Archives: 10/2011

Reminiscences of Bill Niskanen from Lew Uhler

Lew Uhler, founder and president of the National Tax-Limitation Committee, sends along these thoughts on the passing of Bill Niskanen:

We all develop wonderful friends over a lifetime.  But few become an integral part of one’s perspective on life, challenge your conclusions when you are wrong, confirm  your judgment when—occasionally—you may be right, and broaden your horizons at all times and in a civil and engaging way.  That was Bill Niskanen during our nearly 40-year friendship.

Just two weeks ago, as he was a “resident” at the Washington Rehabilitation Hospital after major heart surgery, I was with him and Kathy frequently, urging him on in his rehab.  While he was tentative physically, he was his old self mentally, as we discussed details of the balanced budget amendment and other issues pending before Congress.

I have thought about our years together since I “recruited” him to the “California Revenue Control and Tax Reduction Task Force” for then-governor Ronald Reagan in the fall of 1972.  I was crisscrossing the nation in pursuit of the finest free-market minds I could find (remember, this was before Cato, Heritage, and many of the fine free-market think tanks in D.C. and well before the SPN state-based think tanks).  Milton Friedman, Jim Buchanan and others who joined the Reagan team said,  “You have to get Bill Niskanen at Berkeley at the Graduate School of Public Policy,”  maybe because he had just published a key book on government in 1971, Bureaucracy and Representative Government.  That’s when I first met Bill Niskanen.

After our Reagan-as-governor experience, Bill was hired by Ford Motor Company in Dearborn as their chief economist.  While in Michigan, Bill translated California’s Prop. 1 of 1973 into Michigan’s successful tax limitation initiative, the Headlee Amendment, in 1978.  Bill consulted informally on many more tax-and-spending limits around the nation.

Bill remained Ford’s chief economist until the company decided it would support trade laws that ran counter to Bill’s free-market views.  He did the risky–but, as always, the honorable—thing and resigned.  Ronald Reagan, who had come to respect Bill as part of our California Tax Reduction Task Force, appointed him to the President’s Council of Economic Advisers, where he served (including service as the Acting Chairman) into the second term of the Reagan administration.  Bill helped shape the federal spending limit that passed the United States Senate in 1982.  Then he went with Cato, and the rest is history.

For the past nearly 15 years, my frequent trips to D.C. have been spent with Bill at his home, and more recently with Bill and Kathy on Capitol Hill.  My wife and I have enjoyed many tennis and canoeing weekends with Bill and Kathy at her home, “Clifton,” on the Eastern Shore.

Bill was very competitive on the clay court and didn’t tolerate losing well—but did so with resignation, dignity and lots of excuses.

Bill was a man of great faith and a regular church-goer.  His singing voice was so good that he became a part of a highly distinguished choral group that performed each fall throughout the Capitol district and sang in many languages, including Russian and Bill’s ancestral Finnish tongue.  He was a regular favorite at the Finnish Embassy.

Bill and Kathy’s latest treasure has been Winston, a young bulldog with an amazing likeness to his namesake.  Winston transformed their world, and Bill spoiled Winston rotten.

We will treasure forever our time with the kid from Bend, Oregon, who made it to Harvard, excelled at the University of Chicago’s Economics Department, and who has left a legacy of ideas, works, and leadership unparalleled in the understanding of bureaucracy, government, free markets and human freedom.

It is my good fortune to have been a friend of Bill Niskanen.

Lefty Relics Gathering Dust

So the Associate Publisher of The Nation sends me an email asking me, “Have any lefty relics gathering dust in your closet?” They’re having a fundraising auction.

As it happens, I do have some lefty relics I’d like to get rid of. I have:

  • Keynesianism
  • Wilsonianism
  • Nationalized health care
  • Government Motors
  • The idea that the Constitution grants “plenary” powers to the federal government
  • The War on Poverty
  • Racial preferences
And by the way, when National Review asks me for conservative relics, I’ll have a list for them, too.

This Week in Government Failure

Over at Downsizing the Federal Government, we focused on the following issues this past week:

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State Department Spreads Democracy—and Money

A friend points me to a recent article on Foreign Policy’s website written by a career State Department employee who spent a year in Iraq trying to “win the hearts and minds” of the Iraqi people. I’ve pretty much become numb to stories about government failure, but this one left me with my forehead planted on my desk.

Here are some of the ideas that government officials actually gave the green light to, using your tax dollars:

  • French pastry classes for Iraqi women.
  • A play about a town’s dispute over “the value of shade cast by a donkey.”
  • A road constructed to facilitate commerce was instead used by insurgents to carry out attacks.
  • A local artist was paid to paint a mural of “oiled, homoerotic Steve Reeves musclemen” on the wall of a gym.
  • Bicycles were bought for impoverished children in a Baghdad neighborhood. However, the roads were too damaged and dangerous for the kids to ride their bikes, so the bike wheels ended up being used on wheelchairs for injured Iraqis.
  • The creation of a Baghdad Yellow Pages even though only 250 businesses with permanent landlines could be found.

I suspect that some readers will respond that the federal government should instead be using taxpayer dollars to build roads and fund the arts here in the United States. However, as we demonstrate over and over again at DownsizingGovernment.org, the federal government does a lousy job of spending other people’s money at home or abroad—period.

Has the Cost of the Fannie-Freddie Bailout Fallen?

Yesterday the Federal Housing Finance Agency (FHFA) released its updated projections of the cost of rescuing Fannie Mae and Freddie Mac.  These estimates update projections last made in October 2010.  The big headline has so far read that costs have been revised lower.  But will that really be the case?

If one digs into the revised numbers, a few striking facts emerge.  First, FHFA states losses since October 2010 have been lower than projected for a variety of reasons, including that “foreclosure delays [have] pushed some defaults into later years” and “net interest income is higher … due to lower interest rates.”  The first reason just sounds like a delay of the ultimate cost to me, rather than a reduction.  And given that homes often lose value during the foreclosure process (who bothers to maintain a home he is going to lose ?), these foreclosure delays are just as likely to increase the ultimate costs, even if they do delay those costs.

On the interest rate question, first, do we believe rates are going to remain low indefinitely?  Seems to me we could easily be in a situation in three to five years where the GSE funding costs are above their interest income.  This especially becomes the case if Obama has his way and Fannie/Freddie re-finance a large share of their book into lower rates.

All this aside, the revisions are still a brutal reminder that taxpayers have so far sunk $169 billion into Fannie and Freddie, more than the ultimate costs of the TARP and more than the cost of the savings-and-loan crisis.  The FHFA projects that, by the end of 2014, total taxpayer costs will be between $220 billion and $311 billion. 

Any way you slice it, Fannie and Freddie have been a massive drain on taxpayers.  The sooner we put an end to these entities, the sooner we can avoid having taxpayers pick up the dime for the next housing bubble.

Four Reasons Why Keynesian ‘Stimulus’ Does Not Work

Professor Allan Meltzer of Carnegie Mellon University has a must-read column in today’s Wall Street Journal, beginning with what should be an obvious statement.

Those who heaped high praise on Keynesian policies have grown silent as government spending has failed to bring an economic recovery. Except for a few diehards who want still more government spending, and those who make the unverifiable claim that the economy would have collapsed without it, most now recognize that more than a trillion dollars of spending by the Bush and Obama administrations has left the economy in a slump and unemployment hovering above 9%.

He then asks a rather important question.

Why is the economic response to increased government spending so different from the response predicted by Keynesian models?

Prof. Meltzer gives four reasons, beginning with the threat of higher taxes.

First, big increases in spending and government deficits raise the prospect of future tax increases. Many people understand that increased spending must be paid for sooner or later. Meanwhile, President Obama makes certain that many more will reach that conclusion by continuing to demand permanent tax increases. His demands are a deterrent for those who do most of the saving and investing.

I especially like how he highlights Obama’s actions, which clearly show the link between more spending and more taxes. I also would have added the European fiscal crisis, which has made more people aware of the negative long-run consequences of excessive government.

He then lists the negative impact of having the government distort the allocation of resources, a point that is music to my ears.

Second, most of the government spending programs redistribute income from workers to the unemployed. This, Keynesians argue, increases the welfare of many hurt by the recession. What their models ignore, however, is the reduced productivity that follows a shift of resources toward redistribution and away from productive investment.

He then discusses the impact of red tape, a point which I’ve never addressed, but obviously is very important if politicians use Keynesian spending as an excuse for expanding the scope of government as well as the size of government.

Third, Keynesian models totally ignore the negative effects of the stream of costly new regulations that pour out of the Obama bureaucracy. Who can guess the size of the cost increases required by these programs? ObamaCare is not the only source of this uncertainty, though it makes a large contribution.

Prof. Meltzer then dings the short-term mentality of Keynesians.

Fourth, U.S. fiscal and monetary policies are mainly directed at getting a near-term result. The estimated cost of new jobs in President Obama’s latest jobs bill is at least $200,000 per job, based on administration estimates of the number of jobs and their cost. How can that appeal to the taxpayers who will pay those costs? Once the subsidies end, the jobs disappear—but the bonds that financed them remain and must be serviced. These medium and long-term effects are ignored in Keynesian models.

The only thing I would change about this argument is that he also could have explained that so-called stimulus spending actually destroys jobs, on net, when you consider the loss of private-sector jobs that takes place when government diverts resources from the productive sector of the economy.

A minor oversight, though, in a blistering indictment of Keynesian economics. Heck, Prof. Meltzer should have taken my place at the NYC debate on stimulus.  I suspect, however, that the crowd would have been reached the wrong conclusion even if the ghosts of Milton Friedman and Friedrich Hayek has been resuscitated for the event (yes, I’m still sulking).

In addition to explaining why Keynesian economics does not work, Prof. Meltzer also outlines the policies that should be implemented.

Clearly, a more effective economic policy would aim at restoring the long-term growth rate by reducing uncertainty and restoring investor and consumer confidence. Here are four proposals to help get us there: First, Congress and the administration should agree on a 10-year program of government spending cuts to reduce the deficit. The Ryan and Simpson-Bowles budget proposals are a constructive start. (Note to Republican presidential candidates: Permanent tax reduction can only be achieved by reducing government spending.) Second, reduce corporate tax rates and expense capital investment by closing loopholes. Third, announce a five-year moratorium on new regulations. Fourth, adopt an enforceable 0%-2% inflation target to allay fears of future high inflation.

These are all good ideas, though I would have written that we need a “10-year program of government spending cuts” rather than saying  we need “10-year program of government spending cuts to reduce the deficit.”

After all, the federal government is too big and the damage to the economy would still exist even if the deficit disappeared because $1 trillion of new revenue magically floated down from heaven.

The problem is spending. That’s the fiscal disease facing America. Deficits and debt are just symptoms of that disease.

Bill Niskanen on Inequality

Our longtime colleague Bill Niskanen passed away yesterday. I will miss him dearly for his good nature, scholarship, wisdom and insight. In light of the debate on inequality, here’s an example of such insight in which he critiques philosopher John Rawls’s views. It is from footnote 21 (page 23) of his book, Autocratic, Democratic, and Optimal Government.

Rawls recognizes that individual well-being is dependent on more than income and wealth, but he does not acknowledge the implications of the fact that the other dimensions of well-being are not fungible. Consider the following example.

One young man is healthy and handsome, spends his days on the beach, has his pick of young women companions, and makes $10,000 a year by busing tables in the evening. Another young man is confined to a wheelchair, has congenital body odor, has never had an intimate relationship, and, with no other life, makes $100,000 a year as an expert computer programmer. In this case, who is worse off? Who should redistribute what to whom and how?