Topic: Tax and Budget Policy

An Inexplicable Vote

Yesterday, the House passed the Renewable Energy and Job Creation Act, which is essentially a hodgepodge of tax provisions, most of which extend existing tax breaks, such as the R&D tax credit and production incentives for renewable fuels.  There are also a few new items, such as a tax cut specifically for trial lawyers who work on a contingency basis.  These tax breaks are offset with $55 billion in tax increases on hedge fund managers and multinational corporations.

The bill passed easily – virtually all Democrats supported it, along with a few dozen Republicans.

As reported in CongressDaily (subscription required), Republican Congressman David Hobson supported the bill with the following justification:

“Probably the responsible vote is ‘no,’ but how do you explain that in a media that’s frantic over gasoline prices? Frankly, this has nothing to do with gasoline prices, but you can’t explain it, and it taxes the rich guys,” Hobson said.

Incidentally, Congressman Hobson hails from a “safe” GOP district in Ohio.  He has been in Congress since 1990 and has won reelection each cycle with no less than 61 percent of the vote.  He already announced that he will retire at the end of the current Congress. Nonetheless, for political reasons, he supported a bill he knows to be unmeritorious.

If a retiring congressman from a safe district cannot muster up the gumption to oppose an admittedly bad bill that contains a hefty tax hike, what does that mean for the state of Congress?

A Health Fed?

Lots of people, on both the Left and the Right, want government to plan economic activity.  Honest central planners recognize that highly concentrated and well-organized groups of producers and consumers typically hijack the plan’s new taxes, subsidies, and regulations.  The central planners are typically horrified to see what their carefully laid plans look like after being put through the political grinder.

Clever central planners look for ways to protect their plans from the influence of their fellow citizens.  For example, some planners seek to restrict their fellow citizens’ right to petition the government for a redress of grievances.  (I have often remarked that if you can’t implement your plans without taking away someone else’s First Amendment rights, maybe you should rethink your plans.)

Other central planners seek to create special government bodies to execute their plans.  These bodies would have the power to tax, spend, and regulate, but their decisions could only be overturned by the people’s representatives with great difficulty.  Indeed, the very purpose of these bodies is to allow the planners to govern their fellow citizens without having to worry so much about the consent of the governed. 

Certain health care reformers have set about this path.  Across the political spectrum, observers acknowledge that government wields enormous power over America’s health care sector, and that those powers are often co-opted to serve private ends.  For example, former Senate Majority Leader Tom Daschle (D-SD) recently remarked:

Congress is just not capable of being the manager of a health care system and yet it’s largely Congress today that has that responsibility. It hasn’t worked for the last 50 years. It’ll work even less in the next 50.

As a result, Daschle and others propose that Congress create a “federal health board” to manage the health care sector.  The Federal Health Board would do things like require you to purchase health insurance, dictate what kind of health insurance you will purchase, set the prices for health insurance and medical goods and services, etc..  In other words, the Federal Health Board would have the power to bankrupt corporations, to force doctors to change the way they do business, to deny medical care to patients, and to shift massive amounts of resources from one part of the country to another.  The problem is, some corporations, doctors, patients, and regional interests would try to block parts of The Plan, either on their own or through their representatives in Congress.

Since it would be so hard for the Federal Health Board to do its job with all that meddling by the governed, Daschle et alia want to insulate the Board from the political process.  Specifically, they want Congress to model a new Federal Health Board on the existing Federal Reserve Board.  That would enable the “health Fed” to focus on the public good, much like the Federal Reserve Board manages the money supply and guides interest rates without any of the unseemly pandering to special interests that goes on in Congress and other government bodies.  Because that’s how the Fed operates, right?

Maybe not.  Economist Allan H. Meltzer of Carnegie-Mellon University has read the transcripts of every meeting of the Fed’s Open Market Committee going back to 1913, and has written a two-volume history of the Federal Reserve.  Interviewed recently for one of Russ Roberts’ excellent EconTalk podcasts, Meltzer dismissed the idea that the Federal Reserve is immune from political pressures:

We talk about an independent Federal Reserve, but in reading and writing the history of the Federal Reserve, there are very few occasions since the 1930s when the Fed actually practiced independence.  There was the [Paul] Volcker era; he was certainly an independent central bank governor.  But [current Fed chairman Ben] Bernanke is anything but an independent central bank governor.  He is being leaned on by the Congress, and he accedes to them.  So even though he may worry about inflation … he’s … trying to respond to the short-term pressures instead of thinking ahead and thinking longer-term …

That brings him to the interest rate, because that’s the thing that people in the market see.  The Wall Street people …  put him under great pressure because they own a lot of bonds and mortgages.  And they believe that if he lowers the federal funds rate, it will lower the price of their mortgages and bonds, and they will have smaller losses.  And so they are on his back all the time to do more, to cut the interest rate that he controls, hoping that the rates that they see and own will go down, and their … losses will become smaller …

In reading the minutes of the Fed and watching what they do, the Fed has always been very much afraid of Congress.  And it took someone with the stamina and arrogance, in a way, of Volcker to be able to get around that … By the summer of 1982, [Congress was] facing an election and they were on his back to ease up … He wouldn’t admit that he was [easing up], but he did …

The idea of having a really independent agency in Washington, that’s just not going to happen … The Federal Reserve derives its power from Congress … The Fed’s power is delegated, and they are very much aware that Congress could always change that … [The Fed] manages to hang on to some measure or vestige of independence, but it is very much concerned – always – about what the Congress is doing, and doesn’t want to deviate very far from that.

What can’t come through in a transcription is that Meltzer chuckled at “the idea of having a really independent agency in Washington.”

So if the central planners seek to insulate their health care reforms from the political process, modeling a new health planning board on the Fed won’t achieve that goal.  That’s probably a good thing.  Power with accountability is dangerous enough.  Power without accountability is truly frightening. 

An important advantage of free-market health care reforms is that they provide accountability without allowing anyone to consolidate much power at all.  That seems a much happier state of affairs.

Give the People What They Want

The latest Rasmussen national survey “found that 62% of voters would prefer fewer government services with lower taxes. Nearly a third (29%) disagrees and would rather have a bigger government with higher taxes. Ten percent (10%) are not sure.”

No doubt that if Downsizing the Federal Government were on college reading lists, support for reform would jump from 62% to at least 90%.

Still, no matter how well-informed the public becomes, Congress poses a barrier to reform. The magic of Congress is its ability to consistently transmogrify the long-standing public preference for smaller government into ever larger budgets. Part of the trick is that members always claim that they support budget restraint in general, while arguing at the same time that each particular program, when it is up for a vote, desperately needs to be expanded.

How then can we realign congressional procedures to better reflect the 62 percent support for government downsizing? Part of the answer is to impose a cap on growth in the overall federal budget, allowing it to grow no more than the average family budget each year.

Last Minute Farm Bill Earmarks

The wildly popular, bipartisan farm bill is cruising toward becoming law this week after the likely road bump of President Bush’s veto pen. It passed the House and Senate by veto-proof margins last week. Congressional enthusiasm for the farm bill helps to explain the 18 percent approval rating of Congress in a recent Gallup poll.

Taxpayers aren’t likely to be impressed by a $500 million giveaway for a timber company and other wasteful earmarks in the bill. The official list of earmarks total $934.5 million (not including the $500 million timber tax break or six earmarks authorized without specific funding levels). The earmarks were air-dropped into the bill’s conference report, after legislators spent years — and held countless hearings — crafting it.

Fourteen senators (nine Democrats and five Republicans) and one House Democrat inserted 26 earmarks, according to the conference report. Three earmarks appear to be multi-member earmarks. [Here’s the PDF of the earmarks.]

The earmarks represent only one-third of one percent of the bill’s expected cost ($289 billion). Legislators will soon issue laudatory press releases patting themselves on the back for rewarding their districts and deflecting criticism by pointing out the “low” cost of earmarks. That’s not the point. The sneaky way the earmarks were inserted and the inefficiency of the federal government doling out money for local projects (also an affront to federalism) helps explain why the public has lost faith in Congress.

Earmark critics also point to several provisions in the farm bill not disclosed as earmarks. The Associated Press briefly described these giveaways to favored companies and industries.

Perhaps most egregious is a vague provision inserted by Baucus which would authorize $500 million in tax-credit bonds to purchase 400,000 acres of land (mostly in Montana). Although not mentioned in the bill, there’s only one company that would qualify for this stealth earmark: the Plum Creek Timber Co., which is the largest private landowner in the United States.

Plum Creek’s in-house lobbying operation spent $1.1 million on lobbying from 2005 to 2007, according to Congressional lobbying records rounded to the nearest $20,000. The company spent $140,000 in the first quarter of 2008, the most recent period records are available.

Plum Creek also hired the lobbying firm Nutter & Harris to lobby Congress for the provision and other issues from 2006 to 2008. Firm principal Robert L. Harris, a former Senate staffer, handled the Plum Creek account. Plum Creek paid the firm $300,000 ($120,000 in 2006 and 2007 and $60,000 in the first quarter of 2008).

In the 2006 cycle, Baucus received $9,000 from Plum Creek’s PAC (the Plum Creek Timber Good Government Fund), run by Robert Jirsa, the company’s in-house lobbyist. The PAC gave Baucus $1,000 in the 2004 cycle and $5,000 in the 2002 cycle. It has doled out $511,266 since 1998 to parties and candidates, according to the Center for Responsive Politics. The PAC favored Republican federal candidates until they lost the majority in 2006. Their 2008 cycle donations favor Democrats (60 percent to 40 percent).

All told, that’s roughly a $2 million investment over nearly ten years ($1.4 million in lobbying and $500,000 in PAC contributions) for a windfall tax break of $500 million.

House Republican Leader John Boehner criticized the earmarks in the farm bill, but his warning proved insufficient to stop most Republicans from voting for the bloated bill. It’s a victory for bipartisan, logrolling politics as usual. It’s a defeat for conservative Republicans who tried to convince leadership and rank-and-file members to take a stand on the farm bill as part of an effort to return to conservative fiscal principles after years of out-of-control spending and earmark scandals.

To read previous posts on the farm bill by Sallie James, Cato’s expert on the topic, click here.

A David Brooks Two-fer!

David BrooksCouple of notes on recent David Brooks-related program activities. First, he calls the small-government wing of the conservative movement un-American. No, honestly, he does:

At the end of [1995], when the radical conservatives in the Gingrich Congress shut down the federal government, they learned that the American public was genuinely attached to the modern state. “An anti-government philosophy turned out to be politically unpopular and fundamentally un-American,” Brooks said. “People want something melioristic, they want government to do things.”

Then, in today’s column for the Times, Brooks points out how screwed up the legislative process is, a function of myriad rent-seekers, lobbyists and special interests. His foil? The farm bill:

Interest groups turn every judicial fight into an ideological war. They lobby for more spending on the elderly, even though the country is trillions of dollars short of being able to live up to its promises. They’ve turned environmental concern into subsidies for corn growers and energy concerns into subsidies for oil companies.

The $307 billion farm bill that rolled through Congress is a perfect example of the pattern. Farm net income is up 56 percent over the past two years, yet the farm bill plows subsidies into agribusinesses, thoroughbred breeders and the rest.

The growers of nearly every crop will get more money. Farmers in the top 1 percent of earners qualify for federal payments. Under the legislation, the government will buy sugar for roughly twice the world price and then resell it at an 80 percent loss. Parts of the bill that would have protected wetlands and wildlife habitat were deleted or shrunk.

My colleagues on The Times’s editorial page called the bill “disgraceful.” My former colleagues at The Wall Street Journal’s editorial page ripped it as a “scam.” Yet such is the logic of collective action; the bill is certain to become law. It passed with 81 votes in the Senate and 318 in the House — enough to override President Bush’s coming veto. Nearly everyone in Congress got something.

Funny thing, though: I bet I can think of a much, much better example of what Brooks is driving at here. After all, at least there was broad elite consensus that the farm bill was depraved. But where could we find an example of a legislative product where literally all interests are tied up in rent-seeking and resource extraction? Ah, right:

In current national security politics, there is debate, but all the interests are on one side. Both parties see political reward in preaching danger. The massive U.S. national security establishment relies on a sense of threat to stay in business. On the other side, as former defense secretary Les Aspin once wrote, there is no other side. No one alarms us about alarmism. Hitler and Stalin destroyed America’s isolationist tradition. Everyone likes lower taxes, but not enough to organize interest groups against defense spending. A scattering of libertarians and anti-war liberals confronts a bipartisan juggernaut. The information about national security threats comes to Americans principally from people driven by organizational or electoral incentives toward threat inflation.

Physician, heal thyself. Yet more evidence the that contemporary Right offers nothing of value to libertarians.

Milk Madness

You don’t have to be a libertarian to be amazed at the way the government’s many tentacles often work at cross-purposes. The Wall Street Journal reports today on the U.S. milk industry:

Federal regulators are investigating allegations that the nation’s largest dairy cooperative, Dairy Farmers of America, has manipulated milk and cheese prices … the Commodity Futures Trading Commission is looking into whether DFA sought to drive up the price of milk….

Manipulating milk and cheese prices! Driving up prices! It’s a good thing that we have the government to help protect us from such abuses.

Oh, wait a minute. The federal Department of Agriculture runs an extensive array of marketing orders, import controls, and other programs to squelch dairy competition and keep prices artifically high.

Unaffordable Promises at All Levels of Government

USA Today reporter Dennis Cauchon is an expert at distilling complex data about governments down to bite-size pieces. Today he finds that:

Taxpayers are on the hook for a record $57.3 trillion in federal liabilities to cover the lifetime benefits of everyone eligible for Medicare, Social Security and other government programs, a USA TODAY analysis found. That’s nearly $500,000 per household.

When obligations of state and local governments are added, the total rises to $61.7 trillion, or $531,472 per household. That is more than four times what Americans owe in personal debt such as mortgages.

Kudos to USA Today for running such hard-data stories on the front page. Too many newspapers opt for the ”human interest” angle when reporting on government economic policy.

Cauchon’s data raises many questions. For one, how could governments have gotten away with imposing $62 trillion of unfunded obligations on young Americans?

At the state and local level, taxpayers have been sleeping as union-backed politicians have jacked-up compensation levels for the nation’s 16 million state and local workers

The Washington Post pointed to an example of state and local irresponsibly yesterday. The paper lambasted Montgomery County, Maryland, for its “staggeringly generous” compensation increases for county workers, increases that will add to the $62 trillion total and likely push up county taxes down the road.