The federal holiday of Labor Day, the first Monday in September, is supposed to be a tribute to American workers. While enjoying a day off, if they get one—government employees do—those workers might use the occasion to recall some other realities, including a longstanding government rip-off.
As we noted in July, for 71 years the federal government has been getting workers’ money before they do. Before 1943, their paycheck included all the money they had earned through their labor. Then the government said it was wartime, so they needed the workers’ money more than the workers themselves needed their earnings. So the federal government set up a “team of experts” that included economist Milton Friedman. This stellar team came up with the brilliant idea of withholding money from worker’s paychecks. It later occurred to Friedman that he was helping to make government too big, too intrusive, and too destructive of freedom. That is all true, but the government likes getting workers’ money before they do, so on Labor Day, 2014, the government still has its hand in the workers’ pockets.
As they enjoy Labor Day, workers might also recall that up to April 21 they were in effect working for the government. As we also noted, Tax Freedom Day marks the date when the nation as a whole has “earned enough money to pay its total tax bill for the year.” This year it was a full 111 days into the year, and three years later than last year. Because of new entitlements and new federal agencies such as the Consumer Financial Protection Bureau it will doubtless be coming later.
Labor Day implies that the federal government cares about the workers. That is doubtful, but one thing remains certain: the government likes getting the workers’ money before they do. This Labor Day workers will be hard pressed to find any politician or government official who seeks to reform this injustice. And as long as the government can grab the money, wider reforms against government waste, fraud, and abuse are unlikely.
Joseph Lawler of the Washington Examiner reports on the state of the portion of the U.S. government’s debt that is held by the public:
The federal debt this year will be double what it was before the financial crisis, Congress’ official budget scorekeeper projected Wednesday morning.
The debt is on pace to reach 74 percent of the country’s economic output by the end of the year, double what it was in 2007 and the highest percentage since 1950, according to the Congressional Budget Office.
In its update to its projections for the budget and economy, the agency slightly upped its estimate for the 2014 deficit, which it now expects to total $506 billion, a $170 billion decline from 2013.
The falling deficits sound like good news, but there are two important things to understand about it. First, falling deficits mean that the national debt is still increasing — just more slowly than they previously were. In this case, assuming things play out as projected, that means that instead of trillion-dollar deficits adding a trillion dollars a year to the nation’s debt, we now have a half-trillion dollar deficit adding a half-trillion dollars a year to the nation’s debt.
The second thing to remember is that the latest deficit projections, which also assume that the United States will never experience another recession, indicate that the current decline in the federal government’s budget deficits is expected to be only a short-lived trend. It is expected to reverse as early as 2016.
Deficits will continue to shrink next year, according to the CBO, lowering the federal debt. But then they’re expected to begin rising again in 2016, eventually bringing the federal debt up to 77 percent of GDP in 2024.
That debt trajectory will have serious consequences if unaddressed, the CBO warns, including “restraining economic growth” and “eventually increasing the risk of a fiscal crisis.”
Would this be a bad time to point out that the preferred policy solution of many of the world’s politicians — greatly increased taxes and minor reductions in what would otherwise be the even faster growth of government spending — have somehow managed to restrain economic growth and to increase the risk of a fiscal crisis in every place where those policies have been implemented?
So at least we know that those outcomes won’t happen by accident!
“The 2009 federal Cash for Clunkers program is often hailed as a success because it jump-started new-vehicle sales,” notes Kathleen Pender at sfgate.com, “but a new study says it actually cost car dealers $3 billion in lost revenue because its fuel-efficiency requirement caused people to buy cheaper cars than they would have otherwise.”
The new study is “Cash for Corollas” from economists at Texas A&M University. The goals of the federal program were to stimulate the economy by accelerating car sales and boosting fuel economy. But study author Mark Hoekstra said the pursuit of both goals caused the program to fail.
The Car Allowance Rebate System, official name of Cash for Clunkers, was part of a 2009 economic stimulus program intending to boost the U.S. auto industry. The Texas study finds that the federal program created a drag on the economy because Americans bought cheaper cars than they would have without the stimulus. Fox News finds that the “stimulus” also cost taxpayers $3 billion, but the damage wasn’t entirely economic.
As Wynton Hall of breitbart.com noted last year, Cash for Clunkers drove up car prices and unleashed an environmental nightmare by “shredding, not recycling, many of the 690,000 cars people traded in for an up to $4,500 car credit.” For Hall it was a classic illustration of “the law of unintended consequences.” And Hall has company in the old-line establishment media.
Way back in 2011 Brad Plumer conceded in the Washington Post that the program’s naysayers were right. Cash for Clunkers was “a pretty lousy bargain as far as carbon policy goes,” and “even if the program did have some benefits, it’s hard to argue that it was an efficient way to dole out cash.” Last year Craig Eyermann cited estimates that “the $2.85 billion program really produced a $1.5 billion deadweight loss to the U.S. economy.” On the other hand, the program is only one of many federal clunkers.
“More than a year after Gov. Jerry Brown signed a law he said would tamp down pension spiking,” noted Jon Ortiz in the Sacramento Bee, “the state’s biggest public pension fund is on the verge of adopting rules critics say would undermine its intent.” That pension fund, CalPERS, went on to adopt the new rules in a 7-5 vote, and that is bad news for taxpayers.
Government workers will exploit the new rules to bag larger pensions than they would otherwise have received. CalPERS has authorized, count ‘em, 99 types of special payments counting toward pension calculations. These include: longevity pay, police marksmanship certification pay, physical fitness pay, smog inspector license pay, notary pay, cement finisher pay and holiday pay. The only one of the 99 that drew an objection from Gov. Jerry Brown was temporary upgrade pay. He’s evidently on board with all the rest.
As the Bee noted in an editorial, cops could get bigger pensions if they are physically fit or a good shot. But “shouldn’t all cops be fit and shoot straight?” Cops could also get bigger pensions if they pull duty on drug abuse programs in schools, bust drunk drivers, find fugitives, fight gangs, direct traffic, or work the front desk. These are all standard tasks for police officers and hardly merit special consideration. Likewise, firefighters would qualify for bigger pensions for inspecting buildings and investigating fires, which is kind of what they do. Librarians can goose their pension by telling patrons where to find resources. “We love librarians,” the Bee said. “But isn’t assisting patrons fundamental to what librarians do?”
It is, and so is the other stuff. Taxpayers should bear in mind that government employee pensions, like their salaries, are already inflated. That is particularly true for police and firefighters. This is the ruling class rewarding itself by ripping off embattled taxpayers, who already pay some of the highest taxes in the nation. In the Golden State, the Frank Zappa rule always applies. Politicians and government employees are number one. Workers and taxpayers aren’t even number two.
That’s an important question, because governments will often borrow large sums of money for the sake of building major infrastructure projects as they sell taxpayers on the notion that they’ll be rewarded with higher economic growth over time — particularly if the projects are placed in regions where people earn low incomes.
A new paper from the International Monetary Fund (IMF) casts doubt on that promise after a careful statistical evaluation of real-world data from major government-financed infrastructure projects from a number of countries around the world. The IMF’s Andrew Berg and Catherine Pattillo write:
This paper separates out episodes of large public investment drives, also called investment booms, and tests whether economic growth was higher after those episodes than before. It also compares boom countries with those that never had such episodes. The paper considers alternative ways of identifying what constitutes a boom, and alternative ways of measuring booms. It considers evidence from World Bank projects, asking whether past surges in Bank lending were associated with improved project performance. Finally, the paper reviews case studies of five countries, three of which had major investment drives as defined above (Bolivia, Mexico, and Philippines), and two of which (many believe) used public investment successfully to spur development (Korea, and Taiwan province of China).
The econometric evidence reveals small positive and instantaneous associations between public investment booms and economic growth, but little long run impact. Several aspects of the evidence cast doubt on the idea that past booms triggered or accelerated GDP growth. Most of the positive association occurs immediately; a spending boom tends to be immediately associated with a rise in GDP this year, but not subsequent years. F-tests fail to reject that the long run impact, given by the sum of the coefficients on lagged investment booms, is zero. This runs counter to two ideas. One is that the booms had a causal impact, since this kind of evidence is consistent with reverse causality, from GDP growth to investment booms, as spending is cut in slumps and increased in good years. This evidence also runs counter to the idea that the data is picking up long term productivity effects, since, given the long construction periods of public investments, these effects should show up in the data with lags of three or more years, or the estimated long run impacts should be positive. In addition, the estimated associations are small, certainly not of the magnitudes suggested by big push models.
Overall it is difficult to find a clear-cut example that fits the oft-repeated narrative of a public investment boom followed by acceleration in GDP growth. If anything the cases of clear-cut booms illustrate the opposite—major drives in the past have been followed by slumps rather than booms.
To quickly summarize, the only significant economic growth that occurs as a result of the new public-infrastructure spending occurs during the year the project starts, which then peters out and all but statistically disappears as the project continues or is completed.
The authors go on to note that most of the loss of a project’s productive economic potential is built into public megaprojects (emphasis ours):
Does this mean that infrastructure and public capital is not potentially productive? Probably not; but it strikes a blow against the idea that large pubic capital expenditures alone will have a positive impact, and it casts doubt on the overriding importance of spillovers and positive externalities that motivate big push initiatives. Furthermore, the case studies reveal many problems with past investment drives—mainly deep incentive problems, agency problems, a pervasive avoidance of rational analysis and even difficulty obtaining or collecting the critical data that would underpin rational investment choices. These cases suggest that whether or not future public capital drives will be more successful than past drives hinges on whether these kinds of problems can be overcome in the future.
Examples of recent big infrastructure projects in the United States include things like the “Big Dig” highway tunnel in Boston or the San Francisco–Oakland Bay Bridge. Both have been marked by exorbitant promises and equally exorbitant problems. For example, the Boston Globe has described the Big Dig as a “Road to Tragedy“:
The Big Dig, the $14.6 billion reconstruction of downtown Boston’s roadways, has been rife with troubles since construction began 15 years ago. Those problems have included a leaking tunnel, cost overruns, and most recently several tons of tunnel ceiling collapsing and killing a passenger in a car on her way to Logan Airport.
The 1989 Loma Prieta earthquake revealed structural deficiencies in the eastern span of the San Francisco-Oakland Bay Bridge, and within a few years, then-Gov. Pete Wilson’s administration proposed a $1.4 billion replacement viaduct.
When the replacement opened two decades later, however, it had mushroomed into a $6.4 billion single-tower suspension span, plagued by reports, mostly in The Sacramento Bee, of long delays, cost overruns and construction deficiencies that were ignored or covered up.
This week, Senate Transportation and Housing Committee Chairman Mark DeSaulnier released an investigative report about the mismanagement.
It confirmed suspicions that the debacle is rooted in political hubris, including pressure from two mayors, San Francisco’s Willie Brown and Oakland’s Jerry Brown, and other politicians for route changes and redesigns to make the new section an artistic spectacle.
Not only did the radical design that resulted from political interference raise costs and add years of delay, but its complexity led to construction defects and alleged cover-ups.
“To be sure, some of the longest delays were not the fault of the bridge builders,” says the report. “Rather, they were the product of political infighting at the very highest levels of California state government.”
We’re afraid that these kinds of problems are never isolated incidents. If failure were not really an option, why do so many politicians and bureaucrats do all they can to ensure it?
What would happen if prominent income-inequality theorists, such as economists Thomas Piketty, Emmanuel Saez and Peter Diamond, could get their way and hike the topmost marginal income tax rate in the United States to 80%? Would the nation enter into an enlightened state of economic nirvana as they claim? Or would things perhaps turn out badly? Or would anybody even notice a difference?
To find out, the nonpartisan Tax Foundation applied its integrated model of the U.S. tax system and the U.S. economy to analyze the impact of hiking the top U.S. income tax rates to approximately 55% on annual household incomes above $200,000 and to 80% for households with incomes above $500,000, as these leading income-inequality theorists have advocated. Here are the key findings of what the impact would be for the federal government’s tax collections and the U.S. economy:
- If ordinary income were taxed at the top rates of 80 and 55 percent, our model estimates that after the economy adjusts, total output (GDP) would be 3.5 percent lower, wage rates would drop 1.6 percent, the capital stock would be 7.4 percent less, and there would be 2.1 million fewer jobs.
- If capital gains and dividends were taxed at the new tax rates along with ordinary income, the economic damage would be much worse. GDP would plunge 18.1 percent (a loss of $3 trillion dollars annually in terms of today’s GDP), the capital stock would be 42.3 percent smaller than otherwise, wages would be 14.6 percent lower, 4.9 million jobs would be lost, and despite the higher tax rates, government revenue would actually fall.
- Although Piketty’s proposed income tax increase may appear to target only upper-income taxpayers, all income groups would suffer from the economic fallout.
- Our model estimates that the after-tax incomes of the poor and middle class would drop about 3 percent if the higher rates do not apply to capital gains and dividends and about 17 percent if they do.
In running their analysis, the Tax Foundation tried out two different scenarios, which differ in how income from investments such as the dividends and capital gains might be taxed. The first chart below shows what their Tax and Growth model indicates would be the result if there are no changes in the tax rates for dividends and capital gains, which are currently capped at a maximum rate of 23.4% to minimize the extent of double taxation with the corporate income tax.
In this chart, the capital stock indicates how much the private sector of the U.S. economy could be expected to shrink in response to just these large tax hikes: 7.4%. Meanwhile, the number of employed Americans could be expected to drop by 2.2% and GDP overall would decline by 3.5% below what it would otherwise be in without the income tax increases.
Since income-inequality theorists often cite the income earned through risky investments in the stock or real estate markets as being the primary source of income inequality, the Tax Foundation also considered the scenario where household income earned through dividends and capital gains would be taxed at the same rates as for ordinary income, elevating their top tax rate to the same 80% level even though the corporate income tax would still apply. The following chart reveals the likely outcome for the U.S. economy:
Here, we see that the private sector of the U.S. economy could reasonably be expected to contract by 42.3%, while the number of employed Americans would decline by 5% as the nation’s overall economy would shrink to be permanently 18.1% smaller than it would be without the massive tax hikes advocated by income-inequality theorists.
These negative impacts for the U.S. economy would also have negative impacts for the national debt. The Tax Foundation describes how the tax hikes that were going to be counted upon to rectify inequality would instead aggravate it because government spending would not be able to be sustained without entering into a national debt death spiral:
Because of the dramatic economic decline caused by the higher taxes, government revenue would be lower than otherwise. To avoid going farther into debt, the government would have to cut its spending. Many of the cuts would unavoidably fall on transfer programs for the poor and middle class because those programs are such a large share of the budget.
One estimate indicates that in 2004, the U.S. government’s transfer programs were responsible for elevating 15.5% of the U.S. population out of poverty, dropping the poverty rate from what would otherwise have been 29% to just 13.5% instead. The combination of a shrinking economy with such spending cuts would greatly increase the number of Americans at the bottom of the income-inequality spectrum, which would counteract any decrease in the level of income inequality meant to be achieved in such draconian tax schemes.
The bottom line: there is no real-world way that the U.S. government could tax its way out of debt and inequality.
In January, the United States Postal Service hiked the price of stamps and its package shipping increased, but as Reuters reports, “The U.S. Postal Service continued to bleed money during its second quarter.” From April to June, the USPS lost $2 billion, compared with $1.9 billion in the first quarter and $740 million in the second quarter last year. So the USPS is a bigger loser than ever, and it still resists reform.
Some USPS bosses want to cut back on door-to-door mail delivery and end Saturday delivery. Trouble is, government-employee unions oppose those moves. A statement from National Association of Letter Carriers boss Frederic Rolando said, “Given the positive mail trends, it would be irresponsible to degrade services to Americans and their businesses, which would drive away mail—and revenue—and stop the postal turnaround in its tracks.”
What positive trends and turnaround Rolando has in mind remains unclear. In the second quarter, first-class mail dropped 1.4 percent, part of a long-term trend toward electronic communication.
As we noted in May, Roland also wants to eliminate the congressional mandate to prefund health benefits, which some blame for USPS financial troubles. USPS chief financial officer Joseph Corbett, however, went on record saying that such a move would not balance the books, noting that USPS liabilities exceed assets by $42 billion. Based on current trends, the losses are likely to get worse.
If legislators ever get serious about reform, they should lift the USPS monopoly on first-class mail and let the “service” compete with UPS, FedEx, and other companies on that front, just as it now does in package shipping. Only competition in an open market can spur the reforms the USPS needs. Otherwise the federal government will continue to abuse embattled taxpayers, and common sense, by keeping this born loser afloat.
If taxpayers have any doubt that government is becoming ever more intrusive, they might check out how California is attempting to redefine consensual sex. This legislative attempt is based on the notion that there is some part of the word “No!” that college students, allegedly the best and brightest, fail to understand. Driving the attempt is a recent study, from the White House Task Force to Protect Students from Sexual Assault, which contends that one in five women is sexually assaulted while in college, usually by somebody she knows, and most often she does not report what happened.
If the White Houses Task Force’s one-in-five number is a stretch, it would not be the first time. For 16 years, a woman named Jennifer Beeman ran the UC Davis Campus Violence Prevention Program, and in a 2001 federal grant application she claimed that as many as 700 UC Davis students were victims of rape or attempted rape every year. University officials eventually conceded that Beeman “significantly over-reported” the figures, but her fakery drew down four federal grants totaling more than $3 million. In 2011 Beeman got 180 days in state prison and five years’ probation for embezzlement and falsification of records pertaining to campus violence.
Even if the White House Task Force’s numbers are right, the plan still has problems, according to an editorial in the Los Angeles Times. Consent is appropriate, “but is there a role for the government in mandating affirmative consent?” The Times finds the policy vague, “unnecessarily intrusive,” and questions whether such intrusion is “either reasonable or enforceable.”
The proposed legislation applies to colleges that receive public funds, confirming that government funds invite more government control. The involvement of the White House Task Force confirms that, even in the college dorm room, Big Brother is watching you. And taxpayers foot the bill, even though the Constitution gives the federal government no role in education.
The single most expensive item for which the Medicare welfare program will pay claims is a power wheelchair. In 2008, Medicare “paid” for 158,185 power wheelchairs at a cost of over $490.4 million, or an average cost of $3,100.37 per power wheelchair. By contrast, the second most expensive medical line item that Medicare will pay toward is for a total knee arthroplasty, which costs $1,207 per procedure.
According to news broken by the Washington Post this past weekend, the people who run the Department of Health and Human Services and the Medicare program have absolutely no idea how many of the claims filed for power wheelchairs that they pay each year are completely bogus.
The wheelchair scam was designed to exploit blind spots in Medicare, which often pays insurance claims without checking them first. Criminals disguised themselves as medical-supply companies. They ginned up bogus bills, saying they’d provided expensive wheelchairs to Medicare patients—who, in reality, didn’t need wheelchairs at all. Then the scammers asked Medicare to pay them back, so they could pocket the huge markup that the government paid on each chair.
A lot of the time, Medicare was fooled. The government paid.
Since 1999, Medicare has spent $8.2 billion to procure power wheelchairs and “scooters” for 2.7 million people. Today, the government cannot even guess at how much of that money was paid out to scammers.
Now, the golden age of the wheelchair scam is probably over.
But, while it lasted, the scam illuminated a critical failure point in the federal bureaucracy: Medicare’s weak defenses against fraud. The government knew how the wheelchair scheme worked in 1998. But it wasn’t until 15 years later that officials finally did enough to significantly curb the practice.
As part of its reporting, the Washington Post provides a helpful video describing how to scam Medicare in four easy steps.
While the scam’s easy days seem to be over, Medicare’s administrators and bureaucrats still aren’t able to quantify how much fraud it tolerated during the 15 years they knew they had the problem:
When officials review old wheelchair bills, they discover that at least 80 percent of them were “improper”: They contain major errors and shouldn’t have been paid as is. Perhaps the patient’s diagnosis didn’t actually qualify for a power wheelchair. Perhaps the paperwork was incomplete.
How many of those bills were sent in by fraudsters, trying to squeeze through the system’s blind spots?
Medicare can’t say.
“You’d have to talk to the patient. You’d have to talk to the providers” and ask if the wheelchair was really needed, said Shantanu Agarwal, a doctor who is Medicare’s top fraud fighter. “And then, at the end of it, you could make a reasonable, fact-based, experienced-based determination about whether this is probably fraud,” Agarwal said. Medicare doesn’t have the time or money to do that for power wheelchairs now.
Why doesn’t Medicare take the time to prevent such fraud? Because, in the bureaucratic mind, doing that kind of work is more costly and demanding of government employees than is just sitting back and enabling the fraud. Because that’s Uncle Sam’s money. If he runs low, he can just go borrow more.
The Social Security Trustees have just released their 2014 report, which updates their actuarial estimates of when the program’s Disability Insurance (DI) trust fund and the Old Age and Survivor’s Insurance (OASI) trust fund will run out of money, forcing both disability and pension benefits to be cut.
Let’s get to the worst news first. Social Security’s Disability Insurance trust fund will be the first to be depleted, which the trustees now forecast will occur in less than two years. Under current law, when the DI trust fund is depleted in 2016, Supplemental Security Income (SSI) payments made to Americans with disabilities will be permanently cut by nearly one-fifth.
That change will negatively impact over 8.4 million Americans, who can expect to see their monthly income payments slashed by 19% according to the Trustee’s latest estimate, just seven years after the DI trust fund last ran a surplus from the portion of Social Security’s payroll taxes dedicated to it.
Meanwhile, things are not as immediately dire for Social Security’s OASI trust fund, which is expected to last another nineteen years before it is fully depleted after years of paying out more in benefits than it collects through Social Security’s payroll taxes. When that happens, the monthly income benefits paid to retired Americans, or to the surviving spouses of working Americans who paid Social Security’s payroll taxes, will be slashed by nearly one-fourth.
For more information, Charles Blahous, one of Social Security’s Public Trustees, provides a good overview of what’s in the 2014 Trustees’ report at e21.