Archive | Growth of Government

The Debt Deal and Divided Government

The debt deal passed today does not go as far in cutting spending as I would like. But it does nonetheless enact substantial cuts without any tax increases, with a significant likelihood of more cuts in the future. If the bipartisan commission created by the new legislation fails to come up with a spending cut plan or Congress fails to enact the plan, there will be additional automatic cuts in both civilian and military spending.

If nothing else, the deal provides additional evidence in support of the proposition that divided government reduces the growth of the state, and makes deregulation and spending cuts more likely. Certainly, it is inconceivable that any such deal would have been made had the Democrats retained control of Congress in 2010. One can argue that the Republicans would have enacted bigger cuts had they controlled the Senate and the White House as well as the House of Representatives. But it should not be forgotten that the GOP presided over massive increases in spending and regulation when they controlled all three under George W. Bush. The government-restraining effects of divided government are demonstrated not only by the last decade, but by previous historical experience.

The evidence on the effects of divided government undercuts Democrats’ claims that they can be trusted to get spending under control on their own. But it should also give pause to conservatives who believe that our fiscal problems will be solved if only the GOP can make a clean sweep in 2012. [...]

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Political Ignorance and Federal Spending

Although federal spending was a major political issue in the 2010 campaign and for many months before it, this recently released CBS poll [HT: Dan Mitchell] reveals widespread public ignorance about the distribution of spending between various programs. The detailed data reveal that only 23% know that Medicare and Medicaid take up between 20 and 30% of federal spending, and only 15% realize that Social Security takes up between 20 and 30%. Some 48% underestimate the extent of Social Security spending, with a much smaller percentage overstating it. Similarly, only 23% recognize that defense spending takes up between 20% and 30% of the budget. In this case, the most common error is to overestimate the extent of spending (a mistake made by 42%). Defense, Social Security, and Medicare/Medicaid, are by far the three largest items in the federal budget. And the vast majority of Americans don’t know how much of the federal budget is spent on them. Even if we count as “correct” answers that are close to the truth (on the grounds that all three programs are right around 20%, so both 10 to 20% and 20 to 30% might potentially be correct), the large majority still doesn’t know the answer in all three cases.

The majority overestimates the percentage of federal spending that goes to foreign aid, welfare, and earmarks. For example, only 9% realize that foreign aid is less than 5% of the federal budget, while 67% believe that it is higher than that, including 48% who believe that the true figure is a whopping 10% or more.

Knowing approximately how much federal spending goes to which program is not enough to have a reasonably informed discussion on spending policy. But it’s probably a necessary prerequisite to doing so. Therefore, it’s noteworthy that the majority [...]

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Libertarianism and the Reliance Interests of People Who Depend on Government Programs

In a recent post on Illinois’ plan to nearly double its state income tax, Megan McArdle writes:

The state of Illinois is allegedly close to a deal to nearly double its income tax, from 3% to 5.25%…..

The income tax increases…. are both workable and necessary. Conservatives will holler, but Illinois is not going to eliminate its entire deficit by cutting spending; the cuts needed too deep, the citizenry dependent on the services. Whether or not you think these programs should exist, they do now, and you can’t simply throw people off who planned their lives around them.

Economist David Henderson responds:

It’s not just conservatives who would holler: libertarians would probably holler even louder. But think about her reasoning. McArdle is saying, in effect, that if a government program has been in force for many years–people “planned their lives around them”–it should be kept…..

I saw her on John Stossel’s show the other night making a cogent case for making most drugs legal. She’s probably aware that one of the most effective lobbies for the drug war in California is the prison guard’s union. Although it stayed out of the Proposition 19 battle, it was instrumental in defeating an initiative in 2008 to lighten prison sentences for drugs. Certainly many prison guards, as well as “drug court professionals,” as the article linked to above puts it, have “planned their lives” around this program. Yet that didn’t stop McArdle from advocating a end to the drug war. As well it shouldn’t have.

The bigger issue is that with McArdle’s decision rule–keep even bad government programs in place if enough people have depended on them long enough–promotes the government ratchet that Robert Higgs talks about. The net effect is a bigger and bigger government.

This issue is a common [...]

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Six Types of Libertarian Arguments Against Government Action

Economist Bryan Caplan has an interesting post outlining six types of libertarian arguments against government action – “six stages of libertarian denial,” as he calls it:

Libertarians set themselves apart from other political thinkers by habitually denying that government should do things. Denial is therefore at the heart of libertarian thought. Thanks to pop psychology, unfortunately, “denial” has come to mean “refusing to admit the truth” rather than “refusing to admit what others claim.” But denial is still a concept worth holding onto…..

Playing off of pop psychology, I find it most useful to think about six stages of libertarian denial.

Stage 1: Deny the problem exists. Ex: When someone complains about Chinese imports, the libertarian says, “What’s the problem? They’re selling us cheap stuff.”

Stage 2: Blame the problem on the government. Ex: “Sure, Third World poverty is terrible. But without their governments’ statist economic policies – and our immigration restrictions – they’d already be rich.”

Stage 3: Admit that the government didn’t cause the problem, but insist that government action would only make the problem worse. Ex: Opposing price controls for grain after a severe drought. “The market is making the best out of a terrible situation. You’re going to destroy the incentives that will get us out of this disaster.”

Stage 4: Concede that government action wouldn’t make the problem worse, but say that the cure is so expensive that we’re better off just living with the problem. Ex: Opposing handicap accessibility regulations. “It’s going to cost 1% of GDP. For that price, we could give every handicapped person three full-time helpers.”

Stage 5: Admit that government action could solve a problem at a low cost, but claim that the libertarian principle is more important.” Ex: “Freedom means tolerating the very views that you find most abhorrent

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Excellent Review of Todd Zywicki’s and Max Stearns New Book on Public Choice and the Law

University of Florida lawprof D. Daniel Sokol has published a very good (and extremely favorable) review of co-conspirator Todd Zywicki’s important recent book Public Choice Concepts and Applications in Law (coauthored with Maxwell Stearns), in the Michigan Law Review.

Danny writes that the book is “likely to be recognized as the leading work on the subject for some time.” Having read it myself, I tend to agree. It’s a great introduction to and analysis of the literature on public choice and its implications for law. The book drives home the implications of the simple but important public choice insights that government actions can be understood using the same tools of economic analysis that economists have long applied to the private sector, and that political behavior is often just as self-interested as market behavior. I would also note that the book has an interesting political balance, since Stearns is generally liberal and certainly well to the left of Todd.

Danny’s review essay also considers some possible additional applications of public choice to legal issues that were not covered by Stearns and Zywicki, especially in the field of international law. As he points out, scholars in the international law field have made very little use of public choice analysis, even though international legal institutions have serious public choice problems that may be even worse than those of domestic political processes in Western democracies. John McGinnis and I have sought to help close this gap in the literature in our work on international human rights law and domestic incorporation of international law. [...]

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“Temporary” Tax to Pay for DC Baseball Stadium Becomes a Permanent Cash Cow for City Government

I have often criticized government subsidization of sports stadium construction, including the biggest such boondoggle: the record expenditure of over a billion dollars in government money on the new Yankee Stadium (see here for my most recent post on the subject and links to earlier ones). As I pointed out in my very first post on this issue, such subsidies almost always fail to produce economic benefits that justify their exorbitant costs.

New York, however, is not the only city that has indulged in this particularly egregious form of corporate welfare. Washington, DC spent a great deal of public money to build a stadium for the Nationals. Now, however, the city is extending the life of a tax originally intended to pay for the stadium so that they can divert the funds to other projects [HT: Taxprof Blog]:

A citywide business tax the D.C. Council passed to help to help pay for the $611 million Washington Nationals ballpark has become such a cash cow that the city is now using it to help close its nine-figure budget gap.

D.C. passed a tax on businesses’ gross receipts to help finance the construction of the stadium. From fiscal 2005 until the end of this fiscal year, more than $129 million will have been collected, finance office records show. Overall, the city will have netted more than $135 million in all taxes and rent above what the city is paying back in bond payments from fiscal 2005 to 2010.

But instead of using the surplus funds to pay the stadium off, Mayor Adrian Fenty and the city council are using the money to plug monstrous holes in the District’s budget.

“They took all the money,” Councilman Jack Evans, D-Ward 2, said of his colleagues. “They’re spending every dime.”

Many business leaders are

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Crisis, the Health Care Bill, and the Growth of Government

The passage of the health care demonstrates the ways in which economic crises create opportunities to expand the power of government, often in ways that have little connection to any effort to alleviate the crisis itself. Back in the fall of 2008, I expressed my fear that the combination of an economic crisis, political ignorance by voters, and unified Democratic control of the federal government would lead to a vast expansion of government if Obama were elected. White House Chief of Staff Rahm Emanuel famously said that the Democrats shouldn’t let “a serious crisis go to waste” because a crisis represents “an opportunity to do things you could not do before.”

I. Once Again, a Crisis Facilitates the Growth of Government.

Obama and the Democrats began to realize my expectations by passing a gargantuan “stimulus” bill and pushing a massive expansion of government control over health care, as well as promoting other major increases in the size and scope of government. But recent Republican political victories, especially Scott Brown’s win in Massachusetts, led many people to think that the health care bill would fail and the expansion of government might come to a halt. I had to admit that I had underestimated the political constraints inhibiting the administration. But I still thought that Democrats might be able to pass the bill by getting the House to adopt the proposal previously passed by the Senate – which has indeed happened.

The health care bill will now take its place with numerous Depression and wartime policies that expanded government in ways that would never have been possible absent the crisis, but which had no real connection to alleviating it. Absent the economic crisis, the Democrats would not have won such a sweeping victory in 2008, nor would Obama have had such an [...]

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Political Ignorance and the Proliferation of Elected Offices

Prominent political blogger Matthew Yglesias recently wrote an interesting post arguing that the proliferation of elections increases the difficulty of acquiring enough information to vote in an informed manner. He quotes a post by Jonathan Bernstein, which expresses bewilderment at the range of offices he voted on in a recent Texas election:

Yesterday was election day in Texas, and I voted. And I voted. And then I voted some more. If my count was correct, I voted fifty-two times. I voted for Governor, and I voted for U.S. House and Texas House and Texas Senate…OK, I didn’t actually know the candidates for the state legislature, by I did feel a bit guilty about that. I voted for Lt. Governor (which is a big deal here in Texas). I voted for Attorney General, and Commissioner of the General Land Office, and Commissioner of Agriculture, and Railroad Commissioner. I don’t know what the General Land Office is, no. I voted for judges — judicial judges, and the county judge, who is the head of the county government, not a judicial judge at all. I voted for more real judges. We know someone who is running for “Judge, County Probate Court No. 2.” I voted for her. I voted for District Clerk. I don’t know what kind of district the District Clerk is clerk for.

Yglesias himself comments:

[I]n US political culture, the answer to every government reform problem is always that things need to be “more democratic” and this often proceeds without any real effort to think about what you’re trying to achieve. There’s obviously a sense in which subjecting more and more officials to popular election is “more democratic” but if you think that what’s good about democracy is that it creates accountability you’ll see that asking people to vote

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John Mauldin: “The same market forces that work in Illinois can work in Greece”

A few weeks ago at Minyanville, John Mauldin wrote:

The EU is backed into a corner. They have this treaty that says governments will act in certain ways. Greece is flaunting that treaty. Everyone acts as if Greece defaulting on its debt would be the end of the EU. Will the EU force Greece to withdraw if they don’t control their budget? Upon reflection, I’m not so sure.

Let’s take that proposition to the US. What if Illinois defaulted on its debt? Would we kick them out of the Union? Hardly. A default would mean a severe loss of credit, a forced retrenching, and a severe economic crisis in Illinois. The losses would be serious for banks and investors. There would be negotiations on how to deal with the debt, who gets a haircut on their bonds, what pension assets and expenses would be cut, and so on. A crisis? Yes. End of the world? No.

So what if Greece does default? The banks and those who lent them the money would take a loss of some amount. The cost of borrowing for Greece would rise dramatically, if they could even get into the debt market. If they actually cut their budgets enough to deal with the deficit in a responsible way, it would mean, at best, a severe and prolonged recession. If Stratfor is right about deficits reaching 15% of GDP, it could mean a depression. They have no good choices.

It’s doubtful that German and French voters will be happy with any bailout using their tax money that doesn’t impose serious cuts in Greek budgets, with realistic controls as a condition for the bailout. Can Greece live with that? We’ll see. . . .

But is it so unthinkable that Greece could simply default and then be

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Obama Perpetuates the Myth of Bush as Free-Marketeer

In the State of the Union, Obama continued to blame Bush and the Republicans for our current economic problems. This is understandable for two reasons. First,the GOP does deserve a good deal of blame, though my list of their misdeeds would probably look different from Obama’s. Second, pretty much any president in Obama’s position would do the same thing.

Much less defensible is Obama’s attempt to claim that the Republicans purused free market policies during the last eight years, and thereby caused the economic crisis:

From some on the right, I expect we’ll hear a different argument — that if we just make fewer investments in our people, extend tax cuts including those for the wealthier Americans, eliminate more regulations, maintain the status quo on health care, our deficits will go away. The problem is that’s what we did for eight years. That’s what helped us into this crisis. It’s what helped lead to these deficits. We can’t do it again.

In reality, of course, the Bush-era GOP greatly expanded government control of the economy, including major increases in spending, regulation, and federal “investment” in education. I discussed this at some length here, here, and here. Far from “maintain[ing] the status quo in health care,” Bush established the Medicare prescription drug benefit, the biggest new government program since the 1960s. Ironically, Obama referred to the prescription drug program and other Bush-era spending increases as contributing to the deficit earlier in this very same speech.

The Bush as free marketeer meme is an important prop in the Democrats’ case for massively expanding government control of the economy today. Logically, of course, it is possible to argue for such an expansion even if Bush did it too. Maybe he just didn’t go far enough, or didn’t [...]

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Jim Cramer Analyzes the Proposed New Banking Rules

During the second half-hour of Mad Money on CNBC tonight, Jim Cramer has a revealing criticism of the Obama Administration’s proposed banking rules.

He concludes that the collapse was not the result of proprietary trading by banks, but rather mainly because of bad real estate loans. Cramer sees the proposal as targeting those who are making more money than Obama thinks they should.

Cramer does not point out the obvious: few lawyers and politicians worked as hard as Barack Obama to get banks to lower their lending standards (though to be fair, Obama also promoted Illinois legislation that prohibited some forms of lending fraud).

Obama went from being the lawyer for ACORN, to “the Senator from ACORN” (as he was sometimes called in Illinois in 2007 and 2008), to the presidency. He pushed ACORN’s agenda in the Illinois legislature, and he pushed ACORN’s agenda in the US Senate. It shouldn’t be surprising that he has taken up a more sophisticated version of the ACORN-SEIU campaign against bankers, just as he did as a lawyer in the 1990s.

The show is being rebroadcast at 11pm ET Monday night. [...]

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FHA Slightly Tightens Loan Requirements

Instead of letting housing prices find the natural market-clearing price, many in the government have been supporting the efforts of those trying to reinflate the housing bubble.

The Federal Housing Authority (FHA) has been backing up to half of the mortgage market in some locales — allowing ridiculously low down payments of 3.5%, plus allowing the seller to provide closing costs up to 6% of the purchase price.

Now the FHA is slightly tightening loan requirements:

The Federal Housing Administration will announce more-stringent lending requirements and higher borrower fees on Wednesday to cushion against rising defaults and stave off the need for a taxpayer bailout of the agency.

The FHA, which has taken on a major role in the housing market during the economic downturn, doesn’t lend money to home buyers, but insures lenders against default on loans that meet FHA criteria. In exchange for that backing, borrowers who take out FHA-backed loans must pay an upfront insurance premium, currently set at 1.75% of the total loan amount. The premium can be rolled into the loan.

The FHA is set to raise that fee to 2.25%, the second increase in the past two years, according to people familiar with the matter. The value of the FHA’s reserves to cover losses has fallen to $3.6 billion, about 0.5% of the $685 billion in loans outstanding, down from 3% a year earlier. Congress requires the agency to maintain a 2% capital-reserve ratio. If the larger upfront fee had been in place last year, the FHA would have boosted its reserves by more than $1 billion.

Also to boost the reserve, the FHA will ask Congress to increase a separate insurance fee that borrowers pay annually, people said. If the agency were to run short of cash to cover projected losses, it

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Change I Would Never Have Believed in – Is Obama’s Window of Opportunity Closing Faster than Expected?

President Obama famously promised the country “change we can believe in.” As a longtime Massachusetts resident, one change I would never have believed in until shortly before it actually happened is a conservative Republican winning a Senate seat in my home state. No Republican has won a Senate race in the Bay State since 1972, and even then it was liberal Edward Brooke. With some justice, the White House will point out that Democratic nominee Martha Coakley was a poor candidate. But a Democrat usually doesn’t have to be a good candidate to win in Massachusetts. Normally, it’s enough to be a warm body with a D next to her name. The fact that the election was even close is a sign that the administration and its agenda have become unpopular.

Back in 2008, I wrote that, despite many reservations about McCain and the GOP, I feared an Obama victory because the combination of unified Democratic control of government and a crisis atmosphere was likely to lead to a vast expansion of federal spending and regulation. Naturally, I have to ask whether recent events have proven me wrong. If Obama is this unpopular in liberal Massachusetts, he is likely to have great difficulty in enacting an expansive legislative agenda, especially if the Republicans make major gains in November as many analysts expect.

I either overestimated Obama’s political skills or underestimated the structural obstacles he would have to overcome; probably it was some combination of both errors. His window of opportunity for major left-liberal policy changes is closing faster than I expected. Probably faster than Obama himself expected too.

At the same time, I don’t think I was totally wrong. Obama has already secured an enormous increase in government spending with last year’s $800 billion “stimulus” bill, putting in place policies [...]

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