CBS MarketWatch’s Brett Arends recently featured a number of “brain-busters,” in a Question & Answer format, related to findings that the U.S. Government Accountability Office has made regarding waste, duplication, and inefficiencies in the federal government’s operations. We reviewed each of the items and selected those that fit into a special category, which we’ll explain below the excerpted Q&A material.
Question. How many facilities does the Pentagon own and operate worldwide?
Answer: 562,000, spread across 4,800 sites.
Q: For what percentage of those facilities does the Pentagon have utilization data?
Just 53%—which means there about 264,000 military facilities around the world where the Pentagon doesn’t know for sure what they’re used for—if they are used at all.
Q: What percentage of federal procurement is managed through strategic sourcing in order to make sure we get the best value per dollar?
About 5%, or $26 billion—compared to about 90% for private sector businesses.
Q: How much money does the government spend each year on maintenance and operations of old, “legacy” computer systems without conducting proper reviews to see whether they’ll still worth it?
Q: How much money is still sitting idle in the bank account of an old and defunct uranium-management agency, the U.S. Enrichment Corp.?
Q: How much could the government pocket by selling off the excess amounts of oil in the Strategic Petroleum Reserve?
Q: How much does Medicare overpay to 11 specialist cancer hospitals due to poor billing systems?
$500 million a year
Q: Of the 440 cost and efficiency changes recommended by the GAO in previous years, how many remain partially or completely undone?
269, or around 60%
While there are a number of other items on the full list that relate to what would amount to be tax evasion on the part of U.S. individuals and businesses, the items we’ve listed above are the ones that U.S. federal bureaucrats are fully capable of addressing all by themselves, not requiring the actions of anyone else, if only they would.
Alas, making the federal government less wasteful, and getting it to work better for the people it is intended to serve, would not appear to be among Uncle Sam’s top priorities.
In the United States, Tax Day, April 15, marks the deadline for Americans to file their income tax returns for what they earned in the previous calendar year.
Tax Freedom Day, however, marks the day after which the average American begins earning money that he or she can spend on things other than taxes, if we assume that every dollar earned before that day went to pay federal, state and local taxes.
According to calculations by the non-partisan Tax Foundation, in 2015, Tax Freedom Day will fall on April 24, one day later than in 2014. Here are its key findings:
- This year, Tax Freedom Day falls on April 24, or 114 days into the year.
- Americans will pay $3.3 trillion in federal taxes and $1.5 trillion in state and local taxes, for a total bill of more than $4.8 trillion, or 31 percent of the nation’s income.
- Tax Freedom Day is one day later than last year due mainly to the country’s continued steady economic growth, which is expected to boost tax revenue especially from the corporate, payroll, and individual income tax.
- Americans will collectively spend more on taxes in 2015 than they will on food, clothing, and housing combined.
- If you include annual federal borrowing, which represents future taxes owed, Tax Freedom Day would occur 14 days later on May 8.
- Tax Freedom Day is a significant date for taxpayers and lawmakers because it represents how long Americans as a whole have to work in order to pay the nation’s tax burden.
You read that fourth item correctly — in 2015, Americans will collectively pay more in taxes than they do on necessities such as food, shelter and clothing!
In California, prodigious waste of taxpayer dollars is inherent in the system but politicians look the other way and few in the old-line establishment media are watching. One notable exception is Jon Ortiz of the Sacramento Bee, co-author with Jim Miller of “The Public Eye” watchdog report headlined “Audit: California departments break law, game personnel system for money.” According to the audit from the State Department of Finance, “California state departments illegally pad their budgets with millions of tax dollars earmarked for employee salaries by manipulating their payroll to make it appear they have more employees than they do.”
If a position goes unfilled for six months, the law requires funding for that position to return to its source. But Ortiz and Miller found the “departments deceptively move employees between jobs ahead of the six-month deadline. They accomplish the phony transfers by altering the identifying job numbers to make it appear that a position was filled with a transferred employee, thus avoiding a cut to their budgets.” And that “state worker shuffle” squares with the audit, which found some employees transferred into multiple positions, with no documentation for transfers, and other “widespread noncompliance” with state law. According to the audit, skirting the law was “commonplace and even encouraged by management.”
This happens because, as Ortiz and Miller note, “there are no state policies regulating the movement of vacant positions within a department,” and, “departments face no penalties for violating the law.” Ten departments said they complied but the auditors found nine were not in compliance. The audit did not calculate the money involved in the scam but Ortiz and Miller cite a 2014 investigation estimating “at least $80 million” from “illegal vacancy maneuvers.” And as we noted, state departments are also fond of stashing funds in secret accounts.
Meanwhile, no California politician heralded the new state personnel audit and announced new legislation to change the system. No politician called for those responsible to be held accountable. So the waste and fraud are likely to continue, all part of the corruption inherent in the system.
Over the past decade, Wolters Kluwer, the publishers of the CCH Standard Federal Tax Reporter, a leading publication for tax professionals that summarizes the administrative guidance and judicial decisions issued under each section of the U.S. tax code, has created an infographic to convey just how many pages it takes to explain the nation’s tax code to tax professionals. Here’s the latest update through 2014:
Through the 2014 tax year, it takes 74,608 pages to explain the U.S. tax code to the people who have to work with it the most, or rather, about 10 feet of shelf space for the printed version!
It’s now growing at an average rate of about 1 foot every 6 to 7 years!
Today’s episode features the unfortunate situation where both current and retired employees of the U.S. federal government aren’t paying the taxes they owe to the U.S. government. Stephen Ohlemacher of the Associated Press reports:
WASHINGTON (AP)—Federal workers and retirees owed more than $3.5 billion in unpaid taxes last year, a $200 million increase over the previous year, the IRS said Tuesday.
Almost 305,000 federal workers and retirees owed back taxes as of Sept. 30. That’s down from 318,000 the year before.
Doing some quick math, the average amount of federal taxes owed per delinquent bureaucrat has risen from $10,377.36 to $11,475.41 in the last year. So while there are about 13,000 fewer deadbeat bureaucrats than last year, the ones who aren’t paying their taxes this year are worse.
Ohlemacher identifies the best and worst federal government departments and branches for tax deadbeats:
Among executive departments, workers at the Department of Housing and Urban Development had the highest delinquency rate, at 4.7 percent. Workers at the Treasury Department, which includes the IRS, had the lowest delinquency rate, at 1.2 percent....
In Congress, House employees had a higher delinquency rate than Senate workers. About 5 percent of House employees owed back taxes, compared to just 3.5 percent of Senate workers.
Among active duty military, just 1.4 percent owed back taxes, the IRS said.
Ohlemacher explains why the Internal Revenue Service (IRS), whose serial misconduct in its operations has become well known in recent years, has managed to achieve such a low delinquency rate for tax payments among its own employees, while at the same time contributing to the higher delinquency rates seen at other government departments through its practices:
Tax compliance at the IRS is generally better than at other federal agencies in part because the IRS cannot share information about tax delinquents with other departments. A 1998 law calls for removing IRS employees who are found to have intentionally committed certain acts of misconduct, including willful failure to pay federal taxes.
As an institution, the IRS does not provide the same level of tax law policing to other government agencies as it is compelled to maintain by law for itself. Even so, the IRS has serious problems with its self-policing, where the agency has established the practice of awarding generous bonuses to its own delinquent-on-their-income-taxes employees.
To tackle this macroeconomic question, the authors outline the methods that governments have historically used to monetize debt (we are focusing on domestically-held debt here):
1. Grow out of the problem–Economic growth
2. Tough love–fiscal adjustment/austerity
3. Give up–default or restructuring
4. Inflate away–sudden surprise burst of inflation
5. Stealth liquidation–steady financial repression (impose regulations and incentives that make debt artificially attractive) and steady inflation
It has long been assumed that the United States and Western European nations simply grew their way out of the massive debt problems they faced in the aftermath of WWII. What Reinhart and Sbrancia show is that, between the 1940s and the start of the 1980s, these governments made a concerted use of option 5: stealth liquidation. And, in fact, debt levels dropped dramatically over the course of three decades. Debt levels began to rise again during the period of liberalization marked by the 1980s and 1990s, as governments abandoned “financial repression.”
Here’s how the fantastic financial education resource Investopedia defines financial repression:
A term that describes measures by which governments channel funds to themselves as a form of debt reduction. This concept was introduced in 1973 by Stanford economists Edward S. Shaw and Ronald I. McKinnon. Financial repression can include such measures as directed lending to the government, caps on interest rates, regulation of capital movement between countries and a tighter association between government and banks.
The way that has historically worked in the United States, from the 1940s through the 1970s, was for the U.S. Federal Reserve to artificially lower short term interest rates, whereby U.S. banks and other financial institutions supported the mammoth growth in the debt the U.S. government took on during the Second World War, by facilitating the federal government’s solvency. Six years after the war ended, the Federal Reserve reached an accord with the U.S. Treasury to continue providing that support in return for being allowed to increase interest rates above the rock-bottom levels they had previously agreed to support back in 1942. In doing so, the Fed implicitly agreed to tolerate higher levels of inflation, the forces of which slowly built up over the next two decades until it ultimately resulted in the hyperinflation of the 1970s, which is really what led to the end of that period of financial repression.
Gray outlines the methods that governments have used in the past to execute their policies of financial repression:
- Explicit or indirect caps or ceilings on interest rates
- Regulated rates (e.g., government-mandated caps on savings deposits), interest rate targets (e.g., through central bank open market operations—buying/selling government bonds), etc.
- Creation and maintenance of a captive domestic audience
- Force domestic investment through regulation (e.g., through exchange controls, high reserve requirements for banks, gov’t bond holding requirements for banks, taxes on alternative investments (equity, corp bonds, etc)
- Control banking sector
- Eliminate entry, direct ownership of and/or management of banks, direct credit to certain industries.
Since 2008, we’ve seen each of these methods come back into play in the United States, primarily through two different vehicles: the Federal Reserve’s various Quantitative Easing programs, by which the Federal Reserve has filled the role of the “captive domestic audience,” and the Dodd-Frank Wall Street Reform and Consumer Protection Act, which is the means by which the U.S. government has both imposed controls over the banking industry and which a major study has revealed to have significantly impaired the ability of smaller community banks to compete with politically favored institutions.
Combined, the effects of the Fed’s interest rate lowering policies and the Dodd-Frank Act’s regulatory schemes are such that they are succeeding in eliminating the entry of new banks into the market, where the rate of new entrants has fallen from an average rate of 100 per year in the period before the passage of Dodd-Frank to fewer than 2 per year. The following chart, from Motley Fool, shows the FDIC’s recorded number of newly chartered banking institutions in each year from 1990 through 2014:
It could be worse, which is to say that it could still get worse. There are proposals that would force investors who have 401(k) and IRA retirement savings plans to “invest” in government-issued bonds, which could become the next major “captive” domestic audience for financial repression.
At present, President Obama’s “myRA” retirement account program represents an early step in that direction, which is currently being targeted at exploiting the most financially illiterate Americans, who likely don’t appreciate that when more money floods into Treasury auctions to buy government bonds, the yield (or interest rate) that the government will pay to borrow the money falls, which in turn means a worse rate of return for them in their myRA retirement account, which in turn would make it harder to accumulate a decent amount of money to even be able to afford to retire.
That President Obama’s myRA program is a bad deal for regular Americans can be confirmed by what some of the same people backing the President’s initiative are doing to advance the financial interests of the federal government’s employees in their default investment options for their Thrift Savings Plan retirement accounts, where currently, the default option for federal employees is to invest in the exact same government bond funds as for the myRA accounts. Because federal employees want better returns and bigger retirement savings, they’re pushing for legislation to have the default investment option changed to one that has a much higher rate of return.
Which perhaps indicates that they don’t believe they should have to face the same consequences as those upon whom they impose such policies of financial repression.
Last week, we suggested that the U.S. government could “rather painlessly” pay down the national debt if it adopted a policy where it restrained the growth rate of government spending to be less than the growth rate of the nation’s GDP.
Let’s take a closer look at how that might work in practice. Let’s start by looking at what would have happened to the growth of the U.S. government’s spending and national debt in all the years after World War 2 if it had restrained its spending to grow at an average annual rate of 5% per year, just slightly faster than the average combined rate of the nation’s population growth (1.2% per year) and inflation (3.6% per year) during that time.
Coincidentally, that combined rate is consistent with the growth rate of the nation’s economy during all those years!
Let’s throw an extra wrinkle in that approach as well — let’s connect the amount of money that the U.S. government would be allowed to spend to the actual amount of revenue it collects. And the way we’ll do that is to directly link the amount it spends to how much it actually collected two years earlier.
The reason why we would do that is a practical one — when the U.S. Congress is busy working on a budget for the next year, it doesn’t know exactly how much revenue the government is going to collect during the current year. But they most certainly do know how much was collected during the preceding fiscal year, two years earlier than the year for which it is working on the budget. And all we have to do to set the amount of money the U.S. government would be allowed to spend is to take that number and multiply it by 110% (100% for the amount of revenues from 2 years earlier than the year being budgeted, plus 5% to account for the current year, plus another 5% to get to the year being budgeted.)
Let’s see how that would work in terms of the actual performance of the U.S. economy and the growth of government revenues from 1946 to the present, and then on to the year 2020 with the amount of spending proposed by President Obama. Our first chart below shows those actual tax collections and the amount that would be spent following our simple system and compares it with the amount of money that the U.S. government actually spent over that time.
What we find is that over most these years, the U.S. government would actually have run a small budget surplus each year. And interestingly, we see that there would a countercyclical benefit to the approach during periods of recession, where the U.S. government would be allowed to spend more money than it takes in when tax revenues fall during these periods, which it could apply to pay for the increased cost of things like unemployment benefits during the period of recession without requiring a special act of Congress to authorize more spending.
Our next chart compares how our simple approach for restraining the growth of government spending to be less than the average growth rate of the U.S. economy would have have affected the growth of the national debt, as measured by the accumulation of annual budget deficits or surpluses from 1946 to the present.
Here, we see that the actual level of spending the U.S. government had from 1946 to the present, and then on to the year 2020 would be responsible for adding at least $14.4 trillion to the U.S. national debt. By contrast, if spending had been restrained to an average growth rate of 5% per year, by 2020, the U.S. would instead have an accumulated surplus of $1 trillion. What’s more, we see that only in the four years following the recession of December 2007 to June 2009 would the U.S. have even added to its national debt at all before being able to pay it down and return to a net surplus.
Finally, just out of curiousity, we wondered what growth rate we would have to use with our approach to match the actual accumulated deficits recorded by the U.S. government since 1946. After a little bit of trial and error, we determined that spending would have to be increased at an average annual rate of 15.5% per year to accumulate the equivalent amount of deficits and debt.
What that result means is that the U.S. government has been consistently spending money at over three times the rate it can actually afford to spend since the end of World War 2.
Politicians promoted the California high-speed rail project as a rapid route between Los Angeles and the San Francisco Bay Area. But as we noted, the “bullet train” broke ground near Fresno. Now Dan Walters of the Sacramento Bee finds a gap between other bullet-train claims and reality.
The California High-Speed Rail Authority claims that by 2040, “the system will reduce vehicles miles of travel in the state by almost 10 million miles of travel every day.” The rail authority further claims that “Over a 58-year period (from the start of operations in 2022 through 2080), the system will reduce auto travel on the state’s highways and roads by over 400 billion miles of travel.” As Walters notes, Californians travel about 330 billion miles in cars every year, nearly a billion miles each day. Therefore, “the bullet train’s projected reduction in driving would be scarcely 1 percent.” And the claimed reduction of 400 billion vehicle-miles over 58 years works out to “just over one year of driving.” This assumes a “very high train ridership” that can hardly be assumed, and it would come “at a very high cost.”
The bullet train is supposed to cost of $68 billion but with more federal financing in doubt, high-speed rail bosses may seek loans. Walters projects a debt of $100 billion with interest, a lot of money for “an unnoticeable tiny dent in automotive travel.” And how will the debt be repaid? Probably through the use of cap-and-trade funds, which were supposed to be for emission goals. California’s Legislative Analyst pointed that out, but legislators ignored him and gave 25 percent of cap-and-trade funds to the bullet train. The grounds for this money grab was that the train would reduce carbon emissions through reduction in automobile travel. But it doesn’t do much of that, and doesn’t go where politicians said it would. So what is this all about?
California’s four-term governor Jerry Brown, Walters says, “sees the bullet train as a legacy.” That’s why he “pushed hard for the cap-and-trade funds.” As we noted, the bullet train also provides a soft landing spot for washed-up politicians like High Speed Rail Authority board member Lynn Schenk, a former congresswoman who served as chief of staff for California governor Gray Davis. And of course the project gives politicians a new place to spend money. That’s why the ruling class is “all aboard” the bullet train.
How did the USA end up with $18,000,000,000,000 of debt? More importantly, can the US government pay back the debt?
The United States federal government has ended up with a total public debt outstanding of more than $18 trillion (at this writing) because it has chronically run annual budget deficits for decades, as indicated in the following chart that was put together by the Heritage Foundation:
But these chronic deficits only explains a little over $17 trillion of the national debt. In addition, there is also a hidden budget deficit, where since 2009, the U.S. government has borrowed well over $700 billion for the purpose of issuing direct student loans:
This additional borrowing adds to the national debt, but is not reflected in the U.S. government’s annual budget deficit figures.
The U.S. could pay down its national debt rather painlessly if it adopted a policy where it restrained the growth rate of government spending to be less than the growth rate of the nation’s Gross Domestic Product. This kind of policy has been extremely successful in places like Switzerland, to name one international example, and also individual U.S. states like Colorado.
The U.S. government would also improve its fiscal situation with respect to the growth of the national debt by getting out of the student loan business, which the Obama administration primarily did as a backdoor way to increase the amount of money the federal government collects from low and middle income earners without appearing to directly increase their income tax rates. Selling its portfolio of student loans back to the private lenders would go a long way toward moving that portion of the national debt off the government’s books.
As we recently noted, California’s Department of Consumer Affairs was implementing a computer system pegged at $27 million. Problems with the system boosted the cost to $77 million, but that still didn’t get it done. Consumer Affairs bosses want another $17.5 million, bring the cost to $96 million, more than three times the original estimate. Now Jon Ortiz of the Sacramento Bee shows how this is merely a drop in the waste bucket.
“The state has spent about $900 million on three stalled or terminated IT projects in the last few years,” Ortiz writes. These include: a failed overhaul of the state payroll system, a DMV project for licensed and registration, and “a statewide court system that burned through a half-billion dollars before it was shut down.” Adds Ortiz, “future failures could be even more costly,” noting a combined budget of $3.5 billion for the “dozen most expensive projects” in the pipeline, according to the state’s Department of Technology. Will these projects cost three times that estimate, bringing the tab to some $10 billion? It is certainly possible to guess.
The problem is not with technology itself but government. As Consumer Affairs boss Awet Kidate told Jon Ortiz, his department “failed miserably at change management.” But they get the money anyway. So did the bosses at Caltrans, who managed construction of the new eastern span of the San Francisco-Oakland Bay Bridge. It cost $5 billion more than the original estimate, came in ten years late, and remains riddled with safety issues. Besides defective welds, cracked rods and such, as the San Francisco Chronicle noted, “access to the top and midlevel sections of the tower are next to impossible for maintenance work after the elevator failed after just a few uses.” In similar style, the Golden State fails miserably at management of technology projects.