Archives: 07/2012

Majority Rule?

The economist Greg Mankiw reports some disturbing news.  In 2009, a majority of households in the United States received more in government transfers than they paid in taxes. The middle quintile have recently changed from being a net contributor to government (they paid more in taxes than they received in transfers) to a net recipient. Perhaps the recent recession caused that change, but as Mankiw notes, the deep recession of 1982 did not have the same effect on the middle quintile.

Under pure majority rule, we might expect that the wealthiest 50 percent of the population will pay all taxes while the poorest 50 percent will consume all government spending. The United States is not governed by pure majority rule, but we might wonder if we are on the way to outcomes consistent with it.

Truth in Budgeting and Personnel Costs in the OCO

This week, likely on Wednesday, the full House of Representatives will take up the defense appropriations bill passed out of the Armed Services Committee in May. Although most of the floor debate will focus on restoring or cutting funding for individual programs and weapons platforms, fiscal hawks should fix on a seemingly esoteric issue to make a point about truth in budgeting and basic transparency: the arbitrary decision by the Obama administration to shift approximately $5.6 billion dollars from the DoD’s base budget to the Overseas Contingency Operations (OCO) account. The move is ostensibly intended to pay for some of the troops fighting in Afghanistan over the next few years, but the particulars are murky, and the rationale is dubious, at best.

The OCO budget has always been a slush fund of sorts, but the potential for mischief has risen because last year’s Budget Control Act (BCA) explicitly exempted war spending from budget caps. This particular gimmick – funding supposedly temporary active-duty personnel out of the OCO account – has attracted some notice. House Budget Committee Chairman Paul Ryan called attention to it in a hearing on February 29th. POGO’s Ben Freeman wrote about it in March, pointing to a letter sent by six House Republicans, including Jim Jordan, head of the Republican Study Committee, and Arizona’s Jeff Flake, to Harold “Hal” Rogers, chair of the House Appropriations Committee. Along with my co-authors Carl Conetta, Charles Knight and Ben Friedman, I mentioned it in the “Defense Sense” paper (.pdf) published in May.

Although the “Defense Sense” paper reported the amount of the shift at $4.5 billion, the Pentagon explained that the OCO request included $6.1 billion for a temporary end strength increase in the Army and Marine Corps (see page 6-7 here: .pdf). Last week, the Congressional Budget Office’s definitive report on the FY 2013 budget concluded that the active duty troops in the OCO budget would cost $5.3 billion in 2013, and $15.2 billion over five years. (See Box 2-1 on page 15, here: .pdf). My current read puts the figure for next year closer to $5.6 billion.

Regardless of the exact amount, it might not seem like much in the grand scheme of things, and it isn’t. The budget passed out of the HASC weighs in at a whopping $519 billion, $3 billion more than the Pentagon requested. Moving the OCO money would actually increase the amount of the base budget, but that should then force members to offer actual cuts to bring the budget below the targets established by last year’s BCA.

The point is not to get into the weeds; different people can disagree about how much of the base budget has been shifted into the war budget. But no amount of money should be moved from one to the other for the purpose of evading the BCA limits.

I would reiterate what we said in “Defense Sense” a few months ago. Rescinding

the planned shift of DoD personnel costs from the base budget to the Overseas Contingency Operations (OCO) account [would] preserve the integrity of the deficit reduction process. Success in this process depends on foreclosing the use of accounting measures to give the false appearance of savings or to shield any part of discretionary spending from deficit reduction.



The Senate will soon vote on a new version of the DISCLOSE Act. This new version is likely to fail to gain enough votes.

Instead of looking at the national fight in detail, let’s consider a current local case that tells us something about disclosure and campaign finance.

Three members of the District of Columbia city council have called upon the current mayor to resign. Why? Some former supporters of the mayor have alleged that a city contractor spent an undisclosed $600,000 on his behalf in the last election. This donor held a $300 million health care contract with the city.

That contract had been awarded by the administration of the former mayor, the man the current mayor defeated with the putative help of the $600,000. So the contractor faced the following problem: He could stick with the guy that awarded him the contract, but if the former mayor lost the race (as he did in fact), the new mayor might well give someone else (a supporter perhaps?) the $300 million contract. So maybe the contractor should support the former mayor’s challenger. But what if the former mayor had won? He would then take away the contract of his former supporter who had bet on the wrong horse, so to speak. The contractor could solve this problem by supporting the challenger (now current mayor) in secret. Maybe none of this happened, but it is, as they say, a plausible theory.

D.C. is the one of the most leftwing places in the United States, so its political class is condemning the alleged non-disclosure and suggesting the mayor bears responsibility for the deed. Hence, the calls for his resignation.

Yet, there is another lesson in all this. In D.C., business never gained independence from the city government. Firms are nothing more than another point of distribution of government largesse. No capitalism, just cronies. In this world, governing is about helping friends and harming enemies. Disclosure of campaign spending reveals you to be one or the other, and for those dependent on the government, deciding to be a friend or enemy is not an option.

The United States is not yet like the District of Columbia: civil society is not yet wholly dependent on the federal establishment. As government expands, however, the DC disclosure problem will grow: an expectation of retaliation will become the norm. This small scandal in DC thus tells us something larger about unlimited government. The more government matters to economic life, the less resistance to elected officials we can expect. An expanding government militates against a liberal politics.

President Obama Is Wrong about Businessmen

Last Friday, President Obama revisited Elizabeth Warren’s reasoning for higher taxes on the wealthy. Like Warren, the President stated that:

If you’ve been successful, you didn’t get there on your own… If you were successful, somebody along the line gave you some help.  There was a great teacher somewhere in your life… Somebody invested in roads and bridges.

The President then took Warren’s reasoning up a rhetorical notch and said “If you’ve got a business – you didn’t build that.  Somebody else made that happen.”

President Obama’s statement begs an obvious question: If it is so easy to be a businessman - just put together all the services that the government provides you with - why isn’t everyone a successful businessman?

As Israel Kirzner reminds us, successful businessmen tend to be people who are alert to the opportunities that surround us but others cannot see.

Kirzner describes alertness as the fundamental quality of the entrepreneur. Alertness is the entrepreneur’s ability to perceive new economic opportunities that no prior economic actor has yet recognized…  The entrepreneurial function is possible due to the presence of sheer ignorance on the part of some economic actors. Sheer ignorance, in Kirzner’s definition, consists of not only not knowing a given piece of information but also of not knowing that one does not know it: no consideration of the information – positive or negative – even enters the economic actor’s mind.

That goes for Art Fry who invented the humble Post-it note as well as for Bill Gates’ vision of a personal computer in every household. Thus, while there are many practical reasons for not begrudging the wealth of successful businessmen – they often risk their own capital, provide us with goods and services we need, create employment and pay taxes – let us not lose sight of the moral angle either.

Paradoxically, President Obama comes close to undermining his entire argument later in his speech. He says:

I’m always struck by people who think, well, it must be because I was just so smart.  There are a lot of smart people out there.  It must be because I worked harder than everybody else.  Let me tell you something – there are a whole bunch of hardworking people out there.

Precisely. There are a lot of good hard-working people out there. But not everyone has the aptitude to be a businessman. If it were otherwise, I would not be typing these words. I would be out there inventing the next iPhone.

Remember: The Feds Fund Students

It’s so fun and easy to bash for-profit schools: on the whole their outcomes aren’t good; they don’t look like the ivy-covered institutions we envision when we think of “college”; and it’s easy to assume that anyone who openly seeks profit must have zero compunction about duping the innocent. But guess what? Openly for-profit schools are no more rapacious than putatively not-for-profit institutions, and it’s not the schools that federal money is funding, anyway. It’s students, and if you want to place blame for wasted time and dough, it should be placed on Washington giving college money to anyone with a high school diploma or GED—and that’s a newly heightened level of restriction.

Look at the whole profit thing. It’s true that for-profit schools want to take in more money than their operations cost. But guess what? So do other colleges. As Oklahoma State University professor Vance Fried has estimated, not-for-profit institutions typically bring in between $2,000 and $13,000 more per undergraduate student—depending on school type and inclusion of various subsidies—than it costs to educate him or her.

Of course those schools don’t call this “profit,” primarily because they don’t send it to investors. Instead they spend it on themselves—bolstering administrative ranks, raising salaries, paying more for journals—then call those things “costs” the next year. But the self-interest underlying it is the same: people are making themselves better off through the bills they send to students.

But aren’t for-profits worse performers than not-for-profits? Seemingly yes, but it is very hard to make apples-to-apples comparisons. Indeed, it makes little sense to make policy based on sectors of higher education at all. What should be important is whether an individual school is working, be it a state flagship, its local branch, or the strip-mall Strayer. But if you want to play the sector vs. sector game, look at community colleges. They appear to be atrocious performers—worse than for-profits—with only one out of every five students completing a program within 150 percent of normal time.

The word “appear,” however, is crucial. Schools might be doing the best they can but are working with many people who simply have too little ability, desire, or a combination of the two to handle college work. But as long as those students can get money to pay for college, it’s crazy to think that there won’t be schools to admit them. Indeed, were all schools to refuse to admit large swaths of students the feds deem college-qualified, major federal investigations would almost certainly ensue.

No, the root problem is not the schools (though all sectors seem happy to make big bucks), it’s that the federal government, first and foremost, will give college aid to almost anyone. Indeed, the one time Washington created student aid programs that required some demonstration of aptitude and success—Academic Competitiveness and SMART grants—Sen. Ted Kennedy (D-MA) objected that they abandoned “the federal commitment to prioritize the neediest students.” That the grants were tied to Pell eligibility was apparently irrelevant; they were allowed to die last year.

If you want to really tackle the problems of noncompletion, debt, and overall waste in higher education, the first thing you must do is cease making cheap aid available to students regardless of their demonstrated aptitude or desire. Do that and you would almost certainly see diminution in the size of both the for-profit and not-for-profit sectors. Much more important, you would cease to have so many people squandering both their resources and those of taxpayers.

Unfortunately, making aid contingent on recipients demonstrating real aptitude is not in the best interest of politicians, who maximize their benefit—getting people to vote for them—by maximizing the number of people to whom they give money. Indeed, as we’ve seen, even if we could get politicians to pass even relatively small programs that require recipients do a little more than breathe, it won’t last. That, in addition to the Constitution giving the federal government no authority to be involved in student aid, is why we must phase out federal aid programs. Unless we have the clarity of an absolute prohibition against federal politicians providing aid, it is almost certain that they will give it out, and will do so without regard for what makes even minimal educational sense.

And when things go badly? They’ll just find easily demonized groups—like honestly profit-seeking schools—to scapegoat.

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

The CBO on Falling Incomes and Rising Tax Shares of the Top 1%

A favorite talking point among redistributionists is to say the tax code was much “fairer” under President Bill Clinton, than it has been since the Bush tax cuts of 2003.  New Congressional Budget Office (CBO) figures show that the top 1% paid 21.3% of all federal taxes from 1993 to 2000, when Clinton was president, but they paid 25.1% from 2003 to 2008, after the Bush tax cuts.   If 21.3% was a fair share in the Clinton years, then the top 1% has been paying much more than its fair share since 2003.

In a June 12 Wall Street Journal article, James Carville and Stanley Greenberg write that “Some conservatives seem breathlessly excited by new academic studies … that put middle-income gains at princely 37% over three decades—failing to note that … most of the gains came in the Clinton era when taxes were raised on the wealthiest and government tax credits expanded for the working poor.”  The source of that 37% figure is undisclosed, but the number is way too low.  Bruce Meyer of the University of Chicago and Francis X. Sullivan of Notre Dame estimate that “between 1980 and 2009, median after-tax income plus noncash benefits grew by 58 percent.”

Similarly, the CBO finds that after-tax median household income rose by 48.8 percent from 1980 to 2009, after properly adjusting for shrinking household size (more singles, fewer children).  The table below, constructed from CBO data, shows what happened when.


Changes in Real Median Household Income
Adjusted for Household Size
Before taxes After taxes
1979-1983 0 0
1983-1989 13.5 12.8
1989-1992 0 0
1992-2000 17.3 18.1
2000-2007 10.3 13.9
2007-2009 -4.7 -1.2


In the CBO’s after-tax estimates, real median income rose 18.1% from 1992 to 2000 (thanks to the Internet and cellphone revolutions), but median income also grew by another 13.9 percent from 2000 to 2007.  Comparing pretax and after-tax estimates shows the Bush tax cuts and refundable credits helped quite a lot, particularly in the crash from 2007 to 2009.

The CBO’s Gini coefficient (a broad measure of inequality) was 0.426 in 2009 – essentially unchanged from 0.424 in 1988.  Like the strong 1992-2007 increase in real median income, the absence of any sustained upward trend in such broad measures of inequality is unlikely to be treated as newsworthy during an election year.

In late 2011, by contrast, the CBO grabbed a lot of media attention with a supposedly new report saying, “The share of income received by the top 1% grew … to over 17% in 2007.”   In a Wall Street Journal article last December, I asked why the report stopped with the frothy cyclical peak of 2007, since I could easily calculate from IRS data that “the share of after-tax income of the top 1% by my estimate fell to 11.3% in 2009.”  Now that the CBO has finally gotten around to releasing estimates for 2008 and 2009, it turns out that my estimate was almost exactly on the mark: the top 1 percent’s share of after-tax income fell to 11.5% in 2009.

Perhaps it is time for the CBO to issue a corrected report saying, “The share of income received by the top 1% fell from 11.8% in 1985 to 11.5% in 2009.”

From Overlawyered: Medical Roundup

Cross-posted from Overlawyered:

  • How’d we get shortages of hospital and community sterile injectables? Check out the role of FDA Good Manufacturing Practice (GMP) regs, warning letters, and resulting plant closures [Tabarrok, with comments controversy; earlier here, here, here, etc.].
  • California orthopedist sues, wins damages against medical society that took action against him based on his testimony for plaintiff in liability case [American Medical News; earlier here, etc.].
  • Can’t have that: medical apology should be opposed because it “can create an emotional connection with an injured patient that makes the patient less likely to ask for compensation” [Gabriel Teninbaum (Suffolk Law), Boston Globe].
  • Feds’ war on painkillers is bad news for legit patients and docs [Reuters, Mike Riggs/Reason].
  • New federal pilot project in Buffalo will provide concierge-style home care to emergency-department frequent fliers. Spot the unintended consequence [White Coat].
  • Dastardly drug companies? Deconstructing Glaxo SmithKline’s $3 billion settlement [Greg Conko, MPT]. Paging Ted Frank: “HIPAA’s Vioxx toll” thesis may depend on whether one accepts that the premised Vioxx toll has been established [Stewart Baker, Ted’s recent post].
  • United Kingdom: “Lawyers seizing lion’s share of payouts in NHS negligence cases” [Telegraph].
  • Silver linings in SCOTUS Obamacare ruling? [Jonathan Adler and Nathaniel Stewart] “DNC Scientists Disprove Existence of Roberts’ Taxon” [Iowahawk humor]. Did Ginsburg hint at the court’s direction on the HHS contraception mandate? [Ed Morrissey, Hot Air]

If you like Overlawyered roundups, we run them regularly on legal and regulatory topics that include prosecution and police, environmental law, food and farm policy, judges, free speech, and torts.