Topic: Government and Politics

The Cost of Government Guarantees

John Kay’s column in yesterday’s Financial Times criticizes government guarantees to banks because they involve hidden but large costs. According to Kay:

  • Such guarantees distort competition: sheltered banks outperform rivals not because of greater efficiency, but because capital becomes cheaper to obtain.
  • Sheltered banks gain too-big-to-fail status, which creates barriers to entry for smaller, more efficient banks.
  • Relief from business risk leads to more risk taking, AKA moral hazard.
  • Cheaper private risk management incentives are reduced within and outside the bank.

Other kinds of government guarantees, such as social insurance, also involve large hidden costs. Social Security and Medicare’s guarantee of a paid holiday with medical care for the rest of retirees’ lives generates the same types of costs:

  • Labor competition is reduced because the programs induce early worker retirements, which leads to higher wage costs, on average, and lower national output.
  • Workers who believe they will receive Social Security and Medicare will engage in lower personal saving, which means less capital formation and lower economic efficiency.
  • Retirement income guarantees induce riskier personal savings portfolios, AKA moral hazard.
  • Guaranteed retirement income means poorer financial knowledge and poorer risk management.

And now, retiree political power is too big to fail as well!

How come when Kay writes about market distortions from government guarantees for banks, he gets published; but when I do the same about government guarantees for people, I get the cold shoulder from editorial page editors?

Hungry for Taxes

The Washington Post reports:

Would you gladly pay more for a cheeseburger today if it keeps your local librarian working tomorrow?

Several members of the Fairfax County Board of Supervisors think so. So do supervisors in neighboring Loudoun County, who hope the General Assembly will allow them to impose a meals tax, too.

If the supervisors are so sure that a tax increase would be popular, why don’t they put it to a referendum?

Or better yet, why not make it voluntary? The waitress could bring you a bill that shows the cost of the food and drink, the state tax, the county tax (as Virginia receipts already do), and then “additional voluntary local tax to keep Fairfax government big.” If the supervisors are right, people will gladly pay it.

Right, supervisors?

Defending Obama…Again

I caught a lot of flack from my Republican friends for my post blaming the FY2009 deficit on Bush instead of Obama. Well, I must be a glutton for punishment because I can’t resist jumping (albeit reluctantly) to Obama’s defense again. I’m venting my spleen for two reason. First, FoxNews.com posted a story headlined “Obama Shatters Spending Record for First-Year Presidents” and noted that:

President Obama has shattered the budget record for first-year presidents – spending nearly double what his predecessor did when he came into office and far exceeding the first-year tabs for any other U.S. president in history. In fiscal 2009 the federal government spent $3.52 trillion …That fiscal year covered the last three-and-a-half months of George W. Bush’s term and the first eight-and-a-half months of Obama’s.

This story was featured on the Drudge Report, so it has received a lot of attention. Second, Bush’s former Senior Adviser wrote a column for the Wall Street Journal eviscerating Obama for big budget deficits. Given Bush’s track record, this took considerable chutzpah, but what really nauseated me was this passage:

When Mr. Obama was sworn into office the federal deficit for this year stood at $422 billion. At the end of October, it stood at $1.42 trillion.

I’m a big fan of criticizing Obama’s profligacy, but it is inaccurate and/or dishonest to blame him for Bush’s mistakes. At the risk of repeating my earlier post, the 2009 fiscal year began on October 1, 2008, and the vast majority of the spending for that year was the result of Bush Administration policies. Yes, Obama did add to the waste with the so-called stimulus, the omnibus appropriation, the CHIP bill, and the cash-for-clunkers nonsense, but as the chart illustrates, these boondoggles only amounted to just a tiny percentage of the FY2009 total – about $140 billion out of a $3.5 trillion budget.

There are some subjective aspects to this estimate, to be sure. Supplemental defense spending could boost Obama’s share by another $25 billion, but Bush surely would have asked for at least that much extra spending, so I didn’t count that money but individual readers can adjust the number if they wish. Also, Obama used some bailout money for the car companies, but I did not count that as a net increase in spending since the bailout funds were approved under Bush and I strongly suspect the previous Administration also would have funneled money to GM and Chrysler. In any event, I did not give Obama credit for the substantial amount of TARP funds that were repaid after January 20, so the net effect of all the judgment calls certainly is not to Bush’s disadvantage.

Let’s use an analogy. Obama’s FY2009 performance is like a relief pitcher who enters a game in the fourth inning trailing 19-0 and allows another run to score. The extra run is nothing to cheer about, of course, but fans should be far more angry with the starting pitcher. That having been said, Obama since that point has been serving up meatballs to the special interests in Washington, so his earned run average may actually wind up being worse than his predecessor’s. He promised change, but it appears that Obama wants to be Bush on steroids.

The Reagan Tax Cuts, Budget Forecasting, and Government Revenue

While perusing the Internet, I saw an article by Iwan Morgan, who is the author of The Age of Deficits: Presidents and unbalanced Budgets from Jimmy Carter to George W. Bush. The author asserted in this article that, “The deficit explosion on his watch was a nasty surprise for Ronald Reagan not a deliberate strategy to reduce government.  In his rosy interpretation of Laffer curve theory, the personal tax cuts he promoted in 1981 would deliver higher not lower revenues through their boost to economic growth.”

The first sentence is an interesting interpretation, since many leftists believe that Reagan deliberately created deficits to make it more difficult for Democrats in Congress to increase spending. I’m agnostic on that issue, but Morgan definitely errs (or is grossly incomplete) in the second sentence. The Reagan Administration did not employ dynamic scoring when predicting the revenue impact of its tax rate reductions. It is true that the White House failed to predict the drop in revenues, particularly in 1982, but that happened because of both the second stage of the 1980-82 double-dip recession and the unexpected drop in inflation (the Congressional Budget Office also failed to predict both of these events, so Reagan’s forecasters were hardly alone in their mistake). Moreover, Morgain’s dismissal of the Laffer Curve is unwarranted. While several GOP politicians exaggerated the relationship between tax rates, taxable income, and tax revenue, this does not mean it does not exist.

The table below, which is based on data from the IRS’s Statistics of Income, shows what happened to tax collections from upper-income taxpayers between 1980 and 1988. Supply siders can be criticized for many things, especially their apparent disregard for the importance of limiting the size of government, but the IRS figures clearly show that lower tax rates were followed by more rich people, more taxable income, and more tax revenue. For those keeping score at home, that’s a perfect batting average for supply-side economics.

1980-88 Laffer

We Should Not Praise Stalin, But Bury Him

Although the debate has been raging for months, it has just come to my attention that the man responsible for the second-most number of murders ever – after Mao, of course, with Hitler a distant third – is to have his bust placed at the National D-Day Memorial in Bedford, Virginia.

Defenders of the Stalin bust argue that, whether we like it or not, our uneasy alliance with the Soviet Union during the war is a part of history and should be recognized. Furthermore, they say that his visage is in no way glorifying the man or his deeds.

This argument misses the point entirely. Memorials are monuments to fallen heroes, not historical dioramas. There is no statue of Stephen Douglas at the Lincoln Memorial, no bust of Wendell Willkie at the FDR Memorial, and no plaques honoring Axis dead at our WWII Memorial. Moreover – and perhaps most importantly from a historical perspective – Stalin had no role in D-Day; the invasion of Normandy by U.S., British, Canadian, Australian, Free French, and other Western forces.

While there is no question that Stalin, by virtue of commanding the army fighting on the Eastern Front, played an indispensable role in defeating Hitler, it should escape no one’s memory that he too was an evil, mass-murdering despot.

Stalin and communism should be universally reviled in the very same way as Hitler and Nazism. (Note also that Stalin only fought the Germans because Hitler invaded the USSR in violation of the Molotov-Ribbentrop Pact that divided Eastern Europe and enabled the Reich’s western incursions in the first place.)

Finally, no one doubts or discounts the bravery of the Russian and other Soviet soldiers fighting in defense of their homeland and families, far removed from the politics of terror that permeated their government – including my maternal grandfather, a tank captain who helped take Berlin. Accordingly, if we are to honor the Soviet role at our D-Day Memorial, we should honor the common Red Army soldiers – whom Stalin treated as disposable bullet-stoppers, many of whom he murdered after the war because they had witnessed the world beyond communism – not the tyrant and the murderous system they represented.

You can read about the collective amnesia – if not willful blindness – about the evils of communism that has set in among Western elites in Paul Hollander’s excellent Cato Development Policy Analysis.

A Complaint for Wednesday

Rep. Emanuel Cleaver (D-Mo.) has introduced H.Con.Res.155, “Supporting the goals and ideals of ‘Complaint Free Wednesday.’” The bill description says:

Expresses support for the goals and ideals of Complaint Free Wednesday. Encourages each person in the United States to remember that having a positive life begins with having a positive attitude. Recognizes and reaffirms the meaning of Thanksgiving by asking each person in the United States to use Complaint Free Wednesday to refrain from complaining and prepare for a day of gratitude.

So what’s my complaint? My complaint is that people get elected to office and they think their every passing thought should be a law. Eat less, exercise more, play classical music to unborn children, have a college football playoff, keep your frequent-flyer miles forever, don’t complain so much – every time a politician has an idea, he writes a law to ban or mandate something.

So, please, send Rep. Cleaver a message – on this Wednesday of all Wednesdays, complain about politicians who don’t understand that the powers of the federal government are “few and defined” and think that all their preferences should be enacted into law.

Greedy Local Politicians Attempt to Grab Revenue Far Outside Their Borders

Regular readers of this blog are familiar with the tax competition battle, which largely revolves around high-tax governments attempting to track – and tax – economic activity that migrates to lower-tax jurisdictions. But this is not just a global fight between decrepit welfare states such as France and fiscal havens such as the Cayman Islands. American states also compete with each other, and there are numerous examples of high-tax states such as California and New York trying to grab money from people who escape to zero-income tax states such as Nevada and Florida. The fight even exists at the local level, and a good example is the attempt by politicians to tax faraway online travel agencies. The Orange County Register opines about these extraterritorial tax grabs:

A recent legal victory for some Texas cities against online travel companies over hotel taxes may have given Anaheim officials hope for their own case, but they shouldn’t start celebrating just yet. Other cities have not fared as well in similar lawsuits. …Here’s what Fairview Heights, Anaheim and other cities wanted to change: In a typical transaction, a traveler picks a hotel and books a room, stays there, and pays the hotel a room charge plus a local occupancy tax based on the room charge. The hotel keeps the room charge and forwards the tax money to the government. Enter online travel companies like Expedia, Hotels.com, Orbitz, Priceline and Travelocity, which allow travelers to sort through hotels and book a room on a central Web site. These companies do not reserve or resell hotel rooms, but act as intermediaries to facilitate the transaction between hotel and traveler. The hotel receives an amount for the room, on which the city’s hotel tax is based. Let’s say I search a Web site and book a $100 hotel room. The online company charges me $10 for their service. Anaheim argues that hotel occupancy tax should be paid not only on the $100 room charge, but also on the $10 service fee. …A federal bill is pending to limit hotel taxes to amounts collected by a hotel for occupancy purposes, excluding service fees and markups by intermediaries. The Constitution permits Congress to pass such laws if there is a danger that state and city laws are interfering with interstate commerce. Hotel taxes are attractive to local politicians because they are a way to shift the tax burden to “outsiders.” But because every U.S. city has a hotel tax, we’re all somebody else’s “outsider.” The net result is that everyone is taxing everyone else in an unaccountable way, and unless the cities and their lawyers are stopped, in an unpredictable way, too.