If you looked at the new CBO report on the budget, you may have noticed that federal spending this year will be $3.6 trillion.
In fact, federal spending this year will top $4 trillion. But virtually all reporters and budget wonks (including me) routinely use the lower number when discussing total federal spending. I don’t think the higher $4 trillion number even appears anywhere in the CBO report.
The $3.6 trillion figure is “net” outlays. But “gross” outlays, or total spending, is quite a bit higher. The difference is caused by “offsetting collections” and “offsetting receipts.” These are revenue inflows to the government that are netted against spending at the program level, agency level, or government‐wide level. Some examples are national park fees, Medicare premiums, and royalties earned on mineral deposits. There are hundreds of these cash inflows to the government that offset reported spending.
Details on these revenue offsets can be found in Chapter 16 of OMB’s Analytical Perspectives (pdf). In fiscal year 2010, net federal outlays were $3.456 trillion, but gross outlays were $4.057 trillion. Thus, gross outlays were 17 percent larger than widely reported net outlays.
In FY 2011, OMB expects gross outlays to be about 15 percent larger than net outlays. Thus, gross outlays this year will be $4.1 trillion, compared to net outlays of $3.6 trillion. As a share of GDP, gross outlays will be about 27.3 percent of GDP, compared to net outlays of 23.8 percent.
Accounting for offsets in this manner is a long‐standing convention, but it is one of the sneaky ways that Washington tries to hide its large intrusion into the economy. Certainly, the CBO and OMB should include more prominent presentations of gross outlays in their regular budget updates.
For citizens and reporters, a rule‐of‐thumb to remember is that total federal spending is 3 to 4 percentage points of GDP larger than usually reported by officials.
As we close in on congressional votes to increase the federal debt limit, negotiators are coming up with all kinds of ideas to hike taxes. (Suspiciously, they haven’t revealed very many spending cut ideas so far).
One idea being discussed is to raise revenue by reducing the indexing of parameters in the income tax code. Currently, tax brackets and other features of the tax code are indexed to the Consumer Price Index (CPI). It is widely recognized that the CPI overestimates inflation for various reasons, as discussed here.
The Bureau of Labor Statistics has developed a more accurate (and lower) measure of inflation, called chained CPI. If the tax code was indexed to chained CPI instead of CPI, the government would receive an automatic tax increase relative to current law every year until the end of time.
Switching to chained CPI is a very bad idea for two reasons:
- It would create a large tax increase over the long run. And it would be an invisible annual tax increase on families and voters because there would be no obvious changes in their tax forms.
- It would be an anti‐growth tax increase because it would push families into higher tax brackets more quickly over time, subjecting them to higher marginal tax rates. The chained CPI proposal is essentially a proposal to increase marginal tax rates slowly and steadily over time.
Some economists may argue that the chained CPI proposal is a good idea because the tax code would more accurately reflect inflation, and it would. However, the tax code already contains a bias that pushes families into higher tax brackets over time, which is called “real bracket creep.” Real growth in the economy steadily moves taxpayers into higher rate brackets since the tax code is indexed for inflation but not real growth. The discussion in the Congressional Budget Office’s new long‐range budget outlook implies that this will be an important force in raising federal revenues as a share of GDP in coming decades.
So I’ve got a better idea than indexing the tax code to chained CPI: indexing the tax code to nominal GDP growth. That would adjust for the effects of both inflation and real economic growth on tax code parameters, and it would prevent stealth tax rate increases under our graduated income tax system.
Fiscal crises have a predictable pattern.
Step 1 occurs when the economy is prospering and tax revenues are growing faster than forecast.
Step 2 is when politicians use the additional money to increase government spending.
Step 3 is that politicians do not treat the extra tax revenue like a temporary windfall and budget accordingly.Instead, they adopt policies — more entitlements, more bureaucrats — that permanently expand the burden of the public sector.
Step 4 occurs when the economy stumbles (in part because more resources are being diverted from the productive sector to the government) and tax revenues stagnate. If the resulting fiscal gap is large enough, as it is in places such as Greece and California, a crisis atmosphere is created.
Step 5 takes place when politicians solemnly proclaim that “tough measures” are necessary, but very rarely does that mean a reversal of the policies that caused the mess. Instead, the result in higher taxes.
Greece is now at this stage. I’ve already argued that perhaps bankruptcy is the best option for Greece, and I showed the data proving that Greece has a too‐much‐spending crisis rather than a too‐little‐revenue crisis. I’ve also commented elsewhere about the feckless behavior of Greek politicians. Sadly, it looks like things are getting even worse. The government has announced a huge increase in the value‐added tax, pushing this European version of a national sales tax up to 21 percent. On the spending side of the ledger, though, the government is only proposing to reduce bonuses that are automatically given to bureaucrats three times per year. Here’s an excerpt from the Associated Press report, including a typically hysterical responses from a Greek interest group:
Government officials said the measures would include cuts in civil servant’s annual pay through reducing their Easter, Christmas and vacation bonuses by 30 percent each, and a 2 percentage point increase in sales tax to bring it to 21 percent from the current 19 percent. …One government official, speaking on condition of anonymity ahead of the official announcement, said…that “we have exhausted our limits.” …“It is a very difficult day for us … These cuts will take us to the brink,” said Panayiotis Vavouyious, the head of the retired civil servants’ association.
Now, time for some predictions. It is unlikely that higher taxes and cosmetic spending restraint will solve Greece’s fiscal problem. Strong global growth would make a difference, but that also seems doubtful. So Greece will probably move to Step 6, which is a bailout, though it is unclear whether the money will come from other European nations, the European Commission, and/or the European Central Bank.
Step 7 is when politicians in nations such as Spain and Italy decide that financing spending (i.e., buying votes) with money from German and Dutch taxpayers is a swell idea, so they continue their profligate fiscal policies in order to become eligible for bailouts. Step 8 is when there is no more bailout money in Europe and the IMF (i.e., American taxpayers) ride to the rescue. Step 9 occurs when the United States faces a fiscal criss because of too much spending.
For Step 10, read Atlas Shrugged.
As part of his ill-considered credentialing-to-compete initiative, President Obama wants to greatly increase both the size and availablity of Pell Grants. Under his proposed FY 2011 budget, the total pot of Pell aid would rise from $28.2 billion in 2009 to $34.8 billion in 2011; the maximum award would go from $5,350 to $5,710; and the number of students served would rise by around 1 million.
A critical question, of course, is whether increasing Pell will ultimately make college more affordable or self-defeatingly fuel further tuition inflation. The New York Times took that up in yesterday's Room for Debate blog.
Economist Richard Vedder has long educated people about the inflationary effect of student aid, and does so again with great clarity. It's higher-ed analyst Art Hauptman, however, whom I think best captures what likely occurs when Pell is combined with all the cheap loans and other aid furnished by Washington, states, and schools themselves:
Via Cato’s Director of Government Affairs, Brandon Arnold, comes this [$] bold claim by the National Journal’s Congress Daily (although, to be fair, they are just quoting the study):
U.S. wheat promotion programs increase sales more than programs for other grains and agricultural products, according to an analysis of wheat export programs released this week.
The study by Cornell University professor Harry Kaiser showed that for every dollar spent on wheat promotion, U.S. producers get $23 back in increased net revenue, Kaiser told U.S. Wheat Associates, which commissioned the study.
With that sort of return on “investment”, the U.S. government should devote all of its revenue to wheat promotion as an ultra‐quick revenue raising measure. Right after they’ve bought the swampland in Florida that the U.S. Wheat Associates has to sell them.
Alternatively, since it is such a great deal, perhaps U.S. Wheat Associates should pick up all of the tab for the program, instead of saddling U.S. taxpayers with half the cost.
The most interesting libertarian‐related conversation I’ve read today comes from Rortybomb, by way of Andrew Sullivan, with commentary by Megan McArdle. Here’s a challenge to libertarians from Rortybomb, aka Mike Konczal:
I want to pitch to the credit card and financial industry a new innovative online survey. It is targeted for older, more mature long‐time users of our services. We’ll give a $10 credit for anyone who completes it. Here is a sense of what the questions will look like:
— 1) What is your age?
— 2) What day of the week are you taking this survey?
— 3) Many rewards offered are for people with more active lifestyles: vacations, flights, hotels, rental cars. Do you find that your rewards programs aren’t well suited for your lifestyle?
— 4) What is the current season where you live? Are any seasons harder for you in getting to a branch or ATM machine?
— 5) Would rewards that could be given as gifts to others, especially younger people, be helpful for what you’d like to do with your benefits?
— 6) Would replacing your rewards program with a savings account redeemable for education for your grandchildren be something you’d be interested in?
— 7) Write a sentence you’d like us to hear about anything, good or bad!
— 8 ) How worried are you you’ll leave legal and financial problems for your next‐of‐kin after your passing?
Did you catch it? Questions 1,2,4,7 are taken from the ‘Mini‐mental State Examination’ which is a quick test given by medical professionals to see if a patient is suffering from dementia. (It’s a little blunt, but we can always hire some psychologist and marketers for the final version. They’re cheap to hire.) We can use this test to subtly increase limits, and break out the best automated tricks and traps mechanisms, on those whose dementia lights up in our surveys. Anyone who flags all four can get a giant increase in balance and get their due dates moved to holidays where the Post Office is slowest! We’d have to be very subtle about it, because there are many nanny‐staters out there who’d want to coddle citizens here…
I smell money — it’s like walking down a sidewalk and turning a corner and then there is suddenly money all over the sidewalk. One problem with hitting up sick people, single mothers, college kids who didn’t plan well and the cash‐constrained poor with fees and traps is that they’re poor. Hitting up people with a lifetime of savings suffering from dementia is some real, serious money we can tap as a revenue source.
Clearly, only an evil person (or a libertarian!) would allow a scam like this one. Megan responds, I think rightly:
I’m not sure why this is supposed to be a hard question for libertarians. I mean, I might argue that preventing people from ripping off the marginally mentally impaired would, in practice, be too difficult. Crafting a rule that prevented companies from identifying people who are marginally impaired might well be impossible — I’m pretty sure that if I wanted to, I could devise subtler tests than “What day of the week is it?” And while the seniors lobby is probably in favor of not ripping off seniors, they’re resolutely against making it harder for seniors to do things like drive or get credit, which is the result that any sufficiently strong rule would probably have.
But it’s pretty much standard libertarian theory that you shouldn’t take advantage of people who do not have the cognitive ability to make contracts. Marginal cases are hard not because we think it’s okay, but because there is disagreement over what constitutes impairment, and the more forcefully you act to protect marginal cases, the more you start treating perfectly able‐minded adults like children.
The elderly are a challenge precisely because there’s no obvious point at which you can say: now this previously able adult should be treated like a child. Either you let some people get ripped off, or you infringe the liberty, and the dignity, of people who are still capable of making their own decisions.
I’d add two responses of my own.
First, I can’t believe there’s all that much money to be had here. Anyone who wanders into Tiffany’s and back out again without remembering what they bought is, generally speaking, a bad credit risk. Mildly irresponsible people — those who slightly overspend, then have to make it up later — those are probably great for creditors. Lesson learned: If you’re not demented, don’t be irresponsible. (If you are demented, you’re not going to follow my advice anyway.)
Second, I am always amazed at how border cases are dragged out, again and again, as if they proved something against libertarianism. Border cases — How old before you can vote? How demented before a contract doesn’t bind? — are a problem in all political systems, because all systems start with a presumed community of citizens and/or subjects. We always have to draw boundaries between the in‐group and the outliers before we have a polity in the first place.
What makes the classical liberal/libertarian approach so valuable is in fact that it draws so few boundaries. Where other systems depend on class boundaries, race boundaries, religious boundaries, and so forth — with annoying boundary issues at every stop along the way — libertarians make it as simple as I think it can be. We presume that all mentally competent adults are worthy of liberty until they prove themselves otherwise.
The boundary cases are still there, but they are fewer and more tractable. Konczal just wandered into one of them. It proves much less than he thinks.
It’s been a rough couple of weeks for Greece, which has been battered by rumors of government default. Interest rates have been climbing, as investors are nervous about state finances, and the country’s debt rating has been downgraded.
Not surprisingly, Greek politicians are dealing with the crisis in large part by further increasing the tax burden. One particularly horrible idea is a 90 percent tax on bank bonus payments. I don’t know if lawmakers in Athens have heard of the Laffer Curve, but they’re about to get a real‐world lesson that will teach them how punitive tax rates lead to less revenue.
For those who wonder how Greece got into this mess, here’s a quick chart I put together, based on OECD fiscal data. Don’t be surprised if America has a similar chart in about 10 years.