February 2011

February 15, 2011 12:21PM

Eternal Vigilance Needed on Trade Carve‐​Outs

A bill that would have set a troubling precedent indeed was killed in the Senate last week. I’ve written previously about the Trade Adjustment Assistance program, and its fate has been tied up with the Generalized System of Preferences, a scheme by which certain developing countries gain duty‐​free access to the U.S. market for many of their goods. Congress was trying — and failed — to pass an extension of the programs together, along with the Andean Trade Preference Act.

Well, in an effort to extend for eighteen months the stimulus‐​enhanced TAA program (they were less fulsome in their enthusiasm for the other part of the bill; the barrier‐​reducing ATPA), Senators Bob Casey (D-PA) and Sherrod Brown (D-OH) introduced what they deemed to be a legislative “fix” to the thorny problem of how to extend all these programs in the face of Sen. Jeff Sessions (R-AL) opposition to the GSP so long as sleeping bags were included in the program (there just happens to be a sleeping bag manufacturer in his state). Their solution? Just carve out sleeping bags from the GSP.

Section 202 of the proposed bill was literally titled “Ineligibility of Certain Sleeping Bags for Preferential Treatment Under the Generalized System of Preferences”. The Senators didn’t even go to the trouble of carefully wording and designing the provision so that it — oh, hey, look at that! — just happened to pertain to exactly the product for which a carve‐​out was being sought. No, in this case all subtleties were thrown to the wind. They even, should any confusion remain, helpfully provided the specific H.S. number (the code used by customs officials to identify a good) for the sleeping bags in question.

(I should note here that administrative reviews — processes built into the GSP to avoid what legislators deem undue harm to domestic interests — had already shown that the conditions for GSP ineligibility for sleeping bags were not met. )

While this bill thankfully failed, it serves as a timely reminder that legislators will not allow anything so minor as the rule of law (in this case an administrative review) to prevent them from seeking favors for certain constituents. Thank goodness that effort was thwarted this time: a precedent whereby any Senator (or House member, for that matter) can get a carve out from general trade liberalization for their special interest friends would see the post‐​war progress on freer trade — imperfect though that may be — quickly unravel.

An additional note: in their press releases, Senators Casey and Brown both alluded to the “fact” that the TAA helps workers “either get back to work or regain some measure of the financial security that has been stripped from them due to unfair foreign trade.” [emphasis mine] TAA has no such condition attached: workers eligible for the stimulus‐​enhanced TAA didn’t even have to prove that they lost their job because of a trade agreement, let alone any condition that the trade was “unfair” (i.e., a result of dumping or subsidization — and see here why those charges are themselves canards). Unless, of course, the Senators consider any trade that threatens domestic producers’ interests to be “unfair”.

February 15, 2011 9:52AM

Deconstructing the Revenue Side of Obama’s Budget

I looked yesterday at the spending side of Obama’s budget and found some good news and bad news. The good news was the absence of any big new initiative to expand the burden of government. That’s a welcome relief since the past couple of years have featured budget busting proposals such as the so‐​called stimulus scheme and a government‐​run healthcare plan.

The bad news is that the budget does nothing to undo any of the damage of the past two years. Nor does it undo any of the damage of the previous eight years. And because the President’s budget refuses to address entitlement spending, it certainly doesn’t do anything to avert the damage of rapidly expanding budgets over the next several decades.

Now let’s look at the tax side of the fiscal equation. In large part, the White House is recycling class warfare ideas from last year’s budget. The President wants higher tax rates, including higher taxes on investors, entrepreneurs, and small business owners. He also wants to increase the tax burden of American companies that are competing for market share in global markets.

These are remarkably misguided proposals. But what’s especially disappointing is that the Administration stuck with these bad ideas when the President’s own fiscal commission proposed lower tax rates and base broadening. Those proposals would have increased the overall tax burden, so they definitely were not pure supply‐​side economics. And the Commission also proposed an increase in the double taxation of saving and investment, which also would be unfortunate.

But at least the Commission proposed to do the wrong thing in a good way. Yes, taxes would have increased, but the damage would have been ameliorated by a better tax structure. Obama’s budget, by contrast, does the wrong thing in the worst way — increasing the tax burden while also making the tax system more unfair.

It’s also worth noting that the President decided to punt on the issue of corporate tax reform. This is remarkable since even he acknowledged during his State‐​of‐​the‐​Union address that America’s corporate tax rate is far too high in a competitive global economy.

Last but not least, it’s worth noting that Obama’s budget shows that tax revenues will rise above their long‐​run average of 18 percent of GDP — even if taxes are not increased by one penny.

America’s budget problem is too much spending, period.

February 15, 2011 8:07AM

Obama Shellacking and the Federal Budget

A lot has happened since President Obama introduced his last budget in February 2010. His party took an historic “shellacking” at the polls for its big government policies, his Fiscal Commission recommended serious spending cuts, and European governments have illustrated the severe problems of deficit spending. 

Given all this, did the president adopt a more frugal and prudent approach in his new budget yesterday? Not at all–the spending levels in his new budget are virtually the same as the unsustainably high spending levels in his February 2010 budget.

The chart shows Obama’s proposed spending for FY2012 from last year’s budget, and his proposed spending for the same year from his new budget. His new budget proposes slightly more discretionary and entitlement spending for next year than did his last budget!

  • Last year, Obama planned to spend $1.301 trillion on discretionary programs in FY2012, but now he plans to spend $1.340 trillion.
  • Last year, Obama planned to spend $2,107 on entitlement programs in FY2012, but now he plans to spend $2,140.

So take that Tea Party!

Obama claimed in his “Budget Message” yesterday that “taking further steps toward reducing our long‐​term deficit has to be a priority,” but looking at his actual budget numbers shows that isn’t true.

Media Name: 201102_blog_edwards151.jpg

For more budget numbers, see my NRO summary.

February 15, 2011 8:07AM

Defending Defense Badly

Monday was budget day, where the President sends Congress the budget he would like it to pass and reporters and analysts scurry around reacting, as if the he were issuing stunning edicts rather than predictable suggestions . Due to a Healy‐​esque aversion to this species of DC pageantry, I was not planning to comment.

Then I read this oped in Politico where James Fly and John Noonan of the neoconservative Foreign Policy Initiative flack for the President’s defense budget. It demonstrates the intellectual poverty of the case for current defense spending so well that I decided to discuss it.

Fly and Noonan first claim that the White House wants to cut defense spending by $78 billion over five years, repeating the President’s talking point and labeling the reduction “deep and far‐​reaching.” But as Chris Preble wrote earlier, the cut is to the rate of spending growth. Neither Obama nor Secretary Gates has ever proposed cutting actual defense spending. In the unlikely event that the administration’s new five‐​year spending plan holds up, the non‐​war portion of Pentagon spending will cost taxpayers $2.918 trillion from fiscal year 2012 to 2016, rather than last year’s proposed $2.994 trillion, a reduction of 2.5 percent. We will still spend more on the non‐​war Pentagon budget, even adjusting for inflation, than we did in the prior five years, which was the most ever. Some cut.

The oped dutifully repeats Gates’ claim that he canceled procurement programs worth more than $300 billion in 2009. It does not say that that’s a speculative lifetime spending estimate, that new programs replaced those canceled, and that other Pentagon spending categories, like personnel, have grown more rapidly than procurement, eating any savings.

When they try their own arguments, Fly and Noonan do even worse. They write that “it is worth asking whether other federal agencies or domestic entitlement programs have been forced to reduce their budgets to the same extent that the Pentagon has over the past two years.” Though they mean to imply otherwise, the answer, since they asked, is yes, more. As they could have figured out by looking at OMB’s historical outlay table, total non‐​defense discretionary spending has not grown over the last two years. Defense has.

It gets worse. Fly and Noonan complain that we lack a military that can handle “any unanticipated contingency, which cancould [sic] emerge at any time.” We could triple defense spending, reinstitute the draft, and still not meet that standard. What if we had to occupy India? And why is instability anywhere always our problem?

Of course they also mention China, noting that it wants to use its military to assert “its long‐​term interests” and recently tested a stealth fighter. Given that we spend almost as much researching, developing and testing new weapons as China spends on its whole military, that we have far more advanced stealth and surveillance technology, that we have eleven carriers while China has one that they can’t really operate, and that we have no good reason for war with China, the Chinese’s effort to build a military that can protect their interests is unalarming, reasonable and a terrible argument for our current defense budget.

Beyond China, Fly and Noonan make no effort to justify military spending with specific threats. They just assert that the world is “volatile” and the “strategic landscape” grows “increasingly perilous.” Actually the world has been getting less volatile for several decades, if we measure volatility by the frequency and human cost of wars. And even if that were not true, why should our military aim, quixotically, at pacifying all war, rather than self‐​defense? Strategy is a product of our making, not a landscape we passively confront. National security threats to Americans are quite limited in historical context, and mostly avoidable. A less activist stance would avoid the peril we now increase by having defense commitments in so many unstable places.

February 15, 2011 8:04AM

New Era of Big Government

The George W. Bush administration ushered in a new era of big government. The Obama administration has built on Bush’s profligacy, and the president’s new fiscal 2012 budget proposal would further cement the trend.

Spending as a percentage of GDP has increased dramatically since the surplus years of the late 1990s. As the chart shows, the president’s budget once again seeks a permanently high level of federal spending as a share of the economy:

Media Name: obama2012spending.jpg

While the numbers drop from their stimulus‐ and recession‐​induced highs, it is not because the president has suddenly decided that he desires a less active government. Rather, optimistic economic assumptions largely account for the slight retrenchment.

Tax increases and optimistic economic assumptions explain the projected rise in revenue as a share of the economy. While the president would like us to believe he’s found religion on spending cuts, he’s actually relying on a rosy economic forecast and sucking more money out of the private sector to reduce annual deficits.

Taking more money from the productive private economy to maintain destructively high levels of federal spending is not a recipe for economic growth. Therefore, this budget proposal is as dangerous as it is disingenuous. Fortunately, it’s also dead on arrival in the Republican‐​controlled House.

February 15, 2011 8:03AM

A Dishonest Budget, as Told in One Graph

Yesterday, President Barack Obama released his proposed budget for fiscal year 2012. Many of my Cato colleagues have already discussed why the president should be embarrassed of this document. Chris Preble writes that the president offers “faux cuts” to military spending. Dan Mitchell says the president is “missing in action” on entitlement reform. Chris Edwards writes that “the Obama administration has completely chickened out on spending reforms in its new budget.”

They were too kind. This budget is thoroughly dishonest, too.

Back in 1997, Congress enacted automatic reductions in the price controls that Medicare uses to pay for physician services. Congress has delayed those cuts year after year, and everyone now agrees they are politically infeasible. We’re not talking about your the usual, Washington‐​DC definition of spending cuts here, which is just a reduction in spending growth. If the accumulated cuts were to take effect in 2012, as provided by current law, Medicare payments to physicians would fall by some 25 percent, and lots of seniors would find their doctor no longer accepts their Medicare coverage. The problem is, these cuts are still on the books and they grow larger every time Congress delays them. But no one wants to come up with the money needed to pay for a permanent “doc fix.”

Enter President Obama’s FY2012 budget submission. Rather than propose a permanent “doc fix,” the Obama administration proposes a temporary and dishonest one. As shown by the blue bars in the below graph, the administration proposes to delay these cuts until 2014 at a cost of $54 billion. As shown by the black line, the administration proposes to pay for this additional spending by reducing the rate of spending growth in other areas of Medicare by $62 billion over the next 10 years. Note that only 6 percent of these Medicare “cuts” will occur in 2012 and 2013. The other 94 percent of the “cuts” will come after the administration has spent the $54 billion it wants to spend. Note also that the vast majority of the “cuts” would take effect after Barack Obama is no longer president. Finally, the president offers no proposals to deal with the cuts in physician payments during the last eight years of the 10‐​year budget window (as shown by the purple bars). But he’s more than happy to use those implausibly low current‐​law spending levels to make his proposed budget appear more responsible than it is.

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It’s the same old story: dessert today, spinach tomorrow. (Or, never.)

Both parties engage in such dishonesty all the time. Those cuts in physician payments were scheduled to take effect in 2011. To pay for delaying them until 2012, Congress and the president agreed on the ridiculous and dishonest strategy of trying to track down and recover excessive subsidies that the federal government will pay to people in ObamaCare’s health insurance “exchanges,” beginning in 2014. (Call it the new “pay and chase.”)

February 14, 2011 2:16PM

Federal Budget: Obama Chickens Out

Despite the record $1.6 trillion deficit this year, and the consensus that exploding spending and debt is pushing the nation toward catastrophe, the Obama administration has completely chickened out on spending reforms in its new budget.

The president took a “shellacking” in the November elections as a result of his big‐​government policies. Does his new budget reflect any movement to the fiscal center? Not at all — spending levels in his new budget are virtually the same as in last year’s budget.

Read my post at NRO for full details.