201109

September 8, 2011 8:42AM

Government and Job Creation: Help or Hindrance?

I recently posted four charts eviscerating Obama's record on jobs.

My Cato colleagues, Caleb Brown and Austin Bragg, have a good complement to those charts. They've put together a short video looking at how government spending and regulation undermine job creation.

Caleb says he will be doing more excellent videos like this, which is very encouraging since there is so much more ground to cover -- particularly when trying to educate people in Washington.

One thing he should explain is that jobs don't exist without profits. As I explained in a New York Post column last year, employers "only create jobs when they think that the total revenue generated by new workers will exceed the total cost of employing those workers."

This seems like an elementary observation, but it's one that most politicians don't seem to understand. Or don't care to understand.

That certainly seems to be the case at 1600 Pennsylvania Avenue. The president will speak tonight and supposedly will propose a $300 billion plan. He'll claim, of course, that this new "stimulus" package will boost growth.

But a look at the various components that reportedly will be in his plan doesn't create a sense of optimism. Especially since it appears that he's mostly recycling proposals that already have failed at least once.

Maybe the President should copy the policies of a former resident of the White House, who also had to deal with a deep downturn, but managed to produce dramatically better results.

September 7, 2011 3:56PM

No Additional Subsidies for State & Local Governments

According to press reports, the president will roll out a $300 billion stimulus package “jobs plan” this week. The plan will contain additional subsidies for state and local government, including money for school construction.

My colleagues Adam Schaeffer and Andrew Coulson have explained that money to build schools is one of the last things that the government school system needs (see here and here). There will probably be money for “hiring teachers” and other targets that the administration thinks will play well with the electorate – not to mention government employee unions.

The electorate – and reporters covering the president’s plan – should understand that subsidies to state and local government have gone through the roof since 2000:

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A Cato essay on federal aid to state and local government explains why these subsidies should be abolished, not increased. The following are five fundamental reasons:

1. Subsidies undermine constitutional federalism. The federal government should handle only those issues that are truly national in scope, such as defending the country from attack. The Constitution assigned the federal government specific limited powers, and the 10th Amendment clearly states that “The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.”

2. Subsidies destroy the concept of the states being “laboratories of democracy.” The beauty of “fiscal federalism” is that it allows the states to experiment and figure out what does and doesn’t work. It also allows citizens to live in a state with policies that match their preferences. Federal subsidies stifle this experimentation and limit the choices available to citizens.

3. Subsidies fuel burdensome regulations and bureaucratic waste. The federal government creates countless regulatory hoops that the states have to jump through in order to get the federal handouts. The rules and regulations naturally spark an explosion in bureaucracy at all levels of government. When I was a budget official in the state of Indiana, I saw firsthand the federal and state taxpayer money being wasted trying to administer programs funded with federal dollars.

4. Subsidies misallocate taxpayer resources. Federal aid misallocates resources because the money is distributed on the basis of political, rather than economic, considerations. Congress uses complex formulas to disburse money to the states that ensure that just about everyone gets a piece of the pie. Spreading the largesse across many congressional districts and states helps secure the votes necessary to ensure that the programs are continued. For example, federal community development subsidies were originally intended for poor areas, but now the money goes to poor, middle-class, and rich areas alike.

5. Subsidies breed irresponsibility and waste. Federal politicians and bureaucrats waste a lot of money for the simple reason that it isn’t their money. Federal subsidies exacerbate the problem at the state and local level: not only are state and local officials playing with other people’s money – they’re playing with money that they didn’t have to tax from their citizens. And because state and local citizens weren’t taxed to pay for these federally funded activities, they have less incentive to pay attention to how the money is spent.

September 7, 2011 3:21PM

Another Judicial Takings Case Reaches the Supreme Court

For over a century, Montana citizens have used non-navigable streambeds along their properties for various purposes without objection from the state government.  The hydroelectric energy company PPL Montana and thousands of other private parties exercised their rights over these non-navigable stretches that the state never claimed. 

Last year, however, the Montana Supreme Court overturned well-settled state property law by effectively converting the title in hundreds of miles of riverbeds to state ownership. The majority of the court ruled that the entirety of the Missouri, Clark Fork, and Madison rivers were navigable at the time of Montana's statehood, producing a broad holding that eradicates the right to use rivers and riverbanks that Montanans had enjoyed for over a century.

PPL Montana thus asked the U.S. Supreme Court to review the state court’s decision; Cato filed an amicus brief supporting that request, which the Court granted.  Now that the case is before the Court, Cato has joined the Montana Farm Bureau Federation, American Farm Bureau Federation, and National Federation of Independent Business on a brief supporting the property owners.

We are chiefly concerned with two parts of the Montana Supreme Court’s ruling:  First, the court incorrectly evaluated navigability for the purpose of establishing title -- finding the entirety of the rivers at issue navigable (and thus belonging to the state) because portions of them are -- contravening the legal standard established by the U.S. Supreme Court in United States v. Utah (which analyzed the riverbeds section-by-section to achieve a “precise” assessment of navigability).  Second, the court effectively transferred a substantial quantity of land from private owners to the state -- a judicial taking that violates either the Fifth or Fourteenth Amendments (as the Court described in the recent Stop the Beach Renourishment case, in which Cato also filed a brief).  

In short, the Court should reaffirm the Utah standard for navigability in the context of establishing title and protect private property owners against judicial takings.  By doing so, it would send a strong message to state courts across the nation that judicial usurpations of property rights are just as unconstitutional as those undertaken by other branches of government.

The Court will hear the case of PPL Montana, LLC v. Montana late this year or in early 2012.  Again, you can find Cato's brief here.

September 7, 2011 12:01PM

Grading the Likely Components of Obama’s New Stimulus Plan

President Obama will be unveiling another "jobs plan" tomorrow night, though Democrats are being careful not to call it stimulus after the failure of the $800 billion package from 2008.

But just as a rose by any other name would smell as sweet, bigger government is not good for the economy, regardless of how it is characterized.

Here are the most likely provisions for Obama's new stimulus, as reported by the Associated Press, along with a grade reflecting whether the proposals will be effective.

  • Payroll tax relief - C - This proposal won't do any harm, but it probably won't have much positive impact because people generally don't make permanent decisions on creating jobs and expanding output on the basis of temporary tax cuts.

    But, to be fair, if the tax cut keeps getting extended, people may begin to view it as a semi-permanent part of the tax code, which would make it a bit more potent.

  • Extended unemployment benefits - F - I agree with Paul Krugman and Larry Summers, both of whom have written that you extend joblessness when you pay people to be unemployed for longer and longer periods of time.

    And I recently produced a chart showing how long-term unemployment has jumped sharply since Obama entered the White House, a dismal result that almost surely is related to the numerous expansions of unemployment benefits.

  • New-hire tax credit - D - This proposal actually would subsidize employment rather than joblessness, so it's an improvement over extending unemployment benefits, but it's unclear how the IRS can effectively enforce such a scheme.

    This approach was tried already, as part of HIRE Act of 2010 (which was infamous for the FATCA provision), and it obviously didn't generate great results. Simply stated, giving special tax breaks to companies with high employee turnover is not an effective approach.

  • School construction subsidies - F - The federal government should have no role in education. Period.

    That being said, the economic flaw of school construction spending-cum-stimulus is that government spending must be financed with either taxes or borrowing, both of which divert resources from the productive sector of the economy. Simply stated, Keynesian spending does not work.

  • Temporary expensing of business investment - B - The current tax code penalizes new business investment by forcing companies to "depreciate" those costs rather than "expense" them, thus forcing companies to artificially overstate profits. Temporary expensing mitigates this foolish bias.

    But temporary tax cuts, as noted above, are unlikely to have a permanent impact on growth. Temporary expensing, however, will encourage companies to accelerate planned investment to take advantage of better tax treatment, so it can lead to more short-term economic activity (albeit perhaps by reducing economic activity in future years).

The only good news - at least relatively speaking - is that Obama supposedly will propose to misallocate $300 billion of resources, significantly less than what was squandered as part of the 2009 faux stimulus.

But the bad news is that the AP story also notes that "Obama has said he intends to propose long-term deficit reduction measures to cover the up-front costs of his jobs plan." Translated into English, that means the gimmicks and new spending in the plan proposed tomorrow night will lead to proposed tax hikes at some point in the future.

More taxes and more spending. Hey, it worked for the Greeks, right?

September 7, 2011 11:29AM

A U.S. Troop Presence in Iraq Does Not Serve U.S. Security Interests

Many years ago, longer than I care to remember, I wrote an op ed wondering aloud "Who Will Decide When We Leave Iraq?" More than five and a half years later, we still don't know the answer to that question.

Sure, we have an agreement with the Iraqis to leave by the end of this year. All U.S. troops are supposed to be gone, although a very large diplomatic presence, including perhaps thousands of security contractors, will remain. George W. Bush presided over the negotiation of the deal, and then passed it off to his successor. When he drew down to fewer than 50,000 troops over the summer, on a path to zero by January 1, 2012, Barack Obama was merely implementing the policy. He cannot fairly be accused of doing anything other than what his predecessor would have done. If it is a mistake for Obama to preside over a troop withdrawal, then it was a mistake for Bush to negotiate one.

But maybe we're not leaving? Defense Secretary Leon Panetta is reportedly supporting a deal for 3,000 to 4,000 troops to remain in a training capacity past the end of the year, provided a deal can be struck with the Iraqis.

Those few Americans who are still paying attention to Iraq cannot be enthusiastic about this. We have long since tired of the ruinous, pointless war. The cheerleaders for invading Iraq said it would be a cakewalk, and that the costs would be paid for by Iraqi oil revenues, not U.S. taxpayers. It has instead consumed nearly $800 billion in U.S. taxpayer dollars, claimed the lives of over 4,400 U.S. troops, and wounded many thousands more. The costs of caring for the wounded and recapitalizing equipment will likely top an additional $1 trillion.

Haven't we had enough already?

Apparently not.

A handful of U.S. senators are appalled to learn not that U.S. troops might be staying in Iraq, but rather that the administration is contemplating a troop withdrawal. (Is this news to them?) When they learned that the administration was trying to retain a U.S. troop presence beyond the end of this year, Diane Feinstein, Joseph Lieberman, John McCain and Lindsay Graham, complained that the numbers being contemplated were insufficient. They claimed that such a draw down would imperil the fragile gains made in the country over the past few years, and expose the few troops left behind to serious harm.

That last point might be true. It isn't clear to me why 3,000 troops makes much more sense than 30,000 or 300. But the essential fact is that the presence in Iraq, any presence, is unnecessary. Bush made many mistakes in Iraq, beginning with the decision to invade. He was correct to determine that the mission must end. It does not serve U.S. security interests to remain in that country indefinitely.

At the time when I wrote that earlier op ed, in early 2006, I pointed to President Bush's insistence that we would only stay so long as the Iraqis wanted us there, and suggested that the Iraqs might ultimately determined whether we stayed or went. Bush might have been gambling that the Iraqis would not ask us to leave, at least not right away, and the polling data at the time suggested that was a safe bet.

It isn't any longer. A few people here in the United States might want U.S. troops to stay in Iraq; but very few Iraqis agree.

Realist IR scholars will repeat ad nauseum the mantra from Thucydides:  "The strong do what they can; the weak suffer what they must." To the extent that this is true, no U.S. president would gamble this country's security on the whims of a nascent parliamentary democracy rife with anti-American sentiment. We would never hand such a decision over to the Iraqis if it was truly vital to our national security to remain there.

It isn't. It never has been. The Iraq war was a war of choice; we can choose to leave. We should.

 

September 7, 2011 8:41AM

Obama’s Failure on Jobs: Four Damning Charts

President Obama may have a buddy-buddy relationship with big labor, but he's no friend to ordinary workers. Here are four damning pieces of evidence.

1. The unemployment rate remains above 9 percent according to the Labor Department data released on Friday.

This is about 2-1/2 percentage points higher than Obama promised it would be at this stage if we adopted the failed stimulus.

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This is a spectacular failure.

2. Black unemployment has jumped to 15.6 percent.

I've already commented on how Obama has produced bad results for the African-American community, and the joblessness numbers are rather conclusive.

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What makes that figure especially remarkable is that the black unemployment rate during the Obama years is more than 50 percent higher than it was during the Bush years.

3. More than 40 percent of the unemployed have been out of work for more than six months.

These bad numbers almost certainly are caused, at least in part, by the unemployment insurance program -- as even senior Democrat economists have acknowledged.

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4. Millions of people have dropped out of the labor force, dropping the employment-population ratio to the lowest level in decades.

Here's the chart I posted last month. It hasn't changed, and it's perhaps the clearest evidence that Obama's policies are crippling America's long-run economic outlook.

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All four of these charts are bad news. But the economy periodically hits a speed bump. The real problem is not bad numbers, but the fact that bad numbers have persisted for several years.

And the really bad news is that there is little reason to expect a turnaround given the current Administration's affinity for bigger and more burdensome government.

September 6, 2011 5:04PM

‘Subsidy Risk’ in Green Tech

Two-and-a-half years ago, I attended a venture capital conference that focused a good deal on "clean tech." I wasn't impressed.

[T]he current vogue for "clean tech" differs from the information technology revolution that has done so much for the economy and society. Venture investors may be turning to government subsidy and regulatory advantage for their portfolio businesses, rather than producing to meet a market demand. "Going green" may mean "going red" in at least two senses—a more socialist political economy and a government even deeper in debt.

Essaying to instill some doubts among investors who were banking on "political will," I asked pointedly how VCs assessed subsidy risk and the vagaries of public policy. The responses weren't insightful or memorable.

Some vindication of my doubts comes in an article called "The Crisis in Clean Energy" ($) by David Victor and Kassia Yanosek in the July/August Foreign Affairs.

In the United States, most clean-energy subsidies come from the federal government, which makes them especially volatile. Every few years, key federal subsidies for most sources of clean energy expire. Investment freezes until, usually in the final hours of budget negotiations, Congress finds the money to renew the incentives---and investors rush in again. As a result, most investors favor low-risk conventional clean-energy technologies that can be built quickly, before the next bust.

Elsewhere, they write, "With clean energy suffering from long time horizons, high capital intensity, and a heavy dependence on fickle public policies, some Silicon Valley venture firms are scaling back or even canceling their 'clean tech' investment arms."

Alas, Victor and Yanosek don't call for the federal government to clear the field so entrepreneurialism can flourish. They offer three bland "shifts in approach" that amount to more of the same. Until the federal government does clear the field, watch for the subsidy muddle in green tech to suppress profound innovations while government-directed investment brings modest returns to investors/tax-consumers at the expense of taxpayers.