Topic: Tax and Budget Policy

Is Fiscal Constraint a Bug or a Feature?

A Washington Post profile of Art Pope, political donor and now budget director of North Carolina, finds a flaw in his fiscal management:

For all of his pull, the revolution Pope helped set in motion is not going quite as planned. The tax overhaul, styled in part off ideas promoted by Pope-backed groups, has contributed to tight finances in North Carolina at a time when other states are flush with cash.

Is that bad? Fiscal conservatives such as Pope just might think that budgetary constraints are a good thing, perhaps especially when revenues would otherwise be rising, leading to profligacy. State governments have a tendency to overspend when the economy booms, and then face difficult adjustments in downturns. Limits on overspending, whether constitutional constraints or tax reductions, should be seen as a feature, not a bug, in state fiscal systems.

By the way, this Post profile of Pope, who is a contributor to the Cato Institute, is not exactly positive, but it’s nothing like Jane Mayer’s 2011 profile in the New Yorker, which I dubbed “Snidely Whiplash in North Carolina.”

Politicians Befriend Big Business, Undermine Free Market

The recent primary defeat of House Majority Leader Eric Cantor was one of the bigger shocks to American politics in some time. Congressional leaders, known to bring home the bacon for local folks, usually are handily reelected.

But Cantor’s loss will do more than simply reshuffle the biggest offices on Capitol Hill. He gave lip service to fiscal responsibility but was, argued Nick Gillespie of Reason, “atrocious and hypocritical in all the ways that a Republican can be,” constantly voting to grow government.

Indeed, Cantor’s constituency was as much corporate America as it was Virginia voters. Business was counting on him to help reauthorize the Export-Import Bank, known as “Boeing’s Bank” for lavishing extensive benefits on one company; extend terrorism risk insurance, which transfers financial liability for loss from firms to taxpayers; and preserve Fannie Mae and Freddie Mac, which nearly wrecked the economy while subsidizing homeowners, builders, and lenders. 

CBO Long-Term Spending Projections

The Congressional Budget Office has released new long-term projections of federal spending and debt. Without reforms, spending is expected to rise steadily and dangerously as a share of the economy in coming decades. The chart below shows spending under CBO’s “extended alternative” scenario, which assumes that politicians keep current policies in place. Spending would rise from 17.6 percent of GDP in 2000, to 20.4 percent this year, to 31.8 percent by 2040.

Under that scenario, federal debt held by the public would rise from 74 percent of GDP this year to a giant 170 percent by 2040. But if spending and debt were to rise along that trajectory, we would surely have a major financial and economic meltdown long before we got to 2040.

Our fiscal outlook is actually much worse than reflected in this scenario. That’s because under the basic extended alternative, CBO does not take into account the negative effects of rising spending and debt on GDP over the long term. CBO does have a special chapter in their report looking at some of these negative effects—but only some of them. In this testimony, I mention reasons why the outlook is worse than under the CBO baseline.

    

Government Infrastructure and Political Enthusiasm

Most politicians are optimistic about the government’s ability to intervene and solve problems. That’s one reason why they run for office. Neocons, for example, have excessive faith that foreign intervention can fix the world, while liberals embrace the misguided idea that subsidies and regulations can boost the economy.

On infrastructure, we’ve seen political enthusiasm leading to overpromised and underdelivered projects since the founding of the nation. The construction of the National Road—funded by Congress beginning in 1806—was fraught with problems. The Army Corps of Engineers has been known for boondoggles since the 19th century. In recent decades, government infrastructure has become so notorious for waste that The Simpsons had an episode about a failed monorail scheme.

Chapter 1 of Burton and Anita Folsoms’ book, Uncle Sam Can’t Count, examined the inefficiency of the government’s fur-trading infrastructure from 1795 to 1825. Chapter 2 of the book looked at how 19th century subsidies for steamship transportation were wasteful and damaging.

Chapter 3 of the book looks at the orgy of state government canal building from the 1820s to the 1840s. Here is the basic story:

  • New York State funds construction of the Erie Canal, which opens in 1825.
  • The Erie Canal is a big success, which spurs canal fever across the nation and encourages other state governments to hand out subsidies. Government canal schemes are launched in Michigan, Pennsylvania, Ohio, Indiana, Maryland, and Illinois. There is particular excitement about subsidized “internal improvements” among Whig politicians, including Abraham Lincoln.
  • However, politicians overestimate the demand for canals in their states and underestimate the costs and difficulty of construction. They do not recognize that the Erie Canal is uniquely practical and economic as it traverses relatively flat land and connects the Great Lakes with the Atlantic.
  • Some of the state-sponsored canals are huge boondoggles and are abandoned. And other than the Erie Canal, all of the state canals sustain heavy losses, including other subsidized canals in New York.
  • After the failures, numerous states privatize their infrastructure and change their constitutions to prevent politicians from wasting further money on such schemes.

Thomas DiLorenzo writes about these issues here. And Clifford Thies goes into detail about the canal follies in this Cato Journal article. As these authors discuss, governments unfortunately made similar mistakes subsidizing railroads in the 19th century.

Perhaps our current political leaders are not funding escalators to nowhere—as they did on The Simpsons monorail episode—but today’s uneconomic streetcars and high-speed rail schemes are not that much different.

Trevor Ariza: NBA Champion, Tax Refugee

Do some people think taxes don’t affect economic choices? If so, they should talk to Trevor Ariza and the Washington Wizards. Ariza, a member of the Los Angeles Lakers’ 2009 NBA championship team and “a key part of the Wizards’ playoff run,” has decided to leave Washington and join the Houston Rockets. Why?

Washington was disappointed but hardly shaken when Ariza chose to accept the same four-year, $32 million contract offer in Houston, where the 29-year-old could pocket more money because the state doesn’t tax income.

Yes, a $32 million salary – or indeed a $32,000 salary – goes further in Texas than in the District of Columbia. What economists call the “tax wedge” is the gap between what an employer pays for an employee’s services and what the employee receives after taxes. It causes some jobs to disappear entirely, as employees and employers may not be able to agree on a wage once taxes are taken out of the paycheck. It causes some employees to flee to lower-tax countries, states, or cities. The Beatles, the Rolling Stones, Bono, and Gerard Depardieu are some of the better-known “tax exiles.” Now Trevor Ariza has joined their ranks.

PolitiFact Oregon “False” Rating of Wehby Claim … Is False

I was pleased to get an inquiry from PolitiFact Oregon recently about a controversy I knew nothing about. Alas, I must deny credit to Politifact’s use of the information I provided.

Monica Wehby, the Portland pediatric neurosurgeon challenging Senator Jeff Merkley (D), recently fired on the senator for his support of the Rebuild America Jobs Act (S. 1769 in the 112th Congress).

According to the Politfact Oregon write-up, Wehby described Merkley’s vote for the act as “typical of a Washington insider like Senator Merkley,” saying, “I would have voted no because this legislation would have cost the average American family $1,000 a year while making no significant impact to fix our infrastructure and roads.”

Is the cost figure true? My site WashingtonWatch.com was the source of the number that the Wehby camp used (actually $958.40).

I described the source of the number to the Politifact reporter in some detail:

WashingtonWatch.com does a net present value calculation on CBO scores, calculating as costs the amount that would have to be put in a bank account now to fund future taxes and spending, for example, and as savings the amount that would go into a bank account now based on expected tax reductions and spending cuts. We divide gross amounts by the number of people in the country (according to census figures) and then multiply by the size of the average U.S. family (3.14, if my memory serves). At the end of a Congress, we “freeze” the relevant figures, so the calculation for S. 1769 is based on a discount rate of 3.73%, a U.S. population of 315,085,045, and a national debt of $16,338,243,391,74.

The CBO score for S. 1769 (click “Read an analysis of the bill” on the bill’s page) shows revenues (taxes - a cost) of about $56.8 billion and outlays (spending - a cost) of $56.5 billion. That made S. 1769 a high-cost bill — it proposed increasing both taxes and spending — but it was fairly budget-neutral, increasing the average family’s share of the national debt by only about $40 per average family.

If Wehby claimed that the bill would have cost the average American family about $1,000 in new taxes, I think that is incorrect. It would have cost about $500 per family in new taxes and about $500 per family in new spending.

Wehby’s claim was not that it would cost $1,000 in new taxes, though, as the PolitiFact reporter said to me in his inquiry. It was that the bill “would have cost the average American family $1,000 a year.” That is a correct number, though the reporter did not catch or raise with me that the net present value calculation produces a one-time cost figure—not the cost per-year.

There are arguments against this methodology for calculating costs, which I noted to the reporter:

As the bulk of the revenues would have come from a surtax on people with a modified AGI above $1,000,000, I see an argument that this would not have come from “average families” in the “median” or “mode” sense. But our calculations are literal averages — the arithmetic mean — which is produced by dividing costs among all families in the U.S. That approach makes the most sense for outlays, as funds in the U.S. treasury can be thought of as “owned” by all the people, and expenses should be treated as falling on all of us. The average/arithmetic mean makes less sense when it comes to revenues because they often come from distinct sets of taxpayers, such as the relatively well off.

We use the method of calculating we do because there are upwards of 10,000 bills in every Congress and hundreds get CBO scores. We don’t know of a reliable or accurate way to calculate and report tax or spending incidence at scale — who actually pays and who actually receives tax dollars — in all these bills.

My conclusion: “The statement that the bill would have cost the average family $958.40 according to CBO figures is accurate because taxes and spending are each appropriately treated as costs and ‘average’ refers to the arithmetic mean.”

But that’s not what PolitiFact Oregon reported. To my surprise, I “faulted Wehby’s claim on two counts.”

The first involved the $958.40 figure itself. In reality, [Harper] said, only half of that would come in the form of new taxes. The remainder really doesn’t count since it’s in the form of new spending. And while it could be argued that new spending amounts to a long-term debit, the CBO’s own finding that the bill was budget-neutral negates that point.

I neither said nor implied that spending “really doesn’t count.” It counts. The methodology I use counts it. And, while I pointed out that the bill was relatively budget-neutral, candidate Wehby didn’t make any claim about the budgetary effects of the bill. A bill can cost a lot and be budget-neutral. This one did and was.

The second point that the Politifact report attributed to me “was that ‘average families’ would not have borne the burden of any new costs because language in the bill made clear that it would be financed by a 0.7 percent surtax on millionaires.”

That wasn’t my point at all. Here’s what I wrote to the reporter:

It’s important and relevant to many, though, that the incidence of the taxes would have been on relatively rich people. The $500 in taxes would not have hit the “typical” (median/mode) American or Oregonian family. It’s up to you whether you believe it’s expected in the context of Wehby’s statement to get into tax incidence. You can ding her for that omission if your judgment is that it’s something she should have included.

It’s not something I faulted Wehby for. I called the statement “accurate” and left the question of subtlety around tax incidence to the reporter (thinking to myself, “Yeah, right. A political campaign is supposed to get into ‘tax incidence’…”).

It turns out that what a bill “costs” is hard to figure out when the bill has both revenue and spending measures. I’ve given it a lot of thought over years and come up with a pretty good methodology (explained and caveated at WashingtonWatch.com’s “about” page.) It’s disappointing when this thinking, and the work you put in writing up an issue for a reporter, comes out this badly misunderstood, and your own views mischaracterized.

With regret, I rate Politifact Oregon’s rating of Wehby’s claim False.

Convention Center Boondoggles

Every country wants a national airline, and every city wants a glitzy convention center to bring those free-spending conventioneers to town. But the economic analysis doesn’t hold up well in either case. A new book on convention centers should be required reading for any city council thinking of investing the taxpayers’ hard-earned money in another white elephant. This report by Don Bauder in the San Diego Reader is worth quoting at length:

Would you take advice from a gaggle of consultants whose forecasts in the past two decades have been off by 50 percent?

Of course you wouldn’t. But all around the U.S., politicians, civic planners, and particularly business executives have been following the advice of self-professed experts who invariably tell clients to build a convention center or expand an existing one.

A remarkable new book, Convention Center Follies: Politics, Power, and Public Investment in American Cities, published by the University of Pennsylvania Press, tells the amazing story of how one American city after another builds into a massive glut of convention-center space, even though the industry itself warns its centers that the resultant price-slashing will worsen current woes.

The author is Heywood Sanders, the nation’s ranking expert on convention centers, who warned of the billowing glut in a seminal study for the Brookings Institution back in 2005. In this new, heavily footnoted, 514-page book, Sanders, a professor of public administration at the University of Texas/San Antonio, exhaustively examines consultants’ forecasts in more than 50 cities.

Nashville was told its new center would result in 466,950 hotel room nights; it’s getting around 267,000 — “a little better than half [what was projected],” says Sanders in an interview. Philadelphia isn’t garnering even half the business that was promised.

“Getting half the business [that was projected] is about the norm,” says Sanders. “The actual performance is a fraction of what it is supposed to be.”

Yet, in city after city — including San Diego — self-appointed civic leaders listen to and act on these faulty forecasts. In almost all cases, mainstream media and politicians swallow the predictions whole without checking the consultants’ miserable track records….

How can convention centers get away with such legerdemain? Those in the know shut up, and the press, politicians, and public have neither the time nor the expertise to follow the prestidigitation.

How do the consultants get away with being 50 percent wrong most of the time? In my opinion — not Sanders’s — consultants in many fields are paid to provide answers that the people paying the consultants’ bills want to hear. And the people paying those bills are the business community — using taxpayers’ money, of course.

The worst news: “These expansions will keep happening,” as long as “you have a mayor who says it is free,” says Sanders.

More, much more, in the Reader and of course in the book. Free-market think tanks have been pointing out the bad economics behind convention centers – and publicly funded stadiums – for many years.