Tax and Budget Policy

May 15, 2020 4:00PM

California’s Budget and Rainy Day Fund

Congress is considering passing additional financial aid for state and local governments. I argued against further aid in this Fox News op‐​ed. One reason is that many states have built substantial rainy day funds, which will help them balance their budgets even as tax revenues decline. Federal bailouts would undermine incentives to build such useful funds going forward.

California has built a substantial rainy day or reserve fund over the past five years, as shown in the chart below from this state report. State residents passed a referendum in 2014 to create the fund structure, and so kudos to Californians for approving Proposition 2 by 69–31. The state is in a better place today both because the reserve fund can be tapped during the crisis and because contributions to the fund during the boom helped to reduce program growth.

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California political leaders who supported Proposition 2 should also be commended, including former Governor Jerry Brown. Brown scored poorly on Cato’s Report Cards, but I did note his support of expanding the rainy day fund.

California needs a larger rainy day fund than most states because its revenue system is so volatile. The system is heavily dependent on highly “progressive” income and capital gains taxes, which are tied to growth in Silicon Valley. The top 1 percent of earners pay almost half of California’s income and capital gains taxes, which is remarkably lopsided.

The California Legislative Analyst’s Office (LAO) includes this graphic in its CalFacts publication:

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To better handle downturns and promote economic growth going forward, California should restructure its tax system to rely more on sales taxes and less on income and capital gains taxes.

California also needs budget reform because spending rises too quickly during booms. General fund spending rose 6.2 percent in 2018 and 12.1 percent in 2019. The governor has just released projections showing slower 3.3 percent spending growth in 2020 and spending cuts in 2021. The rainy day fund helps, but California government will need to downsize in coming months as revenues fall. Hopefully, the sobering new projections will encourage policymakers to reopen the state economy as quickly as possible.

Over the longer term, California should shrink overall taxing and spending. But its experience shows that even states on the political left can build substantial reserve funds. I argue here and here that when the current crisis passes and the economy starts growing, states should begin building reserves for the next rainy day.

By the way, California’s LAO produces excellent data and studies, perhaps superior to that produced by federal agencies. The CalFacts booklet, for example, has many interesting charts on taxes, budgets, education, and other topics.

May 13, 2020 10:56AM

CDC Failures: Mission Sprawl Is One Problem

The Centers for Disease Control and Prevention (CDC) says that it “has a unique mission—to save lives by deploying effective, proven strategies to prevent, detect, and rapidly respond to disease outbreaks at their source.”

But the CDC was slow to recognize the size of the COVID-19 threat and it fumbled the ball in numerous ways. CDC Director Robert Redfield tweeted January 14 that “there is no confirmed person‐​to‐​person spread” of the illness, and on January 28 he emailed CDC colleagues that “the virus is not spreading in the U.S. at this time.”

A ProPublica analysis found, “Internal Emails Show How Chaos at the CDC Slowed the Early Response to Coronavirus.” The analysis concluded that “the CDC underestimated the threat from the virus and stumbled in communicating to local public health officials what should be done.” Meanwhile, an NPR investigation found that the CDC’s initiative to create an early warning system in selected cities was a flop.

This CDC brochure lauds the agency’s success at battling COVID-19. It says, “An important part of CDC’s role during a public health emergency is to develop a test and equip state and local public health labs with testing capacity.” The brochure does not mention that the CDC’s test failed and that federal actions delayed the deployment of private‐​sector tests.

The CDC and other federal health agencies told the public not to wear masks. The official line was: “CDC does not recommend that people who are well wear a facemask to protect themselves from respiratory illnesses, including COVID-19.” The U.S. Surgeon General was insistent about masks: “They are NOT effective in preventing general public from catching #Coronavirus.”

Why should we spend billions of dollars on health agencies that give us harmful advice?

Some pundits claim that budget cuts were the problem, but the table below suggests otherwise. The CDC workforce increased 12 percent between 2010 and 2019, based on data in CDC budget submissions here and here.

The largest employment increase was in “Global Health,” a group that monitors foreign outbreaks of infectious disease. The group’s employment jumped from 272 in 2010 to 1,263 in 2019. The CDC says the group “supports global efforts to detect epidemic threats earlier, respond more effectively, and prevent avoidable catastrophes.” The agency should have been ready.

CDC leaders may have been distracted because of mission‐​sprawl. The CDC’s 512‐​page budget submission for 2021 reveals a vast and disparate array of activities. What are occupational safety and injury prevention doing in the government’s infectious disease agency?

The CDC highlights its recent accomplishments on pages 18 to 23. How is CDC Director Redfield supposed to remain alert to emerging epidemics when he is also supposed to manage programs on tiny teeth, colon cancer, opioids, child abuse, diabetes, workers’ compensation, lead‐​based paints, mold in buildings, and lifting heavy objects on construction sites?

From the highlights:

“In 2019, CDC launched the Protect Tiny Teeth initiative in collaboration with partners. The initiative includes an oral health toolkit to raise awareness about the importance of oral health as part of prenatal care.”

“As part of the Combatting Opioid Overdose through Community‐​Level Intervention program, CDC expanded efforts to partner with public safety (e.g., law enforcement, first responders) by collaborating with the Office of National Drug Control Policy to fund 25 pilot projects.”

“Using CDC resources, the Forest County Potawatomi Community, a tribal nation in Wisconsin created a media campaign, in collaboration with the Tribe’s Executive Council, targeting the stigma associated with opioid use disorder within the Native American culture.”

“CDC’s Essential for Childhood program recipient states increased the percentage of Community‐​Based Child Abuse Prevention dollars invested in evidence‐​based programs from 24% to 52%.“

“CDC’s Colorectal Cancer Control Program grantees have partnered with over 760 health system clinics that serve over 1.2 million patients age‐​eligible for colorectal cancer screening.”

“As of December 2019, more than 1,500 organizations have received CDC‐​recognition for delivering CDC’s National Diabetes Prevention Program lifestyle change program…”

“CDC Project 3–3: Children with Asthma is working to identify factors associated with asthma exacerbation in children following the 2017 Hurricanes Harvey and Maria and aims to establish or improve programs to reduce asthma burden among children during and after hurricanes.”

“CDC published a web‐​based data visualization dashboard to explore 1.4 million workers’ compensation claims in Ohio, creating a causation‐​specific injury surveillance system using existing claims databases.”

“CDC’s Data Linkage Program facilitated evidence building which supported policy decisions for the U.S. Department of Housing and Urban Development (HUD). HUD’s 2018–2022 Strategic Plan cited findings from the NCHS-HUD linked data files to support the continued removal of lead‐​based paint hazards in HUD homes.”

“Using CDC resources, the CPWR‐​Center for Construction Research and Training, piloted and launched best​built​plans​.org to provide contractors and workers with practical tools, microgames, and information to prevent injuries from lifting and moving heavy materials while staying productive and profitable.”

“In 2019, the Coal Worker’s Health Surveillance Program provided 8,398 chest x‐​ray screening examinations and reviewed 2,758 spirometry test results from its mobile unit and 40 Spirometry Clinics in 11 states.”

“CDC released the Dampness and Mold Assessment Tool for both general buildings and schools to help employers identify and assess areas of dampness in buildings.”

In coming months, Congress should reassess the CDC’s budget and consider some of the agency’s failures during the COVID-19 crisis. Policymakers may want to take a pruning knife to the CDC and refocus it on the core mission of infectious disease and epidemics.

In general, less is more with federal agencies. Federal mission‐​sprawl often results in overlaps with state, local, and private activities, and it distracts federal leaders from their core responsibilities.

Dave Kemp assisted with research for this post. 

May 7, 2020 11:02AM

Postal Service Forum Tomorrow

The Heritage Foundation is hosting an online forum tomorrow at 11am: “Is the Postal Service Worth Saving? A Debate Among 3 Experts.”

The U.S. Postal Service is in deep financial trouble with mail volumes falling and losses rising. Analysts have differing views about the best USPS reform options, but all agree that the agency’s operations are unsustainable as currently structured.

The forum features Chris Edwards of Cato, Rachel Greszler of Heritage, and Kevin Kosar of R Street. It is hosted by Heritage’s Romina Boccia.

You can rsvp here.

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For background on the USPS, see Cato articles here, here, here, and here, and see Heritage articles here, here, and here.

May 1, 2020 6:11PM

Trillion‐​Dollar Spending Bills Bring Out the Lobbyists

The Center for Responsive Politics reports that lobbying spending has jumped to near‐​record levels in the first quarter of 2020 “as powerful companies, trade groups and other clients rushed to influence the government’s response to COVID-19, particularly its $2.2 trillion stimulus bill.” Federal lobbying spending totaled $903 million in the first quarter, the most since the legislatively active first two years of the Obama administration — which had exceeded the last few months of 2008, when TARP was on the table.

OpenSecrets found that at least 3,200 clients reported lobbying on issues related to coronavirus and the stimulus bill. More than 1,500 lobbying clients specifically reported attempting to influence the House version of the CARES Act. Among all non‐​appropriations bills introduced since 2005, only the 2009 stimulus package drew more lobbying clients.

This is no surprise, of course. When you lay out a picnic, you get ants. When you lay out taxpayers’ dollars, you get lobbyists. And the CARES Act is the biggest picnic in a decade. (I’m not addressing here whether the money being spent on Covid‐​19 response is necessary or justified, just the fact that big spending bills lead to big lobbying.)

Journalists have noticed. A few headlines from the past few weeks: “Coronavirus fuels K Street lobbying gush, new disclosures show” (Politico). “How Lobbyists Robbed Small Business Relief Loans” (New York Times). “Investment firms spent millions lobbying Trump administration and Congress on coronavirus relief bill” (CNBC). “Lobbyists Pile On to Get Wins for Clients Into Coronavirus Stimulus Package” (Wall Street Journal)

Everybody wanted a piece of the $2.2 trillions. (Well, except the Cato Institute.) Airlines, pharmaceutical companies, utilities and shrimp processors. Apple, CVS and Toyota. The Metropolitan Opera and casino operators. Medical device makers. It always helps to have political connections.

What can we expect? With a federal budget headed toward $5 trillion even before the extraordinary spending now being contemplated, many companies and interest groups see a profit opportunity. It’s worth hiring platoons of lobbyists to get just a small, an infinitesimal, sliver of that pie.

People invest money to make money. In a free economy they invest in building homes and factories, inventing new products, finding oil, and other economic activities. That kind of investment benefits us all — it’s a positive‐​sum game, as economists say. People get rich by producing what other people want.

But you can also invest in Washington. You can organize an interest group, or hire a lobbyist, and try to get some taxpayers’ money routed to you. That’s what big business, small business, the farm lobbies, AARP, industry associations, and teachers unions do. And that kind of investment is zero‐​sum — money is taken from some people and given to others, but no new wealth is created.

If you want to drill an oil well, you hire petroleum engineers. If you want to drill for money in Washington, you hire a lobbyist. And more people have been doing that.

The trillions of dollars being spent on Covid‐​19 response may well be necessary and appropriate. And maybe all this lobbying activity is just the price we pay for government help. But we should understand how much deadweight loss goes along with government spending, especially spending that’s being rushed through Congress without any serious deliberation. And we should at least insist on serious oversight of the spending, which is not yet happening.

May 1, 2020 4:38PM

U.S. Postal Service in Crisis

President Trump has reignited a feud with the U.S. Postal Service calling it “a joke” the other day. He does not like Amazon’s delivery deal with the USPS and is withholding $10 billion in aid to the government‐​owned postal company. Trump uses harsh rhetoric but sometimes he spotlights an important issue that other politicians have ignored.

The USPS is in deep trouble. First‐​class mail volume has fallen 47% since 2001 because of the rise of email and other internet services. First‐​class mail is the USPS’s most profitable product, so the decline has generated a decade of losses at the company. COVID-19 is compounding the problems. The head of the USPS said that the crisis is having a “devastating effect on our business.”

I examined the USPS crisis and Trump’s comments in the New York Daily News.

After reading my piece, a retired postal worker in Minnesota sent me a note saying, “always flying under the radar is the absurdly bloated and overpaid USPS management infrastructure that you find nationwide. The union representing workers / the common folk / are not overpaid. It’s the management that drastically needs to be cut size wise and salary wise. … UPS and Fed Ex would never tolerate it.”

Is USPS management “absurdly bloated”? The organization has 634,000 workers and labor costs are 76 percent of total costs. The USPS has a heavily layered structure covering 7 areas, 67 districts, and 31,000 facilities with both functional and operational managers.

The USPS Inspector General issued a report on the company’s workforce covering 2009 to 2018. The report does not directly answer the bloat question, but does include useful data:

  • Labor Costs. Inflation‐​adjusted labor costs fell 14 percent over the decade, while mail volume dropped 17 percent.
  • Size of Workforce. The workforce shrank from 712,000 to 634,000 workers over the decade and shifted to less expensive “noncareer” staff. The noncareer share of the workforce rose from 13 percent to 22 percent. Career employees earn twice what similar noncareer employees earn, as shown in the chart below.
  • Size of Management. The USPS did not appear to get more top heavy over the decade. I summed the number of career employees who are in headquarters and area offices, or are postmasters, supervisors, or managers. This management group was 10 percent of the workforce in both 2009 and in 2018.
  • Retirement Costs. Retirement costs are 24 percent of total USPS labor costs. The company has more than $100 billion in unfunded retirement costs.
  • Productivity Variations. Labor costs compared to mail volumes vary dramatically across the country, which suggests that efficiency could be improved in some places. A separate 2019 report on USPS productivity also finds wide geographical variation.
  • Overtime Costs. These costs have risen and appear to be excessive in some areas. Overtime as a share of total worker hours varies from less than 6 percent in the Northern Plains to as much as 18 percent in some areas of California, the Northeast, and southern Florida.
  • Employee Grievances. The number of employee grievances has soared from about 110,000 to 180,000 a year, even though the number of USPS employees has fallen. The USPS paid out $1 billion for grievances over the decade.

I do not know how much management bloat the USPS has, but management appears to have been a stable share of the workforce over the decade. However, there are workforce issues that need addressing, such as the rising costs of grievances, the lower productivity in some areas, and the high overtime costs in some areas.

The USPS has cut its workforce, shifted to noncareer staff, and consolidated routes to save money. It has proposed other cost‐​cutting reforms—such as reducing delivery days and closing little‐​used post offices—that Congress has blocked. It is mainly politicians of both parties who are to blame for the crisis at the USPS, not the USPS itself.

The way forward for the nation’s postal services is privatization and competition. That reform approach would give the USPS the flexibility it needs to further cut costs, to innovate, and to develop new sources of revenue in the internet age.

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April 21, 2020 3:20PM

Crisis May Add $6 Trillion to Federal Debt

The COVID-19 pandemic has pushed the economy into a deep recession. The crisis will also create lasting economic damage from the jump in debt as a result of higher federal spending and lower federal revenues.

Treasury Secretary Mnuchin said recently that “interest rates are incredibly low, so there’s very little cost of borrowing this money.” That statement is not correct. Mnuchin seems to have forgotten about loan principal. Every dollar borrowed causes damage down the road from the resulting higher taxes extracted from the private sector. Furthermore, interest rates may spike, which will increase federal borrowing costs as accumulated debt is rolled over.

How much debt will the crisis add? Perhaps $6 trillion, based on the rough spending and revenue scenario shown in the chart below.

I started with CBO’s pre‐​crisis baseline projection to 2030 and adjusted annual spending and revenues to reflect the new realities.

The spending and tax cuts in the CARES Act will increase debt by $1.76 trillion. The prior relief package called Families First will increase debt by $192 billion. Add to that perhaps $450 billion for a further relief bill that Congress may soon pass. In total, spending increases and tax cuts in coronavirus legislation may increase debt about $2.4 trillion.

Debt will rise further because the recession is reducing federal revenues. During the last recession, revenues fell 18 percent between 2007 and 2009 and took five years to recover to the prior level. For the current scenario, I assumed revenues will fall 18 percent this year due to the recession and then start to recover and regain the CBO baseline level by 2025. Under that scenario, the revenue losses will be $2.2 trillion.

With higher spending and lower revenues, federal borrowing costs will be roughly $1.2 trillion higher over the coming decade.

The chart shows the deficit soaring to $3.9 trillion this year, then narrowing to about $1.5 trillion for a few years before widening again. The gap between the lines on the chart is the new debt added each year. Between 2019 and 2030, the federal government may add $20 trillion in new debt. The future of the U.S. economy is hard to forecast, but we do know that unprecedented mountains of government debt will generate huge risks to the nation.

Under the CBO baseline, federal debt held by the public had been expected to rise from $16.8 trillion in 2019 to $31.3 trillion by 2030, or 79 percent of GDP to 98 percent. Under my scenario, debt will rise to $37.2 trillion by 2030 or 116 percent of GDP. The crisis may impose almost $6 trillion of costs on future taxpayers.

The previous high federal debt‐​to‐​GDP ratio was 106 percent in 1946. That pile of debt was cut to 56 percent by 1955. Was that fall due to Congress being prudent and running surpluses? Nope. Instead, most of the drop in debt‐​to‐​GDP from 1946 to 1955 was due to substantial inflation that reduced the debt’s real value.

Will the government try to use the same technique to cut its record debt this time?

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Further background on debt is here.

April 15, 2020 4:44PM

USPS: Privatization vs. Bailouts

The economic crisis has highlighted reckless fiscal policies and a lack of foresight by our political leaders. Despite a decade of growth, the federal government ballooned its debt, which has now put the nation in a very precarious financial state. Meanwhile, some state governments saved little money in their rainy day funds and now the storm has arrived.

Similarly, Congress has long ignored calls to reform the U.S. Postal Service, and now the USPS faces a desperate financial crisis. In the past, the Trump administration proposed major USPS restructuring, as did the Cato Institute. But over the years, Congress has blocked even modest cost‐​saving changes that the USPS has proposed.

I proposed to Congress that it privatize the USPS, which would have given the company the flexibility it needs to weather the Covid‐​19 crisis. The USPS is in a straitjacket unable to save itself during the crisis because Congress imposes restrictions on costs, pricing, labor unions, delivery, and other operational factors.

The USPS is a huge enterprise, with more than 600,000 employees and $70 billion in annual revenues. Revenues are supposed to cover costs, but the USPS has lost tens of billions of dollars over the past decade as mail volume has plunged. Even before the crisis, first‐​class mail volume was down 47 percent since 2001.

The head of USPS, Megan Brennan, estimates that losses tied to Covid‐​19 will be $13 billion this year. She says the crisis is having a “devastating effect on our business … The sudden drop in mail volumes, our most profitable revenue stream, is steep and may never fully recover.” The Washington Post reports, “Volume in the first week of March declined 30 percent, postal agency officials told lawmakers last week. At the end of June, the agency projects volume to be down 50 percent, and it could lose $23 billion over the next 18 months.”

The $2.2 trillion relief bill (CARES Act) gave a $10 billion loan to the USPS, but that does not solve any underlying problems. The USPS and some congressional leaders are pushing for more USPS bailout money in the next relief bill. But major USPS restructuring is needed, not more subsidies.

While it makes sense to help USPS buy protective gear for employees, the main policy focus should be cost‐​cutting. Congress should allow the USPS to implement long‐​needed reforms such as reducing delivery days, closing locations that have few customers, repealing collective bargaining, and other cost‐​saving changes.

Such reforms would provide breathing room for the USPS and help it prepare for privatization. Facing falling mail volumes, European countries have privatized their postal systems, which has opened the door to innovation. Germany’s privatized Deutsche Post, for example, closed virtually all its stand‐​alone branches, sold 29,000 buildings, and opened counters in retail businesses such as grocery stores. That is the type of cost‐​saving reform the U.S. system needs.

Some members of Congress want to write‐​off USPS debts in a new relief bill and push the costs onto taxpayers. That would be reasonable if tied to restructuring that cut long‐​run costs and allowed the USPS to innovate. Without privatization, the postal system’s red ink will continue to flow like an endless river.

Even before the crisis, postal and delivery markets were changing rapidly. The crisis is spurring further shifts in business and consumer behaviors. Congress should privatize the USPS to give it the flexibility it needs to deal with all the new challenges.