Topic: Tax and Budget Policy

Scottish Independence: Not That Big a Deal in Today’s World

Yesterday, my colleague Doug Bandow blogged about Scottish independence, concluding with the following: “Whatever the Scots choose on September 18, Americans should wish them well.” I just wanted to add a quick point here, drawing on something law professor Eric Posner said on this issue: “the benefits of a large country—mainly, security and a large internal market—are of diminishing significance in a world of free trade and relative peace.”

To me, this is a very important consideration. If Scottish independence meant an increased chance of war or high tariffs designed to separate the Scottish market from the rest of the world, it would be worrying. But those seem unlikely. In terms of war and peace, there have been no Mel Gibson sightings that I’m aware of. On trade, there may be some bureaucratic challenges, but it seems clear the goal is for Scotland to join the EU and be part of its large, single market. As for trade with the rest of the world, Scotland will take on the EU’s trade policy–which is not perfect of course–but has followed the trend toward liberalization that the rest of the world has pursued over the past few decades. In all likelihood, Scotland will continue to search for export markets for its whisky and allow the free flow of imports.

If Scottish independence meant it would become like North Korea, I’d be concerned. But it doesn’t seem like that’s the path it is on. With the exception of a few regions, we live in a highly integrated, peaceful world. Scottish independence would not change that.

The Naked Truth about TSA Spending

Governments tend to spend money on low-value activities because they do not have market signals or customer feedback to guide them. In this report, I examined the problem with respect to the Transportation Security Administration. As one example, TSA’s SPOT program for finding terrorists spends more than $200 million a year with few if any benefits.

Further confirmation of TSA’s misallocation problem comes from a new academic study looking at the full-body “nudie” scanners installed in U.S. airports at great expense between 2009 and 2013. A team of university researchers bought a Rapiscan Secure 1000 backscatter X-ray machine and began testing it on various types of weapons and explosives. It turns out that a terrorist could fool the machines pretty easily:

We find that the system provides weak protection against adaptive adversaries: It is possible to conceal knives, guns, and explosives from detection by exploiting properties of the device’s backscatter X-ray technology.

If you walked though the machines with a big block of C-4 plastic explosive in your hands, it would be detected. The problem, of course, is that terrorists are smarter than that:

We show that an adaptive adversary, with the ability to refine his techniques based on experiment, can confidently smuggle contraband past the scanner by carefully arranging it on his body, obscuring it with other materials, or properly shaping it. Using these techniques, we are able to hide firearms, knives, plastic explosive simulants, and detonators in our tests. These attacks are surprisingly robust, and they suggest a failure on the part of the Secure 1000’s designers and the TSA to adequately anticipate adaptive attackers.

The Rapiscan machines were pulled from U.S. airports due to concerns about civil liberties and the possible health effects of emitted radiation. But as one of the study authors observed to Bloomberg: “What does this say about how these scanners were tested and acquired in the first place? … It says there’s something wrong with the government’s process … [the process] is secret and not independent. Those are problems.” It’s also a problem that the government has a monopoly on aviation security, and that TSA is not accountable to anyone for its level of efficiency or performance. Well, it’s accountable to Congress I suppose, but that doesn’t really amount to much these days.

The good news is that airport security screening does not have to be a government monopoly. We should move to private contracting with federal oversight, which is the approach taken by Canada and numerous European countries. For more, see my report and check out the writings of Bob Poole at Reason.

Arkansas’ Budget-Busting Medicaid Expansion

Back in February, I highlighted the fight to reauthorize Medicaid expansion under ObamaCare in Arkansas. The states’ plan not only expanded Medicaid; it did so in a more expensive way.  Supporters claimed that the concerns were hogwash. Costs would be the same or lower because Department of Health and Human Services (HHS) required “budget neutrality” for the expansion. A new report from the Government Accountability Office (GAO) confirms that AR’s expansion is a budget-buster.

Medicaid provides insurance to low-income individuals, focused on pregnant women, children, and the disabled. ObamaCare sought to expand this program adding millions of able-bodied, childless adults to the program. States that agreed to dramatically expand the entitlement program would receive a large sum of federal funding. The federal government agreed to fund 100 percent of expenditures through 2016, slowly decreasing to 90 percent in 2020 and after. Even with the large financial enticement, states, rightly, resisted. The program is expensive to operate. States also have little control over the program. The quality of insurance is poor. A 2013 study found “no significant improvements” in health outcomes for individuals joining the program.

Arkansas decided to try something different. Under the plan passed by Democrat Governor Mike Beebe and the Republican legislature, more than 200,000 individuals would join the state’s Medicaid rolls. These individuals would not join the traditional program, but instead would receive money from the state and federal government to purchase insurance on the state’s newly-created health insurance exchange. This plan was preferable, according to advocates, because it would eliminate the known health disparities between traditional Medicaid and private insurance. Better yet, the AR Department of Human Services said that the so-called private option would save the state $670 million over the next ten years and would save the federal government $600 million. Choice and competition would power the market and result in lower prices.

Supporters argued that if the state was going to dramatically expand an entitlement program; it should do it in a fiscally-conservative way saving money in the process.

However, subsidizing Medicaid expansion through private insurance is not fiscally conservative. It turns out that private insurance costs $3,000–or 50 percent more–per enrollee than traditional Medicaid coverage according to the Congressional Budget Office (CBO). Spending $3,000 per person more adds up to a huge added cost for taxpayers. This would be compounded by the Arkansas’ decision–due to federal strings–to eliminate any out-of-pocket expenses for enrollees; no co-pays, no deductibles, no cost-sharing.

Supporters of Arkansas’ expansion claimed it didn’t matter because HHS’s approval required that the plan be “budget neutral.” In other words, the federal government would not spend more than if the state pursued traditional expansion. If the state exceeded the budget cap, the state would be responsible for the additional expenses. The state would be forced to tweak the program later if costs rose.

The plan passed and costs quickly grew. The first month was overbudget. As of June, the program was $10 million overbudget.

GAO now says that HHS did not guarantee budget neutrality in the Arkansas plan suggesting that even more taxpayer money is at risk. “HHS did not ensure budget neutrality. HHS approved a spending limit that included hypothetical costs despite questionable state assumptions and limited supporting documentation…HHS officially told us they accepted the state’s projections of the increased cost of expanding Medicaid in the absence of a demonstration without requesting data to support the state’s assumptions.”

HHS just accepted what Arkansas said, and did not question the state’s assumptions. The promised federal backstop does not seem to exist. GAO estimates that the “$4.0 billion spending limit approved by HHS was about $778 million [over three years] more than what it would have been.”  That’s a 20 percent increase in costs for federal taxpayers.

Making matters worse, GAO says that AR has the authority to “adjust the approved spending limits if costs…prove higher than expected.” This sort of upward flexibility never used to be granted, but HHS recently granted it to 11 other states. AR has already acknowledged that it might need a higher spending limit.

This is not the first time that GAO has highlighted HHS’ inability to properly enforce budget neutrality. HHS’ refusal to properly set spending caps is costing federal taxpayers millions, or billions, more than it should. GAO confirms that Medicaid expansion in Arkansas is busting the budget.  

Taxes, Tennis, and Transportation

We have an uncompetitive federal corporate tax rate of 35 percent compared to Canada’s 15 percent. Our Roth IRA is inferior to Canada’s TFSA, as Amity Shlaes and I discussed in the Wall Street Journal. And while Serena Williams still tops rising star Eugenie Bouchard, we should be paying attention to ”What Canada Can Teach Us About Tennis.”

Now we face another competitive threat from the north. This time it’s British Columbia seaports says Bloomberg:

Container ships sailing across the northern Pacific are carrying more cargo and are setting course for British Columbia to avoid delays from a possible strike by U.S. West Coast longshoremen. Traffic in Prince Rupert soared 49 percent in July from a year earlier, according to data compiled by Bloomberg Intelligence, while volume dropped 19 percent in Seattle, its nearest major U.S. rival.

Canadian ports are gaining an advantage over their U.S. rivals amid an economic recovery that’s increasing container volumes from East Asia. While U.S. West Coast ports are mired in a labor dispute and congestion hobbles local railways, Prince Rupert is winning customers with its shorter sailing times from China and efficient infrastructure that can whisk freight to the U.S. Midwest and beyond.

“If people are using the Canadian ports now out of concern for a slowdown, and they like what they see and they like the processing times and the experience, they’ll continue to funnel some of their traffic that way,” Emma Griffith, a director at Fitch Ratings in New York.

So Canadian seaports are gaining in the short-term because of our self-inflicted wound, but they may also gain in the long-term because of both natural and man-made advantages:

[Prince Rupert] lies ice-free 745 kilometers (462 miles) northwest of Vancouver, is as many as 68 hours closer to Shanghai in sailing time than is Los Angeles, according to the Prince Rupert Port Authority. Including rail times, cargo transiting from Shanghai through Prince Rupert would reach Chicago two days quicker than if the ships called at Oakland or Seattle-Tacoma, and three quicker than if they unloaded in Los Angeles…

One of Prince Rupert’s advantages is that inbound containers can be transferred directly to trains rather than trucks that head to a distribution center, which is what happens at other West Coast ports, according to Kris Schumacher, a spokesman for the port authority. This kind of traffic, which uses different modes of transportation, is known within the industry as intermodal freight, and it’s booming for Canadian National.

Meanwhile back on the United States, it’s antibusiness-as-usual:

…there’s no indication when new contracts will be signed for workers at 29 ports from Washington state to California. About 20,000 dockworkers represented by the International Longshore and Warehouse Union have been without a contract since early July. The union and the maritime association are negotiating over work rules, salaries and health-care benefits.

In 2002, the maritime association locked out U.S. West Coast port workers after contract talks broke down. The 10-day shutdown ended when then-President George W. Bush invoked the rarely used Taft-Hartley Act to reopen the ports. The dispute cost the U.S. economy $1 billion a day, according to the maritime association.

Edwards’ Law of Cost Doubling

Large government projects often double in cost between when they are first considered and when they are finally completed. This pattern—call it “Edwards’ Law”—is revealed in story after story about highways, airports, computer systems, and other types of government infrastructure.

It looks like New York’s World Trade Center train station is the latest example of Edwards’ Law. The Wall Street Journal reports:

The most expensive train station in the U.S. is taking shape at the site of the former World Trade Center, a majestic marble-and-steel commuter hub that was seen by project boosters as a landmark to American hope and resilience.

Instead, the terminal connecting New Jersey with downtown Manhattan has turned into a public-works embarrassment. Overtaking the project’s emotional resonance is a practical question: How could such a high-profile project fall eight years behind schedule and at least $2 billion over budget?

An analysis of federal oversight reports viewed by The Wall Street Journal and interviews with current and former officials show a project sunk in a morass of politics and government.

Edwards’ law takes effect:

When completed in 2015, the station is on track to cost between $3.7 and $4 billion, more than double its original budget of $1.7 billion to $2 billion.

Savings and the Decline of Small Business Entry

A recent paper from the Brookings Institute raises an important observation that businesses are “becoming older,” that is, the age profile of American business is increasingly dominated by older firms.  One reason is that the entry rate of new businesses has been steadily declining for decades. 

While this decline has been witnessed across firm size, it has been most dramatic among small firms.  One potential contributor to the decline in new small businesses is the long run decline in the personal savings rate.  According to the Census Bureau’s Survey of Business Owners, the number one, by a long shot, source of capital for new businesses is the personal savings of the owner.  For firms with employees, about 72 percent relied upon personal/family savings for start-up capital.  The other dominate sources of capital, credit cards and home equity, were much less frequently used.  Recent legislative changes (2009 Card Act) and a volatile housing market have made those sources less reliable in recent years.

The chart below compares the trend in entry rates for new business establishments with less than five employees with the personal savings rate.  The correlation between the two is 0.62.  While both the decline in business entry and savings are likely driven by common macroeconomic factors, it seems plausible that if households have fewer saving, they are also less likely to be able to start a business.  My preferred response would be to eliminate policies, such as those in the tax code or current monetary policy, which penalize savings.  I suspect others might have different suggestions.