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Archive for the ‘corporate welfare’ Category

Academics are given to bemoaning partisan polarization. But the mushy centrism being pushed by the No Labels crowd frequently just amounts to special-interest whoring. Bipartisanship usually means the people get screwed, and the lobbyists win. Latest case in point: the morally corrupt Farm Bill. Congress is claiming it has reformed the program and cut it slightly, but those claims turn out to be false. Perniciously, the farm subsidies are now more indirect and less transparent. The only Congressmen who voted against this were the radical Tea Partiers. Conservatives claim to defend the taxpayer and the free market, yet most of them voted for a bill that extends $10 billion or more a year in corporate welfare. Progressives claim to defend the poor, yet voted overwhelmingly for a bill that gives away taxpayer money to big business and wealthy families while killing starving Africans.

Shame on them.

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In my last two posts, I showed that the U.S. has a large social welfare state by cross-national standards, maybe even the second-largest in the OECD. However, the U.S. welfare state is much less redistributive from rich to poor than most other welfare states.

In this post, I tackle spending on infrastructure (“gross fixed capital formation”) and subsidies. According to the punditocracy, the U.S. always needs to spend more on infrastructure. Conversely, the populist mood in this country stands firmly against subsidies to business, and perhaps rightly so — very few subsidies seem rationally designed to compensate for positive externalities.

But it turns out the U.S. spends more than almost every other OECD country on public investment in fixed capital, and less than every other OECD country on subsidies. Take a look:

u.s. spends a lot on infrastructure

u.s. spends little on subsidies

The first plot shows public investment by country, divided by GDP, in 2012. It includes spending by all levels of government. The U.S. places near the top of the international standings in that year, but this is no fluke: throughout the last three decades, the U.S. has been near the top of international tables in this measure. Maybe everybody needs to spend more on infrastructure, but this certainly doesn’t seem like a uniquely American problem. And maybe you think that a less densely populated country has a higher optimal level of public infrastructure spending, but I’m not so sure: higher infrastructure spending in such a country could subsidize an inefficient distribution of population.

The second plot shows public subsidies by country, divided by GDP, in 2012, again summing up the figures for all levels of government. The U.S. stands right at the bottom, with less than half a percentage point of GDP going to subsidies. Further, state and local governments spend only about 0.1% of GDP on subsidies, so the federal government is the main sinner here. Now, these figures don’t seem to be picking up tax advantages like “tax increment financing” districts popular at the local level. Still, businesses can typically be exempted only from taxes that they otherwise would have paid; expenditure-side subsidies are potentially unlimited.

I should note that federalism doesn’t seem to be the key to U.S. spending patterns here: federal Austria and Switzerland are among the highest subsidy spenders, and are not very high on infrastructure spending.

Bottom line: it’s not clear that, at the margin, the U.S. needs a lot more infrastructure spending, and the subsidy picture certainly complicates any plausible “libertarian populist” movement aimed at big business privileges.

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Ah, yes, a bit of nostalgia from the “summer of recovery”: the Car Allowance Rebate System (CARS), also known as Cash for Clunkers.

It seemed quite promising to many in the halcyon days of 2009.  Citizens could trade in their old gas guzzlers (which were subsequently destroyed) for a rebate that could be applied to purchase a more fuel-efficient car. It would simultaneously stimulate the economy (and the auto industry) and improve the environment. Undoubtedly, as part of the stimulus efforts, it would pay for itself.

Ted Gayer and Emily Parker have a new paper and policy brief at Brookings on the program. (For a brief overview, see Kevin Robillard’s piece in Politico). The discussion below draws from the policy brief.

How did Cash for Clunkers perform?

  • By the end of the program, 677,842 vehicles were traded for vouchers, at an overall cost of $2.85 billion (some $4,200 per rebate).
  • But according to Gayer and Parker, the program only added 380,000 additional sales to what would have occurred absent the program, and these were largely sales that were pulled forward from sales that would have normally occurred in the future. “Ten months after the end of the program, the cumulative purchases from July 2009 to June 2010 were nearly the same, showing little lasting effect.”
  • And while there was a short-term addition of $2 billion to GDP, it was simply pulled forward from the next two quarters.
  • Cars for Clunkers did create jobs, but at a cost of $1.4 million per job.

There are some additional information in the brief on the distributional impacts (surprise: the recipients tended to be more affluent than those who purchased a new or used car during the same period without a rebate) and the environmental impacts (surprise: Cash for Clunkers was not a cost-effective means of reducing carbon emissions).

Bootlegger-Baptist coalitions (a term coined by economist Bruce Yandle) are common in politics (particularly in regulation). In essence, a Bootlegger promotes a policy that will further its economic interests. It  legitimizes its efforts by forming a coalition (often implicit) with the Baptists, who appeal to higher values or the public good. A simple example: renewable fuel standards. Agribusiness secures a market for corn ethanol, and draws on environmental advocates for cover.  In Cash for Clunkers, the bootlegger is easy to identify: auto dealers. Robillard’s article notes that the program retains the support of the National Automobile Dealers Association, which strongly advocated the program at its inception and lobbied quite effectively for its expansion from $1 billion to almost $3 billion. Its spokesperson noted: “There’s no question Cash for Clunkers was the best Obama administration program to date.”  From the perspective of the industry, what’s not to like? It provided a de facto subsidy for the industry, and industry self-interest was veiled by tying it to the larger goals of promoting the needs of the unemployed and saving the earth. Even if the Baptists were hung out to dry (another parallel with ethanol), what’s the harm? The $2.85 billion price tag (not including interest) will fall to future generations (i.e., the children who had the brief privilege, in 2009, to ride in their parents’ new cars).

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In 2010, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act “to promote the financial stability of the United States by improving accountability and transparency in the financial system, to end ‘too big to fail’, to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes.” Dodd-Frank was a massive piece of legislation (the Economist quipped that it was too big not to fail). One of the key criticisms was that so much of what Dodd-Frank aspired to do was delegated to rulemaking in the regulatory agencies. Ultimately, whether Dodd-Frank would prevent another financial crisis would depend on the quality and compatibility of some 398 rules.

One of the many targets of Dodd-Frank was the securitization process. In the days of traditional banking, banks financed their loans with deposits and then retained those loans until they matured (the “originate-to-hold” model). Because they had skin in the game, they had incentives to lend only to credit-worthy borrowers. But increasingly, this model was replaced by the “originate-to-distribute” model wherein banks would sell their loans to other parties that would, in turn, pool them and sell shares to investors (the securitization process). The securitization process changed the incentive structure. Lenders no longer had skin in the game and were thus far less interested in the question of whether borrowers could document their ability to meet their obligations. (more…)

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President Obama visited Phoenix yesterday to give a speech on homeownership. The promotion of homeownership has been on the agendas of the past several presidents (e.g., George W. Bush and the “ownership society) and much of President Obama’s speech could have been written by HUD secretaries Jack Kemp or Henry Cisneros. While there is little new in the President’s speech, two things were particularly noteworthy.

First, the administration appears committed to addressing Fannie and Freddie, the two government-sponsored enterprises (or GSEs) that played a central role in fueling the bubble. President Obama talked about “laying a rock-solid foundation to make sure the kind of crisis we just went through never happens again.” He continued:

That begins with winding down the companies known as Fannie Mae and Freddie Mac. For too long, these companies were allowed to make big profits buying mortgages, knowing that if their bets went bad, taxpayers would be left holding the bag. It was “heads we win, tails you lose.” And it was wrong.

Oddly enough, Dodd-Frank did little more than note that “the hybrid public-private status of Fannie Mae and Freddie Mac is untenable and must be resolved” and stated that financial reforms “would be incomplete without enactment of meaningful structural reforms.” That task was put off for another day. Perhaps the day is nearing. (more…)

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The new farm bill is making its way through the Senate and to the House. As it currently stands, it will cost some $950 billion over the next ten years. To be fair, much of that is for food stamps (or the Supplemental Nutrition Assistance Program). As you may know, rural legislators used the original Food Stamp Act (1964) as a means of getting legislators representing urban districts to back agricultural price supports. It might have been a small price to pay: it provided some $75 million to 350,000 people when first enacted. However, in 2012, it claimed $75 billion to support some 48 million people, and this has been at the center of the debate.

Our agricultural policy has long been an exercise in corporate welfare, perverse incentives, and unintended consequences (of course, at some point what are unintended consequences may be correctly viewed as intended consequences if we continue to enact the same policies with the same results). Advocates of the new farm bill make the claim that this time there will be genuine reform. The new farm bill, purportedly, will end direct most subsidies to farmers (we will file that under “believe it when you see it”). But as a piece in the new Economist notes, this is really a case of bait-and-switch insofar as two-thirds of the “savings” are simply redirected into other, less visible forms of support. For example, much will be diverted to federal crop insurance. Taxpayers cover two-thirds of the premiums and the claims. Last year’s bill: $7 billion in insurance subsidies with an additional $17 billion in payouts due to the drought. (more…)

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Let’s start with the good: the Obama administration is considering removing all US troops from Afghanistan at the end of 2014 (rather than leaving a force of 6,000-15,000 behind).  As coverage in WaPo notes, this option “defies the Pentagon’s view that thousands of troops may be needed to contain al-Qaida and to strengthen Afghan forces.” If the Senate confirms Chuck Hagel as Defense Secretary, I would assume there would be an additional voice for complete withdrawal.

And now the bad: As of Tuesday, there have been six drone strikes so far this year. Total death toll: 35 and counting. As Spencer Ackerman (Wired) notes:

Obama has provided the CIA with authority to kill not only suspected militants, but unknown individuals it believes follow a pattern of militant activity, in what it terms “signature strikes.” The drone program has killed an undisclosed number of civilians. A recent study conducted by Center for Civilians in Conflict and Columbia Law School’s human-rights branch explored how they’ve torn the broader social fabric in tribal Pakistan, creating paranoia that neighbors are informing on each other and traumatizing those who live under the buzz of Predator and Reaper engines. Those traumas are raising alarm bells from some of the U.S.’ most experienced counterterrorists.

And the ugly: a crony capitalist may rise up against its political patron. AIG is contemplating joining a lawsuit against the US government. Now that it has repaid the $182 billion it owed, it may want to make a claim on some $22 billion in profits that were generated in the interim. As the NYT reports:

At issue is the possibility that [the] insurer may join a lawsuit filed by its former chief executive, Maurice R. Greenberg, claiming that the 2008 bailout shortchanged investors and violated their Fifth Amendment rights.

The alternative to the bailout would have been liquidation. A.I.G. embraced the bailout on the terms offered in 2008. It seems a bit odd to cry foul at this point in the game, particularly given that the collapse that A.I.G. helped create reduced the median net worth of American families by nearly 40 percent (from $126,400 in 2007 to $77,300 in 2010), according to the Fed.

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