Topic: Tax and Budget Policy

IMF Proposes to Sabotage China’s Economy

For the people of China, there’s good news and bad news.

The good news, as illustrated by the chart below, is that economic freedom has increased dramatically since 1980. This liberalization has lifted hundreds of millions from abject poverty.

 

The bad news is that China still has a long way to go if it wants to become a rich, market-oriented nation. Notwithstanding big gains since 1980, it still ranks in the lower-third of nations for economic freedom.

Yes, there’s been impressive growth, but it started from a very low level. As a result, per-capita economic output is still just a fraction of American levels.

So let’s examine what’s needed to boost Chinese prosperity.

Budget Conference Moves Forward

Negotiators for the House of Representatives and the Senate are expected to announce a deal on the budget resolution as early as today. A budget resolution sets overall spending limits for the year. If it passes, it would be the first resolution in six years, but it does little to fix the country’s long-term fiscal mess.

The original House and Senate budget proposals left much to be desired. Each proposal increased defense spending by using the Overseas Contingency Operations (OCO) account as a slush fund. This maneuver allowed each chamber to claim allegiance to the 2011 Budget Control Act spending caps, while bypassing it to boost spending.  The House budget included a version of Medicare reform, but delayed its start date until 2024. The Senate left Medicare reform off the table.

This week, budget negotiators seem to be taking disappointing parts from each chamber.

Indian Schools Are Failing

Since treaties in the 19th century, the federal government has provided educational aid to American Indians. These days, the Bureau of Indian Education (BIE) owns about 180 Indian schools, which have about 41,000 students in Arizona, New Mexico, South Dakota, North Dakota, and other states.

I examined Indian schools in this study at Downsizing Government. The schools have long failed Indian children and seem to waste a great deal of money.

The Washington Post reported similar findings:

The U.S. Bureau of Indian Education spends nearly 56 percent more money than American public schools on each student, but many Native Americans learn in facilities that are languishing in poor condition, according to federal auditors.

A report this week from the Government Accountability Office said the agency has struggled to staff, manage and repair its schools, largely because of a broken bureaucracy.

… The bureau also suffers from high leadership turnover, inconsistent accountability, poor communication between offices, a lack of strategic planning and a dearth of financial experts to manage spending, auditors said. The “systemic management challenges,” as the report described them, have hindered the agency’s efforts to improve student achievement and sustain key initiatives, according to the report.

The problems have persisted for years, despite the bureau spending significantly more than U.S. public schools in general. A 2014 GAO analysis found that the agency spends an estimated $15,000 per pupil on average, while public schools nationwide spend an estimated average of about $9,900.

… Indian Education spokeswoman Nedra Darling said Thursday that the bureau is “deep into the process of fixing the problems that the GAO highlighted.”

… “The president has asked Congress for significant increases in the budget to accomplish many of these goals and to increase staff available to serve tribal schools and BIE-run schools,” Darling said.

The last two sentences are classic: Agency leaders using their own failings as an excuse to demand more taxpayer money.

A better reform would be for Congress to advance Indian self-determination by ending the federal ownership and operation of schools and converting BIE funding to block grants. Tribal governments could then use the block grants to either competitively source school management or to pass through the funds to Indian parents in the form of school vouchers.

The important thing is to get Washington out of the business of running schools because decades of experience reveal that it is not very good at it.

Martin O’Malley’s Tax Increases

As scandals continue to swirl around Hillary Clinton, former Maryland Governor Martin O’Malley is positioning himself for a run for the Democratic nomination. He is relatively young, telegenic, and well-spoken. However, O’Malley has a record that includes tax hikes so large that they turned off even Democratic-dominated Maryland.  

As I discuss in the Daily Caller today, O’Malley:

  • Raised the top personal income tax rate from 4.75 to 5.75 percent. With local taxes on top, Maryland’s top rate is 8.95 percent.
  • Raised the corporate tax rate from 7.0 to 8.25 percent.
  • Raised the sales tax rate from 5 to 6 percent and expanded the sales tax base.
  • Raised the sales tax rate on beer, wine, and spirits by 50 percent.
  • Raised the gas tax by 20 cents over four years, almost doubling the rate from 23.5 cents.
  • Doubled the cigarette tax from $1 to $2 per pack.
  • Imposed higher taxes on vehicle registration.
  • Imposed a stormwater mitigation fee on property owners, or a “rain tax.”

O’Malley raised taxes on everybody, and by 2014 Marylanders had finally had enough. In the gubernatorial election, Republican Larry Hogan pulled off a stunning upset over Democrat Anthony Brown based on his promise to roll back some of O’Malley’s tax increases.

The choice then for Democrats is whether unpopular tax increases are the type of “hope and change” they want to run on in 2016.

Government Spending: Accounting and Economics

A Wall Street Journal story today looks at government spending through the lens of the national income and product accounts (NIPA). The article says that as government spending rises, it is “no longer dragging on growth.” Unlike recent years when spending was supposedly cut, the government today “has ceased to be a drag on growth.” But that is an unwarranted conclusion from the NIPA data, which are produced by the Bureau of Economic Analysis (BEA).

The BEA includes government output within overall gross domestic product (GDP). The first thing to note is that measuring government output is guesswork because most of it is not sold in the marketplace. The BEA solution “is to value government output in terms of the input costs incurred in production.” So if the government hires a worker for $80,000 to administer food stamps or impose new regulations, government “output” would rise by $80,000. That seems rather optimistic.

More importantly, NIPA data does not tell us the overall effect of government spending on growth. Let’s say defense spending rises $10 billion from added weapons purchases. NIPA would show government output rising $10 billion. The Wall Street Journal would have you believe that overall GDP would rise as well, but that ignores the effect of the spending on private output. Higher defense spending ultimately requires higher taxes, which are resources sucked out of the private sector. Also, Pentagon contractors would hire engineers and other skilled workers to produce the new weapons, drawing those people away from private goods production. As government output rose, the output of private goods would fall.

In the long run, private GDP would probably shrink more than $10 billion, and thus overall GDP would also shrink. One reason is that extracting taxes to fund federal spending generates “deadweight losses” as people reduced their working, investing, and other productive efforts. Another reason is that added government output is likely to be worth less than the private output replaced. That’s because government spending decisions are based on guesswork, whereas private spending decisions are guided by the price system, which helps direct resources to the highest-value uses.

So in the Wall Street Journal chart reproduced here, the reporter implies that when the blue line (government output) rises, the red line (overall output) is pushed upwards. But that ignores the negative relationship between the blue line and the yellow line (private output). The reality is that as the blue line rises, the yellow line would be dragged down, and that in turn would tend to drag down the red line over time.

For more on measuring the government in GDP, see here.

More Duplication in Government

The Government Accountability Office (GAO) releases an annual report on government duplication, fragmentation, and overlap. Since 2011 GAO has highlighted 440 different actions that Congress and the president could take to reduce this wasteful spending. This week, GAO released its updated report and included an additional 66 actions.

Here is a sample of items from this year’s report:

  • Consumer Product Safety Overlap. GAO found that more than 20 federal agencies are involved with the oversight of consumer products. For example, the Consumer Product Safety Commission is responsible for overseeing the safety of children’s toys, but the National Institute of Standards and Technologies oversees toy guns. GAO noted that the current structure does not “leverage each agency’s expertise and therefore may not be the most efficient use of scarce federal resources.”
  • Nonemergency Medical Transportation. GAO found 42 programs within the federal government that provide nonemergency medical transportation. These programs focus on enrollees who are unable to provide their own transportation because of age, income, or disability. GAO noted that many of these programs target “similar beneficiaries … and engage in similar activities.” It noted that a coordination council was created to eliminate some of these issues, but the council hasn’t met since 2008. “Without proper controls, cost or ride sharing with other non-Medicaid programs could allow for improper payments for individuals who do not qualify for Medicaid,” GAO reported.
  • Serious Mental Illness. Eight federal agencies, overseeing more than 100 programs, support individuals with serious mental illness, with 30 of those programs “specifically targeting individuals with serious mental illness.” GAO estimated that the 30 programs spent $6 billion in fiscal year 2013. While rules are in place requiring the programs to coordinate their activities, GAO said that coordination was “largely absent.”

Kill the Whole Jellyfish, or the Tentacles Will Grow

There’s a lot of debate right now about whether conservatives (I don’t know if anyone thinks libertarians can be reached) should support current No Child Left Behind reauthorization efforts. The “support this” argument is that bills in the House and Senate are not ideal because they would keep a major federal role in education, but they would end many bad things in NCLB and conservatives should take what they can get politically. But we just got a terrific illustration of what happens when you cut off just a few jellyfish tentacles: they grow back.

Yesterday, an amendment was passed in the markup of the Senate bill that would restore the 21st Century Community Learning Centers program. What is the 21st CCLC? A Clinton Era program that furnishes funds – $1.2 billion in FY 2015 – for before- and after-school activities and summer programs. The problem: It appears to be a failure. As I discussed a few years ago, federal studies of the program found it not only largely ineffectual, but possibly even a negative influence. As a 2005 report summarized:

Conclusions: This study finds that elementary students who were randomly assigned to attend the 21st Century Community Learning Centers after-school program were more likely to feel safe after school, no more likely to have higher academic achievement, no less likely to be in self-care, more likely to engage in some negative behaviors, and experience mixed effects on developmental outcomes relative to students who were not randomly assigned to attend the centers.

It isn’t just Cato folk who’ve stumbled on the research. The Brookings Institutions’ Mark Dynarski just laid into the 21st CCLC last month, writing that evaluations “reported on how the program affected outcomes. In a series of reports released between 2003 and 2005…the answers emerged: the program didn’t affect student outcomes. Except for student behavior, which got worse.”