May 2012

May 31, 2012 5:05PM

My ‘Fiscal Cliff’ Prediction

Policymakers have been kicking the fiscal policy can down the road for years. That can is going to reappear shortly after the November elections when policymakers will be forced to confront scheduled tax increases, mandated spending cuts, and – once again – the debt ceiling. (I’m assuming, quite confidently, that nothing gets resolved before the elections.) The combination of events is being called the “fiscal cliff” as the failure to resolve these issues would cause the economy to go back into recession in 2013 according to conventional economic forecasters.

The Congressional Budget Office recently upped the alarm ante with its projection that the combination of tax increases and spending cuts would cause the economy to contract in the first half of 2013. The CBO also warned, however, that “eliminating or reducing the fiscal restraint scheduled to occur next year without imposing comparable restraint in future years would reduce output and income in the longer run relative to what would occur if the scheduled fiscal restraint remained in place.”

The cynic in me believes that this is precisely what policymakers want to hear.

The CBO projection gives Republicans ammo to argue against any tax increases and cuts to military spending. And it gives Democrats ammo to argue against any spending cuts while allowing them to support the continuation of tax cuts for all but the “wealthy.” Both sides can then continue to pontificate about the need to avoid a future debt crisis while continuing to avoid actually doing something about it. That means that in the end, policymakers will once again end up agreeing to kick the can further down the road. In the meantime, much hand‐​wringing will occur over the next six months as the intelligentsia bemoans our “dysfunctional political system.”

Now that’s my non‐​ideological “analyst” take. My personal policy preference is to not increase taxes (although I do believe “fiscal illusion” is a real problem) and address the mounting debt by reducing the size and scope of government. Unfortunately, neither party is interested. And this doesn’t help matters.

(Note to intelligentsia: when you give a select group of fallible human beings trillions of other people’s dollars and the ability to play God, you’re going to get dysfunction.)

May 31, 2012 2:16PM

Getting Cato — and Fed Ed Policy — Right

I want to thank Kevin Welner for giving the Cato Institute’s education people some pub, and I’m heartened that he thinks our ideas have a lot of influence with the Romney folks. As far as I can tell, though, they don’t. Why? Because if they did, Gov. Romney wouldn’t be offering federal open‐​enrollment, voucher, or even “neovoucher” proposals. He would be calling to get the federal government out of education, which is exactly what I and my colleagues have long advocated.

Do we like school choice? Absolutely, because logic and mounds of evidence strongly suggest that it works. But that does not mean we want the federal government to impose or “incentivize” it.

There are myriad reasons for this, even though it requires resisting the powerful temptation to have the federal government impose a policy we like in one fell swoop rather than going through the hard work of having individual states and districts adopt it.

First and foremost, we oppose federal involvement because the Constitution doesn’t give Washington authority to meddle in education outside of its 14th Amendment duty to prohibit state and district discrimination, and its jurisdiction over federal lands and DC itself. To press for what we know to be unconstitutional just because it would be politically easy would be to subvert the very rule of law, that which protects us from the arbitrary — and as the Founders understood, very dangerous — rule of men.

But the reasons for keeping Washington at bay are not simply legal or to avoid an oppressive dictatorship.

The fact of the matter is that no one person or group of people — even those of us at Cato’s Center for Educational Freedom — are omniscient, or even close to it. There are lots of things we don’t know, and we all make mistakes. That’s why it is never wise to give broad authority to a central government, even if it is utterly benevolent. If it does something wrong everyone goes down, and the human tendency is to do lots of wrong things. It is this understanding that backs the “laboratories of democracy” concept of states. Individual states can try different ideas, but others are free to steer clear of those that fail and run with those that work.

But aren’t state governments and districts prone to the same human failings as Washington, not to mention the same special‐​interest driven politics, misalignment of political and educational incentives, etc.?

They certainly are, which is why education policy people at Cato support school choice generally and education tax credits — which crucially do not involve public money — specifically. Given the numerous reasons that government fails, as well as the need for the specialization, competition, and innovation that government quashes, we understand that education would work much more effectively if government didn’t control the schools. But it is far better to let fifty states control their own education systems — including getting to experiment with their own school‐​choice delivery mechanisms — than to empower the central government to dictate one policy for all.

Yes, education analysts at Cato like school choice. But we’re also big fans of federalism and the Constitution, and when it comes to federal policy those things must come first.

C/P from the National Journal’s “Education Experts” blog.

May 31, 2012 1:39PM

Looking at Austerity in Spain

Spain is perhaps the weakest link in the Eurozone after Greece. Almost a quarter of its labor force is unemployed; its banking system is extremely vulnerable and it might collapse anytime; housing prices haven’t yet returned to normalcy after the burst of its real estate bubble; and the economy is in its second recession in two years and it’s expected to contract further in 2012 and maybe even in 2013. A bailout seems imminent and Tyler Cowen even warns of “an absolute and total crash” of the Spanish economy.

There is a wide consensus that Spain’s economic troubles are the result of an enormous housing bubble—even bigger than the one that hit the U.S.—that burst in 2008. Just the year before, Spain boasted healthy fiscal indicators: a general government budget surplus of 1.9% of GDP and a gross consolidated debt of just 36.2% of GDP. However, once the bubble burst, government revenues collapsed and stimulus spending was injected into the economy, resulting in a fiscal deficit of 11.2% in 2009 and a gross debt that has increased over 30 percentage points of GDP in just 4 years.

Paul Krugman and The Economist argue that this evidence shows that, unlike Greece, Spain wasn’t fiscally profligate. However, the devil is in the details. Spain did run budget surpluses prior to the crash, but those surpluses weren’t caused by restrained government spending, but by ballooning tax revenues (thanks to a growing housing bubble). If we look at total government spending in the last decade, we can see a steady and significant rise until 2009:

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* Using GDP deflator.

Source: European Commission, Economic and Financial Affairs.

Government spending in nominal terms increased at an annual rate of 7.6% from 2000 to 2009. Ryan Avent at The Economist says that “the push for austerity began in 2010,” and thus we have to look at nominal spending after that year, when according to Avent, it fell “substantially” due to austerity measures. In reality, it went down by just 1% in 2010 and a further 3.6% in 2011. If these cuts seem “substantial” to Avent, then a yearly average increase of 7.6% for almost a decade must be staggering.

Moreover, if we look at spending in real terms, using constant euros from 2000, there hasn’t been any decrease in the level of government spending.

If we look at government spending as a share of the economy, Spain appears as fiscally prudent: Spending was 39.2% of GDP in 2000 and exactly the same figure in 2007. However, as has been noted by Juan Ramón Rallo, Ángel Martín Oro and Adrià Pérez Martí of the Juan de Mariana Institute in a recent Cato study, “the data should be interpreted with caution, given that the GDP was growing at an artificially high rate.” The point is proven by the fact that when the economy came to a halt in 2008 (it grew by just 0.9%), government spending as a share of GDP leapt 2.3 percentage points to 41.5% in just one year. Government spending as a share of the economy remained constant during much of the 2000’s not because the government was spending too little but because GDP was growing too fast.

Moreover, once the crisis kicked in, government spending as a share of GDP reached a peak at 46.3% in 2009 (due to a combination of still more stimulus spending and a contracting economy). It later fell to 43% in 2011, still a higher share than in 2008. Government spending in Spain has indeed come down in the last two years, but not in a dramatic fashion as some people would have us to believe.

What about taxes? As has been the case in Britain, France, Italy and Greece, in the last two years the Spanish government increased taxes to tackle the soaring deficit: personal income tax rates went up in 2010 and two new brackets of 44% and 45% were introduced for higher incomes. Tax credits to self‐​employed workers were revoked. The VAT rate went up from 16% to 18% and excise duties on tobacco and gasoline were also raised. All these tax increases took place before the large tax hike introduced this year by the conservative government of Mariano Rajoy, which turned Spain into one of the highest taxed countries in Europe (and explained at length in this Economic Development Bulletin).

In short, austerity in Spain, described by Paul Krugman as “insane,” consists mostly of significant tax increases and timid spending cuts.

May 31, 2012 12:04PM

States Should Flatly Refuse to Create ObamaCare Exchanges (New Cato Video)

This new Cato Institute video explains why it is in no state’s interest to create an ObamaCare Exchange.

Many thanks to Cato’s very talented Caleb O. Brown and Austin Bragg.

For the more‐​words‐​no‐​pictures version, click here or here. For a word about ObamaCare profiteers the pro‐​Exchange lobby, click here. Click here to read about what is happening in the states.

May 31, 2012 11:52AM

Mayor Bloomberg’s Sweet Sugary Nanny State

“A spoonful of sugar helps the medicine go down,” sang a legendary nanny. But today’s most powerful nanny, New York mayor Michael Bloomberg, won’t tolerate that. He plans to ban the sale of large sodas and other sugary drinks at restaurants, movie theaters, and even street carts, the New York Times reports.

Mayor Bloomberg has lots of facts at his fingertips: Many Americans are overweight. Consumption of sugar can cause weight gain. All true, and a good reason for Mike Bloomberg to watch his diet.

But why should he watch MY diet? And the diets of 8 million New Yorkers, most of them adults? If he thinks New Yorkers should consume less sugar, let him hold a press conference. But giving people information isn’t good enough for him. Sometimes he gives people information, and they still don’t act the way he thinks they should. So what’s a billionaire mayor to do? He could bribe them, I suppose. But as Otter said, that could take years and cost millions of lives. Well, millions of dollars anyway. So, like Otter, he’s decided to go with “a really futile and stupid gesture” instead.

When he’s in the mood, Mayor Bloomberg can give eloquent testimony to the virtue of freedom when it comes to Muslims —

America is a beacon of freedom, and no place defends those freedoms more fervently, or has been attacked for those freedoms more ferociously, than New York City.

– or gay people:

I have no doubt that in your lifetime, liberty’s light will allow us to see more clearly the truth of our nation’s founding principles, and allow us to see all people, and all couples, as full and equal members of the American family.…If government can deny freedom to one, it can deny freedom to all.

But somehow when it’s the mayor’s own sensibilities that are offended, he forgets his eloquent defense of freedom. Suddenly, as White House chief of staff Andrew Card said of President Bush, Bloomberg “sees America as we think about a 10‐​year‐​old child.” A child who needs protection. A child who can’t make his own decisions. A child who needs a parent, or a nanny, to tell him what to eat and when to exercise.

In a free society, government doesn’t make our personal decisions for us. We don’t need a Big Brother or a mayoral nanny. We have the right and the responsibility to make our own decisions, so long as we don’t interfere with the rights of others. And even if we make what Mayor Bloomberg views as the wrong decisions.

And speaking of the mayor’s commitment to freedom, who exactly is going to impose this sweeping ban? Not the people, in a referendum. Not a constitutional convention. Not even the city council. This “far‐​reaching ban,” as the Times describes it, will be imposed on 8 million free citizens of New York by the city’s unelected Board of Health, all of whose members are appointed by … the mayor.

May 31, 2012 9:55AM

How to Tell When ObamaCare Takes a Beating in the Kaiser Poll: the Headline Is about Something Else

Consider these charts from the latest Kaiser Family Foundation tracking poll, released today.

Even when pollsters tell the public that ObamaCare is “reform,” the public still doesn’t like it.

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ObamaCare’s slip in this month’s poll is the result of a simultaneous drop in support among both Democrats and Independents.

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The people who hate ObamaCare are really, really angry. And they are not going away.

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The following shares of voters believe ObamaCare will either be of no use or will be harmful to the following groups: children (47 percent), young adults (51 percent), women (50 percent), the country as a whole (55 percent), themselves and their families (68 percent).

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Bear in mind, ObamaCare has always fared better in the Kaiser tracking poll than other polls.

May 30, 2012 4:27PM

Disadvantaged Minority: Non‐​Beneficiaries of Government

The Hill reports that “The Commerce Department is considering naming Arab Americans a socially and economically disadvantaged minority group that is eligible for special business assistance” through its Minority Business Development Agency. I would argue that the federal government should not favor people of one particular ethnic backgrounds over others. However, I think the bigger issue here is that a Commerce determination in the affirmative would be yet another step in the direction of greater government dependency.

Citing Census Bureau data, the Wall Street Journal’s Phil Izzo recently reported that 49.1 percent of the U.S. population “lives in a household where at least one member received some type of government benefit in the first quarter of 2011.” According to Izzo, that’s up from 30 percent in the early 1980s.

More troubling figures come from economist Gary Shilling. The October 2009 edition of Shilling’s Insight investment newsletter (not available online) provided updated figures for government dependency that he has been calculating for decades. Shilling separates Americans into two categories, government beneficiaries and non‐​beneficiaries, and defines the former as people who “depend on government, directly or indirectly, for a major part of their income.” As of 2007 (before the recession), Shilling estimated that 58.2 percent of the population were government beneficiaries. That figure would have certainly risen through the recession and, as he notes, the upward trend in government dependency “is ominous because it’s only a taste of what lies ahead when the postwar babies retire and move heavily into Social Security, Medicare and Medicaid.”

Assuming that Shilling’s numbers are remotely accurate—and I suspect that they are—then perhaps it’s time to recognize a new disadvantaged minority: those private sector producers who pay the taxes to support the majority of Americans dependent on government. Why would these people be considered “disadvantaged”? Because to the degree that they have a voice, it’s typically drowned out by the myriad special interests and constituencies that dominate Washington, the state capitals, and the city halls. That’s a problem because the more that people depend on government, the more difficult it becomes to get government spending under control. And as we are starting to see in Greece and other countries, that situation can’t go on forever.