Why does the Canadian federal government collect 1.9 percent of GDP in revenues with a 15 percent corporate tax rate, while the U.S. federal government only collects about the same (2.0 percent) with a 35 percent corporate tax rate?
One reason is that a low corporate tax rate induces higher real investment and economic growth, which in turn generates higher government revenues.
Another reason is profit shifting by multinational corporations. Over time, paper profits are steadily shifted out of countries (such as the United States) that have unfavorable tax rates and tax rules. The (now abandoned) plan for American Pfizer to merge into British AstraZeneca to save $1 billion a year on taxes was one illustration of how tax based migration works.
This May 5 story in Tax Notes International (subscription required) provides another illustration from the pharmaceutical industry:
The combined entity resulting from the proposed acquisition of U.S.-based Allergan Inc. by Valeant Pharmaceuticals would have an effective tax rate in the single digits, around 20 percentage points lower than Allergan’s current rate, according to Valeant CEO J. Michael Pearson.
Quebec-based serial acquirer Valeant on April 22 announced an offer of close to $46 billion in cash and stock in its bid for competitor Allergan, the company behind Botox. The acquisition would make Valeant the second largest company in eye health globally, ahead of Johnson & Johnson and behind Alcon.
Valeant has partnered with Allergan’s largest shareholder, Pershing Square Capital Management, led by CEO William Ackman, to solicit support for the deal from Allergan shareholders.
Ackman said he has spent time familiarizing himself with the sustainability of Valeant’s tax structure. “The company has the benefit of being based in Canada; there are some unique attributes of the Canadian tax system,” he said during an April 22 presentation to investors led by Valeant’s management team. High on the list of selling points are tax synergies that would result from the deal. The combined company would have a high single-digit cash tax rate, Pearson said, adding, “and those of you who know us know what we’re able to do there.”
Pearson may have been alluding to tax savings Valeant has achieved in the past using strategic deal structures and intellectual property migration.
Valeant, which began as a New Jersey company with an effective tax rate in the mid-30 percent range, merged with Canadian pharmaceutical company Biovail Corp. in a 2010 inversion that resulted in a combined company domiciled in Canada with offshore IP and a worldwide effective tax rate of about 5 percent. Last year Valeant bought New York-based Bausch & Lomb for around $8.7 billion cash and promptly integrated the U.S. company into Valeant’s decentralized model.
During the April 22 presentation, Valeant CFO Howard Schiller confirmed that the Allergan acquisition plan would be business as usual on the tax front: Allergan would be integrated into Valeant’s corporate structure in much the same way as Bausch & Lomb, with the new company based in Canada.
“We’ll use an installment sale approach to migrate our IP to our Irish subsidiary and, just like in Bausch & Lomb, we expect to get immediate synergies in that regard,” Schiller said, adding, “and we will have a high single-digit tax rate for the foreseeable future.”
The tax projection comes from five- to six-year models and should be welcome news to shareholders of Allergan, which expects an effective tax rate for 2014 of between 26 and 27 percent.
But Valeant is sensitive to those who might see the new effective rate as high, compared with the company’s typical low single-digit rates. “There are things that we’re looking at that we could possibly do to improve that,” Schiller said. “Over time, if we bought assets outside the U.S., which, given our footprint we’re likely to do, that would create opportunities.”
K. William Watson
The government of India is set to impose antidumping duties on solar panels imported from the United States. These duties represent just one more episode in the bizarre saga of global solar protectionism that has seen governments in Europe and the United States impose tariffs on solar panels while simultaneously subsidizing the consumption of solar power. Unfortunately, India seems set on following Western economies in the pursuit of irrational green industrial policy.
The increased duties are sure to further inflame a preexisting dispute between India and the United States over solar power subsidies. The WTO is currently reviewing a U.S. complaint against India for requiring that subsidized solar power plants use domestic solar panels.
Imposing tariffs on foreign panels is just another way to achieve the same protectionist goals and is equally bad for India’s economy. Either way, the demand for domestic panels is artificially inflated, enabling Indian panel makers to charge less competitive prices. The losers from this policy are not just U.S. manufacturers, but also Indian consumers, Indian taxpayers, and every other business in India.
The Indian case is especially exasperating because, as reported in the Wall Street Journal, India’s government is hoping to dramatically increase its domestic manufacturing base. There are few policies more detrimental to achieving that goal than an increase in the cost of energy.
The great irony is that government-led schemes to promote the use of renewable energy are one of the greatest obstacles to the development and broad adoption of solar technology in the future. This ought to be intuitive. Just imagine if the government had decided in the 1960s that computers were important to the future, but since they were slow and big and clunky, we should develop bureaucratic incentive programs to usher in a new high-tech economy. Does anyone really believe such a policy would have hastened the adoption of digital technology or enabled development of the innovative devices, services, and business models that have revolutionized American life?
The inconvenient truth is that green industrial policy isn’t going to lead to a future of renewable energy, but it does benefit cronies and politicians. Bureaucrats who don’t make decisions based on market realities still respond to incentives, making them susceptible to capture by special interests at public expense (see Solyndra). Even if bureaucrats are enlightened saints, the centralization of decision-making benefits large firms at the expense of entrepreneurs and other innovative competitors. Over time, the relationship between commercial success and political acumen leads businesses to invest more in lobbying and leads to a culture of rent-seeking and privilege.
The global proliferation of protective tariffs on solar and wind energy components offers one of the clearest examples of how industries built on government subsidies learn to rely on government solutions. It’s what they know how to do. The result is an irrational government policy that taxes what it subsidizes, funneling all the benefits toward an increasingly narrow group of people—the green energy future be damned.
The most immediate policy fix for this problem is for countries to agree to zero tariffs on all “environmental goods” like solar panels. There are already efforts in place at various international fora to work out just such an agreement. As Simon Lester and I pointed out in a policy bulletin last year, if an environmental goods agreement is going to be truly effective, it must include a moratorium on antidumping duties like the ones currently imposed by the United States, the EU, and now India.
Michael F. Cannon
David A. Hyman is the H. Ross & Helen Workman Chair in Law and director of the Epstein Program in Health Law and Policy at the University of Illinois Urbana-Champaign, as well as an adjunct scholar at the Cato Institute.
Earlier this month, Hyman gave the following erudite presentation on the implementation of the Patient Protection and Affordable Care Act – which he calls PPACA, not “ObamaCare” or “the Affordable Care Act” – at a faculty seminar hosted by the University of Chicago’s MacLean Center for Clinical Medical Ethics.David Hyman - Implementation Challenges of PPACA
Hyman’s remarks begin at about 5:00.
Be sure to read Hyman’s excellent satire, Medicare Meets Mephistopheles.
After my blogpost yesterday about Department of Veterans Affairs spending, my research assistant Nick created the chart below on the number of VA employees. Wow, you don’t often see bureaucracies expand that rapidly! A 56 percent increase in just 13 years, from 219,000 to 341,000 employees. The VA has 100,000 new employees just since 2006.
The data is from this OPM website, which also provides a breakdown for agencies within departments. About 90 percent of VA employees are in the Veterans Health Administration, which is currently in the news for its horrendous mismanagement.
Steve H. Hanke
Since Hassan Rouhani assumed the presidency of the Islamic Republic of Iran in August of last year, the economic outlook for Iran has improved. When Rouhani took office, he promised three things: to curb the inflation which had become rampant under Mahmoud Ahmadinejad, to stabilize Iran’s currency (the Rial), and to start talks to potentially end the sanctions which have battered Iran since 2010. Rouhani has delivered on each of these promises. From this, one might assume that the Iranian economy, and the Iranian people, are headed towards better times.
Unfortunately, the Misery Index paints a different picture. The Misery Index is the sum of the inflation, interest, and unemployment rates, minus the annual percentage change in per capita GDP. It provides a clear picture of the economic conditions facing Iranians.
The accompanying Misery Index chart gives us both a snapshot of the Iranian misery levels spanning the past three administrations, as well as a forecast of Iran’s future misery levels. Over the past three administrations, Iran’s miserable state of economic affairs has been driven in large part by its unstable currency and high inflation. The most dramatic peak in the Misery Index occurred in October of 2012, when, under Ahmadinejad, Iran’s monthly inflation rate reached 69.6 percent – throwing Iran into a brief period of hyperinflation.
Rouhani’s administration has delivered on exactly what it promised, but now Rouhani is running into popular resistance to his administrations’ proposed cuts in fuel, electricity, and food subsidies – subsidies which were expanded greatly during the Ahmadinejad years.
And if the prospect of not being able to deliver on promised subsidy cuts and other economic reforms aren’t sobering enough, forecasts by the International Monetary Fund and The Economist Intelligence Unit indicate that Iran’s Misery Index will probably remain elevated for the next four years. Inflation, though stabilized since the 2012 hyperinflation episode, is predicted to remain above 20 percent in the next few years. Meanwhile, GDP growth is predicted to remain low, and unemployment and lending rates are predicted to remain high.
While Rouhani has been successful in pulling Iran out of its death spiral, the economy has settled into stagflation (high inflation coupled with low GDP growth). Projections of the Misery Index levels suggest that Iranians’ will remain, well, miserable, for some time.
Ted Galen Carpenter
South Korean officials insist that China now agrees that North Korea’s nuclear program poses a serious security threat to the region. If that interpretation is accurate, it is a strong indicator that Beijing’s patience with its troublesome ally is wearing very thin. But as I point out in a new article in China-U.S. Focus, the United States and its East Asian allies have a long-standing tendency to overestimate China’s willingness, even its ability, to restrain Pyongyang without incurring excessive risks to its own national interests.
Rumors continue to swirl that North Korea plans to conduct yet another nuclear test. China is apparently trying to dissuade its volatile ally from taking such a provocative step. According to Reuters, Beijing has used various “diplomatic channels” to convey its wishes to Kim Jong-un’s regime. But China adopted a similar stance with regard to Pyongyang’s last nuclear test, as well as the test of a long-range ballistic missile. Unfortunately, Beijing’s latest expression of opposition is not likely to fare better than previous efforts. Both Kim and his father, Kim Jong-il, defied China’s wishes and conducted such tests. If that weren’t enough, North Korea also attacked the South Korean naval vessel Cheonan and shelled a South Korean island. Although Beijing was clearly unhappy about such incidents, it did not prevent Pyongyang’s dangerous, destabilizing conduct.
Because China provides North Korea with a majority of its food and energy supplies, Pyongyang would seem to be highly vulnerable to pressure from Beijing. But a decision by China to employ maximum economic power to impose its will on the North Korean regime would also require a willingness to incur grave risks. Bringing such pressure to bear could cause the North Korean state to unravel. Not only would that development produce a massive refugee crisis (and possibly a civil war) on China’s border, but North Korea’s demise would obliterate a crucial geographic buffer between the Chinese homeland and the U.S. sphere of influence throughout the rest of Northeast Asia. Few Chinese leaders want to risk that outcome.
If Washington and its East Asian allies want Beijing to become more assertive in leashing Pyongyang, they need to create far more appealing incentives. Perhaps the most important one would be to eliminate China’s worry that the fall of North Korea would lead to a U.S. alliance with a united Korea and the establishment of U.S. air and naval bases on the northern portion of the Peninsula.
Offering the necessary reassurances would require a drastic change in U.S. policy, most notably abolishing the “mutual” defense treaty with Seoul. If North Korea collapsed (or even if the hard-line communist regime was replaced by a non-aggressive, reform government) the ostensible rationale for the treaty would also disappear. Retaining the alliance would then make Beijing extremely suspicious that the real purpose was to contain China. Understandably, Beijing would not want to take action against Pyongyang, if that were the ultimate outcome.
Washington should instead make Chinese leaders an offer that might prove very tempting, given Beijing’s noticeably increased annoyance with the North Korean government. The Obama administration should prod China to use its considerable economic leverage to bring Pyongyang to heel, and offer an explicit assurance that if a significantly less threatening environment develops on the peninsula, Washington will phase-out its alliance with Seoul. As an added incentive, U.S. officials should make it clear that under no circumstances would the United States station forces in the northern portion of a united Korea.
Such an agreement might well be enough to soothe China’s worries about U.S. intentions and get Chinese leaders to take a firmer stance against the dangerous behavior of its client, despite the underlying risk that applying serious pressure might destabilize that client. Since current U.S. policy clearly is not working, we have little to lose by making such an innovative offer to Beijing.
President Obama will likely take some executive action this fall to reduce deportations or legalize some unauthorized immigrants. He recently ordered Jeh Johnson, Secretary of Homeland Security, to delay the release of a review of current deportation policy until after the summer.
A White House official revealed the reason for the delay: “[President Obama] believes there’s a window for the House to get immigration reform done this summer, and he asked the secretary to continue working on his review until that window has passed.”
President Obama has taken a much more conciliatory tone toward Republicans in his push for immigration reform. His 2014 State of the Union address asked Republicans to support reform without blaming them for obstructing it. The White House official’s statement that Obama will delay executive action until after the summer is consistent with that bipartisan tone. It also allows President Obama to appear to be working with Republicans on reform while leaving his policy options open prior to the 2014 elections.
There is no doubt that President Obama’s attitude is better than blaming Republicans for all immigration problems and is more likely to motivate House Republicans to pass some kind of reform, but the mere mention of executive action only deepens the distrust that many Republicans have for the president – not to mention the many legal issues it raises. Republicans are justifiably concerned that President Obama may not enforce any immigration law that is passed or may change it with executive actions.
The Obama administration has consistently piled on more complex rules and regulations for the H-2A, H-2B, and H-1B work visas (with some exceptions that will actually liberalize the system) that make the legal migration system difficult to use. A new guest worker visa program created by Congress could be similarly stymied by rules and regulations promulgated by executive agencies. Some Republicans also complain about the president’s deportation policy. These are real concerns that are not mitigated by the president’s threats.
Many of President Obama’s adjustments to immigration enforcement have been disappointing and haven’t legalized as many unlawful immigrants as they could have. The president’s record on enforcing our harsh immigration laws is strict in contrast to his rhetoric and the stated goals of his executive actions.
However, only legislation can create a guest worker visa program and expand legal immigration enough to channel future immigrants into the legal market. Whatever executive actions the president decides to take, they will deal with problems that have emerged due to our restrictive immigration system that makes it virtually impossible for low and mid-skilled workers to immigrate. Expanding the scale and scope of immigration while diminishing the intensive regulatory oversight role of the federal government is a long-term solution in contrast to an executive action that is temporary at worst and at best seeds legal uncertainty.
Wow, more of this please [St. Paul Pioneer Press]:
It’s no longer a crime in Minnesota to carry fruit in an illegally sized container. The state’s telegraph regulations are gone. And it’s now legal to drive a car in neutral — if you can figure out how to do it.
Those were among the 1,175 obsolete, unnecessary and incomprehensible laws that Gov. Mark Dayton and the Legislature repealed this year as part of the governor’s “unsession” initiative. His goal was to make state government work better, faster and smarter….
In addition to getting rid of outdated laws, the project made taxes simpler, cut bureaucratic red tape, speeded up business permits and required state agencies to communicate in plain language.
If lawmakers in Minnesota could identify 1,175 worthless or outdated laws that could be rooted out with little real political resistance, imagine how many other worthless or outdated laws there are that are not so easy to uproot because they work to the benefit of one group or other.
Rep. Ralph Hall is in the news for losing to a primary challenger in his Texas district. I first met 91-year-old Hall just last week as we were on a Capitol Hill panel together organized by the Texas Association of Business (TAB). In the photo, that’s Hall to my right and Rep. Kevin Brady and TAB head Bill Hammond on my left. (Photo credit: Office of Rep. Hall).
One thing we discussed was how tax reform has stalled because the two parties see “reform” so differently. Rep. Brady noted that the Democrats keep insisting on tax increases as part of any tax reform. I noted that the Democrats have moved so far to left on economics in recent years that it makes 1986-style tax reform very difficult to achieve.
The 1986 Tax Reform Act was a major bipartisan success, with Democratic leaders such as Dick Gephardt and Bill Bradley playing key roles. This 1985 article in Cato Journal by Gephardt reads almost like it could have been written by a Cato scholar, so you can see how the tax deal was possible.
The gulf between that article by a leading Democrat in the 1980s and the relentless drive today by the Obama administration to raise taxes in the most anti-growth of ways is huge. I discussed Democratic tax policy then and now in this op-ed.
Rep. Hall himself reflects the changing party ideologies. He had been a Democrat for decades and always considered himself to be a conservative. But a decade ago he finally switched parties to better line up his beliefs with his affiliation. His loss to a Republican challenger apparently stemmed from the desire to see a fresh face in the district. And yet, when it comes to fresh faces, I sure hope I look as good as Hall does at 91.
The administration has apparently decided to combine the alarming developments I chronicled in my last two blogposts, which dealt with racial discrimination in Hawaii and President Obama’s abuse of executive power. In a classic Friday-afternoon news dump – and on the eve of a holiday weekend, no less – the Interior Department issued an advance notice of proposed rule-making (ANPR) to “solicit public comments on whether and how the Department of the Interior should facilitate the reestablishment of a government-to-government relationship with the Native Hawaiian community.” (Our friends at the Grassroot Institute of Hawaii broke the news; it helps that their weekend starts six hours after Washington’s!)
This would be an end-run around both Congress and the Constitution, marking the first step toward the creation of a race-based government in Hawaii. That is, with variations of the Akaka Bill stalled in Congress for over a decade – and Daniel Akaka no longer in the Senate, and congressional Democrats on their heels more generally – the administration has decided that this is yet another area where it can’t wait for the legislative branch. Even setting aside the Fourteenth/Fifteenth Amendment and policy problems with any proposed racial governing body, this brazen executive action raises serious separation-of-powers concerns.
As recently as September 2013, four members of the U.S. Civil Rights Commission wrote a letter to President Obama, urging him not to unilaterally push for a Native Hawaiian government. After extensive historic and legal analysis, the letter noted that “conferring tribal status on a racial group is itself a violation of the equal protection guarantees of the Constitution.” Moreover, “as beyond the scope of Congress’s powers as it would be for Congress to attempt to organize Native Hawaiians as a tribe, we believe it would be doubly so for you to attempt to do so by executive action.”
Quite so. I just wish that the next time the executive branch wanted to piggyback off my ideas, it would pick some reform proposals rather than mixing two blatantly illegal policies I’ve criticizing.
Foreign policy in the United States is an elite sport. Unless there is a big Iraq- or 9/11-style disaster, the public mostly ignores foreign policy, because it can. The United States is extremely safe, but it runs an expansive, ambitious grand strategy that keeps elites busy and the public largely uninvolved. President Obama will give a speech tomorrow at West Point defending his foreign policy and answering elites who have begun to grow bored with it.
The president seems to view foreign policy mostly through a domestic political lens. While he opposed an Afghanistan surge, he ordered one anyway, likely for fear of the domestic political implications of defying the generals’ request for more time and more troops. Ideologically, Obama fancies himself a realist in the mold of Reinhold Niebuhr, although no actually-existing realists think his policies resemble realism. During the 2012 presidential campaign, Obama found himself particularly captivated by an essay from Robert Kagan—a neoconservative Romney adviser—that urged Americans to wade ever more deeply into world politics. If there were any doubt that the two political parties agree on U.S. foreign policy, Obama’s accord with Kagan should have demolished it.
But the president has begun to irritate both the right and left halves of the foreign policy establishment by declining to intervene more forcefully in Syria and in Eastern Europe. Obama will likely play to nationalist themes in his speech tomorrow, reassuring the foreign policy elite that he endorses their project and explaining to Americans that their special place and special responsibilities in the world necessitate a costly, globe-girdling grand strategy. News reports indicate the administration is contemplating sending anti-aircraft weapons to the Syrian opposition, and that the president will criticize Russian behavior in Ukraine during an upcoming trip to Europe. In addition, the foreign policy establishment has breathed a collective sigh of relief with the announcement that the president will keep nearly 10,000 U.S. troops in Afghanistan beyond his previously-announced 2014 withdrawal date.
Regular Americans should view the speech for what it is: a cynical sop to the insular clique of Beltway elites who view themselves as the vicars of liberalism on earth, and the rightful possessors of hundreds of billions of American tax dollars to do with what they will.
Does giving voters goodies help to get their votes? In Malawi they think so:
Malawi’s President Joyce Banda is betting voters in her poor African nation will rank cows and corn flour ahead of economic tumult and corruption allegations in Tuesday’s elections….
To sweeten the deal for eight million registered voters, most of whom are poor farmers, she spent the past few months giving away hundreds of cows and thousands of 100-pound bags of corn flour at rallies across the country….
“This old-school electoral patronage, a-cow-for-every family, is effective with female voters especially,” said Anne Fruhauf, vice president at the risk-analysis firm Teneo Intelligence. “No one else is courting that half of the electorate.”
As it turns out, this may not have worked as well as observers expected. Banda, running behind in early returns, annulled the election and called another for 90 days later. But clearly she and many other people thought that the distribution of cows would help her chances.
Meanwhile, here in the United States, elected officials prefer to stick with the tried-and-true distribution of cash from the federal Treasury, as the Washington Post reports today:
One of [Sen. Mary] Landrieu’s television ads this spring stars shipbuilder Boysie Bollinger, a longtime GOP fundraiser and activist. As Bollinger walks through his shipyard in a hard hat, he says into the camera, “Louisiana can’t afford to lose Mary Landrieu,” adding that her energy committee post “means more boats, more jobs and more oil and gas. She does big things for Louisiana.”
Bollinger Shipyards, which employs 3,000 people in Lockport, has been a big beneficiary of Landrieu’s largesse. Last fall, she helped secure a $250 million federal contract for Bollinger to rebuild Coast Guard cutters.
It might be cheaper just to give away cows. But cows or contracts, politicians buy votes with taxpayers’ dollars.
The Department of Veterans Affairs (VA) is the fifth largest agency measured by spending. Looking at estimated outlays for 2014, VA spending of $151 billion comes in behind the Department of Health and Human Services at $958 billion, the Social Security Administration at $914 billion, the Department of Defense at $593 billion, and the Department of Treasury (mainly interest costs) at $469 billion. See Table 4.1.
Figure 1 below shows that VA spending has tripled since 2000. Figure 2 shows the breakdown of VA spending by function. Interestingly, the largest function is not hospital and medical care, but income security. Within income security, the largest item is compensation paid to veterans for disabilities incurred in, or aggravated during, active military service. (Figure 2 based on calculations from database here).
The Obama administration’s most recent budget summary for the VA is here. It promises “high quality and timely health care services” and “improvements in efficiency and responsiveness.”
The Obama budget also notes: “The Nation has a solemn obligation to take care of its veterans and to honor them for their service and sacrifice on behalf of the United States.”
The Federal Trade Commission has unanimously recommended that Congress should pass a law regulating “data brokers.”
Congress passed a law regulating credit bureaus forty-plus years ago, and the results aren’t particularly impressive.
Thomas A. Firey
Advocates of this election cycle’s call to raise the minimum wage have had little success so far. The country’s long-struggling economy has made federal lawmakers hesitant to increase the cost of entry-level jobs. (Let’s dispense with the falsehood that “there’s no solid evidence that a higher minimum wage costs jobs.”)
To combat that hesitancy, the advocates are trying a new argument: raising the federal minimum wage, they say, will boost the economy.
Harold Meyerson, for one, floats this idea in his latest Washington Post column:
By putting more money into the pockets of the working poor—a group that necessarily spends nearly all its income on such locally provided basics as rent, food, transport and child care—an adequate minimum wage increases a community’s level of sales and thereby creates more jobs.
This idea raises the question: did previous federal minimum wage increases boost the economy? Below is a list of all federal increases since the modern Fair Labor Standards Act (FLSA) minimum wage law was adopted in 1977, along with notes on what subsequently happened to the economy:Legislation date Phase-in dates Economy 1977 Amendments 1/1/1978 Economy enters recession, 1/1980 1/1/1979 1/1/1980 1989 Amendments 4/1/1990 Economy enters recession, 7/1990 4/1/1991 1996 Amendments 10/1/1996 U.S. Real GDP grows 4.5% in 1997, 4.4% in 1998, and 4.8% in 1999 9/1/1997 2007 Amendments 7/24/2007 Economy enters recession, 12/2007 7/24/2008 7/24/2009
Going back further, the economy also entered recessions during the phase-ins of the two previous minimum wage increases, under the 1966 and 1974 FLSA Amendments. So, during five of the last six federal minimum wage increases, the nation fell into recession.
Now, perhaps the minimum wage increases did stimulate the economy in each of those years, but the stimulus was not enough to overcome the problems that brought on the recessions. Heck, perhaps the ‘96–’97 wage increase was the sole cause of the economic boom of the late 1990s.
But probably not.
It seems far more likely that mandating a small wage increase for a small group of workers who work a small number of hours will not have much stimulatory effect on the economy. It may not even be enough to counterbalance the negative economic effects of would-be workers who can’t find—or lose—their jobs because of the mandated increase.
Daniel J. Mitchell
Two years ago, there was a flurry of excitement because MarketWatch journalist Rex Nutting crunched annual budget numbers and proclaimed that Barack Obama was the most fiscally conservative president since at least 1980.
I looked at the data and found a few mistakes, such as a failure to adjust the numbers for inflation, but Nutting’s overall premise was reasonably accurate.
As you can see from the tables I prepared back in 2012, Obama was the third most frugal president based on the growth of total inflation-adjusted spending.
And he was in first place if you looked at primary spending, which is total spending after removing net interest payments (a reasonable step since presidents can’t really be blamed for interest payments on the debt accrued by their predecessors).
So does this mean Obama is a closet conservative, as my old—but misguided—buddy Bruce Bartlett asserted?
Not exactly. A few days after that post, I did some more calculations and explained that Obama was the undeserved beneficiary of the quirky way that bailouts and related items are measured in the budget.
It turns out that Obama’s supposed frugality is largely the result of how TARP is measured in the federal budget. To put it simply, TARP pushed spending up in Bush’s final fiscal year (FY2009, which began October 1, 2008) and then repayments from the banks (which count as “negative spending”) artificially reduced spending in subsequent years.
So I removed TARP, deposit insurance, and other bailout-related items, on the assumption that such one-time costs distort the real record of various administrations.
That left me with a new set of numbers, based on primary spending minus bailouts. And on this basis, Obama’s record is not exactly praiseworthy.
Instead of being the most frugal president, he suddenly dropped way down in the rankings, beating only Lyndon Baines Johnson.
That explains why I accused him in 2012 of being a big spender—just like his predecessor.
But the analysis I did two years ago was based on Obama’s record for his first three fiscal years.
So I updated the numbers last year and looked at Obama’s record over his first four years. And it turns out that Obama did much better if you look at the average annual growth of primary spending minus bailouts. Instead of being near the bottom, he was in the middle of the pack.
Did this mean Obama moved to the right?
But I don’t care who gets the credit. I’m just happy that spending didn’t grow as fast.
I’m giving all this background because I’ve finally crunched the mostrecent numbers. If we look at overall average spending growth for Obama’s first five years and compare that number to average spending growth for other recent presidents, he is the most frugal. Adjusted for inflation, the budget hasn’t grown at all. That’s a very admirable outcome.
What what about primary spending? By that measure, we get even better results. There’s actually been a slight downward trend in the fiscal burden of government during the Obama years.
This doesn’t necessarily mean, to be sure, that Obama deserves credit. Maybe the recent spending restraint in Washington is because of what’s happened in Congress.
I’ve repeatedly argued, for instance, that sequestration was a great victory over the special interests. And Obama vociferously opposed those automatic budget cuts, even to the point of making himself a laughingstock.
But don’t forget that TARP-type expenses can mask important underlying trends. So now let’s look at the numbers that I think are most illuminating. Here’s the data for average inflation-adjusted growth of primary spending minus bailouts.
As you can see, Obama no longer is in first place. But he’s jumped to third place in this category, which is an improvement over prior years and puts him ahead of every Republican other than Reagan. Given that all those other GOPers were statists, that’s not saying much, but it does highlight that party labels don’t mean much.
My Republican friends are probably getting irritated, so I’ll share one last set of numbers that may make them happy.
I cranked the numbers for average spending growth, but subtracted interest payments, bailouts, and defense outlays. What’s left is domestic spending, and here are the rankings based on those numbers:
Reagan easily did the best job of restraining overall domestic discretionary and entitlement outlays. Bill Clinton came in second place, showing that Democrats can preside over reasonably good results. And Richard Nixon came in last place, showing that Republicans can preside over horrible numbers.
Obama, meanwhile, winds up in the middle of the pack. Which is probably very disappointing for the president since he wanted to be a transformational figure who pushed the nation to the left, in the same way that Reagan was a transformational figure who pushed the nation to the right.
K. William Watson
Dip maker Sabra claims that its competitors’ hummus is not “hummus-y” enough. To help consumers tricked by this horrible deception, Sabra has petitioned the Food and Drug Administration to regulate the definition of hummus. That definition just happens to coincide with the products that Sabra already sells.
I’m not an expert on hummus or the hummus business, but my guess is that many people like the idea of eating hummus more than they like the taste of traditional hummus. The result has been a proliferation of dips that contain some of the characteristics of hummus but otherwise appeal more to American tastes (such as Red Lentil Chipotle Hummus with Poblano Pepper & Corn Topping). Sabra wants the government to mandate what portion of a dip’s ingredients must be traditional hummus ingredients before a company can market that dip as hummus.
These development in the hummus industry are eerily reminiscent of recent attempts by the U.S. olive oil industry to “protect” consumers from its European competitors. The U.S. manufacturers have been trying to portray Italian olive oil as tainted and inherently untrustworthy. The U.S. firms want the federal government to impose new labeling and testing requirements on olive oil that would insulate the U.S. market and benefit domestic producers, who currently hold less than 2% of market share.
Last year, Sallie James and I wrote a Cato policy analysis identifying some red flags that can help us identify protectionist regulations. Two of the most obvious ones are industry support of the proposed regulation and lack of a plausible theory of market failure. Basically, if a firm is asking the government to make the firm better serve its own customers for their own good, don’t believe it. The firm is looking for something else—probably to disadvantage its competition.
One of the best ways to get the government to stifle your competition is to frame your anticompetitive policy preference as advancing some altruistic public cause. The altruistic cause in the hummus case seems to be protection from tasty dips that are not made by Sabra.
Tim Cavanaugh at National Review astutely points out that Sabra, which is owned by PepsiCo and is by far the largest provider of retail hummus, is much more capable of dealing with the compliance burdens of FDA regulation than its competitors. He notes, “The claim that getting the FDA involved will promote a ‘spirit of fairness’ is a crock. And the crock is not filled with hummus.”
Hopefully, Sabra will decide to dedicate itself to making and marketing competitive products–something it apparently does well–and stop trying to regulate away its competitors.
Two years ago, a thorough, bipartisan Senate report concluded that the federally subsidized information-sharing hubs known as “fusion centers,” long billed as a “centerpiece of our counterterrorism strategy,” were in fact an expensive boondoggle. Despite being funded by the Department of Homeland Security to the tune of hundreds of millions of dollars over a decade, the centers produced no useful counterterror intelligence and often focused instead on local law enforcement matters unrelated to any legitimate national security purpose.
Confirming that judgment, the New York Times has obtained documents showing how numerous regional fusion centers circulated “threat analysis” reports related to the Occupy Wall Street movement. As the Times reports, many centers circulated memoranda “sometimes describing arrests or disruptive tactics, but often listing apparently lawful, even routine activities” including campus lectures on grassroots organizing and classes on “yoga, faith & spirituality.” One example of intelligence sharing: Officials in Boston apprised the Washington, D.C. fusion center that 15 protesters were headed for the nation’s capital via bus, though reassured them that none of the activists were “known to be troublemakers.” Other reports consisted of little more than searches for “Occupy” copied and pasted from Twitter.
To be clear: There’s nothing inherently illegitimate about a local police department keeping tabs on large upcoming public gatherings–including protests–for prosaic reasons of public safety and traffic management (though it is hard to think of a legitimate reason for them to take official notice of specific individuals speaking on political topics). What’s absurd is that the federal government is throwing “homeland security” funds at institutions that, having proven hilariously incapable of making any contribution to counterterror efforts, instead busy themselves trawling Google for information about political rallies.
Setting up local law enforecement officials to play “intelligence analyst” in a toy spy agency is, as these documents show, a recipe for the very creepiest sort of mission creep—with databases of peaceful political activities classed as “potential threats.” But even leaving aside any concerns about First Amendment–chilling effects, there’s simply no reason for the federal government to be footing any of the bill for local police functions. If, as it seems, fusion centers serve no real homeland security purpose, let’s shut them down and assume municipal cops are perfectly capable of carrying out traditional crowd control functions without help from Washington.
For as long as I can remember, conservatives have been bemoaning “moral decline” in America. The reality may be different, as I’ve noted before. And now comes P. J. O’Rourke with a similar reflection. P. J., who has moved from editing an underground newspaper in the ’60s to writing for conservative magazines to cultivating a reputation as a curmudgeon, has a new book titled The Baby Boom: How It Got That Way (And It Wasn’t My Fault) (And I’ll Never Do It Again).
Talking with P. J. about the book, Will Pavia of the Times of London notes (gated page):
I’m not sure [the baby boomers were] better or worse than the current crop of American teenagers, to judge from some of the things they post on YouTube. O’Rourke disagrees. “I would say there has been a considerable improvement in public morality. It’s probably been going on since the anti-slavery movement at the beginning of the 19th century.” He gives the example of his own son, Cliff.
“Admittedly, he goes to a little private day school. You know, a gentle place. I don’t think he’s ever been in a fight nor shown any desire to be. Nor have I seen his friends get in fights; it’s not just him. It’s definitely a less violent world, a more tolerant world.”
Less violence and more tolerance is a pretty good slice of morality. Steven Pinker, author of The Better Angels of Our Nature: Why Violence Has Declined, backs up O’Rourke’s intuition in the New York Times:
It’s easy to focus on the idiocies of the present and forget those of the past. But a century ago our greatest writers extolled the beauty and holiness of war. Heroes like Theodore Roosevelt, Winston Churchill and Woodrow Wilson avowed racist beliefs that today would make people’s flesh crawl. Women were barred from juries in rape trials because supposedly they would be embarrassed by the testimony. Homosexuality was a felony. At various times, contraception, anesthesia, vaccination, life insurance and blood transfusion were considered immoral.
TransForm, a smart-growth group in Oakland, has analyzed California’s household travel survey data and made what it thinks is an important discovery: poor people drive less than rich people. Moreover, poor people especially drive less than rich people if the poor live in a high-density development served by frequent transit (that is, a transit-oriented development or TOD).
According to TransForm’s report, poor households who live in TODs drive only half as much as poor households who live away from TODs, while rich households who live in TODs drive about two-thirds as much as rich households who don’t live near TODs (see figure 1 on page 7).
Based on this, TransForm proposes that California build lots of “affordable housing” in the TODs, then herd encourage poor people to live in the TODs. Apparently, TransForm’s thinking is that moving poor people into TODs will have the greatest effect on driving, energy consumption, and greenhouse gas emissions. Putting “more affordable homes near transit … would be a powerful and durable GHG reduction strategy,” says TransForm (emphasis in the original).
Unfortunately, TransForm’s proposal is grounded on a seriously flawed analysis and morally questionable reasoning. First, TransForm has committed a simple arithmetic error when it concludes that the best greenhouse-gas reduction strategy would be to focus on low-income people. Though the data show rich people in TODs drive only a third less than rich people away from TODs, the rich drive so much more than the poor that the greatest impact would come from herding the rich into the TODs.
According to TransForm’s data, poor households in TODs drive about 21 fewer miles per day than poor households away from TODs. But rich people in TODs drive 29 miles less than rich people away from TODs. Thus, if you believe TransForm’s numbers, the best greenhouse-gas reduction strategy would be to coerce encourage rich people to live in TODs.
However, I don’t believe TransForm’s numbers because TransForm has made the classic error of ignoring self-selection. That is, people of all incomes who want to drive less are more likely to live in TOD-like places, while people who want to drive more are more likely to live away from TOD-like places (which are typically the most congested and least auto-friendly).
Note that all of TransForm’s numbers measure miles of driving and other factors per household, not per person. Households in TODs tend to have no children, while households with children are far more likely to live away from TODs. It’s a mistake to think that, because people who want to drive less tend to live in TODs, getting people who want to drive more to live in TODs will lead them to drive much less than they do. As economist David Brownstone concludes, after taking self-selection into account, the effect of urban form on driving is “too small to be useful” in reducing greenhouse gas emissions.
TransForm’s third error is in failing to calculate the costs of its “powerful and durable GHG reduction strategy.” Developable land in the San Francisco Bay Area is very costly, and land in the city and suburban centers that make up the region’s TODs and potential TODs is the most expensive of all. Buying that land, building housing on it, and selling or renting it at “affordable” prices is going to require huge subsidies. If I believed in the TOD strategy at all, this would be one more reason to focus on the rich, rather than the poor, as any necessary subsidies would be much smaller. But I suspect that even herding the rich into TODs would end up costing thousands of dollars per ton of abated greenhouse gas emissions, while McKinsey & Company says that anything that costs more than about $50 per ton is a waste of money.
Perhaps most embarrassing, TransForm’s herd-the-poor approach to reducing greenhouse gas emissions is condescending (or worse). California’s SB 375, a law promoting TODs, imposed an affordable housing mandate that is supposed to be as strong as its greenhouse-gas-reduction mandate, so TransForm poses this idea as one that will solve both problems. But it really won’t, partly because the state simply can’t afford the billions of dollars in subsidies that would be required to build tens of thousands of “affordable” units of housing in Bay Area TODs.
Poor people are politically weak, so the idea of packing them into cramped apartments isn’t going to have as much pushback as a proposal to coerce the rich to live in TODs. While poor people themselves are politically weak, California low-income housing groups are politically powerful, and they would be only too happy to accept huge state subsidies to build low-income housing in TODs or anywhere else.
The average dwelling unit in a TOD is about half the size of an average dwelling unit in the suburbs. People who are transit-dependent are less than half as mobile as people who have cars. Cramming poor families into dense housing and limiting their mobility is prescription for keeping them poor.
If TransForm wants to advocate a policy that really would make housing affordable, it should demand that Bay Area counties abandon the urban-growth boundaries that have confined 98 percent of the people in the region to just 17 percent of the land. And if TransForm really wants to target carbon emissions, it should focus on making housing and cars more energy efficient, which is a far more efficient strategy of reducing carbon emissions than trying to get people to live in apartments and take transit.
Instead, TransForm promotes the “pack-‘em-and-stack-‘em” strategy that has obsessed urban planners for the last three or four decades. We know this strategy doesn’t work: between 1980 and 2012, the population density of the San Francisco–Oakland–San Jose urban areas grew by 55 percent, yet per capita transit ridership fell by a third and per capita driving grew by 5 percent.
Aside from the fact that this strategy doesn’t work, its moral problems seem to go right past the “progressives” who support it. It’s like a movie in which poorly educated villagers are ready to riot about some frightening event, when someone—probably the perpetrator—points at a persecuted minority and yells, “They’re the ones who did it—get ‘em!”
Sadly, the California politicians who passed SB 375 are all too likely to fall for this line of thinking.