Dynamic Scoring in Congress

The House of Representatives voted this week to establish rules for the 114th Congress. One rule change requires that the Congressional Budget Office (CBO) and Joint Committee on Taxation (JCT) dynamically score legislation. The change is a much-needed reform to the federal budgeting process.

The current legislative scoring process completed by CBO and JCT is generally called static scoring. It currently incorporates some microeconomic behaviorial responses to projected changes in federal spending and taxes.

But static scoring misses a big piece of the puzzle. It assumes that the size of the economy is constant. It does not include an analysis of the economy-wide responses to  policy changes. By constrast, dynamic scoring  acknowledges the obvious fact that actions of Congress could affect gross domestic product (GDP). 

Consider a hypothetical income tax increase from 35 to 40 percent. The tax increase may cause  individuals to work fewer hours and businesses to reduce their capital investment. Those sorts of decisions will be made by millions of individuals and businesses in response to tax changes. In aggregate, these responses would affect GDP. Dynamic scoring includes these macroeconomic responses.

Contrary to some opponents, dynamic scoring is not new to CBO. CBO has used dynamic scoring before. The large immigration bill in 2013 was dynamically scored to show how less stringent immigration policy could foster economic growth. CBO estimated the economic growth effects of the 2009 stimulus. And CBO’s long run spending projections include supplementary forecasts that include the effects of future spending, taxes, and deficits on economic growth. The House rule change requires that CBO and JCT use dynamic scoring on all  legislative cost estimates above a certain magnitude.

Dynamic scoring is not perfect. Its results are influenced by the assumptions made by the models used to produce the results. For this reason, CBO should make its models, assumptions, and data available to outside experts so it can receive feedback from scholars and improve its methods. But static scoring is even less perfect than dynamic scoring. Its assumption of constant GDP leads to results that are biased against policies that lead to economic growth, such as tax rate reductions.

Dynamic scoring will not be a cure-all, but it will be a helpful tool so policymakers can better weigh  policy options. Providing Congress with the best information available on policies to help grow the economy seems like a no-brainer. Congress should understand how its actions affect economic output. This rule change starts the new Congress off on the right foot.

TTIP Opponents Fret Over Phantom Liberalization of GIs

Some of the most vocal criticism of the Transatlantic Trade and Investment Partnership, a proposed trade agreement between the European Union and the United States, is coming from Europeans worried that the agreement will liberalize parts of their economy that it actually won’t.  This is a very frustrating situation, because supporters of the agreement are then forced to assure critics that the TTIP will not, in fact, do this particular good thing they don’t want it to do.

For example, people have claimed angrily that the TTIP will require the UK to privatize its National Health Service and then prevent the government from “renationalizing” it—that would be great, but it’s not true.  At most, the UK would be required to allow U.S. companies to participate if the government chose to privatize parts of the NHS and then compensate them in any future taking, as it would surely do anyway.  If the UK ever reforms its health system, it won’t be because of TTIP.

Now a new boogieman has emerged, with European news media fretting this week that the TTIP could require Europe to relax protections for geographical indications on cheese and meat products.

As reported in the Financial Times:

Christian Schmidt, Germany’s agriculture minister, said in an interview with Der Spiegel: “If we want to seize the opportunities of free trade with the enormous American market then we can’t carry on protecting every sausage and cheese speciality.”

Food producers, politicians and campaigners against the trade deal seized on his remarks as evidence that the protection of regional brands would be sacrificed to globalisation.

[But] Daniel Rosario, spokesman for the EU, insisted that TTIP would not undermine European food brands or weaken intellectual property safeguards.

“On the EU side, we have made clear to our American counterparts that geographical indications are one of our main priorities and we have not agreed and will not agree to reduce the protection of our geographical indications in Europe,” he said.

Despite what a German official may have said, the EU is not only committed to maintaining its GI protection scheme but is intent on spreading it internationally.  If the TTIP does impact the use of geographical indications it will likely be to require the United States to recognize and protect European GIs in the U.S. market.

That’s a real shame, because Europe’s method for protecting GIs is bad for European consumers.  U.S. policymakers should avoid imitating it.

Stop Them Damn Pictures

Through Tammany Hall, the New York City Democratic political machine in the late 19th century, “Boss” William M. Tweed essentially controlled the city’s government and much of the state’s. Like most political leaders he never felt entirely secure, and he tried to bully his opponents, including journalists. He is famously reported to have been especially outraged by cartoonists such as Thomas Nast, and to have roared to his associates,

Let’s stop them damn pictures. I don’t care so much what the papers write about—my constituents can’t read—but damn it, they can see pictures.

It seems that Islamic extremists may feel the same way. Theo van Gogh was murdered after producing a film about Islam. The publication of cartoons about Muhammad in the Danish newspaper Jyllands-Posten generated much outrage and numerous death threats. And now we have the brutal murders of cartoonists and other journalists from the French newspaper Charlie Hebdo. At least Boss Tweed just used bribery and corrupt politics to ruin his enemies.

Walter Olson wrote eloquently in Time magazine yesterday about the Charlie Hebdo murders and the challenge they present to liberal society:

There is no middle ground, no soft compromise available to keep everyone happy–not after the murders at the satirical newspaper Charlie Hebdo. Either we resolve to defend the liberty of all who write, draw, type, and think–not just even when they deny the truth of a religion or poke fun at it, but especially then–or that liberty will endure only at the sufferance of fanatical Islamists in our midst. And this dark moment for the cause of intellectual freedom will be followed by many more.

Flemming Rose, the editor who commissioned the Jyllands-Posten cartoons, writes about threats to free speech in his book The Tyranny of Silence, published recently by the Cato Institute, and in various articles and interviews.

And herewith my favorite Thomas Nast cartoon, not primarily about Boss Tweed’s corruption, but about “Peace with a War Measure” – peace and liberty shackled by the income tax.

Thomas Nast Cartoon on peace and income tax

 

Challenging President Obama’s Immigration Action Even Though It’s Good Policy

Our immigration system is broken and Congress has shamelessly refused to fix it. Of course, this unfortunate circumstance doesn’t give the executive branch the power to institute reforms itself. Yet through a recently announced policy known as Deferred Action for Parental Accountability (DAPA), President Obama has given partial legal status to more than four million illegal migrants, entitling them to work authorizations and other benefits.

This unilateral action is good policy, bad law, and terrible precedent. Perhaps most importantly, it violates the separation of powers and is thus unconstitutional.

In what is becoming a routine occurrence under this administration, 25 states have sued the federal government in response to this executive action. The case is now before a federal district judge in Brownsville, Texas, who is entertaining the plaintiffs’ motion to enjoin DAPA.

Cato, joined by law professors Josh Blackman, Jeremy Rabkin, and Peter Margulies, has filed an amicus brief supporting the motion. It’s highly unusual for Cato to file at the district court level—indeed amicus briefs of any kind are unusual in this forum—but this is a highly unusual situation.

To be clear, we support comprehensive reform that would provide relief to the aliens protected by DAPA (among many other goals), but it’s not for the president to make such legislative changes alone.

President Obama has defended his action by citing past deferrals for (1) battered and abused aliens, (2) aliens involved in human trafficking, (3) foreign students affected by Hurricane Katrina, and (4) widows of U.S. citizens. But these deferred actions, to the extent they’re relevant here, served as temporary bridges from one legal status to another, not tunnels that undermine legislative structure or detours around the law to hitherto unknown destinations. Moreover, they were several orders of magnitude smaller than DAPA, in the tens of thousands not the millions. Most significantly, they were all approved by Congress.

None of these principles holds true for DAPA. The administration itself stated the applicable test in the memorandum setting out DAPA’s legal justification: “an agency’s enforcement decisions should be consonant with, rather than contrary to, the congressional policy underlying the statutes the agency is charged with administering.” This executive action represents a fundamental rewrite of the immigration laws that is inconsistent with the congressional policy currently embodied in the Immigration and Naturalization Act (INA)—a policy that, again, those who joined this brief by no means endorse.

As Prof. Blackman explains in a new law review article, DAPA is in palpable tension with the INA, implementing under the guise of executive discretion wholesale waiver/suspension/deferral that swallows the enforcement rule. Indeed, Congress rejected or failed to pass immigration-reform bills reflecting this policy several times, so executive power in this area is “at its lowest ebb,” to use Justice Robert Jackson’s famous formulation from the 1952 Steel Seizure Case.

In our constitutional architecture, executive action based solely on Congress’s resistance to presidential policy preferences has no place. While we agree that the immigration laws need to be overhauled and sympathize with the plight facing undocumented aliens, the path designed by the Framers for implementing needed reforms goes through the halls of Congress. Unilateral exercises of power such as DAPA undermine the separation of powers and ultimately the rule of law.

Judge Andrew Hanen, who was nominated by George W. Bush and unanimously confirmed by the Senate, will hold his preliminary injunction hearing in Texas v. United States on Jan. 15 in Brownsville, Texas.

Museum of Government Failure

The Washington Post reported that NASA spent $349 million on a rocket test facility that is completely unused. It is an impressive structure, a handsome monument to congressional folly, as the photo shows.

The story made me ponder an idea I’ve had for a while. Why not collect similar stories of federal waste and present them in a Museum of Government Failure in Washington?

About 18 million tourists visit D.C. each year. They view the grand government buildings, and they see the monuments to the great political leaders. They learn about the government’s successes in places such as the Air and Space Museum, and they read the pro-government history in places such as the Capitol Visitor Center. They also might notice the man-and-horse statue outside the FTC, which signifies the government’s heroic battle to strangle trade.

We need more balance in the D.C. tourist experience. Major failures are a fundamental part of the government’s story, but most of the boondoggles and scandals get forgotten. How many people remember the appalling scandals at HUD during the 1980s? Or the $2 billion down the drain on the Superconducting Supercollider, or the $10 billion down the drain on the Yucca Mountain waste site?

I envision a museum near the Smithsonian that would give tourists a reality-based perspective on the government. It could display a scale model of the NASA rocket facility with photos of the politician responsible, Sen. Roger Wicker (R-Miss.). It could explore failures in history, such as a diorama of a boondoggle Indian trading post from the 1790s. It could have a video screening room showing disgraceful moments caught on tape, such as the Abscam sting of the late 1970s. So if there is a philanthropist out there who wants to educate Americans on the government’s real track record, this is an idea to consider.

I Googled the other day, and was pleasantly surprised that someone is proceeding with such a project. Jim and Ellen Hubbard have proposed a Museum of Government Waste, and have filmed a related movie. I understand that their idea began as an investigation into pork barrel politics, but they are now considering an actual museum. Budget expert David Williams is also involved in the project.      

It will be interesting to see what these folks come up with. Good for them for taking the initiative. They should note that the problem in Washington is broader than just “waste” in the sense of porky projects. Instead, it is government failure on a grand scale, meaning the vast spending and regulation that costs us much more than it benefits us, while also reducing our freedom. I’m not sure how that can be captured in museum displays, but it is worth a try. A possible model is the private International Spy Museum in D.C., which gets 600,000 visitors a year.

One issue that a Museum of Government Failure would have to tackle: What should be sold in the gift shop? Perhaps a Lego kit of the Bridge to Nowhere? T-shirts with the humorous “I am not a crook” line? Science kits with experiments in ethanol and other wasteful energy sources?

One thing for sure is that the museum should not take any federal grants: that would guarantee that construction costs would soar!

The Auto Bailout Warrants No Pride, Mr. President

President Obama is in Michigan today, which means his handlers at the White House recently consulted their very thin manila file folder labeled “Economic Successes or Anything That Might Pass for Such” to cull talking points about the auto bailout. Of course, nothing has been more celebrated as an economic policy success of this administration by this administration than the “rescue” of GM and Chrysler.
 
I spent a good deal of time in 2008-2010 analyzing, commenting, and testifying about the collateral damage–the often unseen but important externalities and longer term costs–that was being inflicted on third parties, the U.S. economy, and the rule of law, all for the purpose of ensuring that specific interests were insulated from the consequences of their behavior. So let me just summarize by repeating some previous thoughts.
 
It is galling to hear the auto bailouts characterized as “successful.” The word should be off-limits when describing this unfortunate chapter in U.S. economic history. GM and Chrysler, through their own relatively poor decisions with respect to labor contracts, product offerings, and quality management, failed by the market’s judgment and were rightful candidates for downsizing or liquidation. The bailouts essentially deprived the better auto companies of the spoils of competition and forestalled a capacity reckoning, which meaning that in the years ahead, auto workers in Alabama, Tennessee, South Carolina, Indiana, and even Michigan and Ohio may lose their jobs because GM and Chrysler were propped up beginning in 2009.
 
Calling the bailouts “successful” is to whitewash:
  • the diversion of funds from the Troubled Assets Relief Program by two administrations for purposes unauthorized by Congress;
  • the looting and redistribution of claims against GM’s and Chrysler’s assets from shareholders and debt-holders to pensioners;
  • the use of questionable tactics to bully stakeholders into accepting terms to facilitate politically desirable outcomes;
  • the unprecedented encroachment by the executive branch into the finest details of the bankruptcy process to orchestrate what bankruptcy law experts describe as “sham” sales of Old Chrysler to New Chrysler and Old GM to New GM;
  • the costs of denying Ford and the other more deserving automakers greater market share and access to GM’s and Chrysler’s best workers and capital;
  • the costs of insulating irresponsible actors, such as the United Auto Workers, from the outcomes of an apolitical bankruptcy proceeding, and;
  • the diminution of U.S. moral authority to counsel foreign governments against similar market interventions, to name some.
Acceptance of the president’s claim of auto bailout success demands profound gullibility or willful ignorance and virtually guarantees similar interventions in the future. 

State Spending Machine Keeps on Rolling during Recession

While other matters dominate the headlines, American governments continue to spend more money, despite the presumed effects of the Great Recession. Washington Post reporter Abha Bhattarai lays out the latest details:

State and local governments in Maryland, Virginia and the District spent $7.82 billion more than they collected in revenue between 2007 and 2012, during the throes of the economic downturn, according to data released from the U.S. Census Bureau last month….

State and local governments in Virginia spent $1.03 billion more than they took in between 2007 and 2012, while expenditures in Maryland outpaced earnings by $6.07 billion….

Nationally, state and local governments spent $118.15 billion more than they collected between 2007 and 2012. Total expenditures during that period increased by 18.2 percent, from $2.7 trillion to $3.2 trillion, while total revenue declined 3.2 percent over the same five-year period, from $3.1 trillion to $3.0 trillion.

Over that five-year period, plenty of businesses, families, and nonprofits found their revenue declining by more than three percent, and most responded by spending less.

Of course, it’s often said that governments spend when times are good and the tax revenue is rolling in, then find themselves over-extended and facing painful cuts when growth slows down. But the evidence above suggests that governments just keep spending even as the money stops rolling in. It’s exceedingly difficult to get governments to spend less, especially when every government dollar helps to create pro-spending constituencies who will resist cuts. Spending interests never rest; taxpayer groups have to work twice as hard just to hold the line.

One side note: The online headline for this article is

State, local governments continue to spend more than they earn

Actually, I don’t think governments “earn” money. Merriam-Webster defines “earn” as “to receive as return for effort and especially for work done or services rendered.” Governments don’t earn, they take. Just try saying “I don’t find your services worth the money, and I won’t be renewing my contract.”

For more on state government spending, see Cato’s latest “Fiscal Policy Report Card on America’s Governors.”