLeod’s credentials.

Even with the recent politicization of some Inspector General reports, the reports can be useful to illuminate waste, mismanagement, and fraud within the federal government.

Mississippi Copies Misguided Energy Subsidies

The federal government has a long history of “green energy” failures. Many states have also foolishly subsidized green energy, including Mississippi.

KiOR biofuels launched several years ago with much fanfare. The company was supposed to turn wood chips into liquid hydrocarbons for use as fuel and promised to revolutionize the energy industry. Its chief investor, Vinod Khosla, described KiOR’s refinery as “an amazing facility.”

The company benefited from a federal biofuel requirement that mandated refiners use 16 billion gallons of biofuels annually by 2022. It then sought out state subsidies. The company decided to locate in Mississippi after the state offered a $75 million, no-interest loan. In exchange, the company promised to create 1,000 jobs by December 2015.

Yet the company had financial problems that were apparent from the start. Operating costs  ran $5 to $10 a gallon. The Washington Post reports that court papers estimated KiOR’s revenue at just $2.25 million but losses of $629.3 million.  

Production issues also plagued the facility. The system that fed wood chips into the plant frequently malfunctioned. The process converted less than 40 percent of its inputs into gasoline or diesel, leading to higher costs.

The problems were too much for the company to overcome. It filed bankruptcy in November and  still owes Mississippi $69.5 million.

This loan is just one of the many types of energy subsidies that Mississippi provides to green energy companies. The state exempts some green energy manufacturers from taxes. It has provided grants and loans to multiple companies.

Tax Money Down the Drain

There are many types of federal government waste. Perhaps the most glaring is spending on projects that simply do not work. The money is spent, but taxpayers receive no benefit.

From the Washington Post:

Social Security officials have acknowledged that the agency spent nearly $300 million on a computer project that doesn’t work. The agency, however, is trying to revive it. The program is supposed to help workers process and manage claims for disability benefits.

Six years ago, the agency embarked on an aggressive plan to replace outdated computer systems overwhelmed by a growing flood of disability claims. But the project has been racked by delays and mismanagement, according to an internal report the agency commissioned.

As a wild guess, let’s say that skilled computer techs cost $150,000 a year in wages and benefits. Apparently then, about 333 of them have been paid for six years, yet have made little or no progress on this mishandled Social Security project.

Here’s a much larger taxpayer black hole, also reported in the Washington Post this week:

One of the first casualties was the Crusader artillery program, which was canceled after the Pentagon spent more than $2 billion on it. Then there was the Comanche helicopter debacle, which got the ax after $8 billion. More than twice that amount had been sunk into the Army’s Future Combat System, but that program got killed, too.

In all, between 2001 and 2011 the Defense Department spent $46 billion on at least a dozen programs—including a new version of the president’s helicopter—that never became operational, according to an analysis by the Center for Strategic and Budgetary Assessments.

Any organization will go down some wrong paths when it comes to advanced technologies, but $46 billion is a remarkable amount to have sunk into dead-end projects. Let’s say that engineers, machinists, managers, and other workers at defense firms earn an average of $200,000 a year. The $46 billion lost would be like having a small city of 23,000 such high-skill people beavering away for a decade on projects that all end up in the trash bin. I’m not an expert on procurement, but I do know that is a lot of human talent for the government to waste.

Two Very Depressing Charts for President Obama, Two Very Encouraging Charts for America’s Taxpayers

Let’s look at some fiscal data that must be very depressing for President Obama and other advocates of big government.

Which means, of course, that this information must be very good news for American taxpayers!

Here’s a chart looking at annual federal spending since 2000. You’ll notice that spending skyrocketed from 2000-2009 (a time when libertarians were justifiably glum), but look at how the growth of government came to a screeching halt after 2009.

Here are some specific numbers culled from the OMB data and CBO data. In fiscal year 2009, the federal government spent about $3.52 trillion. In fiscal year 2014 (which ended on September 30), the federal government spent about $3.50 trillion.

In other words, there’s been no growth in nominal government spending over the past five years. It hasn’t received nearly as much attention as it deserves, but there’s been a spending freeze in Washington.

Now let’s look at what happens when government is put on a diet.

Who Will Watch the Watchdogs?

Inspectors General (IGs) serve an important purpose within the federal bureaucracy. They are supposed to be independent, internal watchdogs that guard against fraud, corruption, waste, and other failures. But based on the recent actions of some Inspectors General, their independence is being questioned.

Congress created the system of Inspectors General in 1978 with support from both parties and President Carter. The 72 IGs monitor agency activities and report on agency malfeasance.  Many IGs are appointed by the president to shield them from agency interference.

In theory, IGs are supposed to crack down on waste, but IGs are often too soft on their agencies. Complaints have increased over the last several years. The Washington Examiner discusses the issue:

In the past two years, IGs at a half-dozen Cabinet-level agencies have been accused of retaliating against whistleblowers or softening their findings to protect top department executives or the White House.

Damning information about high-level misconduct has been scrubbed from recent IG reports at the Departments of State, Defense, Homeland Security, Interior and a slew of independent agencies, according to congressional reports and outside watchdog groups.

The Commerce IG has been rebuked for retaliating against his own people by the U.S. Office of Special Counsel and two congressional committees.

At the Department of Veterans Affairs, the acting inspector general is under fire for downplaying whistleblower claims and absolving the agency of blame for patient deaths in a high-profile report, even though the report confirmed that the VA used phony scheduling practices that led to delays in care.

Whistleblowers who have turned to Congress or the media routinely say inspectors general failed to investigate their charges of wrongdoing and then idly watched as their bosses subjected them to brutal retaliation for exposing agency secrets.

Even investigators within IG offices have faced retaliation for reporting internal wrongdoing or attempts to withhold embarrassing findings, according to congressional reports.

IGs are supposed to be guardians of the public interest, but sometimes they are the opposite. Congress has even had to use its subpoena power to force IGs to release documents and reports in some cases.

IGs serve an essential function ensuring that taxpayer funds are spent wisely, but many IGs are falling short on their oversight responsibilities. If they refuse, who will watch the watchdogs? As James Madison wrote in Federalist 51, “”In framing a government which is to be administered by men over men…, you must first enable the government to control the governed; and in the next place oblige it to control itself.”

New Essays in Cato Growth Forum

Here are today’s new essays in the Cato Institute’s online forum on reviving growth:

1. Edward Glaeser targets land use restrictions – and five other barriers to growth.

2. Susan Dudley wants to reform the regulatory process.

3. James Pethokoukis takes aim at the crony capitalist alliance.

4. Andrew Kelly calls for better integration of school and work.

5. Bowman Cutter looks for a path to the “good economy.”