Tag: federal deficit

More Truth about Sequestration

Pentagon officials and other proponents of big military spending have three basic complaints about sequestration. That’s the process created by last summer’s Budget Control Act that would cut planned federal spending by about $1.1 trillion over the next nine years through budget caps and a $110 billion in across-the-board cuts in January 2013, with half the cuts coming from defense.

The first complaint is that the cuts would harm national security. The second is that the defense cuts would cause great job loss and economic damage. The third complaint concerns sequestration’s breadth. Because the hit coming in January would apply in equal proportion to every “program, project, and activity” in the defense budget, Pentagon officials claim it prevents prioritizing among programs and planning to limit its pain. That’s what Secretary of Defense Leon Panetta, always ready with a violent metaphor, calls the “goofy meat-axe approach.”

The video Cato posted yesterday concerns the first complaint, noting that the cut is not that large in historical terms and that we could safely spend far less if we defended fewer countries (a point Chris Preble, Justin Logan and I have often made elsewhere). In a paper Cato released today, Ben Zycher attacks the economic case against military spending cuts, including sequestration, showing that they generally increase economic productivity and employment in the long term.

In a piece published today by CNN.com’s Global Public Square, I concentrate on the third complaint. I point out several ways that current law gives the Pentagon to control where sequestration applies. The most important is a provision in the 1985 Gramm-Rudman-Hollings Act, which the BCA amends. It seems to allow the president to transfer funds at will beneath the defense cap, provided Congress passes an expedited joint resolution approving the shift. So the president, with Congress’s permission, can convert the 2013 sequester into a cap and prioritize among programs beneath it.

These options (and several others mentioned in Frank Oliveri’s excellent subscriber-only piece in CQ Weekly) undermine the claim that the Pentagon cannot plan for sequestration. The reason you hardly hear about them is that both the Obama administration and Republicans leaders are gambling that the threat of sequestration will serve their priorities (tax increases and entitlement cuts, respectively), so everyone in power wants it to sound as scary as possible.

To be clear, I do not think sequestration is good policy unless what I just mentioned occurred—the 2013 cut essentially becomes a spending cap. Even if that joint resolution process does not occur, the same end could be accomplished by amending the BCA.

The Truth about Sequestration

Cato has just released a new video, titled “The Truth about Sequestration,” that tells the real story about sequestration, the automatic budget cuts required by the Budget Control Act. Many in Congress claim to abhor their creation, including many of those who voted for it, yet the members and the president haven’t done much to prevent it. Perhaps they shouldn’t do anything and let the cuts happen. In our video, my colleagues Ben Friedman and Dan Mitchell join me in explaining that, whatever its shortcomings as legislation (and there are many, as discussed below) sequestration may be the only viable way to reduce the Pentagon’s budget.

However, there’s little likelihood that sequestration will significantly reduce the defense budget long term. That’s because sequestration cuts the defense budget only in the first year. Every year after that, defense spending will increase. Spending levels will indeed be lower than the Pentagon last year expected them to be. But only in Washington is that considered a cut. So, under sequestration, instead of spending $5.7 trillion on defense over the next decade, as the FY2013 budget suggests, the government will spend about $5.2 trillion.

That $500 billion difference may not actually materialize. Congress has a few options to mitigate the effects of the initial $55 billion slice off the budget. They could reprogram funds after the sequester, change the definition of “programs, projects and activities” (the budget level at which the cuts are implemented), or take advantage of the flexibility within operations and maintenance (O&M) funds. In fact, because the Office of Management and Budget has declared that war spending is eligible to be sequestered, the total cuts to O&M can be spread out across a bigger pot of money. Beyond all that, sequestration does not affect outlays or funds already obligated, which means it will not affect existing contracts. So, the real story is that should sequestration actually happen, Congress and the Pentagon will have much more flexibility than they’re willing to admit.

Our video also highlights the fact that we spend far more on the military than is necessary. Since the end of the Cold War, policymakers and pundits have coalesced around the idea that the United States is the “indispensable nation” responsible for protecting everyone from everything. Under the misapprehension that threats anywhere in the world are necessarily threatening to the United States, we have taken on the responsibility of policing the entire planet. This increases the chances that the United States will become involved in conflicts that do not engage vital U.S. interests, or that we do not fully understand, or can easily remedy. This strategic hypochondria (H/T Ted Galen Carpenter) also burden American taxpayers with additional costs that could and should be borne by others. The video includes a nifty graphic showing the expansion of NATO. We have added a host of weak or fragile countries in the Middle East and Southwest Asia (including, still, Iraq and Afghanistan), and now we are doubling down with assurances to Asian nations that we will constrain China (and implying that they need not do so).

In short, a bloated defense budget has enabled these misguided policies, encourages free-riding by our “allies” and make us less safe abroad and less free at home. Though I would have much preferred a serious strategic debate before the current fiscal crisis, and indeed called for such a thing, sequestration should help us to refocus our national security priorities. In fact, the real story is that sequestration doesn’t restrict our choices, it enables us to make better ones.

Americans shouldn’t worry that sequestration will make our defense budget too small. We account for approximately 48 percent of the world’s military spending. We will retain a margin of superiority over any conceivable combination of rivals, including China, even if our share of military spending fell to 44 or 45 percent of the world’s total.

Sequestration was no one’s first choice, but keeping our reckless spending and strategic myopia on auto pilot is worse.

A Few Questions for Paul Krugman

I am not a budget expert, but I saw Paul Krugman interviewed on the PBS Newshour program last evening and had a few questions.

Here’s an excerpt from that interview:

PAUL KRUGMAN:

I guess I don’t know how you can be honest about what is actually going on in this country without sounding partisan. That’s the old line, right? The facts have a well-known liberal bias, because, right now, we’re in a world where deficits are a good thing and a little bit more inflation would also be a good thing.

PAUL SOLMAN:

A proposal that’s put him at odds with the man who hired him at Princeton, Fed Chairman Ben Bernanke.

Tom Ashbrook asked him about it.

TOM ASHBROOK:

Ben Bernanke calls your proposal very reckless.

PAUL KRUGMAN:

Odd, because he made the same proposal himself 12 years ago for Japan.

(LAUGHTER)

PAUL KRUGMAN:

Those of us who have been calling for a bit more inflation are calling for 4 percent inflation, which is what we had back during the reign of Ronald Reagan in his second term. It didn’t seem that terrible to me at the time.

PAUL SOLMAN:

But we could be taking a big risk, right? You have no way of knowing whether or not the interest rate we’re going to have to offer to borrowers might change overnight, as it has often recently.

PAUL KRUGMAN:

Well, I am reasonably sure that isn’t going to happen until or unless the U.S. economy is really on the path to recovery. And that’s the point also when – by the way, when I will support the austerity. Once we no longer need that support to keep the economy afloat, that’s when you do want to start raising taxes and cutting spending, but not now.

A few questions for Mr. Krugman:

  1. I don’t know whether you agree with the proposition that we’re about $100 trillion in debt, but if we were, could we really afford to postpone (again) deep spending cuts? Wouldn’t  the time for cuts be … yesterday?
  2. You say that you would support spending cuts when the overall economy gathers more strength, but isn’t the record clear that the pols have neglected to reduce spending during previous periods of economic growth?
  3. What evidence leads you to believe the pols will act differently if economic growth were robust? Wouldn’t they seek to avoid the political pain of cuts and be seduced (again) by those who say the United States can “grow our way out of the debt problem”?

Spending Cut Goal: 10% in Two Years

The new issue of International Economy has an article by Canada’s Liberal finance minister from the 1990s, Paul Martin, who succeeded in shrinking that country’s federal government. If a new President Mitt Romney wants to cut spending in Washington, Martin has some tips for him, such as cutting spending broadly, forecasting conservatively, and aiming to eliminate the deficit in a fixed time frame and sticking to it. (I’d also advise President Obama to follow the Canadian example, but he’s issued four budgets so far and seems to be more interested in following the Greek fiscal approach).

Paul Martin says:

I tabled the 1995 Budget in the House of Commons. No department of government escaped untouched. Transfers to the provinces for healthcare and education were reduced, public sector employment was cut by 20 percent, the Department of Transport was cut deeply, historic subsidies in the Department of Agriculture were eliminated, and spending in the Department of Industry was cut by 65 percent.

These were massive cuts, far greater than anything Canada had ever seen. Nor were the cuts simply reduction in the growth of future spending as is so often the case. These were absolute cuts in existing spending, such that by the end of the process the federal government’s expenditures as a percentage of GDP were lower than they had been at anytime in the previous fifty years.

From a libertarian perspective, Canada’s cuts weren’t actually “massive,” but for a Liberal government in a country with a population that had gotten used to government coddling, it was pretty impressive. As I noted in my recent article on Canada, Martin and his team cut the budget by 10 percent in just two years.

So my suggested goal for Romney and team if elected this Fall: at least match the Canadians and push for $380 billion of cuts out of otherwise expected spending in 2015 of $3.8 trillion. And do what the Canadians did: cut everything, including entitlements, aid to subnational governments, defense, business subsidies, farm subsidies, and much more in one big push. Many in Congress will resist of course, but presidents have their most leverage in the first year. Mitt will have nothing to lose but the country into a vortex of debt and economic despair if he doesn’t at least try.

Note to Larry Summers: The Government Borrows for Transfer Payments, Not Investment

“It is time for governments to borrow more money,” according to former treasury secretary Larry Summers.  He is not peddling this advice to Greece and Spain, but to countries like the United States and Japan that can still sell long-term bonds at very low interest rates. Summers urges the United States, in particular, to borrow more for “public investment projects” that are presumed to raise the economy’s future output. He offers the hypothetical example of “a $1 project that yielded even a permanent 4 cents a year in real terms increment to GDP by expanding the economy’s capacity or its ability to innovate.”

Even if such promising projects were easy to find, however, that is not the way the current government has been inclined to spend borrowed money. Despite all the rhetoric about “shovel-ready projects,” about 95 percent of the 2009 stimulus bill consisted of government consumption (salaries), refundable tax credits, and transfer payments which, as Robert Barro notes, “dilute incentives to work.”

Summers says, “Any rational chief financial officer in the private sector would see this as a moment to extend debt maturities and lock in low rates — the opposite of what central banks are doing.” Locking-in low borrowing costs would indeed make sense if the money from selling long bonds were used to retire short-term Treasury bills, but that would not involve borrowing more as Summers proposes.

For both government and households, it is certainly more prudent to use borrowed money to finance investments that will yield a stream of income in the future—either actual income (such as toll roads) or implicit income (the benefits from living in a mortgaged home).

Apostles of the Keynesian doctrine, such as Larry Summers, Paul Krugman, and Alan Blinder, invariably use hypothetical public works examples to make the case for more and more national (taxpayer) debt. Keynesian forecasting models, used by the Congressional Budget Office (CBO) to warn of the looming fiscal cliff and defend the fiscal stimulus of 2009, likewise assume the highest “multiplier” effect from tangible government investments.

In the real world of politics, however, Congress and the White House use borrowed money to placate constituencies with the most political clout. Federal spending on investment projects has essentially nothing to do with the huge 2009-2012 budget deficits (only 29 percent of which can be blamed on the legacy of recession, according to the CBO).

The Table shows that transfer payments and subsidies account for 63.8 percent of estimated spending in 2012, while federal purchases account for 28.4 percent. Also, most federal aid to states is for transfer payments like Medicaid.  Within federal purchases, only 7.6 percent of the spending ($152.5 billion) was counted as gross investment in the first quarter GDP report, and two thirds of that was military equipment and buildings. Net investment, minus depreciation, is smaller still.

If borrowing more for investment was a genuine political priority, rather than an academic conjecture, the government could do that by borrowing less for government payrolls, transfer payments, and subsidies.  At best, Larry Summers has made an argument for spending borrowed money much differently, not for borrowing more.

‘Even Though Earmarks Are Gone, There Are Still Billions of Dollars Available’

That quote from a local government official in California sums up why banning earmarks won’t do much to rein in the size and scope of the federal government. The quote comes from a McClatchy Newspapers article on lobbying expeditions to Washington undertaken by local government officials who want federal taxpayers to pick up the tab for projects in their backyards.

From the article:

[Fresno County supervisor Henry] Perea has joined 19 other Fresno County business, academic and political leaders in this week’s three-and-a-half day lobbying venture on behalf of transportation and other projects. Separately, a four-member delegation from the Merced County city of Livingston also is on the prowl.

Billed under the unifying ‘One Voice’ banner, the Fresno County wish list ranges from a transportation bill that might help improve State Route 99 to assistance with controlling air pollution and streamlining environmental reviews for roadwork…

Underscoring the potential regional competition, four representatives from Livingston are separately making the rounds this week in their own search for federal assistance.

‘We want to hit up some congressmen,’ Livingston Mayor Rodrigo Espinoza said Monday.

Federal grants, too, are part of the Livingston delegation’s agenda, with city officials targeting a variety of potential opportunities, including funding, to help nurture a downtown cultural arts district.

If local officials in Livingston want funds for a cultural arts district, then they should be traveling around Livingston “hitting up” local taxpayers to pay for it. But with “billions of dollars” available in Washington, why would Livingston officials take the politically unpleasant route of asking their voters to foot the bill? Of course, federal policymakers are typically only too happy to oblige because they’ll get to attend the ribbon cutting ceremony and brag about their ability to bring home the bacon. Meanwhile, the federal taxpayer continues to get soaked, the government’s debt mounts, and the Beltway Neros fiddle.

Bring home the bacon? But isn’t there an earmark ban? There is, but the programs that policymakers were earmarking money from still exist. That means that the federal dollars continue to flow; the only thing that changed is the course of the river. An earmark ban is good, but as I’ve repeatedly discussed, earmarks are only a symptom of the problem.

So let me make a suggestion to reporters: the next time you’re interviewing a federal policymaker who supports keeping the ban on earmarks, ask them if their staffers are helping the folks back home obtain federal grants, loans, etc. When they respond in the affirmative but argue that they’re merely making sure that their constituents receive their “fair share” of the loot, ask them how the federal government is supposed to get its finances in order if policymakers won’t stop putting parochial concerns ahead of the national interest. You might have to keep pressing, but eventually the hypocrisy will expose itself.

See this Cato essay for more on federal subsidies to state and local government.

ObamaCare—The Way of the Dodo

In the latest issue of Virtual Mentor, a journal of the American Medical Association, I try to capture the multiple absurdities that make up ObamaCare. An encapsulation:

During the initial debate over ObamaCare, House Speaker Nancy Pelosi (D-CA) famously said, “We have to pass [it] so you can find out what’s in it.” One irreverent heir to Hippocrates quipped, “That’s what I tell my patients when I ask them for a stool sample.” The similarities scarcely end there…

ObamaCare supporters are ignoring the federal government’s dire fiscal situation; ignoring the law’s impact on premiums, jobs, and access to health insurance; ignoring that a strikingly similar law has sent health care costs higher in Massachusetts; ignoring public opinion, which has been solidly against the law for more than 2 years; ignoring the law’s failures (when they’re not declaring them successes); and ignoring that the law was so incompetently drafted that it cannot be implemented without shredding the separation of powers, the rule of law, and the U.S. Constitution itself. Rather than confront their own errors of judgment, they self-soothe: The public just doesn’t understand the law. The more they learn about it, the more they’ll like it…

This denial takes its most sophisticated form in the periodic surveys that purport to show how those silly voters still don’t understand the law. (In the mind of the ObamaCare zombie, no one really understands the law until they support it.) A prominent health care journalist had just filed her umpteenth story on such surveys when I asked her, “At what point do you start to question whether ObamaCare supporters are just kidding themselves?”

Her response? “Soon…”

(For more proof that ObamaCare supporters can draw from an apparently bottomless well of denial, see this article by Politico.)