Tag: private sector

A Government Man

This afternoon Politico Arena asks:

Will the president’s health care remarks today sway enough votes to pass ObamaCare through “reconciliation”?

My response:

Who knows? What they show beyond all doubt, however, is the mind-set of the president and the bill’s proponents. Consider just a few of his opening words: “Everything there is to say about health care has been said and just about everyone has said it. So now is the time to make a decision about how to finally reform health care so that it works, not just for the insurance companies, but for America’s families and businesses.”

Notice first the insinuation that health care works today for the insurance companies, but not for the rest of us. Obama has to have his foil, this man with no experience in the private sector and little understanding of how that sector works. But notice, more importantly, that we need “to finally reform health care so that it works” – the implication being that this is a collective undertaking, the only question being how to do it. “We’re all in this together.” In the private sector, if we can’t reach an agreement about some proposed undertaking, we walk away. That seems inconceivable to Obama. He’s a government man: conceiving public solutions to private problems is what his life is all about.

I suppose you could say that government is so enmeshed in health care today that there are only public solutions to the problems government is largely responsible for having created – starting with the favorable tax treatment employer-provided health care affords. But the direction of reform needn’t be toward even greater government. It might be toward less government, as with health savings accounts. But that approach has been rejected from the start by Obama and his Democratic supporters. They move in only one direction.

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Six Reasons to Downsize the Federal Government

1. Additional federal spending transfers resources from the more productive private sector to the less productive public sector of the economy. The bulk of federal spending goes toward subsidies and benefit payments, which generally do not enhance economic productivity. With lower productivity, average American incomes will fall.

2. As federal spending rises, it creates pressure to raise taxes now and in the future. Higher taxes reduce incentives for productive activities such as working, saving, investing, and starting businesses. Higher taxes also increase incentives to engage in unproductive activities such as tax avoidance.

3. Much federal spending is wasteful and many federal programs are mismanaged. Cost overruns, fraud and abuse, and other bureaucratic failures are endemic in many agencies. It’s true that failures also occur in the private sector, but they are weeded out by competition, bankruptcy, and other market forces. We need to similarly weed out government failures.

4. Federal programs often benefit special interest groups while harming the broader interests of the general public. How is that possible in a democracy? The answer is that logrolling or horse-trading in Congress allows programs to be enacted even though they are only favored by minorities of legislators and voters. One solution is to impose a legal or constitutional cap on the overall federal budget to force politicians to make spending trade-offs.

5. Many federal programs cause active damage to society, in addition to the damage caused by the higher taxes needed to fund them. Programs usually distort markets and they sometimes cause social and environmental damage. Some examples are housing subsidies that helped to cause the financial crises, welfare programs that have created dependency, and farm subsidies that have harmed the environment.

6. The expansion of the federal government in recent decades runs counter to the American tradition of federalism. Federal functions should be “few and defined” in James Madison’s words, with most government activities left to the states. The explosion in federal aid to the states since the 1960s has strangled diversity and innovation in state governments because aid has been accompanied by a mass of one-size-fits-all regulations.

For more, see DownsizingGovernment.org.

Another Reason Imports Get a Bad Rap

Why blame only media and politicians for the public’s confusion about imports and trade deficits? Surely economists deserve some scorn. Some of the misunderstanding can be traced to the famous National Income Identity, which expresses gross domestic product, as: Y = C + G + I + (X-M). That is, national output (Y) equals personal consumption (C) plus government spending (G) plus investment (I) plus exports (X) minus imports (M).

The expression clearly lends itself to the wrong interpretation. The minus sign preceding imports suggests a negative relationship with output. It is the reason for the oft-repeated fallacy that imports are a drag on growth. Here’s why that conclusion is wrong.

The expression is an accounting identity, which “accounts” for all of the possible channels for disposing of our national output. That output is either consumed in the private sector, consumed by government, invested by business, or exported. The identity requires subtraction of aggregate imports because consumption, government spending, business investment, and exports all contain, in various amounts, import value. Americans consume domestic and imported products and services, the aggregate of which shows up in Consumption. Likewise, Government purchases include domestic and imported products and services; businesses Invest in domestic and imported machines and inventory; and, eXports often contain some imported intermediate components. Thus, the identity would overstate national output if it didn’t make that adjustment for iMports. After all, imports are not made on U.S. soil with U.S. factors of production, so they shouldn’t be included in an expression of our national output.

To reiterate, it is a simple matter of accounting: as an expression of national output, the National Income Identity subtracts imports only because imports are that portion of consumption, government spending, investment, and exports that are not produced on U.S. soil with U.S. factors of production. If we did not subtract an aggregate import value, then national output would be overstated.

But what unnecessary confusion that identity has created. Economists are often indecipherable, but here was an opportunity to actually connect with the public and describe a relatively easy concept in relatively easy terms. Why has it not been commonplace to use notation that conveys in no uncertain terms that C and G and I and X include some amount of imports? Maybe something like this:

Y=C(d)+C(m)+G(d)+G(m)+I(d)+I(m)+X(d)+X(m)-M,

where (d) connotes domestic; (m) connotes imported; and M=C(m)+G(m)+I(m)+X(m).

Again, imports are subtracted, not because they are a drag on output, but because imports are included in the other constituent elements of the identity. I’ve always found it misleading that the parentheses go around X-M – which isolates the expression “net exports,” but in the process can obscure the fact that imports are subtracted from the whole expression.

Finally, if the description above makes sense, then you’ll agree that imports have NO impact on national output. Regardless of how large or small, the import value embedded in the four constituent elements of national output is fully deducted by subtracting M. Thus, imports are neither a drag on GDP, nor can they cause GDP to rise. That conclusion may sound like it contradicts one of my assertions in yesterday’s post—that imports are pro-cyclical—(at least that was the claim of a NBER economist responding my post yesterday), but I think the conclusions are harmonious. To say imports are pro-cyclical means that they rise when the economy is growing and fall when the economy is contracting. It says nothing about causation.  That pattern has been amply and consistently demonstrated through expansion, recession, and recovery.

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Perceptions of Government Pay

A new poll by Rasmussen finds that the general public has an accurate assessment of government worker pay.

Compared to the average government worker, most Americans think they work harder, have less job security and make less money.

In fact, 59% of Americans say the average government worker earns more annually than the average taxpayer, according to the latest Rasmussen Reports national telephone survey. Just 15% don’t believe that to be true, while another 26% are not sure.

Among those who have close friends or relatives who work for the government, the belief is even stronger: 61% say the average government worker earns more than the average taxpayer.

Feeding that belief is the finding that 51% of all adults think government workers are paid too much. Only 10% say they are paid too little, while 27% say their pay is about right.

Bureau of Labor Statistics data indeed shows that government workers work fewer hours in a year and have much higher job security than private sector workers. And I’ve argued that they are generally overpaid, and by increasing amounts.

For more, check out:

Public Housing for the Dead

The HUD Inspector General’s Office released an audit earlier this week on the department’s progress in making sure local public housing agencies aren’t subsidizing the deceased. According to the report, local “agencies made an estimated $15.2 million in payments on behalf of deceased tenants that they should have identified and corrected.”

The audit found the following “significant weaknesses:”

  • HUD and local agencies did not have effective policies related to deceased tenants.
  • Local agencies did not provide accurate and reliable information to HUD.
  • HUD and local agencies did not safeguard assets to ensure correct assistance payments.

This report is a small illustration of the fundamental problems with the federal government subsidizing local governments. The local public housing agencies are supposed to be monitoring how money is spent and reporting to HUD. HUD is supposed to be monitoring the local public housing agencies. But no one does a very good monitoring job, despite the piles of regulations and paperwork that every level of government has to deal with for such subsidies. The muddled web of responsibilities also makes it easy for fraud artists to take advantage.

Last week, HUD’s IG reported that the department is sending $220 million in stimulus funds to local agencies already known to misspend taxpayer dollars.

From USA Today:

The government is sending millions of dollars in stimulus aid to communities and housing agencies that federal watchdogs have concluded are unable to spend it appropriately, increasing the risk that the money will be wasted.

Since July, auditors working for the Department of Housing and Urban Development’s inspector general have scrutinized at least 22 cities, counties and housing authorities in 15 states and Puerto Rico to measure whether they can handle stimulus funds effectively. Only six, they found, could do so.

The rest — in line to receive more than $220 million in stimulus aid — had shortcomings ranging from poor management to inadequate staffing that threatened their ability to spend the money quickly and appropriately, a series of audit reports show.

According to a HUD spokesperson, the department is “spending millions of dollars to help local officials spend stimulus money effectively.” Maybe that’s true, but all monitoring help is a pure loss to taxpayers and the private sector economy.

Even when the federal oversight does find problems, the money often keeps flowing anyway. As the article notes:

USA TODAY reported in April that HUD planned to send $300 million in stimulus money to public housing authorities that had been repeatedly faulted by outside auditors for mishandling other forms of federal aid. Congress gave the Obama administration permission to withhold stimulus money from some of those agencies, but HUD opted earlier this year not to do so.

For more on fraud and abuse in federal programs, including housing subsidies, see this essay.

Baucus Bill Would Cost More than $2 Trillion

Sen. Max Baucus’s (D-MT) health care overhaul would cost more than $2 trillion.  It would expand the deficit.  But he has carefully and methodically hidden those facts – so well that he has completely hoodwinked nearly all the major media.

The media are reporting that the Baucus bill would reduce the deficit by $81 billion over 10 years.  Wrong.

The Baucus bill assumes that Congress will allow the “sustainable growth rate” cuts in Medicare’s physician payments to occur beginning in 2012.  Yet Congress has routinely and repeatedly blocked those cuts, making Baucus’s assumption preposterous.  The CBO handled the issue delicately, but essentially said, “Sure, provided that the sun rises in the west in 2012, then yes, this bill would reduce the deficit.”

That means Baucus will come up at least $200 billion short on the revenue side, making his bill a budget-buster.

The media are reporting that the Baucus bill would cost just $829 billion over 10 years.  Wrong.

As Donald Marron observes, that number omits as much as $75 billion in new federal spending.  It also omits a $33 billion unfunded mandate on state governments.

But the worst part is that the Congressional Budget Office’s preliminary cost estimate omits the cost of the private sector mandates in the Baucus bill.  In Massachusetts, those costs accounted for 60 percent of the total cost of reform.  That suggests the actual cost of the Baucus bill – $829 billion plus $75 billion plus $33 billion, times 2.5 – is well over $2 trillion.

Yet the CBO score pretends those costs aren’t even there.  It’s like a mystery novel that’s missing the last 50 pages.  And the media aren’t even curious.

In the words of Brad DeLong, why, oh why, can’t we have a better press corps?

Cross-posted at Politico’s Health Care Arena.

Tuesday Links

  • Is the president’s speech part of a sinister plan to create a socialist Obama Youth movement? Hardly. However, let us not forget that our Constitution’s framers thought schooling was too important to be left to a federal government.
  • The Supreme Court will rule Wednesday on whether the government can ban political speech during election time. Here’s the back story.
  • Podcast: The real problem with Obama’s speech to schoolchildren.