Archive for the ‘Government Spending’ Category

Infrastructure Spending Boondoggles

February 6, 2017

More evidence that undergoing major infrastructure spending, as President Trump proposes, would be foolish for boosting economic growth:

Performance data for megaprojects speak their own language. Nine out of ten such projects have cost overruns. Overruns of up to 50 percent in real terms are common, over 50 percent not uncommon. Cost overrun for the Channel Tunnel, the longest underwater rail tunnel in Europe, connecting the UK and France, was 80 percent in real terms. For Boston’s Big Dig, 220 percent. The Sydney Opera House, 1,400 percent. Similarly, benefit shortfalls of up to 50 percent are also common, and above 50 percent not uncommon.

As a case in point, consider the Channel Tunnel in more detail. This project was originally promoted as highly beneficial both economically and financially. In fact, costs went 80 percent over budget for construction, as mentioned above, and 140 percent for financing. Revenues have been half of those forecasted. The internal rate of return on the investment is negative, with a total loss to the British economy of $17.8 billion. Thus the Channel Tunnel detracts from the economy instead of adding to it. This is difficult to believe when you use the service, which is fast, convenient, and competitive with alternative modes of travel. But in fact each passenger is heavily subsidized. Not by the taxpayer this time, but by the many private investors who lost their money when Eurotunnel, the company that built and opened the channel, went insolvent and was financially restructured. This drives home an important point: A megaproject may well be a technological success but a financial failure, and many are. An economic and financial ex post evaluation of the Channel Tunnel, which systematically compared actual with forecasted costs and benefits, concluded that “the British economy would have been better off had the tunnel never been constructed.”

More here.


Trump’s War On Working Class Americans

May 24, 2016

I’ve blogged previously about Donald Trump’s asinine views on trade. This isn’t the only policy proposal of Trump’s that would harm working class voters. Cato’s Michael Tanner explains what his plan to pay bondholders less than full value:

Oh, and those bondholders who would get screwed under Trump’s proposal? That would be you and me. Roughly 55 percent of government debt is owned by Americans, mostly through their 401(k) or company pension funds. If Trump reduces the value of those bonds, we can say goodbye to our retirement plans.

Trump is also toying with the idea of paying the debt by just printing money. What does that mean?

Massive inflation would mean that the savings and investments of millions of Americans would be wiped out. The cost of living would skyrocket, and low- and middle-income Americans would find it more difficult to afford even the basic necessities of life. Those on fixed incomes, like senior citizens, would be among the biggest losers. Businesses would be forced to offset rising costs by slashing payrolls, throwing millions of Americans out of work. The cost of imports would rise dramatically, which would be a disaster for consumers, but, on the bright side, it would save Trump the trouble of imposing all those tariff hikes.

Yes, Deficits And The Debt Matter

July 15, 2015

Here’s a snippet from my local paper’s liberal Sunday columnist:

Maybe the worry is how to pay for the deficit. Turns out it’s fairly easy. The government just borrows what it needs. The total borrowings of the U.S. government since the 1770s, currently about $18 trillion, is called the national debt. This is where some confusion can come in. The deficit is much different from the debt. Deficits happen each year, but the debt is the sum of deficits from many years. It’s too bad both words begin with D.

And is the columnist worried about this? Nope.

The government has the power to legally confiscate our wealth to pay its bills. That’s called taxation. I wish I could tax my neighbors to pay my bills, but I can’t. The bottom line is the national debt doesn’t need to be paid back anytime soon. It has been around since George Washington’s time.

Ho-hum, nothing to see here.

Except for the real-world consequences of continuous government growth via crowding out private investment:

Andrew Mountford and Harold Uhlig provide a quantitative estimate of these costs. They calculate that a 2 percent increase in government spending will—under the best scenario—lead to a less than 2 percent increase in GDP in the short-run. Eventually, however, the tax increases needed to finance this spending will result in a more than 7 percent contraction in GDP.

The CBO has also estimated the cost of crowding out over the long run. By their estimate, crowding out will reduce inflation-adjusted gross domestic product per person by 6 percent in 2025 and by 15 percent in 2035. For the economy at large, this means an economic cost of $1.2 trillion in real lost economic activity in the year 2025, more than the cost of the wars in Iraq and Afghanistan combined. For individuals, this will mean lower incomes and less opportunity.

These are the consequences of continuing to run high deficits and letting our debt pile up. Sorry, but this sounds like a “major concern” to me.

The Impact Of Government Subsidies On Prices

September 20, 2014

As columnist Steven Pearlstein explains, “well-intentioned subsidies have the perverse effect of shielding colleges from the kind of market discipline that would have forced them to hold down prices by constantly improving their productivity and efficiency, as happens in just about every other industry.”

That’s the theory on subsidies and prices. How does it work in practice? From Dan Mitchell’s blog:

This is why more student aid is not the answer to the student-debt crisis. This is why Obamacare is not the answer to spiraling health care expenses.

But it does explain why the sugar industry keeps lobbying for subsidies. It explains why the health insurance industry supported the central premise of Obamacare. It explains why the NFL keeps strong-arming municipalities for public funds. It also validates the late Milton Friedman’s axiom that businessmen are enemies of the free market.

Not So Stimulating After All

February 18, 2014

Via AEI’s James Pethokoukis, how’d that 2009 stimulus work out?

Source: AEI

The Government Shutdown *Yawns*

September 30, 2013

We’ve had fiscal cliffs, sequesters, and now a good old-fashioned government shutdown. What vital services will we lose out on? Per ReasonTV from 2011:

The Good & Bad of Reaganomics

April 8, 2013

A former co-worker who blogs on politics from a left-wing perspective wrote a post titled “Slings And Arrows” which had some choice comments for Reaganomics, calling it “a shell game of crony capitalism” where middle- and bottom-income earners were “casualties.”

Reaganomics is what first triggered my interest in public policy years ago. While I’m no longer a Reagan idolator (and likely consider him the most overrated Republican president ever thanks to the collateral damage that trickled down from his drug war policies), the debate over his economic policies still peaks my interest.

Reagan has one of the most eloquent defenses of the free market I’ve read, when he stated:

We who live in free market societies believe that growth, prosperity and ultimately human fulfillment, are created from the bottom up, not the government down. Only when the human spirit is allowed to invent and create, only when individuals are given a personal stake in deciding economic policies and benefiting from their success — only then can societies remain economically alive, dynamic, progressive, and free. Trust the people. This is the one irrefutable lesson of the entire postwar period contradicting the notion that rigid government controls are essential to economic development.

So did his policies live up to the rhetoric?

The heart of his fiscal agenda was the across-the-board cut in income tax rates, with the top marginal rate falling from 70% to 28%. Capital gains taxes and corporate taxes were initially cut, although those were partially rescinded. To handle mounting deficits, instead of seriously tackling spending, a series of tax increases were implemented.

Maybe even more important than the fiscal agenda was the monetary policy of the time, as Reagan gave his support to Paul Volcker’s anti-inflationary measures. Without Reagan’s support, it’s highly unlikely the Fed could have operated as it did.

What impact did these policies have? The economy’s standing at the end of Reagan’s presidency (unless a hyperlink is included, the numbers come from this Cato report):

-17 million new jobs

-Growth in real-median income by $4000.00

-A 3.2% growth rate in GDP

-An unemployment rate of 5.5%. During the peak of Volcker’s anti-inflationary measures, the rate peaked at 9.7%.

-A productivity rate of 1.5%.

-A CPI of 4.1%, compared to 13.5% in 1980.

-Overall government spending as a percent of GDP at 22.1%, compared to 22.9% at the start.

Rising incomes for each income quintile (the smallest gain coming to the lowest income) and, more importantly, income mobility in which the poor and middle class were able to move up the ladder.

Per the late William Niskanen, the rate of deregulation started by the Carter administration continued at a slower rate.

-Assuming he’s not fudging numbers, Paul Krugman notes the tax rates middle-class Americans paid on their income went up slightly due to payroll tax increases.

There’s quite a bit of good from this. The Reagan years show incentives matter. If an entrepreneur can enjoy a greater portion of the fruits his/her labor produces, the end result is more work, more entrepreneurship, and greater prosperity for the economy as a whole. Even in the case of Krugman’s stat about middle America, a case can be made that happened because of Americans moving up the income ladder.

Equally important is the need for sound money. Inflation robs us of our standard of living and worsens our living conditions. Sound monetary policy fosters security in what we possess and encourages capital formation, as there is real value to investments that pay off. Taming inflation is arguably the biggest accomplishment of the Reagan years.

But not everything was peachy. As Milton Friedman stated, government spending is the true burden on the economy, because what is not paid by tax revenue is paid either through inflation or borrowing. Borrowing gets paid back (with interest) in the form of future tax increases. And borrowing is apparently what happened with the 1980s, as debt went from 27% of GDP to 42% by the end of Reagan’s presidency. While spending as a percent of GDP went down ever so slightly, it averaged 22.4% during his term, which is a good bit higher President Clinton’s time in office. If you feel the deficit spending paid for the end of the Cold War, than it’s probably justified. Even so, entitlement reform was kicked down the road, and the massive overhauls needed to really make the Reagan “revolution” a sustaining one never materialized.

While I strongly disagree with Mr. Kroeger’s assessment that lower- and middle-income workers were “casualties,” there may be something to the accusation of “crony capitalism” at play. As Sheldon Richman documented years ago, Reagan was arguably the most protectionist president since Herbert Hoover, supporting a host of tariffs, import quotas, and anti-dumping measures meant to protect domestic industries. These protections came at the expense of the American consumer, which paid the equivalent of a 66% income tax surcharge via higher prices. But even these protectionist policies hurt domestic companies, as the report cites American steel-using firms shed 52,000 jobs thanks to tariffs on specialty steel.

Overall, the good was really good, the bad was fairly bad, but not bad enough to overwhelm the good. It’s unfortunate the country didn’t go further with the Reagan economic “revolution” as maybe the doldrums of the last 5 years could have been avoided.

Preserving The Sacred Ponzi Scheme

February 28, 2013

The mindset in this letter shows just how much of an uphill battle any efforts to tackle out-of-control government spending will be. If the belief that Medicare and Social Security are “sacred trusts” that cannot be touched prevails (an idea firmly held by Washington power brokers), it will be an economic sledgehammer to future generations. A recent Cato study shows Social Security has promised the current generation of retirees benefits that are $65 trillion over what is expected to be paid in future payroll taxes, with only $2.9 trillion available in trust funds. Per the study, “today’s Social Security and Medicare payroll taxes would have to be more than doubled to resolve it” or require a near-doubling of income taxes on the broadest tax base.

Sorry, I find nothing “sacred” about bankrupting future generations to preserve a Ponzi scheme. Irresponsible promises like these should have never been made. Whether true reform is made remains to be seen.

The Pending Sequestration-pocalypse

February 27, 2013

Didn’t we have one of these already a couple months back?

A few things to keep in mind as this all takes shape:

-All of this hand-wringing is over a cut equal to 0.26% of GPD. Or to put it another way, the equivalent of a rounding error.

-Do these levels of government growth (including per capita spending) really seem sustainable??

-For those who fear the economic impact of spending cuts, Dan Mitchell discredited that idea a few years back.

The Fiscal Cliff

November 29, 2012

According to Politico, the terms of a fiscal deal between President Obama and Speaker Boehner are coming together.

As Matt Welch writes, don’t expect anything in the way of reduced spending. Nor should we expect any added revenue from tax hikes to go towards deficit reduction, if historical precedent is any indicator.