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Archive for February, 2010

There were many reasons to oppose last year’s so-called stimulus legislation. High on my list of reasons would be that the $800 billion spending bill was based on discredited Keynesian theory. Government spending diverts resources from the productive sector of the economy would be another good reason. Another one of my favorites is that the federal government is involved in all sorts of areas that are outside of its legitimate responsibilities as outlined in the Constitution. But perhaps one of the most compelling reason is that politicians and bureaucrats inevitably do really stupid things because the federal budget is a racket designed to funnel the maximum amount of money to powerful interest groups. Here’s a great example from a story I saw linked on Kausfiles.com. A city in New Hampshire wanted to stick its snout in the trough in order to subsidize a water treatment plant, but eventually decided to reject the money because the out-of-pocket costs would increase primarily thanks to corrupt rules designed to line the pockets of union bosses, but also because of protectionist requirements and a mind-boggling $100,000 of paperwork expenses:

    As stimulating as it might have sounded at the time, the city recently declined $2.5 million from the American Recovery and Reinvestment Act for its new water treatment plant because federal wage regulations would have forced the city to pay more for the project. …the low bidder — Penta Corporation — presented final cost of $21 million with the stimulus funds and $17.3 million without. So the city said thanks, but no thanks, to the stimulus funds. “It just didn’t make sense,” said Deputy Public Works Director David Allen. “It was going to cost us more money to take the money.” Stimulus funds mandate workers are paid using Davis-Bacon Wage Determination, which sets the pay scale for workers on federal projects and added $2.5 million to the bottom line. The “Buy American” provision would’ve added another $500,000 and Allen said there would have been significant administrative costs — upwards of $100,000 — for the city to track it the way the government requires over the course of the two-year project.
    http://www.seacoastonline.com/articles/20100209-NEWS-2090401
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Say No to a VAT.

With the VAT becoming an ever-bigger issue, Dan Mitchell discusses the issue on CNBC. Dan’s opponent winds up agreeing with him:

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One of the many reprehensible features of Washington is how companies climb into bed with government. They do this either because they want legislation to get undeserved wealth by screwing consumers or competitors, or they do it because they think they the government is going to do something bad to them and they hope to reduce the pain by acting like cringing curs. This is a good description of the global-warming/climate-change/whatever-they’re-
calling-it-now issue, where many big companies are part of a coalition to support the Administration’s statist agenda. The good news is that this coalition is now beginning to fall apart, as thee big companies have decided that having a “seat at the table” isn’t such a good idea if it’s Thanksgiving and you’re a turkey. The Wall Street Journal reports:

    Three big companies quit an influential lobbying group that had focused on shaping climate-change legislation, in the latest sign that support for an ambitious bill is melting away. Oil giants BP PLC and Conoco-Phillips and heavy-equipment maker Caterpillar Inc. said Tuesday they won’t renew their membership in the three-year-old U.S. Climate Action Partnership… “We think there’s momentum to get [a climate bill] done,” USCAP spokesman Tad Segal said. “President [Barack] Obama’s State of the Union address made it clear the administration is behind us.” But experts said the companies’ decision to withdraw from USCAP is a sign the politics of climate change is shifting in Washington. When Mr. Obama took office, Congress appeared to have momentum for a climate bill that would push the economy toward lower-carbon alternatives. But as the economy soured, support waned.
    http://online.wsj.com/article/SB10001424052748704804204575069440096420 212.html

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Here are a few interesting links to keep you informed about the fiscal crisis in Greece.

Richard Rahn has a nice comparison in the Washington Times of Poland’s good policy and Greece’s profligacy.
http://www.washingtontimes.com/news/2010/feb/18/poland-versus-greece/

Reuters has a story about some new reforms in Greece, including a very Orwellian proposal to track everyone’s purchases by banning cash transactions above 1,500 euro.
http://www.reuters.com/article/idUSLDE61824V20100209

And the Associated Press has a story about gas shortages because bureaucrats at the Customs office went on strike to protest a proposal by the government to give them only one (rather than two) extra month(s) of pay per year.
http://finance.yahoo.com/news/Fuel-shortage-hits-Greece-as-apf-1182321877.html?x= 0&.v=3

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On the one-year anniversary of Obama’s stimulus scam, I appeared on the Fox Business Network to explain why squandering $800 billion was bad for the economy.

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While admitting that spending restraint is the ideal approach, Tyler Cowen of Marginal Revolution asks whether a value-added tax (VAT) might be the most desirable of all realistic options for dealing with an unsustainable budget situation.

Read his post for yourself, but I think a fair summary is that he is basically saying that a) there will be a crisis if we don’t do something about future deficits, b) a crisis will result in very bad policy, and c) if we support a VAT now, we will at least be able to extract concessions from the other side.

I have no idea whether there will be a future crisis, but I think the rest of Tyler’s argument is wrong.

But before explaining my position, let’s start by stating what I assume to be our mutual objective, which is to control the size of government. We all agree that there is a problem because government is too big now, and it is projected to get even bigger because of the built-in growth of entitlement programs. One symptom of growing government is deficits, which are very large today and will be even bigger in the near future as more and more baby boomers retire and push up costs for Social Security, Medicare, and Medicaid.

Our side (broadly speaking) wants to solve the budgetary situation by restraining the growth of government. One proposed solution is Congressman Paul Ryan’sRoadmap plan, which would reform entitlements and curtail other programs so that the long-term burden of federal spending is reduced to less than 20 percent of GDP. Since long-term federal tax revenues under current law – even if the 2001 and 2003 tax cuts are made permanent – are expected to be about 19 percent of GDP, this solves the budet problem (the tax reform component of the Roadmap includes a VAT, which is a poison pill in an otherwise excellent plan, but let’s set that aside for another day).

The left, by contrast, generally wants to let federal spending consume ever-larger shares of economic output, and they believe that increasing the tax burden is the right way of keeping the deficit from getting too large. No statist has put forth a detailed plan to match Rep. Ryan, but several high-ranking Democrats have made no secret about their desire for a VAT (see herehere, and here). And everyone agrees that a VAT is capable of extracting a lot of money from the productive sector of the economy.

These two visions are fundamentally incompatible, which helps to explain why there is a standoff. The bad guys do not want to control the size of government and the good guys do not want to raise taxes. But now we have to add one more piece to the puzzle. While gridlock normally is a good result, inaction to some degree favors the other side because entitlement programs automatically expand. The helps to explain why Tyler (with reluctance) thinks that it may be best to acquiesce to a VAT now rather than to wait for a fiscal crisis.

Now let’s explain why Tyler is wrong. First, it is far from clear that surrendering to a VAT now will result in better (less worse) policy than what will happen during a crisis. It certainly is true that some past crises have led to terrible policy, such as the failed policies of Hoover and Roosevelt in the 1930s or the more recent Bush-Paulson-Obama-Geithner TARP debacle. But at other points in time, a crisis atmosphere has paved the way for better policy, with Reagan’s presidency being the most obvious example.

The wait-for-a-crisis strategy clearly is a bit of a gamble, but even if we lose, we get a VAT in the future rather than a VAT today. So what’s the downside? Tyler and others might say that the future legislation in the midst of a crisis could be a vehicle for other bad provisions, but he offers no evidence for this proposition. And it may be the case that the other side would be forced to add good provisions instead. Moreover, the lack of a VAT in the period between today and the future crisis might help lead to some much-needed spending restraint.

What about Tyler’s argument that the good guys could extract some concessions from the other side by putting a VAT on the table. This is horribly naive. Even though George Mason University is less than 20 miles from Washington, and even though Tyler is a renassaince man with many talents, he does not understand how Washington really works.

Imagine there is a budget summit where politicians from both sides get together to work on this supposed deal. Here are the inevitable ground rules – and the consequences they will produce:

1. The deal will be 50 percent spending cuts and 50 percent tax increases, but the supposed spending “cuts” will be nothing more than reductions in already-legislated increases. The tax increases, by contrast, will be on top of all the additional revenue that is already exepected under current law (not a trivial matter since receipts will be$1.5 trillion higher in 2015 than they are today according to OMB). For proponents of limited government, using the “current services baseline” as a benchmark in budget negotiations is like playing a five-minute basketball game after spotting the other team a 20-point lead.

2. All spending and revenue decisions will be examined through the prism of CBO income distribution tables, and the left will successfully insist that nothing is done to make the tax code less progressive. But since a VAT is a proportional tax, the only way of preserving overall progressivity is to raise tax rates on those wicked and evil rich people and/or to massively increase “refundable” tax credits (what normal people call income redistribution). Any proposal to lower income tax rates or eliminate the corporate income tax, as Tyler envisions, would be laughed out of the room (though Democrats will offer a fig leaf or two in order to seduce a sufficient number of gullible Republicans into supporting a terrible agreement, and that might include a cosmetic change to the corporate tax regime).

3. Many of the supposed spending cuts, for all intents and purposes, will be back-door tax increases on saving and investment. More specifically, a big chunk of the supposed spending cut portion of a budget deal will be from means-testing entitlement programs. This sounds good. After all, who wants to send a Social Security check to Bill Gates when he retires? But consider how such a system actually will work. The government will say that people with income (and/or assets) above a certain level are ineligible for some or all of the benefits available to less-fortunate retirees. From an economic persepective, this is very much akin to a higher tax rate on people who save and invest during their working years. And since means testing would only generate substantial budgetary savings if it applied to millions of regular people in addition to Bill Gates, we would wind up with a system that created big penalties on middle-class families that were dumb enough to save and invest.

I’ve already pontificated enough for one blog post, so let me summarize by stating that Tyler’s approach, while not unreasonable, is about how to lose gracefully. Even if his strategy works perfectly, the result is bigger government. I’d much rather fight. If you want some inspiration for the battle, watch this video. If you haven’t had enough of me already, here’s my video explaining why the VAT is a horrible idea.

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The healthcare fight in Washington is not about access to doctors and hospitals, or the cost of those services. It is an effort by the left to create more dependency on government. George Will examines this theme in a Washington Post column:

    Killing this small program, which currently benefits 1,300 mostly poor and minority children, is odious and indicative. It is a small piece of something large — the Democrats’ dependency agenda, which aims to multiply the ways Americans are dependent on government. Democrats, in their canine devotion to teachers unions, oppose empowering poor children to escape dependency on even terrible government schools. …For congressional Democrats, however, expanding dependency on government is an end in itself. They began the Obama administration by expanding the State Children’s Health Insurance Program. It was created for children of the working poor but the expansion made millions of middle-class children eligible — some in households earning $125,000. The aim was to swell the number of people who grow up assuming that dependency on government health care is normal. …Democrats’ “reforms” of the financial sector may aim to reduce financial institutions to dependent appendages of the government. By reducing banks to public utilities, credit, which is the lifeblood of capitalism, could be priced and allocated by government. …Many Democrats, opposing the Supreme Court, advocate new campaign finance “reforms” that will further empower government to regulate the quantity, timing and content of speech about government. Otherwise voters will hear more such speech than government considers good for them.
    http://www.washingtonpost.com/wp-dyn/content/article/2010/02/12/AR2010 021204007.html

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