Archive for the ‘fiscal policies’ Category

What if we can’t make government smaller?” the Niskanen Center’s Will Wilkinson asks. He says that the evidence, particularly Wagner’s Law, shows that government spending is impervious to political assault, and libertarians should make their peace with big government. Instead, libertarians should focus on reforming regulations to foster competition and the market process.

I have a different read of the evidence from Will’s. At the Learn Liberty blog, I write,

Governments do have a tendency to grow. However, the U.S. has cut government consumption significantly in the past and could do so again. The drivers of welfare spending are the aging of the population and rising health care costs, not political support for new programs.

I support those claims with a series of charts. Check it out!

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In the U.S., states have full authority over local government. Some states strictly centralize power and leave local government little to do. For instance, Hawaii has a single school district for the entire state, so that different localities cannot choose to spend different amounts on the government schools. Michigan effectively has a similar system, because it requires every school district to spend the same amount of money per student and redistributes tax funds across districts to make that possible. Vermont has also centralized school funding.

At the other end of the spectrum, states like New Hampshire let local governments pretty much decide their own level of funding for schools and other programs (about half of all local spending in the U.S. goes toward schools), and towns differ widely. If you want to live in a low-tax, low-spending town or a high-tax, high-spending town, it isn’t terribly difficult to find one. In the middle are states like Texas, where local governments are responsible for their own tax and spending decisions, but the most important level of local government is the county, much larger than the town, and it is therefore difficult to choose where to live based on local taxes and services.

Can we measure how decentralized each state is? I’ve tried to do so. The first measure of decentralization looks at how important local taxes are compared to state taxes. It divides local taxes by state and local taxes put together. This is a familiar variable to scholars of “fiscal federalism,” and it is typically called “tax decentralization.” Here is how the states rank on tax decentralization, as of fiscal year 2011-12, the most recent year for which data on local taxes are available from the U.S. Census Bureau:

New Hampshire 0.62475539
Alaska 0.584999114
Texas 0.555497037
Colorado 0.5420195
New York 0.540915308
Louisiana 0.520062304
South Dakota 0.514664958
Florida 0.508526077
New Jersey 0.503867865
Georgia 0.502739018
Missouri 0.490816162
Nebraska 0.486587041
Rhode Island 0.483462474
Ohio 0.47233672
Virginia 0.468452418
Illinois 0.466955731
Wyoming 0.465238453
South Carolina 0.459566438
Maryland 0.451067476
Pennsylvania 0.449406333
Arizona 0.440699694
Iowa 0.437082825
Oregon 0.434834984
Kansas 0.434319401
Washington 0.431347838
Wisconsin 0.423486277
Tennessee 0.421965652
Utah 0.420621904
Maine 0.411333699
Massachusetts 0.398031363
Connecticut 0.397670719
Montana 0.389680799
California 0.387518844
Nevada 0.383740954
Oklahoma 0.383081024
New Mexico 0.382245601
Alabama 0.382121115
North Carolina 0.366066432
Michigan 0.361458412
Indiana 0.352963108
Kentucky 0.33512693
Idaho 0.325219717
North Dakota 0.312465478
Mississippi 0.306727915
West Virginia 0.29895431
Minnesota 0.282530032
Hawaii 0.258739008
Arkansas 0.220173834
Delaware 0.215201394
Vermont 0.152464302

This isn’t the only way we can measure decentralization, though. After all, some states have more “competing jurisdictions” from which a prospective homeowner can choose than others do. To get at this concept was a little more complicated. I first counted the number of county, municipal, and township governments for each state from the U.S. Census Bureau. Then I looked at what proportion of local taxes came from each level of government and created a weighted average of number of local governments for each state. So if a state had 100 towns, 10 counties, 0 townships, and towns raised 20% of local taxes, while counties raised 80% of local taxes, the formula for the weighted average would be 10*0.8+100*0.2. The formula “rewards” states for letting lower-level, more numerous governments raise more taxes.

Then I thought about the decision of a homeowner in choosing a government to live under. Typically, your general location is set by where you have a job, say, a metropolitan area. But there may be several jurisdictions in that metro area to choose from. So I divided the “effective number of competing jurisdictions” described in the last paragraph by the state’s privately owned land area in square miles and multiplied by 100. So the resulting variable is the effective number of competing jurisdictions per 100 square miles of privately owned land. Higher values mean there is a lot of choice among governments.

Here is how the states come out on this variable measuring choice among governments:

New Jersey 5.619216533
Massachusetts 4.644661232
Pennsylvania 4.458726121
Rhode Island 4.016477858
Connecticut 3.634408602
Vermont 3.315789474
New York 2.934484963
New Hampshire 2.529344945
Wisconsin 2.189851779
Illinois 1.823655675
North Dakota 1.699505873
Delaware 1.586429725
Ohio 1.522032431
Maine 1.515194346
South Dakota 1.21988394
Missouri 1.105963152
Iowa 1.092652689
Indiana 0.972491305
Michigan 0.968708835
Kentucky 0.818674996
Minnesota 0.789141489
Arkansas 0.724807709
West Virginia 0.709066369
Oklahoma 0.693505752
Alabama 0.684705931
Georgia 0.551970462
North Carolina 0.535369811
Tennessee 0.506450581
Maryland 0.49052107
Kansas 0.479065166
Virginia 0.475682594
Florida 0.453352937
Nebraska 0.444783283
South Carolina 0.431428983
Louisiana 0.427531008
Utah 0.382243912
Mississippi 0.375744252
Washington 0.373979057
Texas 0.326573652
California 0.301273953
Colorado 0.284535146
Idaho 0.275746556
Oregon 0.273392409
Arizona 0.094351369
New Mexico 0.087975845
Montana 0.077669113
Hawaii 0.070909413
Wyoming 0.058851844
Alaska 0.042298043
Nevada 0.036335668

In general, the northeastern states score highly, largely because of a historical legacy of strong town government.

We can multiply both variables, tax decentralization and effective number of competing jurisdictions per 100 sq mi, together to get a single measure of how decentralized each state is.

New Jersey 2.831342639
Pennsylvania 2.003779755
Rhode Island 1.941816321
Massachusetts 1.848720839
New York 1.587307839
New Hampshire 1.580221888
Connecticut 1.44529788
Wisconsin 0.927372178
Illinois 0.851566468
Ohio 0.718911807
South Dakota 0.627831517
Maine 0.623250495
Missouri 0.54282459
North Dakota 0.531036915
Vermont 0.505539528
Iowa 0.477579724
Michigan 0.350147957
Indiana 0.343253553
Delaware 0.341401889
Georgia 0.277497088
Kentucky 0.274360038
Oklahoma 0.265668894
Alabama 0.261640594
Florida 0.23054179
Minnesota 0.22295617
Virginia 0.222834661
Louisiana 0.222342761
Maryland 0.221258101
Nebraska 0.216425781
Tennessee 0.21370475
West Virginia 0.211978447
Kansas 0.208067296
South Carolina 0.198270281
North Carolina 0.195980916
Texas 0.181410696
Washington 0.161315058
Utah 0.160780162
Arkansas 0.159583693
Colorado 0.154223598
Oregon 0.118880584
California 0.116749334
Mississippi 0.115251251
Idaho 0.089678217
Arizona 0.041580619
New Mexico 0.03362838
Montana 0.030266162
Wyoming 0.027380141
Alaska 0.024744317
Hawaii 0.018347031
Nevada 0.013943484

New Jersey is the state where the taxpayer has the most choice of government. While local property taxes are generally high there, that may simply reflect the preferences of local homeowners who want to spend money on services. It would be unsurprising if there are also some local jurisdictions in New Jersey where taxes are especially low.

In general, northeastern states, which are mostly left of center and high-tax, have a heretofore unseen advantage in their fiscal systems, letting competing local governments do much or even most of the taxation, making them responsive to local property owners. Perhaps it is precisely because of that responsiveness that overall tax burdens are allowed to be high in some of these states (New Hampshire aside): homeowner voters are more content with the way government uses their tax money there.

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This week the Congressional Budget Office released The Budget and Economic Outlook: 2014-2024. From the press coverage, one would have guessed the report was either entitled Obamacare: the Job Killer that is Almost as Bad as Benghazi or Obamacare: Ending the “Job Lock” and Opening the Door to Leisure. In reality, the impact of the Affordable Care Act was only a small part of the report—largely restricted to the appendix—and arguably the least troublesome.

Here are a few highlights. I will quote from the CBO report, since most of the media coverage will only address the shiny objects connected to the Affordable Care Act (for an exception, see Ron Fournier’s piece in National Journal).

Economic Growth

  • “[T]he economy will grow at a solid pace in 2014 and for the next few years…Beyond 2017, CBO expects that economic growth will diminish to a pace that is well below the average seen over the past several decades. That projected slowdown mainly reflects long-term trends—particularly, slower growth in the labor force because of the aging of the population.” (p. 1)
  • “The unemployment rate is expected to edge down from 5.8 percent in 2017 to 5.5 percent in 2024.” (p. 5)

The Debt

  • “[T]he deficit is projected to decrease again in 2015—to $478 billion, or 2.6 percent of GDP. After that, however, deficits are projected to start rising—both in dollar terms and relative to the size of the economy— because revenues are expected to grow at roughly the same pace as GDP whereas spending is expected to grow more rapidly than GDP.” (p. 1)

The Consequences (p. 18)

  • “The nation’s net interest costs would be very high (after interest rates moved up to more typical levels) and rising.”
  • “National saving would be held down, leading to more borrowing from abroad and less domestic investment, which in turn would decrease income in the United States compared with what it would be otherwise.”
  • “Policymakers’ ability to use tax and spending policies to respond to unexpected challenges—such as economic downturns, natural disasters, or financial crises—would be constrained. As a result, unexpected events could have worse effects on the economy and people’s well-being than they would otherwise.”
  • “The likelihood of a fiscal crisis would be higher. During such a crisis, investors would lose so much confidence in the government’s ability to manage its budget that the government would be unable to borrow funds at affordable interest rates.”

Beyond 2024, things only get worse

  • “Although long-term budget projections are highly uncertain, the aging of the population and rising costs for health care would almost certainly push federal spending up significantly relative to GDP after 2024 if current laws remained in effect. Federal revenues also would continue to increase relative to GDP under cur- rent law, reaching significantly higher percentages of GDP than at any time in the nation’s history—but they would not keep pace with outlays. As a result, public debt would reach roughly 110 percent of GDP by 2038, CBO estimates, about equal to the percentage just after World War II. Such an upward path would ultimately be unsustainable.” (pp. 25-26)

Of course,  the core driver in these projections is the aging of the population.  Policymakers have the ability to reform key policies to reduce the long-term impact of the demographic shift, and the earlier these reforms are introduced, the less dramatic they need to be. But given the endless campaign and the struggle over the news cycle, who can even contemplate serious entitlement and tax reform.  It is far easier to focus on the shiny objects than to acknowledge the core message of the CBO’s report.

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The news has been ripe with administration scandals as of late and will likely be for some time (Memo to BHO: There may be no better way to keep scandals in the news than to use the Justice Department to go after the Associated Press). But soon attention will turn to the issue of fiscal sustainability (or at least one hopes).

I have been updating some charts for a second edition of a book I wrote a while back. One of my favorite charts presents inflation-adjusted spending per capita. I focused on domestic spending in this chart not because I discount the importance of defense spending, but because it was in support of an argument I was making. To give you a flavor of the numbers, consider the following (all figures are in 2005 dollars):

  • Starting at the New Deal, the peak level of domestic spending before US entry into WWII was $865 per capita (1940).
  • Let us leap forward to the 1960s. The highest level of domestic spending per capita under LBJ was $2,265 (1968).
  • Peak domestic spending during the Reagan presidency was $4,950 (1987).  That is 218 percent of the Great Society levels (Don’t fight the urge to cheer “LBJ, All the Way”).
  • President Clinton assured us that we were witnessing the end of Big Government. While federal spending as a percentage of GDP fell to 18.6 percent (2000), per capita domestic spending stood at $6,206.
  • George W. Bush increased that figure to a peak of $7,215 (2007). And Barack Obama made history in 2010, when domestic spending per capita hit $8,631 (it stood at $8,141 in 2012).

Real Spending

A couple of thoughts: First, while many may associate “big government” and FDR,   “that man” (as Grover often calls him) was a piker. In inflation adjusted terms, the Reagan Revolution entailed spending 5.72 times that sum. In 2010, the federal government was spending almost 10 times that amount. Second, these numbers grossly understate overall domestic spending. State and local governments expenditures are 11.3 percent of GDP—a larger share of GDP than the federal government spent in any year during the domestic phase of the New Deal (the peak was 10.3 percent in 1939). If we combine federal domestic, state and local spending for 2012, it stands at $13,034 per capita. Third, the big driver is the combination of demographic trends and mandatory spending on entitlements programs.

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The Economist provides a concise discussion of the debates surrounding the impact of debt on economic growth. The focus is on the work of Carmen Reinhart and Kenneth Rogoff, drawing on some of the research they conducted for their fine book This Time is Different.  The Reinhart/Rogoff paper (link here) had a simple takeaway point: debt seems to have little impact until it reaches 90 percent of GDP, at which point there appears to be a sharp reduction in the rate of growth.  As one might guess, this conclusion attracted a good deal of attention given the implications for fiscal policy decisions and the stakes in stabilizing debt (e.g., Paul Ryan cited it when framing his case for the GOP budget). Critiques have engaged issues ranging from coding errors (acknowledged by the authors) to the direction of causality.

The debate is by no means over and it may prove of some interest as the budget battles heat up and policymakers turn their attention to the vexing issue of entitlement reform. For a recent installment in the discussion over the growth-debt relationship, see Martin Wolf’s column (“Austerity loses an article of faith”) in the Financial Times.

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The Washington Post reports on some of the details of the Obama administration’s budget proposal, which is to be released next Wednesday. There are several important proposals (the largest of which have appeared before in the negotiations with the Speaker). Although the devil is in the details, a few salient points:

  • $200 billion cut from defense and domestic budgets
  • $400 billion cut from Medicare and other health programs via negotiation over pharmaceuticals and means testing
  • $230 billion (combined cuts and revenues) in Social Security via changes in the formula for calculating cost of living adjustments (from CPI-W to chained CPI)
  • $200 billion from farm subsidies and federal retirement benefits
  • Elimination of a loophole that allows people to simultaneously collect unemployment and disability payments.

All of this (and more) in exchange for $580 billion in new tax revenues largely through ending various tax expenditures. As the Washington Post notes: “The budget is more conservative than Obama’s earlier proposals, which called for $1.6 trillion in new taxes and fewer cuts to health and domestic spending programs.”

If one were serious about achieving long-term fiscal stability, this would appear to be a proposal worth serious consideration. Of course, there will be predictable challenges from the Left and the Right.

  • On the Left, entitlement reform is simply off the table. Senator Bernie Sanders (I-VT) is quoted as proclaiming: “Millions of working people, seniors, disabled veterans, those who have lost a loved one in combat, and women will be extremely disappointed if President Obama caves into the long-standing Republican effort to cut Social Security.” The same might be said of Medicare. And one can expect the claims that one should not pursue austerity when economic recovery has proven so elusive.
  • On the Right, many in the House GOP will scoff at any more taxation, even if it is accompanied by major concessions on entitlements.  After all, that $580 billion will be stripped from the corporate welfare larded on the oil and gas industry and tax expenditures that currently place no cap on the size of retirement funds (the administration wants to cap tax subsidized retirement accounts at $3 million).

Presidents’ budgets rarely survive the congressional budget process, so the document to be released on Wednesday might be little more that a symbolic gesture that will allow the administration to signal its commitment to fiscal restraint under the assumption that it will be declared DOA before the ink is dry.  But what if the President is serious?

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As we approach midnight February 28 (tick..tick…tick…) and March 1st arrives, the nation appears to be headed toward a cataclysm. There is an ever-growing number of stories informing us how bad things could get.

The sequestration will force a sharp drop in the economy. It will kill the surging stock market. It will delay tax refunds. It will prevent entrepreneurs from starting new small businesses. It will compromise meat inspection. It will hamper airport safety and Homeland Security more generally. It will prevent assistance for Hurricane Sandy victims.  It will disproportionately harm women, and poor women in particular. Mother Jones expands on this claim to note that it will simply “screw the poor” (e.g., by undermining education, Title I finding, rural rental assistance, the processing of Social Security disability claims, unemployment benefits, veterans services, nutritional assistance, special education…you get the idea).

The Washington Post has provided a user-friendly guide to the White House data on how sequestration will effect each state . Of course, the categories have been nicely selected to construct a politically useful alternative universe (i.e., one where government is seemingly restricted to supporting teachers and schools, Head Start, job-search assistance, child care, vaccines for children, preventing violence against women, etc., etc).  Core message: what government does is universally good and necessary. There is no room for cuts.

Things seem quite dire, until one recalls that the $85 billion will not be sucked out of the economy as the clock turns to 12:00:01 on March 1 and, more than likely, there will be some agreement in the waning moments of February or the first few days of March to avoid this self-inflicted sequestration.

But even if there isn’t, one might question whether $85 billion is all that significant when the President’s budget request for 2013 is $3.803 trillion. Subtract that $85 billion, and the budget would fall to $3.745 trillion.  Placing things in historical context, that would be the largest budget since…(insert drum roll here)… 2012.

Placing things in a broader historical context, the budget (in nominal terms) would be over 160 percent of what it was a decade earlier, around 135 percent if we adjust for inflation.

The most striking thing to contemplate: If this is the political firestorm that arises out of a $85 billion reduction in discretionary spending out of a $3.8 trillion budget, imagine what will occur when focus turns—as it must—to the issue of entitlements.

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