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Posts Tagged ‘Government Spending’

It’s not too surprising to learn that spending money on “high-speed” rail is foolish. And it’s hardly a revelation to learn that politicians over-promise and under-deliver when they push through these boondoggles.

My Cato colleague, Randall O’Toole, has written extensively about these money-losing white-elephant projects. But it’s not exactly shocking news that libertarians would resist wasteful government spending.

But it is stunning when establishment leftists admit that such programs are a mistake.

Here are excerpts from a column by Charles Lane, an editorial writer for the Washington Post. Yes, your eyes are not deceiving you. Even folks at the Washington Post are recognizing (or at least beginning to recognize) that government is a giant sink-hole that squanders tax dollars and undermines prosperity.

Today, Liu Zhijun is ruined, and his high-speed rail project is in trouble. On Feb. 25, he was fired for “severe violations of discipline” — code for embezzling tens of millions of dollars. Seems his ministry has run up $271 billion in debt — roughly five times the level that bankrupted General Motors. But ticket sales can’t cover debt service that will total $27.7 billion in 2011 alone. Safety concerns also are cropping up.

…On April 13, the government cut bullet-train speeds 30 mph to improve safety, energy efficiency and affordability. The Railway Ministry’s tangled finances are being audited. Construction plans, too, are being reviewed.

Liu’s legacy, in short, is a system that could drain China’s economic resources for years. So much for the grand project that Thomas Friedman of the New York Times likened to a “moon shot” and that President Obama held up as a model for the United States.

…China’s train wreck was eminently foreseeable. High-speed rail is a capital-intensive undertaking that requires huge borrowing upfront to finance tracks, locomotives and cars, followed by years in which ticket revenue covers debt service — if all goes well. “Any . . . shortfall in ridership or yield, can quickly create financial stress,” warns a 2010 World Bank staff report.

Such “shortfalls” are all too common. Japan’s bullet trains needed a bailout in 1987. Taiwan’s line opened in 2007 and needed a government rescue in 2009. …[T]he Beijing-Tianjin line, built at a cost of $46 million per mile, is losing more than $100 million per year. …On the whole, I’d say China should envy us.

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Under current law, Social Security is supposed to be an “earned benefit,” where taxes are akin to insurance premiums that finance retirement benefits for workers. And because there is a cap on retirement benefits, this means there also is a “wage-base cap” on the amount of income that is hit by the payroll tax.

For 2011, the maximum annual retirement benefit is about $28,400 and the maximum amount of income subject to the payroll tax is about $107,000.

It appears that President Obama wants to radically change this system so that it is based on a class-warfare model. During the 2008 campaign, for instance, then-Senator Obama suggested that the programs giant long-run deficit could be addressed by busting the wage-base cap and imposing the payroll tax on a larger amount of income.

For the past two years, the White House (thankfully) has not followed through on this campaign rhetoric, but that’s now changing. His Fiscal Commission, as I noted last year, suggested a big hike in the payroll tax burden. And the President reiterated his support for a class-warfare approach earlier this week, leading the Wall Street Journal to opine.

Speaking Tuesday in Annandale, Virginia, Mr. Obama came out for lifting the cap on income on which the Social Security payroll tax is applied. Currently, the employer and employee each pay 6.2% up to $106,800, a level that rises with inflation each year. …Mr. Obama didn’t hint at specifics, though he did run in 2008 on a plan to raise the “tax max” by somewhere between two to eight percentage points for the top 3% of earners. …most of the increase could be paid by the middle class or modestly affluent—i.e., those who merely make somewhat more than $106,800. A 6.2% additional hit on every extra dollar they make above that level is a huge reduction from their take-home pay. If the cap is removed entirely, it will also mean a huge increase in the marginal tax rates that affect decisions to work, invest and save. In a recent paper for the American Enterprise Institute, Andrew Biggs calculates that this and other tax increases Mr. Obama favors would bring the top marginal rate to somewhere between 57% and 68% when factoring in state taxes. Tax levels like these haven’t been seen since the 1970s.

Obama is cleverly avoiding specifics, largely because the potential tax hike could be enormous. The excerpt above actually understates the potential damage since it mostly focuses on the “employee” side of the payroll tax. The “employer” share of the tax (which everyone agrees is paid for by workers in the form of reduced take-home wages) is also 6.2 percent, so the increase in marginal tax rates for affected workers could be as high as 12.4 percentage points.

This video from the Center for Freedom and Prosperity, narrated by yours truly, elaborates on why this is the wrong approach.

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Republicans are understandably nervous about polling data showing considerable opposition to the Ryan plan’s Medicare proposal – particularly since they just voted for a budget resolution in the House of Representatives that includes such a reform.

Their unease is warranted. GOPers almost surely will be subjected to a scorched-earth campaign in 2012, featuring lots of demagoguery about  Medicare “privatization,” mixed in with shrill rhetoric about big insurance companies and “tax cuts for the rich.”

I don’t particularly care about the GOP’s electoral prospects, but I do want to save my nation from fiscal collapse, so that means I don’t want entitlement reform to become radioactive.

So what can be done to counter the predictable onslaught against Ryan’s Medicare proposal?

First and foremost, reformers should borrow some advice about counter-attacks from President Obama. He said during the 2008 campaign that if opponents “bring a knife to the fight, we bring a gun,” and a high-ranking White House aide in 2009 urged supporters to “punch back twice as hard” when dealing with attacks against government-run healthcare.

While reformers obviously should avoid the unseemly rhetoric associated with the current Administration, they should copy the aggressive approach. Timidity is a recipe for defeat.

For instance, do not allow the left to compare the Ryan proposal to the status quo of unlimited handouts. That system is bankrupt and even the Obama Administration acknowledges that something dramatic needs to happen to control costs.

Indeed, the best strategy for reformers may be to compare the Ryan plan to Obama’s scheme for a beefed-up “Independent Payment Advisory Board.” Sounds wonky and technical, but IPAB is the bureaucratic entity that will be in charge of imposing price controls that lead to the rationing of health care for the elderly.

In other words, the real issue is who will be in charge of the pool of dollars that will be used to provide healthcare for the elderly. Ryan’s plan would let seniors choose a health plan that best suits their needs and provide a big subsidy to finance that policy. Obama’s plan, by contrast, will keep seniors in a government-run system and let a bunch of unelected bureaucrats decide what kind of care they should receive.

Moreover, reformers should fight fire with fire. If the left is allowed to use “privatization” to describe Ryan’s plan (notwithstanding massive government involvement and subsidies), then reformers should refer to IPAB as a “death panel.”

My colleague Michael Cannon is a one-man truth squad on these issues, and he already has explained that there was a lot of merit in Sarah Palin’s accusation that Obamacare would create something akin to a death panel, and he has documented the various ways that government-run healthcare will lead to rationing.

To conclude, here are excerpts from two excellent columns that recently have been published on Obama’s IPAB scheme.

Rich Lowry of National Review writes.

Why does Obama need specifics when he has the Independent Payment Advisory Board, or IPAB? If spending on health care is the biggest driver of government spending, then IPAB is Obama’s most important deficit-reduction initiative. …Obama…implicitly acknowledges that [Medicare] is broken and bankrupting us. Otherwise, he wouldn’t be proposing a cap on Medicare’s growth that is at least as stringent as anything New Gingrich proposed in the 1990s… Under Obamacare, IPAB is to hit a target for Medicare’s growth that significantly squeezes the program beginning in 2014 (in his budget speech, Obama said he wants to ratchet down the cap even further). …In the fact sheet released in conjunction with his budget speech, the White House says he wants to give IPAB “additional tools” and “additional enforcement mechanisms such as an automatic sequester.” …IPAB won’t make the notoriously inefficient Medicare program any more efficient. Through arbitrary reductions on payments to providers, it will simply reduce the supply of care. …Medicare’s chief actuary warned that Obamacare will drive providers out of the program. If you love Medicaid, you’ll adore the new IPAB version of Medicare. It will be the experts’ gift to America’s seniors.

The Wall Street Journal’s superb editorial page also has a good analysis.

The Independent Payment Advisory Board was created in the ObamaCare statute, and the President will appoint its experts in 2012 to six-year terms. …Starting in 2014, the board is charged with holding Medicare spending to certain limits, which at first is a measure of inflation. After 2018, the threshold is the nominal per capita growth of the economy plus one percentage point. Last week Mr. Obama said he wants to lower that to GDP plus half a percentage point.  Mr. Ryan has been lambasted for linking his “premium support” Medicare subsidies to inflation, not the rate of health cost growth. But if that’s as unrealistic as the liberal wise men claim, then Mr. Obama’s goals are even more so. …Since the board is not allowed by law to restrict treatments, ask seniors to pay more, or raise taxes or the retirement age, it can mean only one thing: arbitrarily paying less for the services seniors receive, via fiat pricing. …Now Mr. Obama wants to give the board the additional power of automatic sequester to enforce its dictates, meaning that it would have the legal authority to prevent Congress from appropriating tax dollars. In other words, Congress would be stripped of any real legislative role in favor of an unaccountable body of experts. …the board will decide “what works” and apply it through regulation to all of American medicine. …As a practical matter, the more likely outcome is the political rationing of care for the elderly, as now occurs in Britain… Messrs. Ryan and Obama agree that Medicare spending must decline, and significantly. The difference is that Mr. Ryan would let seniors decide which private Medicare-financed insurance policies to buy based on their own needs, while Mr. Obama wants Americans to accept the commands of 15 political appointees who will never stand for election.

Even though I play senior softball, I’m not a senior citizen by Medicare standards. But when I reach that age, I know what I’ll decide if my choice is “privatization” or a “death panel.”

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America is in fiscal peril in the short run because of a 10-year spending binge by Bush and Obama and in the long run because of a toxic combination of entitlement programs and demographics.

Congressman Paul Ryan has introduced a budget plan to address America’s fiscal crisis, but Senator Reid and President Obama have summarily rejected his proposal, so it appears the United States will continue to drift in the wrong direction.

Something is needed to compel action. One might think that such an impetus would have been provided by the recent decision by Standard & Poor to downgrade the fiscal outlook for the United States. But this development hasn’t affected the spending culture in Washington.

But there is hope. Senator Corker has legislation that would force Congress to act – and automatically impose fiscal discipline if they don’t. His bill caps – and then slowly reduces – government spending as a share of national economic output (gross domestic product).

I’ve already written about the merits of this proposal, including an explanation of the all-important enforcement mechanism of sequestration (automatic spending cuts). Here’s Senator Corker’s description of his plan, as delivered at a Cato Institute conference on the Economic Impact of Government Spending.

To build on the Senator’s comments, there are two things that deserve special emphasis.

1. He correctly understands that the problem is the size of government. As explained in this video, spending is the problem and deficits are a symptom of that problem.

Unfortunately, many policy makers focus on the budget deficit, which often makes them susceptible to misguided policies such as higher taxes. At best, such an approach merely substitutes one bad way of financing federal spending with another bad way of financing federal spending. And it’s much more likely that higher taxes will simply lead to more spending, thus exacerbating the real problem.

2. Senator Corker’s legislation has a real enforcement mechanism. If Congress fails to produce a budget that meets the annual spending cap, there is a “sequester” provision that automatically takes a slice out of almost every federal program.

Modeled after a similar provision in the successful Gramm-Rudman-Hollings law of the 1980s, this sequester puts real teeth in the CAP Act and ensures that the burden of government spending actually would be reduced.

Some people complain that Senator Corker’s plan is too timid and that it doesn’t balance the budget by 2021. While it would be desirable to impose additional fiscal restraint, the Tennessee Senator has deliberately chosen a more modest goal in order to attract support from colleagues on the other side of the aisle. And he does have Democratic co-sponsors, something that is critical given the composition of the Senate.

Since I’m just a policy wonk, I’ll leave it to the other people to argue about what’s feasible in the current political environment. My final comment, though, is that we’re on an unsustainable path that will lead to the end of American exceptionalism and turn the United States into a decrepit, European-style welfare state. So I’m not going to complain if someone has a plan that finally moves policy in the right direction, albeit not quite as fast as I prefer.

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There are very serious ways to save huge amounts of money from the defense budget, largely by making smarter choices about defining America’s national security.

This obviously involves high-profile decisions about whether it is smart to engage in nation-building in Iraq and Afghanistan. But it also involves what seem to be “gimme” choices about whether we should be spending tens of billions of dollars to maintain troops in places such as Germany, the United Kingdom, South Korea, and Japan.

And, sometimes, it’s just the simple fact that bureaucracies like to squander money. Here’s a $600,000 boondoggle that barely rises to the level of a rounding error in the Defense Department’s budget, but it is a nauseating example of how government wastes our money in genuinely spectacular ways. Every time some politician says we need to raise taxes, you should think of this piece of you-know-what and  say #*&@;^ No!

Here are the key passages from a U.S. News and World Report story.

A $600,000 frog sculpture that lights up, gurgles “sounds of nature” and carries a 10-foot fairy girl on its back could soon be greeting Defense Department employees who plan to start working at the $700 million Mark Center in Alexandria, Va. this fall. That is unless a new controversy over the price tag of the public art doesn’t torpedo the idea.

Decried as wasteful spending that will be seen by just a couple thousand of daily workers who arrive on bus shuttles, foes have tried to delay the decision, expected tomorrow, April 1. But in an E-mail, an Army Corps of Engineers official said that the decision can’t be held up because it would impact completion of the huge project.

…The Mark Center is one of the facilities that thousands of defense workers will be reporting to as part of the Base Realignment and Closure plan, or BRAC, that is shifting workers around Virginia and Maryland. The BRAC plan itself has been criticized as wasteful.

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The recent agreement between Obama and Boehner supposedly cuts spending by $38 billion. I’ve already explained that this number is disappointingly small and noted that the effect on spending for the current fiscal year is almost too small to measure.

But my analysis was entirely too kind. My Cato Institute colleagues have put together a clever one-minute video mocking both Obama and Boehner for using the dishonest Washington definition of a spending cut – meaning they claim spending cuts merely because they increase the budget by less than previously planned.

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By taking advantage of  “must-pass” pieces of legislation, Republicans have three chances this year to restrain the burden of government.  They didn’t do very well with the ‘CR fight” over appropriated spending for the rest of FY2011, which was their first opportunity. I was hoping for an extra-base hit off the fence, but the GOP was afraid of a government shutdown and negotiated from a position of weakness. As such, the best interpretation is that they eked out an infield single.

The next chance to impose fiscal discipline will be the debt limit. Currently, the federal government “only” has the authority to borrow $14.3 trillion (including bookkeeping entries such as the IOUs in the Social Security Trust Fund). This is a very big number, but America’s gross federal debt will hit that limit soon, perhaps May or June.

Republicans say they will not raise the debt limit unless such legislation is accompanied by meaningful fiscal reforms. The political strategists in the Obama White House understandably want to blunt any GOP effort, so they are claiming that any delay in passing a “clean debt limit” will have catastrophic consequences. Specifically, they are using Treasury Secretary Tim Geithner and Federal Reserve Bank Chairman Ben Bernanke to create fear and uncertainty in financial markets.

Just a few days ago, for instance, the Treasury Secretary was fanning the flames of a financial meltdown, as noted by Bloomberg:

“Default would cause a financial crisis potentially more severe than the crisis from which we are only now starting to recover,” Geithner said. “For these reasons, default by the United States is unthinkable.”

The Fed Chairman also tried to pour gasoline on the fire. Here’s a passage from an article in the New York Times earlier this year:

Mr. Bernanke said the debt ceiling should not be used as a negotiating tactic, warning that even the possibility of the United States not being able to pay its creditors could create panic in the debt markets.

There are two problems with these statements from Geithner and Bernanke. First, it is a bit troubling that the Treasury Secretary and Fed Chairman are major players in a political battle. The Treasury Secretary, like the Attorney General, traditionally is supposed to be one of the more serious and non-political people in a  President’s cabinet. And the Fed Chairman is supposed to be completely independent, yet Bernanke is becoming a mouthpiece for Obama’s fiscal policy.

But let’s set aside this first concern and focus on the second problem, which is whether Geithner and Bernanke are being honest. Simply stated, does a failure to raise the debt limit mean default? According to a wide range of expert opinion, the answer is no.

Donald Marron, head of the Urban-Brookings Tax Policy Center and former Director of the Congressional Budget Office, explained what actually would happen in an article for CNN Money.

Our monthly bills average about $300 billion, while revenues are about $180 billion. If we hit the debt limit, the federal government would be able to pay only 60 cents of every dollar it should be paying. But even that does not mean that we will default on the public debt. Geithner would then choose which creditors to pay promptly and which to defer. …Geithner would undoubtedly keep making payments on the public debt, rolling over the outstanding principal and paying interest. Interest payments are relatively small, averaging about $20 billion per month, and paying them on time is essential to America’s enviable position in world capital markets.

And here is the analysis of Stan Collender, one of Washington’s elder statesman on budget issues (and definitely not a small-government conservative).

There is so much misinformation and grossly misleading talk about what will happen if the federal debt ceiling isn’t increased that, before any more unnecessary bloodcurdling language is used that increases everyone’s anxiety, it’s worth taking a few steps back from the edge. …if a standoff on raising the debt ceiling lasts for a significant amount of time, the alternatives to borrowing eventually may not be enough to provide the government with the cash it needs to meet its obligations. Even at that point, however, a default wouldn’t be automatic because payments to existing bondholders could be made the priority while payments to others could be delayed for months.

The Economist magazine also is nonplussed by the demagoguery coming from Washington.

Tim Geithner, the treasury secretary, sent Congress a letter on January 6th describing in gory detail the “catastrophic economic consequences” such an event would entail. …Even with no increase in the ceiling, the Treasury can easily service its existing debt; it is free to roll over maturing issues, and tax revenue covers monthly interest payments by a large multiple. But in that case it would have to postpone paying something else: tax refunds, Medicare or Medicaid payments, civil-service salaries, or Social Security (pensions) cheques.

There are countless other experts I could cite, but you get the point. The United States does not default if the debt limit remains at $14.3 trillion. The only exception to that statement is that default is possible if the Treasury Secretary makes a deliberate (and highly political) decision to not pay bondholders. And while Geithner obviously is willing to play politics, even he would be unlikely to take this step since it is generally believed that the Treasury Secretary may be personally liable if there is a default.

The purpose of this post is not to argue that the debt limit should never be raised. That would require an instant 40 percent reduction in the size of government. And while that may be music to my ears (and some people are making that argument), I have zero faith that politicians would let that happen. Instead, my goal is to help fiscal conservatives understand that Geithner and Bernanke are being dishonest and that they should not be afraid to hold firm in their demands for real reform in exchange for a debt limit increase.

Last but not least, with all this talk about the debt limit, it’s worth reminding everyone that deficits and debt are merely symptoms of too much government spending. As this video explains, spending is the disease and debt is merely one of the symptoms.

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