In a new mini-documentary released by the Center for Freedom and Prosperity, I explain several of the ways that government spending hinders economic growth.

Any reader interested in state fiscal policy, particularly California’s, should read this excellent piece of journalism from NPR on the state’s prison predicament. (Actually, folks interested in reading why anti-drug policies and some “get tough on crime” efforts are counterproductive should also check this out.)

California’s prison system is a costly, overcrowded, criminal-spawning mess, and the chief culprit is the state’s prison employee union. But this isn’t just another story about public employee unions extracting exorbitant salaries and benefits at the expense of taxpayers:

In three decades, the California Correctional Peace Officers Association has become one of the most powerful political forces in California. The union has contributed millions of dollars to support “three strikes” and other laws that lengthen sentences and increase parole sanctions. It donated $1 million to [former Governor Pete] Wilson after he backed the three strikes law. And the result for the union has been dramatic. Since the laws went into effect and the inmate population boomed, the union grew from 2,600 officers to 45,000 officers. Salaries jumped: In 1980, the average officer earned $15,000 a year; today, one in every 10 officers makes more than $100,000 a year.

[Former CA Dept. of Corrections & Rehabilitation Secretary Roderick] Hickman says the union was able to control the department’s policy decisions, including undermining efforts to divert offenders from prison and reduce the prison population. “Maybe I was just impatient,” he says, “or it wasn’t going to go fast enough, but [the department] is still in the same place I left it, with an over $8 billion budget. Now it’s over $10 billion.” Today, 70 percent of that budget goes to pay salaries and benefits to the union and staff. Just 5 percent of the budget goes to education and vocational programs — the kind of programs that study after study in the past 10 years has found will keep inmates from returning to prison.

This activity strikes me as downright criminal.

Again, the entire article is worth a read, especially with state politicians currently attempting to scare taxpayers into supporting tax increases in order to continue their profligate spending through the recession. Kudos to NPR’s Laura Sullivan for digging into a state’s operations before writing a piece bemoaning its alleged budget woes.

H/T: Reason’s Leonard Gilroy

Despite the ballyhooed cash-for-clunkers program, retail sales dipped in July. Initial claims for unemployment also rose. Housing continues to be plagued by foreclosures. And many banks are still operating under the burden of toxic assets, which inhibits their ability to provide credit. These are not the recipe for an economic recovery. Yet the Federal Reserve is signalling it thinks a recovery is on the way. And President Obama is making happy talk on the economy.

A recovery may very well technically begin in the 3rd quarter of 2009, as signalled by rising GDP. But it is shaping up to be a jobless and joyless recovery. Firms are finding ever new ways of producing and earning some profits without hiring workers. The prospect of higher taxes for health care and to fund all the bailouts understandably makes businessmen cautious about taking on the liability of new workers.

The administration’s economic policy has been behind the curve. The idea of initiating new federal mandates, like health care and cap-and-trade with the attendant higher taxes, is a sure way to derail an economic recovery. What is needed is less spending and broad-based tax cuts. The administration’s economic policy is the real clunker and it is time to trade it in.

Politicians tend to like high tax rates because they believe it yields more revenue for them to redistribute. Yet the perverse incentive effects of high rates tend to limit the increase in revenue, since the higher the rates, the more worthwhile are tax avoidance activities. At some point it becomes better to consume than invest and play than work, since the rate of return is so low.

Reports Robert Carroll for the Tax Foundation:

Economic Effects of High Tax Rates
High tax rates discourage work, saving and entrepreneurship. They also encourage taxpayers to rearrange their tax affairs to receive more of their compensation in less heavily taxed forms and to take greater advantage of the myriad tax preferences in today’s tax code. For example, taxpayers can reduce their tax bill by financing more of a home purchase, receiving more of their compensation as tax-free fringe benefits, or rebalancing their investment portfolios towards tax-exempt state and local government bonds.

It’s important to remember that every time a taxpayer makes a decision based on tax considerations rather than economic merit, we all lose. It wastes resources by redirecting them to less productive uses. The cost of high tax rates is not trivial. Research on the major changes in tax rates over the last several decades—the lower tax rates enacted in 1981, 1986 and 2001 or the higher tax rates enacted in 1993—finds that the behavioral responses can be large. This research generally finds that for every 1 percent decrease in the after-tax reward from earning income, taxpayers reduce their reported income by about 0.4 percent.

This does not mean that tax cuts pay for themselves. Rather, tax rate changes can have a profound effect on the size of the tax base, with lower tax rates increasing the size of the tax base and higher tax rates, such as those proposed by President Obama, shrinking the tax base. A shrinking tax base is not only suggestive of the economic costs of high tax rates, but also means that the government will take in less revenue than the casual observer might assume.

High Tax Rates Will Shrink the Federal Income Tax Base
Consider the combined effect of President Obama’s proposal to raise the top tax rate from 35 percent to 39.6 percent and the new surtax. This means high-income households will receive 54 cents rather than 65 cents from every dollar they earn; that is, the after-tax reward from earning income falls by 17 percent. Based on the research mentioned above, with such large increases in tax rates, we can expect taxpayers facing the top tax rates to reduce their reported incomes by nearly 7 percent.

What is critically important from the government’s perspective is that while it collects an extra 10 cents for every dollar subject to the higher rates, it loses over 45 cents for every dollar by which reported income falls due to taxpayers working less or otherwise reporting less income.

Overall, simulating the effect of the higher tax rates in 2011 shows that the federal government can expect to raise at most only 60 cents on the dollar. While “large” is always in the eye of the beholder, losing 40 cents on a dollar should cause us all to question this policy. Moreover, this is a cautious estimate. It is based on the behavioral response estimated for the overall taxpaying population, even though high-income households are likely to be much more responsive. Thus, we might expect an even faster shrinkage of the federal tax base from these tax increases.

President Barack Obama wants Americans to believe that they can enjoy all of his proposed programs without paying for them because “the rich” will cover the cost. Alas, this is a dangerous political fantasy. Taxing “the rich” will only be the start. To get real money, the big spenders are going to have to tax the middle class as well. There ain’t no such thing as a free lunch–or a free government program!

Washington’s dysfunctional agricultural policy is costing consumers again. Limits on sugar imports, designed to protect a few large sugar producers, are driving up prices in a tight market. Reports the Wall Street Journal:

Some of America’s biggest food companies say the U.S. could ‘virtually run out of sugar’ if the Obama administration doesn’t ease import restrictions amid soaring prices for the key commodity.

In a letter to Agriculture Secretary Thomas Vilsack, the big brands — including Kraft Foods Inc., General Mills Inc., Hershey Co. and Mars Inc. — bluntly raised the prospect of a severe shortage of sugar used in chocolate bars, breakfast cereal, cookies, chewing gum and thousands of other products.

The companies threatened to jack up consumer prices and lay off workers if the Agriculture Department doesn’t allow them to import more tariff-free sugar. Current import quotas limit the amount of tariff-free sugar the food companies can import in a given year, except from Mexico, suppressing supplies from major producers such as Brazil.

While agricultural economists scoff at the notion of an America bereft of sugar, the food companies warn in their letter to Mr. Vilsack that, without freer access to cheaper imported sugar, ‘consumers will pay higher prices, food manufacturing jobs will be at risk and trading patterns will be distorted.’

Officials of many food companies — several of which are enjoying rising profits this year despite the recession — declined to comment on how much they might raise prices if they don’t get their way in Washington.

The letter is the latest salvo fired in a long-simmering dispute between U.S. food companies and the sugar industry over federal policy that artificially inflates the domestic price of U.S.-produced sugar in order to support the incomes of politically savvy sugar-beet farmers on the Northern Plains and cane-sugar farmers in the South. Most years, the price food companies pay for U.S. sugar is twice the world level.

President Barack Obama ran on the platform of change. How about changing agricultural policies which enrich the farm lobby at consumer and taxpayer expense?

In a speech yesterday in defense of his health care plan, President Obama used an interesting analogy to dismiss criticism that the inclusion of a government-run insurance option could undermine private insurers:

“UPS and FedEx are doing just fine… It’s the Post Office that’s always having problems.”

Comparing the USPS with a proposed government-run insurance plan is probably counterproductive for the President’s aims. But making the analogy and deriding the government-run mail carrier — while acknowledging that private-sector UPS and FedEx are “fine” — provides some nice ammo for those of us who think the government should be less involved in both health care and mail delivery.

Now I understand that comparing the USPS to FedEx and UPS isn’t exactly apples to apples. But that’s due at least in part to the fact that the USPS has a government-granted monopoly on first (and third) class mail. When it comes to mailing a letter, there is no private option for Americans.

Last week the Government Accountability Office reported on the state of Government Mail and the situation isn’t pretty:

USPS projects for fiscal year 2009:

• a net loss of $7 billion, even if it achieves record savings of more than $6 billion;
• an increase in outstanding debt to a total of $10.2 billion; and,
• despite this borrowing, an unprecedented $1 billion cash shortfall.

USPS projects cash shortfalls because cost cutting and rate increases will not fully offset the impact of mail volume declines and other factors that increase costs—notably semiannual cost-of-living allowances (COLA) for employees covered by collective bargaining agreements. Compensation and benefits constitute close to 80 percent of USPS’s costs—a percentage that has remained similar over the years despite major advances in technology and the automation of postal operations. Also, USPS continues to pay a higher share of employee health benefit premiums than other federal agencies. Finally, USPS has high overhead (institutional) costs that are hard to change in the short term, such as the costs of providing universal service with 6‑day delivery, a network of 37,000 post offices and retail facilities, and a delivery network of more than 149 million addresses.

It’s time to give Americans a private option for sending mail, with privatization of the USPS being the ultimate goal.

I was very pleased to read in Federal Computer Week this morning that the Office of Management and Budget will begin tracking earmark requests next year for the fiscal 2011 budget cycle.

OMB makes available some years’ approved earmarks, but not the earmark requests put forward by members of Congress. Tracking and publishing requests will shed light on the whole ecosystem of congressional earmarks—the favor factory, if you will.

OMB’s move follows a project Wash​ing​ton​Watch​.com has conducted this summer: asking the public to plug earmark disclosures into a database. The site now maps over 20,000 earmarks. (Well, technically, that much data breaks the mapping tool, but you can see state-by-state earmark maps.)

Earlier this year, the House and Senate Appropriations Committees required their members to disclose earmark requests. These disclosures—published as Web pages and PDF documents—were not useful, but public interest in this area is strong, and the public made them useful by entering them into WashingtonWatch.com’s database.

The project isn’t over, by the way, and the current focus is collecting earmarks requested by Appropriations Committee members.

It’s great news that next year the Obama Administration will track and disclose earmarks, from request all the way through to enactment. Given his struggle in the area lately, this is a chance to score some transparency points. President Obama campaigned against earmarks, promising reform, and this is an important step toward delivering on that promise.