Topic: Tax and Budget Policy

Fumbling Federal Finances

The federal government has suffered from waste, fraud, and abuse in its spending programs for decades—actually, centuries. A federal effort in the 1790s to run Indian trading posts, for example, was plagued by inefficiency. For almost as long, studies have been documenting the waste. An 1836 Ways and Means Committee report, for example, criticized river and harbor projects for being chronically overbudget.

The wasteful spending continues today, and the latest effort to document it is Senator James Lankford’s new study, “Federal Fumbles: 100 Ways the Government Dropped the Ball.” The study describes projects such as “$495,000 to fund a temporary exhibit for sights, sounds, tastes and yes, even smells of the Medieval period” and $2 million for a “multi-year study about kids’ eating emotions, and how they don’t like to eat food that’s been sneezed on.”

Spending on such dubious projects represents only a small share of the $4 trillion federal budget. However, Lankford’s examples illustrate the broader overspending disease that afflicts Congress and the executive branch, which I discuss here and here. Lankford’s projects are not just random failures: they stem from structural features of the government that induce politicians and agency officials to spend on low-value activities.

Senator Lankford will discuss his report at a Cato forum on Capital Hill, Wednesday at noon. Tom Schatz, Justin Bogie, and I will comment on the report and examine prospects for cutting spending during the Trump administration. All are invited.

To explore the structural reasons for ongoing waste in federal spending, see “Why the Federal Government Fails” and essays here.

Donald Trump, Stephen Bannon, Andrew Jackson, and Infrastructure

On his radio show last night, Mark Levin asked his audience whether they thought President-elect Donald Trump would turn out to be a big-government Richard Nixon or a small-government Ronald Reagan. On the infrastructure issue, I fear that we may be headed in a big government direction.

Trump, of course, is a “populist,” not a small-government conservative. His advisor, Stephen Bannon, indicated the other day what that means:

Like [Andrew] Jackson’s populism, we’re going to build an entirely new political movement,” Stephen K. Bannon told the Hollywood Reporter. “The conservatives are going to go crazy. I’m the guy pushing a trillion-dollar infrastructure plan.

Bannon should know that on fiscal policy, Jackson’s populism was anti-debt and small government. Echoing Thomas Jefferson’s views, Jackson thought that federal debt undermined liberty, and he pushed to eradicate it. Jackson’s views were in tune with the public, which strongly supported frugality in the federal government.

Jackson and his allies were dubious of federal investments in infrastructure (“internal improvements”). His vice president, Martin Van Buren, thought that “Congress had no power to construct roads and canals within the states.” He said that spending on such projects “was sure in the end to impoverish the National Treasury by improvident grants to private companies and State works, and to corrupt Federal legislation by the opportunities it would present for favoritism.”

On assuming office, Jackson made a list of his priorities, including “the Public debt paid off, the Tariff modified and no power usurped over internal improvements.” In his first inaugural address, he promised “extinguishment of the national debt, the unnecessary duration of which is incompatible with real independence.” Jackson famously vetoed funding of Kentucky’s Maysville Road in 1830, citing constitutional objections and his goal of debt elimination.

Jackson was also skeptical of federal investments for practical reasons. In his 1830 message to Congress, he said, “Positive experience, and a more thorough consideration of the subject, have convinced me of the impropriety as well as inexpediency of such investments.” One practical concern was what we now call “crony capitalism.” Jackson noted that when the government gave some initial subsidies to companies, they tended to get hooked on the hand-outs and kept coming back for more.

In his book about the Jackson era, Carl Lane concluded that federal debt elimination, “Americans in the Jacksonian era believed, would improve the material quality of life in the United States. It would reduce taxes, increase disposable income, reduce the privileges of the creditor class, and, in general, generate greater equality as well as liberty.”

Back then, the belief was that a frugal federal government that balanced its books and did not interfere in state and local matters would secure liberty and benefit average citizens. That is the type of Jacksonian populism that Bannon and Trump should pursue.

Airport Plan for Trump Administration

During the election campaign, Donald Trump complained that “our airports are like from a Third World country.” Indeed, America’s airports could be a lot better. The problem is that they are virtually all owned by governments and run as bureaucracies.

By contrast, many airports abroad are private and run in a more entrepreneurial fashion. Almost half of European Union airports have been privatized, including the main airports in Antwerp, Budapest, Edinburgh, Glasgow, Lisbon, London, Birmingham, Brussels, Copenhagen, Naples, Rome, Venice, Vienna, and Zurich.

Robert Poole and I explore airport reforms in a new Cato study, “Privatizing U.S. Airports.” We examine the early history of U.S. airports, discuss global reform trends, explain the advantages of privatization, and describe the needed policy changes.

In the early years of commercial aviation, the major airports in numerous U.S. cities were privately owned. Unfortunately, government policies squeezed out the private airports over time. We can and should correct that mistake, and bring back the entrepreneurs to the airport industry.

We don’t know yet how transportation policies will shape up under the new president, but the incoming administration should know that airports and air traffic control are ripe for major reforms.

Airports are a crucial part of America’s infrastructure. Privatization would increase efficiency and innovation, and thus generate benefits to travelers and the broader economy.

Fixing the Federal Budget Process

On Friday, the Heritage Foundation held a conference entitled “Budget Process Reforms in the Next Congress.” Paul Winfree organized the event and provided opening remarks.

The federal budget process is a mess. Congress does not pass bills on time, and then jams huge omnibus measures through at the last minute. Spending exceeds revenues by $600 billion a year and rising. Congress does not scrutinize programs to see whether the benefits actually outweigh the costs. And most of the budget grows on auto-pilot, allowing politicians to pretend that they are not responsible for the government’s massive debt.

I was on the first panel, which looked at budgeting lessons from other countries. Barry Poulson and John Merrifield discussed Switzerland’s “debt brake” and proposed that the U.S. federal government adopt a similar budget cap. Dan Mitchell also likes the Swiss debt brake. In my remarks, I agreed that a cap was a good idea, but argued that a simpler restraint would be better, such as a 3 percent annual growth limit on total outlays.

What we really need is for Congress and incoming President Trump to focus on eliminating low-value programs. I provided evidence that politicians are capable of major spending cuts. In particular, Canada cut federal spending from 23 percent of GDP in the early 1990s to 14 percent by 2015. (Unfortunately, Canada has recently elected a government that seems to believe that deficit spending and debt helps the economy, despite the country’s own experience over two decades that shows the opposite).

On the second panel, former federal budget official Marcus Peacock described how federal agencies tend to maximize their costs, while private businesses focus on minimizing their costs and improving efficiencies. Fiscal restraint can lead to innovation, he argued.

On the third panel, Rick May and George Everly of the House and Senate Budget Committees, respectively, described Republican efforts to overhaul congressional budget procedures. Background materials on these efforts are here.

If you are interested in budget issues and enjoy free lunches, please attend our November 30 panel on Capitol Hill featuring Senator James Lankford. The senator will describe wasteful programs he found in the budget, and experts will discuss spending-cut opportunities during the Trump administration.

Go Big and Grant Milton Friedman His Wish

House Speaker Paul Ryan (R-Wis) held a press conference a few days ago where he said that GOP control of the Congress and White House afforded his party the opportunity “to go big, to go bold.”  There has been talk of rolling back regulations and Obamacare.  That’s good news, but Ryan should consider a bigger and bolder move: End federal income tax withholding. 

The “political establishment” has created a situation where the U.S. is trillions of dollars in debt.  How will the new Congress address that?  The fiscal scandal is too abstract for many voters to grasp so too many of them don’t think twice about supporting new spending measures, such as free college tuition or what have you.  To build the necessary political support for otherwise unpopular spending cuts, Ryan should quickly move to end federal income tax withholding.  If American households would stop viewing their tax refund checks as happy windfalls from politicians and instead better understood how much big government is costing them every year, one would expect to see louder demands to bring runaway spending under control and to downsize the scope of federal programs and operations.  The GOP honeymoon will be over in a few months.  Ending federal withholding will help build support for spending cuts over the next few years and perhaps beyond.

Ironically, it was the late, great Milton Friedman who helped devise the modern income tax withholding system when he worked in the Treasury Department during World War II.  He was fixated on tax collection efficiency at that time, not limiting the size of government.  Late in his life, Friedman said that he wished “there were some way of abolishing withholding now.”  Former congressman Dick Armey (R-Tex) proposed ending withholding when the GOP took control of the House in 1994, but Bill Clinton was never going to sign that measure into law.  Now that the GOP has both the Congress and the White House, it has a real opportunity to go big and bold.  Grant Friedman his wish and get our fiscal house in order.

For related Cato scholarship, go here.

The “Progressive” Threat to Baltic Exceptionalism

I’m a big fan of the Baltic nations of Estonia, Latvia, and Lithuania.

These three countries emerged from the collapse of the Soviet Empire and they have taken advantage of their independence to become successful market-driven economies.

One key to their relative success is tax policy. All three nations have flat taxes. Estonia’s system is so good (particularly its approach to business taxation) that the Tax Foundation ranks it as the best in the OECD.

And the Baltic nations all deserve great praise for cutting the burden of government spending in response to the global financial crisis/great recession (an approach that produced much better results than the Keynesian policies and/or tax hikes that were imposed in many other countries).

But good policy in the past is no guarantee of good policy in the future, so it is with great dismay that I share some very worrisome news from two of the three Baltic countries.

First, we have a grim update from Estonia, which may be my favorite Baltic nation if for no other reason than the humiliation it caused for Paul Krugman. But now Estonia may cause sadness for me. The coalition government in Estonia has broken down and two of the political parties that want to lead a new government are hostile to the flat tax.

Estonia’s government collapsed Wednesday after Prime Minister Taavi Roivas lost a confidence vote in Parliament, following months of Cabinet squabbling mainly over economic policies. …Conflicting views over taxation and improving the state of Estonia’s economy, which the two junior coalition partners claim is stagnant, is the main cause for the breakup. …The core of those policies is a flat 20 percent tax on income. The Social Democrats say the wide income gaps separating Estonia’s different social groups would best be narrowed by introducing Nordic-style progressive taxation. The two parties said Wednesday that they will immediately start talks on forming a coalition with the Center Party, Estonia’s second-largest party, which is favored by the country’s sizable ethnic-Russian majority and supports a progressive income tax.

And Lithuanians just held an election and the outcome does not bode well for that nation’s flat tax.

After the weekend run-off vote, which followed a first round on October 9, the centrist Lithuanian Peasants and Green Union party LGPU) ended up with 54 seats in the 141-member parliament. …The conservative Homeland Union, which had been tipped to win, scored a distant second with 31 seats, while the governing Social Democrats were, as expected, relegated to the opposition, with just 17 seats. …The LPGU wants to change a controversial new labour code that makes it easier to hire and fire employees, impose a state monopoly on alcohol sales, cut bureaucracy, and above all boost economic growth to halt mass emigration. …Promises by Social Democratic Prime Minister Butkevicius of a further hike in the minimum wage and public sector salaries fell flat with voters.

The Social Democrats sound like they had some bad idea, but the new LGPU government has a more extreme agenda. It already has proposed to create a special 4-percentage point surtax on taxpayers earning more than €12,000 annually (the government also wants to expand double taxation, which also is contrary to the tax-income-only-once principle of a pure flat tax).

Trump and Federal Workers

The incoming Trump administration has indicated that it will make reforms to the federal workforce. Here are a few places where the administration may focus its efforts:

  • Freezing Hiring: Trump’s Contract with the American Voter promised “a hiring freeze on all federal employees to reduce federal workforce through attrition (exempting military, public safety, and public health).” As a goodwill gesture, Trump should also shrink the army of almost 4,000 political appointees in his administration in order to speed agency decisionmaking.
  • Increasing Firing: Trump is famous for firing people on his TV show, and he will likely support reforms to increase federal firing. On the campaign trail, Trump talked about firing VA executives, and his advisors Chris Christie and Newt Gingrich talked about the importance of civil service reforms to increase firing. Reforms are needed: federal civilian workers are fired at just one-sixth the rate that private-sector workers are. Members of the federal senior executive service are fired at just one-twentieth the rate that corporate CEOs are.
  • Reducing Retirement Benefits. Federal wages and benefits are higher, on average, than in the private sector, but it is on benefits that federal compensation really stands out. The WaPo has discussed various GOP proposals to reduce federal benefits. My favored reform is to repeal the old-fashioned defined-benefit pension plan. That would leave federal workers with a generous defined-contribution plan, which is the standard in the private sector.  
  • Reforming Federal Unions. One reform was mentioned in the Republican platform: “union representatives should not be allowed to engage in union-related activities while on the public’s time.” Republicans on the Hill have been investigating the use and abuse of such “official time” in federal agencies.

My essays “Bureaucratic Failure in the Federal Government” and “Reducing the Costs of Federal Worker Pay and Benefits” should provide useful information to the Trump team in assembling its workforce reform agenda.