Zombie Corporate Welfare

Perhaps in anticipation of Halloween, two components of corporate welfare have been doing their best impression of a Hollywood monster that refuses to die.

The Export-Import Bank (Ex-Im) seems poised to come back from the grave, and promises have already been made to reverse the minor cuts to the crop insurance subsidy program agreed to in this week’s budget deal. These cases give some insight into just how difficult it is to actually get rid of corporate welfare.

Cato has long criticized both corporate welfare and crony capitalism, which benefit the few, the powerful, and the politically connected at the expense of everyone else. These policies introduce distortions into the market and limit competition, all at taxpayer expense. Despite their many harmful effects, the nature of these programs, with concentrated benefits and dispersed costs makes it hard to root out corporate welfare from the budget. The groups and companies that benefit are highly motivated to make sure they continue, while ordinary people who all bear a smaller share of the cost are more focused on other things like the practical concerns of providing for their families. This can explain part of why it’s so hard to end any of the many programs that make up the web of corporate welfare.

Ex-Im provides financing and loan guarantees for foreign customers of certain U.S. companies. While proponents argue that Ex-Im is critical to exports and helps American businesses, the vast majority of these benefits flow to a handful of major corporations, and roughly 98 percent of U.S. exports do not get any kind of Ex-Im assistance at all. As Cato’s Dan Ikenson has shown, these subsidies also harm “competing U.S. firms in the same industry, who do not get Ex-Im backing, and U.S. firms in downstream industries, whose foreign competition is now benefiting from reduced capital costs courtesy of U.S. government subsidies.” Given these inefficiencies and distortions, opponents of Ex-Im cheered when the bank’s charter lapsed this summer, but unfortunately that was not the last chapter in this saga. Earlier this week, the House, in a discouraging instance of bipartisanship, voted to reopen Ex-Im by a 331-118 margin. While it still has to get past the Senate, a similar bill passed that chamber earlier this year, and the measure will likely be included in the coming highway bill. So after a prolonged battle to shut down this one small component of corporate welfare, the hard-fought victory for Ex-Im opponents will probably be short-lived.

Tucked into this week’s very disappointing budget deal was one minor positive aspect: modest cost savings from making changes to the subsidized crop insurance program. In this program, farmers can purchase insurance from approved private insurance companies, and the federal government reimburses these insurance companies for administrative and operating costs in addition to reinsuring their losses. The tweak in the budget deal wouldn’t even achieve savings by increasing the insurance premiums paid by farmers, but by merely lowering the rate of return for the insurance companies from 14.5 percent of premiums to 8.9 percent.  It’s worth noting that the Congressional Budget Office estimated that this change would save about $3 billion through 2025, and that these savings would not really start to materialize until 2019. Perhaps unsurprisingly, Roll Call reports that “[f]arm-state lawmakers have been assured by leaders that a provision in the bipartisan budget deal that would trim the federal crop insurance subsidy program will be replaced down the road.” This modest change was years away from even taking effect and the savings were extremely modest over a decade, but there have already been promises to reverse them, citing the potential for “dramatic” consequences.

Past Cato research has analyzed the amount of corporate welfare in the federal budget, estimating that it consistently accounts for more than $100 billion (in inflation-adjusted dollars) each year.

Sources: Author’s calculations using Office of Management and Budget, “Public Budget Database, Outlays,” https://www.whitehouse.gov/sites/default/files/omb/budget/fy2016/assets/outlays.xls and Office of Management and Budget, “The Appendix, Budget of the United States Government, Fiscal Year 2016,” https://www.whitehouse.gov/omb/budget/Appendix; Tad DeHaven, “Corporate Welfare in the Federal Budget,” Cato Institute Policy Analysis No. 703, July 25, 2012; Stephen Slivinski, “The Corporate Welfare State: How the Federal Government Subsidizes U.S. Businesses,” Cato Institute Policy Analysis No. 592, May 14, 2007.

The developments with Ex-Im and crop insurance subsidies are just the two most recent examples of why corporate welfare keeps coming back like a Hollywood monster, costing taxpayers and introducing economic distortions, year after year. Even so, opponents of corporate welfare need to continue to expose the flaws, costs and harmful effects of these programs, otherwise they will always be with us.

The TPP Is Already Poised to Grow

The Trans-Pacific Partnership negotiations have just concluded and the parties are about to begin a very long process of ratification and implementation. Once all of that is complete, the TPP will be ready and willing to accept new members. There’s a pretty long list of countries ready to join.

The president called the TPP America’s chance to “write the rules” instead of China. That’s an unfortunately confrontational way to sell international commercial cooperation. Certainly, the TPP is an effort to circumvent gridlocked negotiations at the World Trade Organization and establish new norms while lowering trade barriers. It’s not clear yet whether the proliferation and growth of megaregional agreements like the TPP will help or hinder the broader and more valuable goal of global trade liberalization.  

In practice, having America “write the rules” mostly means (1) lower tariffs; (2) more rules on things like intellectual property, state-owned enterprises, and labor and environment protection; and (3) less pressure to eliminate America’s own protectionist policies like outrageous farm subsidies, shipping restrictions, and abusive antidumping laws. 

But if the TPP is going to be a vehicle for exercising American influence over global economic governance, it will surely need to expand beyond its current 12 members. 

Since the negotiations concluded a few weeks ago, half a dozen governments in the region have expressed or reiterated their interest in joining the TPP. These include Indonesia, South Korea, Colombia, Thailand, the Philippines, and Taiwan. The fact that so many countries are eager to join an agreement they haven’t seen and had no role in drafting says a lot about the politics of international trade.

Once the TPP text is released, we will have a better idea of what these countries will be required to do to gain entry to the agreement. Will they need unanimous approval from existing members? Will they be required to accept additional obligations beyond the current text? Will Congress and other legislatures have to ratify each accession? The answers to these questions could have a big impact on the future of the global trading system.

The Politics of the TPP

In the trade policy world, everyone is eagerly awaiting the release of the full text of the Trans Pacific Partnership (TPP) agreement, but trade news sources say this is still several weeks away. My colleague Bill Watson has done a nice job with the one chapter, on intellectual property, that is available in mostly final form through a leak, but for the rest of the text, it is hard to say too much at this point.

But if we can’t talk much about substance yet, what we can talk about is the politics of the TPP: What are its chances in Congress?  The Obama administration has taken a somewhat creative approach to assembling a coalition from across the political spectrum in support of the TPP.

They have tried to appeal to free market conservatives by talking about how the TPP would involve “18,000 tax cuts,” in the form of lower tariffs on U.S. exports.

They have tried to bring in liberal support by calling it the “most progressive trade agreement in history.”

And some people have portrayed the TPP as having a security component, in order to bring security hawks on board.

But here’s a key question related to the first two: Can they bring in supporters without creating new opponents?  For example, with regard to the TPP’s “progressive” nature, the administration says the TPP would do the following on labor protections: “Require laws on acceptable conditions of work related to minimum wages, hours of work, and occupational safety and health.”  Focusing on the first one, what exactly would the TPP require with a minimum wage?  If it requires that all TPP countries have a minimum wage – either set at a particular level, or just having one at all – some Republicans in Congress might object.

With trade agreements these days addressing so many aspects of social policy, assembling a package of provisions that Congress will support is a challenge. Putting aside the substance, which we will get to once the text is released, the politics of the TPP are going to be very interesting.

About Those Social Security ‘Promises’

In the Republican debate last night, former Gov. Mike Huckabee of Arkansas criticized calls for Social Security reform, saying “people paid their money. They expect to have it,” and that the country needs to honor its promises to seniors. There are problems with this line of argument: the Social Security payroll taxes a person pays are not tied to the benefits they receive in a legal sense, and the ‘promises’ made by Social Security are, and always have been, subject to change.

Congress has had the authority to alter Social Security since its inception. Section 1104 of The Social Security Act of 1935 explicitly says: “The right to alter, amend, or repeal any provision of this Act is hereby reserved to the Congress.”

Not only does Congress have the right to make changes, it has done so multiple times in the past. Sometimes these changes are smaller things, like a technical correction to the indexation formula, but there were also larger reforms that were part of attempts to address the programs solvency issues.

The Supreme Court revisited the issue of Social Security’s promises in Flemming v. Nestor, in which Nestor, who had paid into Social Security for 19 years and begun to receive benefits, was then deported for previous ties to the Communist Party. Nestor tried to appeal the termination of his benefits, citing his previous contributions, but the Supreme Court upheld it, saying:

To engraft upon the Social Security system a concept of ‘accrued property rights’ would deprive it of the flexibility and boldness in adjustment to ever changing conditions which it demands… It is apparent that the non-contractual interest of an employee covered by the [Social Security] Act cannot be soundly analogized to that of the holder of an annuity, whose right to benefits is bottomed on his contractual premium payments.

The other aspect Huckabee touches on is the link between the taxes paid in and the benefits a person ultimately receives, implying that a worker’s contributions are kept in some kind of silo to be paid out to them at a later date. As another Supreme Court case found, this is not true.

In Helvering v. Davis (1937)the Court held that Social Security was not a contributory insurance program in the sense that  “[t]he proceeds of both the employee and employer taxes are to be paid into the Treasury like any other internal revenue generally, and are not earmarked in any way.” Despite how Huckabee and his fellow defenders of the status quo describe the program, the payroll tax payments a person pays into Social Security have no direct link to the benefits that they receive in a legal sense: they  are subject to future changes made by Congress and dependent on the program having sufficient revenue.

Huckabee doesn’t need to familiarize himself with these decades-old Supreme Court cases or the Social Security Act to be able to understand the problems with his invocation of the program’s ‘promises’. Anyone, including Huckabee, can see this for themselves in the Social Security Statement that the Social Security Administration periodically sends to workers:

Your estimated benefits are based on current law. Congress has made changes to the law in the past and can do so at any time.

The ‘promises’ with Social Security always came with an asterisk, and beneficiaries are not entitled to a certain amount because they have contributed payroll taxes. In the past the law has been altered to change the deal facing beneficiaries, and there will undoubtedly have to be more changes in the future if Social Security is to remain viable. If we maintain the status quo and do nothing, benefits will have to cut by 23 percent across the board when the combined trust fund is exhausted in 2034. There can be disagreements about the best way to reform Social Security, but when it is facing trillions in unfunded obligations and the certainty of drastic cuts in the future absent reform, doing nothing is not a feasible option.

First Thoughts on the TPP’s IP Chapter

Technically, even though the negotiations are over, the TPP isn’t finished being drafted.  Lawyers are currently going over every inch of the agreement to make sure the negotiators’ intent is reflected effectively and accurately in the final text, which will presumably be released in the coming weeks.  However, Wikileaks has published what appears to be the fully negotiated, pre-scrub TPP chapter on intellectual property.  While the final text may have somewhat different language, the leaked version gives a clear picture of what the parties agreed to on a number of contentious IP issues.

I have been critical of the inclusion of IP rules in trade agreements generally and in the TPP in particular.  Trying to resolve contentious policy differences that are not strictly trade-related impedes the important and valuable work of trade agreements in lowering trade barriers and reducing harmful protectionism.  Moreover, trade negotiations are not the proper forum for devising complex patent and copyright systems, which if done poorly can have negative impacts on the rights of consumers and even hinder innovation. 

It would have been best if the TPP did not impose any obligations related to IP, but it will, so the task at hand is to evaluate the individual provisions.  While it’s tempting to judge TPP provisions as being good or bad policy on their face, it’s important to remember that the agreement does not exist in a vacuum.  What matters is whether and to what extent the TPP is going to impact national IP laws—that includes not only changes to the law but also restrictions on a legislature’s ability to change the law later. 

Testing for Core Disruption

It’s been a day since the disappointing “Nation’s Report Card” results came out, and it has given me a chance to crunch some numbers a bit. They don’t tell us anything definitive – there is a lot more that impacts test scores than a policy or two – but it is worth seeing if there are any patterns that might bear further analysis, and it is important to explore emerging theories.

Not surprisingly, while many observers have been rightly hesitant to make grand pronouncements about what the scores mean, some theories revolving around the Common Core have come out. The one I’ve seen the most, coming from people such as U.S. Secretary of Education Arne Duncan and Karen Nussle of the Core-defending Collaborative for Student Success, is that the Core will bring great things, but transitioning to it is disruptive and we should expect to see short-term score drops as a result.

That is plausible, and we can test it a bit by looking at the performance of states (and the Department of Defense Education Activity) that have demonstrated some level of what I’ll call Core aversion. Those are states that (1) hadn’t adopted the Core at the time of the NAEP test; (2) had adopted but had moved away by testing time; and (3) were still using the Core at test time but officially plan to move away. They are broken down in the following table, which uses score changes in the charts found here:

The Ted Cruz Tax Plan: A Pro-Growth Restructuring of the Internal Revenue Code, but with One Worrisome Feature

The tax-reform landscape is getting crowded.

Adding to the proposals put forth by other candidates (I’ve previously reviewed the plans offered by Rand Paul, Marco RubioJeb Bush, Bobby Jindal, and Donald Trump), we now have a reform blueprint from Ted Cruz.

Writing for the Wall Street Journal, the Texas Senator unveiled his rewrite of the tax code.

…tax reform is a powerful lever for spurring economic expansion. Along with reducing red tape on business and restoring sound money, it can make the U.S. economy boom again. That’s why I’m proposing the Simple Flat Tax as the cornerstone of my economic agenda.

Here are the core features of his proposal.

…my Simple Flat Tax plan features the following: • For a family of four, no taxes whatsoever (income or payroll) on the first $36,000 of income. • Above that level, a 10% flat tax on all individual income from wages and investment. • No death tax, alternative minimum tax or ObamaCare taxes. • Elimination of the payroll tax and the corporate income tax… • A Universal Savings Account, which would allow every American to save up to $25,000 annually on a tax-deferred basis for any purpose.

From an economic perspective, there’s a lot to like. Thanks to the low tax rate, the government no longer would be imposing harsh penalties on productive behavior. Major forms of double taxation such as the death tax would be abolished, creating a much better environment for wage-boosting capital formation.