Topic: Tax and Budget Policy

Southern’s Subsidies Subverted Sound Strategy

In recent House testimony, I said that energy subsidies should be repealed because they distort business decision making. They induce firms to invest in activities that do not make sense in the marketplace.

That appears to be the case with Southern Company’s “clean coal” plant in Kemper County, Mississippi. The plant is far behind schedule and massively over budget—a first-class boondoggle. The Wall Street Journal reports that the estimated cost has soared from $3 billion to $7.1 billion. (This says the original estimate was $2.2 billion). The utility’s customers could be in for a $4 billion rate hike.

What the WSJ leaves out is that the Kemper plant received federal subsidies and Obama administration support, which may have tilted company executives in favor of the wasteful project instead of a far cheaper natural gas plant. The project had been scheduled to receive hundreds of millions of dollars in grants and tax credits, although I understand that some of the bounty was later rescinded.

Federal subsidies covered only part of the original estimated cost, but they were likely the tail that wagged the dog. When subsidies induce private businesses to invest in dubious projects, the damage comes not just from wasting taxpayer dollars, but also from misallocating private investment funds.

More on energy subsidies, here, here, and here. More on Kemper, here, here, and here.

SNAP: $15 Billion on Junk Food

The Supplemental Nutrition Assistance Program (SNAP) aims for recipients to “make healthy food choices within a limited budget.” SNAP is supposed to “permit low-income households to obtain a more nutritious diet.”

However, the lofty goals of federal programs often differ from the actual results. It turns out that about $15 billion of SNAP benefits are for junk food. Apparently, recipients are not making the nutritious and healthy choices that the government promised.

SNAP, or food stamp, benefits totaled $67 billion in 2016. Food stamps can be used to buy just about any edible item in grocery stores other than alcohol, vitamins, and hot food. But exactly what is being purchased by the program’s 44 million recipients has been mainly shrouded in secrecy—until now.

A November study by the U.S. Department of Agriculture finally shed light on food stamp purchases. The study examined detailed data for SNAP and non-SNAP shoppers for one large food retailer over a one-year period.

The study found that SNAP shoppers bought slightly more junk food than non-SNAP shoppers. For example, 9.25 percent of total purchases by SNAP shoppers were for “sweetened beverages” such as cola, which compared to 7.1 percent for non-SNAP shoppers. At the same time, SNAP shoppers spent relatively less on nutritious foods such as fruits and vegetables.

For SNAP shoppers, “sweetened beverages,” “prepared desserts,” “salty snacks,” “candy,” and “sugar” accounted for 22.6 percent of purchases. These junk food items thus accounted for $15 billion of SNAP purchases in 2016, if the study is representative of all SNAP purchases.

SNAP is a bloated program, and cutting out junk food would be one way to reduce costs. The program was created to tackle hunger, but Harvard University’s Robert Paarlberg noted that on a typical day less than 1 percent of households now face “very low food security.” That low figure contrasts with the 17 percent of U.S. households that currently receive food stamps.

The main food-related health problem for low-income households today is not hunger, but obesity. CDC data show that people with low incomes are more obese than people with high incomes, on average. In general, low-income Americans are suffering not from too little food, but from too much of the wrong kinds of food.

Ending SNAP’s junk food subsidies would likely cut demand for the program and reduce taxpayer costs. If policymakers decided that food stamps could only be used for items such as fruits and vegetables, fewer people would use the program, which would be a good thing.

An even better reform would be to end federal involvement in food stamps. Each state could then decide on the overall level of benefits it wanted, and on whether taxpayers should be subsidizing cola, candy, crackers, and cookies.

For more on food stamps, see here and here.

House Testimony on Energy Subsidies

I testified to a House committee today on Department of Energy (DOE) loan programs. These were the Bush/Obama-era subsidies to Solyndra and other renewable energy businesses.

I discussed five reasons why the loan programs should be repealed:

1. Four Decades Is Enough. The federal government has been subsidizing solar and wind power since the 1970s. These are no longer the sort of “infant industries” that some economists claim need government help. Solar and wind are large and mature industries, and they already receive subsidies from state governments, particularly in the form of utility purchase mandates, which are in place in 29 states.

2. Failures and Boondoggles. The DOE claims that Solyndra’s bankruptcy was the exception, and that the agency’s overall loss rate on loans is low. But as an economist, I’m more concerned with whether the overall benefits of projects outweigh the costs, and that appears not to be the case for numerous projects. The Ivanpah solar project in California, for example, is producing less electricity and consuming more natural gas than promised, and its cost per kwh is at least three times more than for natural gas plants.

3. Corporate Welfare and Cronyism. The Washington Post found that “Obama’s green-technology program was infused with politics at every level.” Public opinion polls have shown plunging support for both politicians and big businesses over the years, and one of the reasons is such cronyism. Businesses and policymakers would gain more public respect if they cut ties to each other by ending corporate welfare.

4. Private Sector Can Fund Renewable Energy. Most DOE loan guarantees have gone to projects backed by wealthy investors and large corporations, such as Warren Buffett and General Electric. Such individuals and companies are fully capable of pursuing energy projects with their own money. Buffett’s Berkshire Hathaway has invested $17 billion in renewable energy since 2004. With that kind of private cash available for renewables, we do not need the DOE handing out subsidies.

5. Subsidies Distort Decisionmaking. Federal energy subsidies create counterproductive incentives in the economy. For example, subsidized firms tend to become slow and spendthrift, thus subsidies undermine productivity. Also, because subsidies are not driven by consumer demands, they can induce firms to invest in activities that will not succeed in the marketplace in the long term.

You can watch the full hearing here. My testimony is here. More background on energy subsidies is here.

Time to Repeal Ethanol Subsidies

The federal government provides an array of subsidies to increase the consumption of biofuels such as corn ethanol. The subsidies include tax breaks, grants, loans, and loan guarantees. The government also imposes a mandate to blend biofuels into gasoline and diesel fuels.

A new study at DownsizingGovernment.org describes the damage caused by these policies. Subsidies and the Renewable Fuel Standard (RFS) harm taxpayers, motorists, consumers, and the environment.

The study by Nicolas Loris argues that Congress should end its intervention in the biofuels industry. It should terminate subsidies and repeal the RFS. Individuals and markets can make more efficient and environmentally sound decisions regarding biofuels without subsidies and mandates.

Investor Carl Icahn said that the RFS has created a bureaucratic market in tradable credits full of “manipulation, speculation and fraud” with the potential to “destroy America’s oil refineries, send gasoline prices skyward and devastate the U.S. economy.”

That language is probably too strong, but federal ethanol policies really are stupid. President Trump says that he wants to cut unneeded regulations and wasteful subsidies. The RFS and biofuel hand-outs would be good policies to target.

So for an interesting read illustrating the craziness of special-interest policies in Washington, check out “Ethanol and Biofuel Policies.” The next time you are at the gas station and see that “E10” sticker on the pump, remember that a tag team of D.C. politicians and corn farmers are picking your pocket. 

The United Kingdom and the Benefits of Spending Restraint

When I debate one of my leftist friends about deficits, it’s often a strange experience because none of us actually care that much about red ink.

I’m motivated instead by a desire to shrink the burden of government spending, so I argue for spending restraint rather than tax hikes that would “feed the beast.”

And folks on the left want bigger government, so they argue for tax hikes to enable more spending and redistribution.

I feel that I have an advantage in these debates, though, because I share my table of nations that have achieved great results when nominal spending grows by less than 2 percent per year.

The table shows that nations practicing spending restraint for multi-year periods reduce the problem of excessive government and also address the symptom of red ink.

I then ask my leftist buddies to please share their table showing nations that got good results from tax increases. And the response is…awkward silence, followed by attempts to change the subject. I often think you can even hear crickets chirping in the background.

I point this out because I now have another nation to add to my collection.

From the start of last decade up through the 2009-2010 fiscal year, government spending in the United Kingdom grew by 7.1 percent annually, far faster than the growth of the economy’s productive sector. As a result, an ever-greater share of the private economy was being diverted to politicians and bureaucrats.

Beginning with the 2010-2011 fiscal year, however, officials started complying with my Golden Rule and outlays since then have grown by an average of 1.6 percent per year.

Corporate Tax Cut and Border Adjustment

The House Republican tax plan would cut the federal corporate tax rate from 35 percent to 20 percent, but it would broaden the tax base in a misguided way. It would deny businesses a deduction for their imported inputs to production, but exempt exports from their taxable income.

This base change would raise tax revenues by about $100 billion a year, which is causing major blowback in the business community. It would be a radical change in the structure of business taxes and cause large disruptions in the supply chains and tax liabilities of many firms. No other nation that I am aware of structures their income tax base that way.

I’m for radical change in the tax system, but not radical change that would increase taxes on so many businesses and make the system more complex. Yes, border adjustment would reduce tax avoidance and cut compliance costs related to transfer pricing, but it would create other avoidance and compliance issues by spurring manipulation of imports and exports on tax returns.

Most supporters of border adjustment know that the economics of it are dubious, but support it anyway because it would limit the deficit impact of tax reform. That’s an understandable goal, but there are three better solutions than broadening the tax base in a way that would harm companies.

1) Match a corporate tax rate cut with corporate welfare spending cuts. Romina Boccia, Tom Schatz, and I identify $50 billion in corporate welfare cuts in a new op-ed. And it’s easy to find another $50 billion in cuts in tables 1 and 2 here to match the $100 billion from border adjustment. Unlike the proposed tax base broadening, spending cuts would boost growth by reducing microeconomic distortions caused by federal programs.

Politicians: Hopelessly Naïve about Government

There are numerous causes of federal government expansion, including special-interest pressures and the ability to borrow-and-spend endlessly.

Another cause was highlighted in a recent story about a Bush-Obama education program: politicians are excessively optimistic and hopelessly naïve about their ability to solve society’s problems top-down from Washington.

Neal McCluskey mentioned the failure of the School Improvement Grant program the other day, but I wanted to highlight the Washington Post summary because this is such a classic failure:

One of the Obama administration’s signature efforts in education, which pumped billions of federal dollars into overhauling the nation’s worst schools, failed to produce meaningful results, according to a federal analysis.

Test scores, graduation rates and college enrollment were no different in schools that received money through the School Improvement Grants program — the largest federal investment ever targeted to failing schools — than in schools that did not.

The Education Department published the findings on the website of its research division on Wednesday  hours before President Obama’s political appointees walked out the door.

The School Improvement Grants program has been around since the administration of President George W. Bush, but it received an enormous boost under Obama. The administration funneled $7 billion into the program between 2010 and 2015 — far exceeding the $4 billion it spent on Race to the Top grants.

The school turnaround effort, he told The Washington Post days before he left office in 2016, was arguably the administration’s “biggest bet.”

He and other administration officials sought to highlight individual schools that made dramatic improvements after receiving the money. But the new study released this week shows that, as a large-scale effort, School Improvement Grants failed.

It is excessively optimistic and hopelessly naïve to think that a new federal spending effort would turn around the nation’s schools after that approach has not worked for five decades. But the Post reveals how deep the blind optimism was in this case:

Some education experts say that the administration closed its eyes to mounting evidence about the program’s problems in its own interim evaluations, which were released in the years after the first big infusion of cash.

The latest interim evaluation, released in 2015, found mixed results, with students at one-third of the schools showing no improvement or even sliding backward.

Even then, Duncan remained optimistic about the School Improvement Grants, which he said had — along with the Race to the Top grants — unleashed innovation across the country.

For more on the causes of government growth and failure, see here and here.