Tag: taxpayers

Deficit Prognostications

Exactly two years ago, George W. Bush released his final budget. Here’s what the Washington Post had to say:

[T]he president’s budget envisions a big jump in the budget deficit, from $163 billion in 2007 to about $400 billion in 2008 and 2009. Much of that increase will be the result of a slowing economy and a stimulus package expected to cost about $150 billion.

Today’s release of President Obama’s FY 2011 budget shows that those deficit prognostications were way off:

Instead of a “big jump” to $400 billion in 2009, the actual deficit turned about to be a trillion dollars higher. Bush deserves most of the blame for that deficit, but the 2010 and 2011 deficits will be on Obama.

The frightening prospect is that, like Bush, Obama’s future budget projections will also turn out to be low-balled. Whether it has been war, natural disasters, or a recession, Bush and Obama have both responded to any “crisis” by spending gobs of money. Given that even Obama is projecting annual deficits still in the trillion dollar range by 2020, taxpayers had better hope the Taliban, Mother Nature, and the economy start cooperating.

That’s Quite a Multiplier

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.

Government and GDP

The expansion in government and poor state of the economy got me thinking about how government growth is reflected in measured gross domestic product. So here is a wonky look at the treatment of government in the Bureau of Economic Analysis GDP data.

Data notes: By “government,” I mean total federal, state, and local. For 2009, I’m using the average of second and third quarter data. All data from BEA Tables here.

GDP measures total production. In 2009, government production was 20.7 percent of U.S. GDP.  Government production is roughly the sum of government value-added (the stuff it produces itself) and government purchases. The first item, government value-added, was 12.4 percent of GDP and mainly consists of employee compensation. For example, the Pentagon produces output by adding together fighter pilots, which it hires, and fighter jets, which it buys.

A more commonly cited measure of government is total government spending. In 2009, that was 38 percent of GDP. The difference between this number (38 percent) and the production number (20.7 percent) is 17.3 percent, and represents the sum of government interest payments and transfer payments to individuals and businesses.

Figure 1 shows how the three measurements of government size have changed over time. Government production has remained fairly stable as a share of the economy, but total government spending has soared. The growing gap between these two lines mainly represents the massive growth in transfer (or subsidy) programs, such as Social Security.

12-10-09 edwardschart

How Does Government Growth Affect Measured GDP?

Consider how the recent rise in government spending might have affected measured GDP. First, let’s look first at the production part of government spending. The important thing here is that we don’t know how much government workers actually produce because their output is generally not sold on the market. As a consequence, the BEA measures their output as the sum of their compensation amounts. Also, we know the dollar value of the things the government buys, but we don’t know how much those intermediate goods actually produce when in the hands of the government. So the government production portion of GDP seems kind of shaky, despite the superb efforts of the BEA to assemble all the data.

Anyway, let’s say the government adds a new worker with pay of $100,000, the BEA measures GDP being boosted by $100,000. But it might be that the worker doesn’t actually produce anything useful, and he adds zero to the economy’s actual output.

If the government hires that worker away from the private sector, private GDP would go down by about $100,000. As a result, overall measured GDP would be unchanged. But that would be incorrect because the economy’s actual output fell by $100,000.

So let’s say the government spent $100 billion to hire a million new government workers. Let’s say half of those workers produced as much value as their salaries, but the other half produced nothing of value. The result of this government expansion would be that the BEA would overestimate U.S. GDP by $50 billion. (I am assuming that the government’s hiring doesn’t change the unemployment rate. I’m also ignoring the distortionary effects of higher taxes).  

Now let’s look at the transfer or subsidy portion of government, which equals 17.3 percent of GDP.

Let’s say the government increases transfers by $100 billion, perhaps by increasing Social Security benefits, and funding it by higher taxes on wages.

If there are no behavioral responses among taxpayers and benefit recipients, measured GDP would be unchanged, which would be the correct answer.

But of course there would be behavioral responses. The higher taxes would induce people to work less and the higher Social Security benefits would induce people to save less and retire earlier. The results would be that output would fall, and that would be accurately reflected in measured GDP.

In sum, my purpose here was not to explore how a growing government affects the economy, which is a huge subject. Instead, it was to explore whether measured GDP accurately reflects changes in the size of government. The answer appears to be that the transfer part of government spending (17.3 percent of GDP) would be accurately reflected in a shrinking GDP, but that the production portion of government spending (20.7 percent of GDP) may not be. If workers produce less output when they work for government than when they work in the private economy, the latter portion of measured GDP will be overstated.

Spending Our Way Into More Debt

Huge deficit spending, a supposed stimulus bill, and financial bailouts by the Bush administration failed to stave off a deep recession. President Obama continued his predecessor’s policies with an even bigger stimulus, which helped push the deficit over the unimaginable trillion dollar mark. Prosperity hasn’t returned, but the president is persistent in his interventionist beliefs. In his speech yesterday, he told the country that we must “spend our way out of this recession.”

While a dedicated segment of the intelligentsia continues to believe in simplistic Kindergarten Keynesianism, average Americans are increasingly leery. Businesses and entrepreneurs are hesitant to invest and hire because of the uncertainty surrounding the President’s agenda for higher taxes, higher energy costs, health care mandates, and greater regulation. The economy will eventually recover despite the government’s intervention, but as the debt mounts, today’s profligacy will more likely do long-term damage to the nation’s prosperity.

Some leaders in Congress want a new round of stimulus spending of $150 billion or more. The following are some of the ways that money might be spent from the president’s speech:

  • Extend unemployment insurance. When you subsidize something you get more it, so increasing unemployment benefits will push up the unemployment rate, as Alan Reynolds notes.”
  • “Cash for Caulkers.” This would be like Cash for Clunkers except people would get tax credits to make their homes more energy efficient. Any program modeled off “the dumbest government program ever” should be put back on the shelf. 

  • More Small Business Administration lending. A little noticed SBA program created by the stimulus bill offered banks an “unprecedented” 100 percent guarantee on loans to small businesses. The program has an anticipated default rate of 60 percent. Small businesses need lower taxes and fewer regulations, not a government program that perpetuates more moral hazard.

  • More aid to state and local governments. State and local government should be using the recession to implement reforms that will prevent them from going on another unsustainable spending spree when the economy recovers. Also, we need fewer state and local government employees – not more – as they’re becoming an increasing burden on taxpayers.

The president said his administration was “forced to take those steps largely without the help of an opposition party which, unfortunately, after having presided over the decision-making that led to the crisis, decided to hand it to others to solve.” Mr. President, nobody has forced you to do anything. You’ve chosen to embrace – and expand upon – the big spending policies that were a hallmark of your predecessor’s administration.

College Students to Taxpayers: ‘Rent Now, Oppressors!’

Inside Higher Ed reports today on growing college student acitivism. And what are the young scholars suddenly so active about? Not unjust wars, racism, or anything else so high-minded. No, today the “no justice, no peace!” chants are all about the injustice of students being asked to pay for more of their hugely taxpayer-subsidized educations.

There’s a word for this kind of activism, and it’s not “idealism” or anything else so complimentary. It’s “rent seeking.” Or, if you want to put it more bluntly, “freeloading.”

A Free Press Only Counts if It’s on Dead Trees

newspapersThe Associated Press reports:

The federal government is wading into deliberations over the future of journalism as printed newspapers, television stations and other traditional media outlets suffer from Americans’ growing reliance on the Internet.

With the media business in a state of economic distress as audiences and advertisers migrate online, the Federal Trade Commission began a two-day workshop Tuesday to examine the profound challenges facing media companies and explore ways the government can help them survive.

Media executives taking part are looking for a new business model for an industry that is watching traditional advertising revenue dry up, without online revenue growing quickly enough to replace it. Government officials want to protect a critical pillar of democracy—a free press.

“News is a public good,” FTC Chairman Jon Leibowitz said. “We should be willing to take action if necessary to preserve the news that is vital to democracy.”

Language mavens, observe the lede: The federal government is “wading into deliberations.” I infer that in Newspeak, this may mean something like “trying to spend more money.” Perhaps I should look forward to the federal government wading into deliberations over my salary? (On second thought, maybe not.)

Some of the proposals aimed at saving traditional journalism are relatively innocuous, like letting newspapers become tax-exempt nonprofits. At least this wouldn’t do too much harm, and, given recent performance in the industry, it approaches being fiscally neutral.

Other ideas, like forcing search engines to pay royalties to copyright holders, would have far more serious consequences. It’s hard to see whom this proposal would hurt worse, the search engines, socked with massive fees, or the copyright holders themselves – if search engines don’t index you, you don’t exist anymore.

The surest loser, though, would be the rest of us. Restricting the flow of news for the financial benefit of Rupert Murdoch seems a far cry from our Constitution, which allows Congress “to promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.” Burdening search engines seems only to inhibit the progress of science and the useful arts, while enriching a small number of people. It might pass the letter of the law, but I doubt that this is what the founders had in mind.

But anyway…. shame on Americans for our “growing reliance on the Internet”! Don’t we realize that, as the article notes, “a free press is a critical pillar of democracy” – and that a free press only counts, apparently, if it’s on dead trees?

I’m all in favor of the good the press can do, but it strikes me as shortsighted to think that this good can only be done in the traditional media. It also seems foolish to me to think that tying the press more closely to the government will make it more critical and independent. Often, the very best journalism comes from complete outsiders. I’m reminded of Radley Balko’s recent (and excellent) takedown of the claim that Internet journalists are basically parasites:

In 20 years, the Gannett-owned Jackson Clarion-Ledger never got around to investigating Steven Hayne, despite the fact that all the problems associated with him and Mississippi’s autopsy system are and have been fairly common knowledge around the state for decades. It wasn’t until the Innocence Project, spurred by my reporting, called for Hayne’s medical license that the paper had no choice but to begin to cover a huge story that had been going on right under its nose for two decades.

… That’s when the paper starting stealing my scoops. Me, a web-based reporter working on a relatively limited budget. Like this story (covered by the paper a week later). And this one (covered by the paper weeks later here). Oh, and that well-funded traditional media giant CNN did the same thing.

Tell me again, who’s the parasite here? And why should taxpayers bail out yet another industry that isn’t delivering what we want?

More on ‘Race to the Top’

Andrew Coulson has already touched on this, but I thought I’d throw in my two cents. “Race to the Top Fund” guidelines were released today and they should please no reformers. They are simultaneously too weak, and way too much.

They are too weak because they don’t require states to actually do anything of substance. Have plans for reform? Sure. Break down a few barriers that could stand in the way of decent changes? That’s in there, too. But that’s about it. And the money is supposed to be a one-shot deal – once paper promises are accepted and the dough delivered, the race is supposed to be over.

In light of those things, how is this more appropriately labeled the Over the Top Fund than the Race to the Top Fund? Because while not requiring anything, it tries to push unprecedented centralization of education power.It calls for state data systems to track students from preschool to college graduation. It calls for states to sign onto “common” – meaning, ultimately, federal – standards. It tries to influence state budgeting.

In other words, it attempts to further centralize power in the hands of ever-more distant, unaccountable bureaucrats rather than leaving it with the communities, and especially parents, the schools are supposed to serve – exactly what’s plagued American education for decades. And, of course, it does this with huge  gobs of federal money taxpayers have no choice but to supply.