Tag Archives: spending

A View of Fairness

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Spiegel Online International reports that the Italian Pime Minister Mario Monti wants his participation prize for the austerity measures the Italian Parliament talks about enacting.  And this prize ought to be in the form of Europe lending him yet more money, this time disguised as Euro bonds—for which Monti expects Germany to put up the lion’s share.  After all, goes his argument

Germany is benefiting from the crisis—interest rates on German bonds are way down and the weak euro favors German exporters—and should therefore share its favorable interest rates with its partners[.]

This is like arguing that, because I ruined my credit rating with profligate spending and irresponsible borrowing, which makes the sound credit rating you built with discipline and care seem even better, you, neighbor, owe me access to your credit card.

Moreover, Monti’s threatening to stage a temper tantrum, if his new-found “austerity” isn’t properly funded with other people’s money.

If this strong movement towards discipline and stability is not recognized as taking place, and a certain approach to financial aspects does not gradually evolve, then there will be a powerful backlash in the countries which are being submitted to a huge effort of discipline[.]

A discipline that other nations have been applying as a matter of course.

Hmm….

Federal Subsidies

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The Department of Education, in its First Year Progress press release concerning the Federal Race to the Top subsidy program, asserts

The 12 state-specific reports provide summaries of accomplishments made and setbacks experienced by states in pursuing reforms around Race to the Top’s four assurance areas—raising academic standards, building robust data systems to improve instruction, supporting great teachers and school leaders….

That’s a lot of bureaucracy, without a lot of actual performance.  To be sure, the rest of the claim from the DoE excerpt above includes “…and turning around persistently low-performing schools.”  Let’s look at DoE’s own individual reports to see how accurate that claim is, along with their introductory claim that

[t]hese twelve states have acted with courage and commitment in taking on ambitious education reform. Their year one work has helped lay the foundation for long-term, statewide improvements centered on doing what’s best for students.

DoE’s assessments of the first year belie those rosy words.  The Wall Street Journal reports that three of those 12 states have been explicitly called out for failure to perform in accordance with the promises they made in order to get this Federal subsidy.

U.S. Secretary of Education Arne Duncan warned New York state…to deliver its promise to overhaul teacher evaluations and develop a comprehensive student data-tracking system or risk losing hundreds of millions of dollars in federal grants.

and

…Hawaii…is now required to get federal approval before spending any of the $75 million it won.

and

Florida has also been criticized.

Florida was criticized for being seriously behind its promised time and budget schedule for getting on with its promised actions.  In fact, Florida has simply issued a string of excuses so weak that even Duncan couldn’t look past them.

I don’t expect perfection out of a government program, or any other human endeavor.  But I do expect far better performance from a government program, funded as it necessarily is, with our money—in this case, with $700 million of our money.  However, as Joy Pullman notes in The Weekly Standard, “the federal government isn’t good at a great many things—particularly education.”

Or at getting efficient results through subsidies generally.

Basic Economics

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A thought on Keynesian economics.  Brad DeLong offers this thought concerning our current debate over government spending:

The government purchases $100 billion of goods, issues $100 billion of bonds, and raises taxes by $3 billion a year in order to amortize the bonds.  Government purchases go up by $100 billion this year.  Private consumption goes down by $3 billion this year.  Net fiscal impetus is not $0 but rather $97 billion.  Cochrane [and other Keynesians] doesn’t understand the Ricardian Equivalence argument he is trying to make.

Keynesians think $97 billion were created through this spending and taxing program and that government spending is a good.  But having sold $100 billion in bonds generate this “demand increment,” from where would those $100 billion have come, and to where would they have gone otherwise?  The Keynesian view can be summarized in either (or both) of two ways: supply creates its own demand, or demand creates its own supply. Talk about trickle down, or building fields of fancy and hoping fanaticizers come.

No, what goes on actually is this.  Falkenblog commenter Aaron Brown explains:

The main point is…that people react to the $100 billion future tax increase (or spending cut, or reduction in value of nominal assets from inflation, or some other loss).  You might argue that people will under-react in some cases, but it’s highly implausible that they don’t react at all, or that they systematically under-react (and there’s no data supporting either implausible contention).  I think systematic over-reaction is plausible (although also has no empirical evidence) since once currency debasement begins i[t] almost always seems to accelerate.

The question of where the $100 billion would have gone otherwise is a different one.  It could come from private consumption or private investment, in either case likely making the net effect of the stimulus spending negative, even before factoring in the future costs.  Government takes money today from privately-selected uses to government-directed ones (loss of utility there) and also must take money tomorrow from privately-selected uses to repay the debt.

And since the economy continues to be depressed from the government having withdrawn so much money from it for its own spending, government must, apart from tomorrow’s taking for current borrowing, repeat the whole borrowing and taxing cycle tomorrow, also.  This continues to hold down the economy, as we saw with the government’s “stimulus” spending in the Great Depression, and as we’re seeing today.  Brown continues:

The Keynesian hope is that today’s $100 billion comes from hoarding or asset bubbles, in which case the net effect could be neutral or even positive.  The further hope would be that the future debt repayment will go to sound private investment or elimination of future wasteful spending (sort of “stuff then starve the beast”).

However “hoarding” and “bubble” are in the eye of the beholder. So even if you make the assumption people under-react to the future implications of stimulus spending, you also have to assume that the government’s judgment using other people’s money, with officials being paid whether they are right or wrong, is better than people making choices with their own money, bearing the losses if they are wrong.

If people are correctly preparing for future bad times instead of “hoarding” or correctly anticipating a rise in nominal asset prices instead of feeding a “bubble”, then the stimulus will be doubly harmful.

But the fact is, we don’t hoard.  We (both individual and business) save/invest.  We may have a good idea of why we’re saving—a new house, future retirement, or future expansion—or we may not, saving only against an inchoate reservation about the future—but this isn’t “hoarding.”  And government judgment?  We’re seeing how that’s playing out with the government’s substituting its judgment for ours in its use of our money for its entitlement programs.  Keynesians are all about the superiority of government’s judgment.  Otherwise, they wouldn’t keep taking our money and spending it for us, even (especially) when we don’t want to spend, in order to stimulate our economy (which, just incidentally, Keynesians also view as government’s economy).

h/t to Eric Falkenstein at Falkenblog.

Gridlock Works

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Lost in the hoo-raw over the payroll tax reduction extension at the end of the year was Congressional inaction on a couple of other weighty matters—and this inaction redounds to our benefit.

Congress failed to continue a 45 cent per gallon tax credit for corn-based ethanol and a 54 cent per gallon tariff on imported ethanol (mostly from Brazil—Obama wants us to be one of their best customers).  Since these two items were among the few things Congress even constructed reasonably—they actually had sunset clauses—they expired Dec. 31.  Of course we can expect the Progressives to attempt to redress this egregious failure or to score the evil Republicans for stopping a resumption—that is, if the Republicans find their courage, lost in the debt ceiling fiasco and which loss was underscored by their screw-up on the payroll tax reduction, and block a resumption.

Another useless “green” subsidy expired through Congress’ inaction, also: the thousand dollar tax credit for installing an electric car charging station in a residential garage expired, as did the related tax credit (up to $30 thousand) for installing a commercial charging station.

Unfortunately, the gridlock didn’t achieve a sweep: fuel refiners still are required to add 36 billion gallons of ethanol to their fuel mixes by 2022, and the (maximum) $7,500 tax credit for buying an electric car remains in place.

Of course, as with all subsidies, these had just made the subsidized items more expensive.  The 45 cent credit for the ethanol-in-gasoline just followed the fuel right into your cost at the pump, for instance.  The $6 billion per year we taxpayers were being hit for this credit bought everyone else’s ethanol gasoline.  And we paid those $6 billion even when we bought an electric car, instead.  Those of us that have bought one; sales are steady, but far from outstanding.

That credit for buying the electric car is interesting in its own right.  Just to take an anecdote for an illustration, a Ford Fusion (ignoring the usual haggling, and only looking at MSRP) runs around $20 thousand.  The correspondingly ungussied-up Fusion Hybrid is a bit under $29 thousand.  With the subsidytax credit, that drops the Hybrid to a shade over $21 thousand.

In some cases, the credit doesn’t do the buyer as much good, though.  The Tesla’s Model S is a $50 thousand electric car, and their Roadster seems, from Tesla‘s Web site, to be of a price that if you have to ask, you can’t afford it.  The tax credit doesn’t have so much practical effect here.  As to the Fisker Karma, well, that electric car isn’t available at any price, at least for a while: its batteries are…defective.  The credit is useless for it.

Maybe instead of renewing the ethanol subsidies, we can get Congress to eliminate the electric car subsidy and the requirement to dump ethanol into our gasoline, too.  Keep in mind that ethanol is hard on your car‘s engine.

Or am I hoping for too much change this year?

Lessons from Germany

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Spiegel Online International talks about a (relatively) strong German economic performance in the coming year, following on the heels of a strong performance for 2011.  It also draws a contrast, while outlining the jealousy of its European neighbors.

Germany’s economic success does not make the country more popular among its neighbors, though. After all, this is the same country that has been blocking all proposals to use the European Central Bank (ECB) to provide more generous financing for embattled euro-zone countries. Some European countries appear to be secretly hoping that Germany, Europe’s economic paragon, will also soon feel the brunt of the crisis.

How did the Germans achieve this?  One path is through the intermediate-term outcome of some economic and governmental reforms they put into place in 2003, in part to cure themselves of being the “sick man of Europe.”  They:

  • increased, from management’s perspective, the mobility of their labor force,
  • provided stronger financial incentives for the unemployed to go back to work, rather than paying them unemployment “benefits” for not working,
  • reduced taxes,
  • reduced government debt relative to their GDP.

One of the things the labor reforms led to was increased hiring because the reforms made it easier for employers to hire.  In 2011 alone, for instance, a half million new jobs were created in a population of 81.5 million.  Their reforms also encouraged more people to try to go back to work.  The resulting increased employment rate matched up with the lower tax burden to leave more money in the hands of individual Germans.  In short, Germany took steps to free up its economy, moving it closer to an open, free market, especially in comparison with their embattled euro-zone neighbors, and embarrassingly so relative to the US.

Their European neighbors, on the other hand, are not implementing similar reforms; indeed, although the embattled euro-zone nations are cutting spending, they’re actually raising the tax burden on their populations and businesses.  Moreover, they’re eschewing reforming their labor laws which leave unions with a decisive upper hand.

Are there lessons here for us?  Let’s see: those half million German jobs would work out to nearly 2 million new jobs in the US in 2011.  Germany cut taxes, but like the failing nations of Europe, our government insists on raising taxes.  Our tax increases aren’t even intended to close any budget gap, or to pay down any national debt, either—they’re for supporting even higher spending.  And here we are, just as are the embattled euro-zone nations, mired in a three-year-old recession in all but name—stagnating away with high unemployment, rapidly increasing budget deficits, and exploding national debt.

Hmm….