Posts tagged ‘budget’

Republican Fail on Obamacare

I find Republican strategy in the recent Obamacare and budget fight to have been insanely aggravating, and that is coming from someone who hates Obamacare.

Yes, I understand why things are happening as they are.  From a re-election strategy, their approach makes total sense.  A lot of these House guys come from majority Republic districts where their biggest re-election fear comes from a primary challenge to the right of them.  I live in one of these districts, so I see what perhaps coastal media does not.  In everyday conversation Republicans are always criticizing their Congressmen for not rolling back Obamacare.  Republicans need to be able to say in a primary, "I voted to defund Obamacare".  Otherwise I guarantee every one of them will be facing a primary opponent who will hammer them every day.

But from the perspective of someone who just wants the worst aspects of this thing to go away, this was a terrible approach.  Defunding Obamacare entirely was never, ever, ever going to succeed.  Obama and Democrats would be happy to have a shutdown last months before they would roll back his one and only signature piece of legislation.  They may have caved in the past on other issues but he is not going to cave on this one (and needs to be seen not caving given his recent foreign policy mis-steps that has him perceived as weak even in his own party).  And, because all the focus is on Obamacare, we are going to end up with a budget deal that makes no further progress on containing other spending.

The Republicans should have taken the opportunity to seek targeted changes that would more likely have been accepted.  The most obvious one is to trade a continuing resolution for an elimination of the IPAB, one of the most undemocratic bits of legislation since the National Industrial Recovery Act.  Another strategy would have been to trade a CR for a 1-year delay in the individual mandate, a riskier strategy but one the Administration might leap at given that implementation problems in exchanges are giving them a black eye.  Finally, an even riskier strategy would have been to tie a CR to a legislative acknowledgement that the PPACA does not allow subsidies in Federally-run exchanges.  This latter might not have been achievable (and they might get it in the courts some day anyway) but if one argues that any of these is unrealistic, then certainly defunding Obamacare as a whole was unrealistic.

I think as a minimum they could have killed the IPAB, but now they will get nothing.

Update:  This line from All the President's Men seems relevant:

You've done worse than let Haldeman slip away: you've got people feeling sorry for him. I didn't think that was possible. In a conspiracy like this, you build from the outer edges and go step by step. If you shoot too high and miss, everybody feels more secure. You've put the investigation back months.

Money for Nothing, Detroit Edition

A huge portion of Detroit's operating costs go to police and fire.  If you include retiree health care and pensions, way over half of Detroit's budget goes to police and fire**.  That is an enormous increase since 1960.

detroit-bankruptcy-spending

So one might expect the schools to suck and the streetlights to be broken (which they do and are), but you would expect great freaking fire and police coverage.  But you would be wrong.  Detroit has one of the highest crime rates in the country.  This is what you get for your money there:

If you're a Detroiter who needs a police officer, it will take 58 minutes to get help -- more than five times what it takes elsewhere in the United States...

Here are some of the other problems outlined in the bankruptcy filing:

-- Response times for Emergency Medical Services and the Detroit Fire Department average 15 minutes, which is more than double the 7-minute averages seen in other cities.

-- The police department closes only 8.7% of its criminal cases, which the filing blames on the department's "lack of a case management system, lack of accountability for detectives, unfavorable work rules imposed by collective bargaining agreements and a high attrition rate in the investigative operations unit."

-- The city's violent crime rate is five times the national average, and the highest of any city with a population exceeding 200,000.

 

** This is in large part due to the power of their unions, and their ability in elections to translate hero worship for police and fire fighters into political power that will allow them to get anything they want.  As a politician, try to stand up for sanity and you will be deluged by union ads arguing that you don't respect our men who are risking their lives for you, etc. etc.

The Government, Nudging, and Delay Discounting

The theory behind the idea that government should nudge (or coerce, as the case may be) us into "better" behavior is based on the idea that many people are bad at delay discounting.  In other words, we tend to apply huge discount rates to pain in the future, such that we will sometimes make decisions to avoid small costs today even if that causes us to incur huge costs in the future (e.g. we refuse to walk away from the McDonalds french fries today which may cause us to die of obesity later).

There are many problems with this theory, not the least of which is that many decisions that may appear to be based on bad delay discounting are actually based on logical and rational premises that outsiders are unaware of.

But the most obvious problem is that people in government, who will supposedly save us from this poor decision-making, are human beings as well and should therefore have the exact same cognitive weaknesses.  No one has ever managed to suggest a plausible theory as to how our methods of choosing politicians or staffing government jobs somehow selects for people who have better decision-making abilities.

Here is a great example.  These are the people who think YOU have a problem with delay discounting:

When all the numbers are crunched, one fact is crystal clear: Yes, a disaster was looming for Detroit. But there were ample opportunities when decisive action by city leaders might have fended off bankruptcy.

If Mayors Jerome Cavanagh and Roman Gribbs had cut the workforce in the 1960s and early 1970s as the population and property values dropped. If Mayor Dennis Archer hadn’t added more than 1,100 employees in the 1990s when the city was flush but still losing population. If Kilpatrick had shown more fiscal discipline and not launched a borrowing spree to cover operating expenses that continued into Mayor Dave Bing’s tenure. Over five decades, there were many ‘if only’ moments.

“Detroit got into a trap of doing a lot of borrowing for cash flow purposes and then trying to figure out how to push costs (out) as much as possible,” said Bettie Buss, a former city budget staffer who spent years analyzing city finances for the nonpartisan Citizens Research Council of Michigan. “That was the whole culture — how do we get what we want and not pay for it until tomorrow and tomorrow and tomorrow?”

Ultimately, Detroit ended up with $18 billion to $20 billion in debt and unfunded pension and health care liabilities. Gov. Rick Snyder appointed bankruptcy attorney Kevyn Orr as the city’s emergency manager, and Orr filed for Chapter 9 on July 18.

Raise Medicare Taxes

I have made this argument before -- your lifetime Medicare taxes cover only about a third of the benefits you will receive.   Social Security taxes are set about right -- to the extent we come up short on Social Security, it is only because a feckless Congress spent all the excess money in the good years and has none left for the lean years.

But Medicare is seriously mis-priced.  I have always argued that this is dangerous, because there is nothing that screws up the economy more than messed up price signals.  In particular, I have argued that a lot of the glowy hazy love of Medicare by Americans is likely due to the fact that it is seriously mis-priced.  Let's price the thing right, and then we can have a real debate about whether it needs reform or is worth it.

A recent study confirms my fear that the mispricing of Medicare is distorting perceptions of its utility.

As debate over the national debt and the federal budget deficit begins to heat up again, an analysis of national polls conducted in 2013 shows that, compared with recent government reports prepared by experts, the public has different views about the need to reduce future Medicare spending to deal with the federal budget deficit. Many experts believe that future Medicare spending will have to be reduced in order to lower the federal budget deficit [1] but polls show little support (10% to 36%) for major reductions in Medicare spending for this purpose. In fact, many Americans feel so strongly that they say they would vote against candidates who favor such reductions. Many experts see Medicare as a major contributor to the federal budget deficit today, but only about one-third (31%) of the public agrees.

This analysis appears as a Special Report in the September 12, 2013, issue of New England Journal of Medicine.

One reason that many Americans believe Medicare does not contribute to the deficit is that the majority thinks Medicare recipients pay or have prepaid the cost of their health care. Medicare beneficiaries on average pay about $1 for every $3 in benefits they receive. [2] However, about two-thirds of the public believe that most Medicare recipients get benefits worth about the same (27%) or less (41%) than what they have paid in payroll taxes during their working lives and in premiums for their current coverage.

Update:  Kevin Drum writes on the same study.  Oddly, he seems to blame the fact that Americans have been trained to expect something for nothing from the government on Conservatives.  I am happy to throw Conservatives under the bus for a lot of things but I think the Left gets a lot of the blame if Americans have been fooled into thinking expensive government freebies aren't really costing them anything.

Meet the Person Who Wants to Run Your Life -- And Obama Wants to Help Her

I am a bit late on this, but like most libertarians I was horrified by this article in the Mail Online about Obama Administration efforts to nudge us all into "good" behavior.  This is the person, Maya Shankar, who wants to substitute her decision-making priorities for your own

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If the notion -- that a 20-something person who has apparently never held a job in the productive economy is  telling you she knows better what is good for you -- is not absurd on its face, here are a few other reasons to distrust this plan.

  • Proponents first, second, and third argument for doing this kind of thing is that it is all based on "science".  But a lot of the so-called science is total crap.  Medical literature is filled with false panics that are eventually retracted.  And most social science findings are frankly garbage.  If you have some behavior you want to nudge, and you give a university a nice grant, I can guarantee you that you can get a study supporting whatever behavior you want to foster or curtail.  Just look at the number of public universities in corn-growing states that manage to find justifications for ethanol subsidies.  Recycling is a great example, mentioned several times in the article.  Research supports the sensibility of recycling aluminum and steel, but says that recycling glass and plastic and paper are either worthless or cost more in resources than they save.  But nudgers never-the-less push for recycling of all this stuff.  Nudging quickly starts looking more like religion than science.
  • The 300 million people in this country have 300 million different sets of priorities and personal circumstances.  It is the worst hubris to think that one can make one decision that is correct for everyone.  Name any supposedly short-sighted behavior -- say, not getting health insurance when one is young -- and I can name numerous circumstances where this is a perfectly valid choice and risk to take.
  • The justification for this effort is social science research about how people manage decisions that involve short-term and long-term consequences

Some behavioral scientists believe they can improve people's self-control by understanding the relationship between short term memory, intelligence and delay discounting.

This has mostly been used to counter compulsive gambling and substance abuse, but Shankar's entry into government science circles may indicate that health insurance objectors and lapsed recyclers could soon fall into a similar category

I am sure there is a grain of truth in this -- all of us likely have examples of where we made a decision to avoid short term pain that we regretted.  But it is hilarious to think that government officials will somehow do better.  As I have written before, the discount rate on pain applied by most legislators is infinite.  They will do any crazy ridiculous thing that has horrible implications five or ten years from now if they can just get through today.  Why else do government bodies run massive sustained deficits and give away unsustainable pension and retirement packages except that they take no consideration of future consequences.  And it is these people Maya wants to put in charge of teaching me about delay discounting?

  • It probably goes without saying, but nudging quickly becomes politicized.  Is nudging 20-something health men to buy health insurance really in their best interests, or does it help keep an important Obama program from failing?

Postscript:  Here is a great example of just how poorly the government manages delay discounting.  In these cases, municipalities are saddling taxpayers with almost certainly bankrupting future debt to avoid paying any short-term costs.

Texas school districts have made use of another controversial financing technique: capital appreciation bonds. Used to finance construction, these bonds defer interest payments, often for decades. The extension saves the borrower from spending on repayment right now, but it burdens a future generation with significantly higher costs. Some capital appreciation bonds wind up costing a municipality ten times what it originally borrowed. From 2007 through 2011 alone, research by the Texas legislature shows, the state’s municipalities and school districts issued 700 of these bonds, raising $2.3 billion—but with a price tag of $23 billion in future interest payments. To build new schools, one fast-growing school district, Leander, has accumulated $773 million in outstanding debt through capital appreciation bonds.

Capital appreciation bonds have also ignited controversy in California, where school districts facing stagnant tax revenues and higher costs have used them to borrow money without any immediate budget impact. One school district in San Diego County, Poway Unified, won voter approval to borrow $100 million by promising that the move wouldn’t raise local taxes. To live up to that promise, Poway used bonds that postponed interest payments for 20 years. But future Poway residents will be paying off the debt—nearly $1 billion, all told—until 2051. After revelations that a handful of other districts were also using capital appreciation bonds, the California legislature outlawed them earlier this year. Other states, including Texas, are considering similar bans.

Or here is another example, of New York (the state that is home to the mayor who tries to nudge his residents on everything from soft drinks to salt)  using trickery to consume 25 years of revenue in one year.

Other New York deals engineered without voter say-so include a $2.7 billion bond offering in 2003, backed by 25 years’ worth of revenues from the state’s gigantic settlement with tobacco companies. To circumvent borrowing limits, the state created an independent corporation to issue the bonds and then used the money from the bond sale to close a budget deficit—instantly consuming most of the tobacco settlement, which now had to be used to pay off the debt.

By the way, I recommend the whole linked article.  It is a pretty broad survey of how state and local governments are building up so much debt, both on and off the books, and how politicians bend every law just to be able to spend a few more dollars today.

Two DVD Reviews of Poorly Rated Movies That Had Some Redeeming Characteristics

I had pretty good experiences this week with not one but two movies rated 6 and under (which is pretty low) on IMDB

Atlas Shrugged, Part II:  A mixed bag, but generally better than the first.  The first episode had incredibly lush, beautiful settings, particularly for a low budget indie movie.  But the acting was stilted and sub-par.  Or perhaps the directing was sub par, with poor timing in the editing and dialog.  Whatever.  It was not always easy to watch.

The second movie is not as visually interesting, but it tossed out most of the actors from the first movie (a nearly unprecedented step for a sequel) and started over.  As a result, the actors were much better.  Though I perhaps could wish Dagny was younger and a bit hotter, she and the actor who played Rearden really did a much better job (though there is very little romantic spark between them).  And, as a first in any Ayn Rand movie I have ever seen, there were actually protagonists I might hang out with in a bar.

The one failure of both movies is that, perhaps in my own unique interpretation of Atlas Shrugged, I have always viewed the world at large, and its pain and downfall, as the real protagonist of the book.  We won't get into the well-discussed flatness of Rand's characters, but what she does really well -- in fact the whole point of the book to me -- is tracing socialism to its logical ends.  For me, the climactic moment of the book is Jeff Allen's story of the fate of 20th Century Motors.  Little of this world-wilting-under-creeping-socialism really comes out well in the movie -- its more about Hank and Dagny being harassed personally.  Also, the movie makes the mistake of trying to touch many bases in the book but ends up giving them short shrift - e.g. Jeff Allen's story, D'Anconia's great money speech, Reardon's trial, etc.

I would rate this as worth seeing for the Ayn Rand fan - it falls short but certainly does not induce any cringes  (if only one could say that about the Star Wars prequels).

Lockout:  This is a remake of "Escape from New York", with a space prison substituting for Manhattan and the President's daughter standing in for the President.  The movie lacks the basic awesomeness of converting Manhattan to a prison.  In fact, only one thing in the whole movie works, and that is the protagonist played by Guy Pierce (who also starred in two of my favorite movies, LA Confidential and Memento).

The movie is a total loss when he is not on screen.  The basic plot is stupid, the supporting characters are predictable and irritating, the physics are absurd, and the special effects are weak.  The movie is full of action movie cliche's -- the hero throwing out humorous quips (ala Die Hard or any Governator movie), the unlikely buddy angle, the reluctant romantic plot.  But Pierce is very funny, and is thoroughly entertaining when onscreen.  I think he does the best  job at playing the wisecracking, cynical hero that I have seen in years.

The Plan For Universities to Raise Tuition to Infinity

Via the WSJ, President Obama is proposing debt forgiveness for student borrowers

The White House proposes that the government forgive billions of dollars in student debt over the next decade, a plan that cheers student advocates, but critics say it would expand a program that already encourages students to borrow too much and stick taxpayers with the bill.

The proposal, included in President Barack Obama's budget for next year, would increase the number of borrowers eligible for a program known casually as income-based repayment, which aims to help low-income workers stay current on federal student debt.

Borrowers in the program make monthly payments equivalent to 10% of their income after taxes and basic living expenses, regardless of how much they owe. After 20 years of on-time payments—10 years for those who work in public or nonprofit jobs—the balance is forgiven.

Already, it's pretty clear that many students pay little attention to size of the debt they run up.  Easy loans for students have essentially made them less price sensitive, however irrational this may seem (did you make good short - long term trade-offs at the age of 18?)  As a result, tuition has soared, much like home prices did as a result of easy mortgage credit a decade ago.  The irony is that easier student debt is not increasing access to college for the average kid (since tuition is essentially staying abreast of increases in debt availability), but is shifting student's future dollars to university endowments and bloated administrations.  Take any industry that has in the past been accused of preying on the financially unsophisticated by driving them into debt for profit, and universities are fifty times worse.

So of course, the Progressives in the White House and Congress (unsurprisingly Elizabeth Warren has a debt subsidy plan as well) are set to further enable this predatory behavior by universities.  By effectively capping most students' future financial obligations from student debt, this plan would remove the last vestiges of price sensitivity from the college tuition market.  Colleges can now raise tuition to infinity, knowing that the bulk of it will get paid by the taxpayer some time in the future.  Just as the college price bubble looks ready to burst, this is the one thing that could re-inflate it.

Postscript:  By the way, let's look at the numbers.  Let's suppose Mary went to a top college and ran up $225,000 in debt.  She went to work for the government, averaging $50,000 a year (much of her compensation in government is in various benefits that don't count in this calculation).  She has to live in DC, so that's expensive, and pay taxes.  Let's say that she has numbers to prove she only has $20,000 left after essential living expenses.  10% of that for 10 years is $20,000 (or about $13,500 present value at 8%).  So Mary pays less than $20,000 for her education, and the taxpayer pays $205,000.  The university makes a handsome profit - in fact they might have given her financial aid or a lower tuition, but why bother?  Mary doesn't care what her tuition is any more, because she is capped at around $20,000.  The taxpayer is paying the rest and is not involved in the least in choosing the university or setting prices, so why not charge the taxpayer as much as they can?

Postscript #2:  It is hard to figure out exactly what Elizabeth Warren is proposing, as most of her proposal is worded so as to take a potshot at banks rather than actually lay out a student loan plan.  But it appears that she wants to reduce student loan interest rates for one year.  If so, how is this different from teaser rates on credit cards, where folks -- like Elizabeth Warren -- accuse credit card companies of tricking borrowers into debt with low initial, temporary rates.  I  find it  a simply astounding sign of the bizarre times we live in that a leading anti-bank progressive is working on legislative strategies to get 18-year-olds further into debt.

Never Miss A Good Opportunity to Shut Up

It strikes me that a service business model that relies on frequently suing your customers is not really sustainable.

My folks out in the field operating campground face far greater problems with customers than any of these petty complaints that Suburban Express is taking to court.  My folks have drunks in their face almost every weekend screaming obscenities at them.  We have people do crazy things to avoid paying small entry fees.  We get mostly positive reviews online but from time to time we inevitably get a negative review with which we disagree (e.g. from the aforementioned drunk who was ticked off we made him stop driving).

And you know how many of these folks we have taken to court in 10 years?  Zero.  Because unless your customer is reneging on some contractual obligation that amounts to a measurable percentage of your net worth, you don't take them to court.

Yes, it is satisfying from an ego perspective to contemplate taking action against some of them.  There are always "bad customers" who don't act in civilized and honorable ways.   But I  tell my folks that 1)  You are never going to teach a bad customer a lesson, because by definition these same folks totally lack self-awareness or else they would not have reached the age of fifty and still been such assholes.  And 2) you are just risking escalating the situation into something we don't want.  As did Suburban Express in the linked article.

The first thing one has to do in the customer service business is check one's ego at the door.  I have front-line employees that simply refuse to defuse things with customers (such as apologize for the customer's bad experience even if we were not reasonably the cause).  They will tell me that they refuse to apologize, that it was a "bad customer".   This is all ego.  I tell them, "you know what happens if you don't apologize and calm the customer down?  The customer calls me and I apologize, and probably give him a free night of camping to boot."  In the future, if this dispute goes public, no one is going to know how much of a jerk that customer was at the time.  Just as no one knows about these students in the Suburban Express example - some may have been  (likely were) drunken assholes.  But now the company looks like a dick for not just moving on.

This is all not to say I am perfect.  It is freaking amazingly easy to forget my own rule about checking one's ego at the door.  I sometimes forget it when dealing with some of the public agencies with which I am under contract.  One of the things you learn early about government agencies is that long-time government employees have never been inculcated with a respect for contract we might have in the private world.  If internal budget or rules changes make adhering to our contract terms difficult, they will sometimes ignore or unilaterally change the terms of our written contract.

And then I will get really pissed off.  Sometimes, I have to -- the changes are substantial and costly enough to matter.  But a lot of the time it is just ego.  The changes are small and de minimis from our financial point of view but I get all worked up, writing strings of eloquent and argumentative emails and letters, to show those guys at the agency just how wrong they are.  And you know what?  Just like I tell my folks, the guys on the other end are not going to change.  They are not bad people, but they have grown up all their lives in government work and have been taught to believe that contract language is secondary to complying with their internal bureaucratic rules.  They are never going to change.  All I am doing is ticking them off with my letters that are trying to count intellectual coup on them.

To this end, I think I am going to tape these two lines from Ken White's post on the wall in front of my desk

  • First, never miss a good opportunity to shut up.
  • Second, take some time to get a grip. You will not encounter a situation where waiting 48 hours to open your mouth will destroy your brand.

Privatizing the TVA -- I'm Doing My Part

Several sources have reported that the new Obama budget calls for privatizing the TVA.  My company is already doing our part -- we have privately taken over the operation of four TVA campgrounds (under a long-term lease) and are looking at others.  Our first was here, and has turned out to be a really good operation for us.  It is impossible to get bank loans for improvements on leased land, but over time, by applying cash flow from the operation back into improvements, we have put nearly a million dollars in to the property.  We took on three new TVA campgrounds this winter and are just now scrambling to get them open.

Sequester Madness 2

This just came in over the transom via email.

WASHINGTON, D.C.///February 20, 2013///Sequestration will cut visitor access to the rim of the Grand Canyon, significantly delay the spring opening of key portions of Yellowstone and Yosemite, reduce emergency response help for drivers in the Great Smoky Mountains, limit access to the beach at the Cape Cod National Seashore, and impair the experiences in many other ways for millions of visitors at America’s national parks.   In addition, local, regional and state economies that depend on national parks will take huge hits as visitors are either turned away or skip visits due to the impact of the mindless sequestration budget cuts.....

CNPSR Spokesperson, Joan Anzelmo, former Superintendent of Colorado National Monument said:  “Congress might just as well put a big “Keep Out !” sign at the entrance to Yellowstone, Grand Canyon, Yosemite, the Cape Cod Seashore, and every other iconic national park in the U.S.   This foolhardy path tarnishes America’s ‘crown jewels’ and is a repudiation of the nation’s national parks often touted as ‘America’s best idea’.  Millions of Americans depend on national parks for their vacations and livelihood.  Those Americans are being told that national parks don’t count … that people who use national parks don’t count … and that people who live and work near national parks don’t count.”

A few observations:

  • It's a 5% freaking cut.  I bet Wal-Mart is a more tightly-run organization than the NPS, and I further bet if I forced an immediate 5% cut at Wal-Mart they would do it without cutting store hours or service to customers.
  • Again, we see government officials cutting the most cherished, visible services, rather than the chaff, in order to maximize citizen outrage rather than do their freaking job and set priorities
  • It's a freaking 5% cut.  Did I say that already?
  • I could cut huge chunks from the NPS budget while improving service by having private companies perform many operating functions.  Our company runs nearly 175 parks and in every one we have seen something like a 50% reduction in cost over government operation while simultaneously increasing staffing in the parks.
  • This is absolutely boilerplate from every single agency and constituency that gets threatened with even the tiniest budget cut -- "you are telling XXX group they don't count."  Barf.
  • I was going to make some observations about their budget over the last few years, but all their budget detail pages online seem to be down

I am currently as depressed and cynical as I have ever been today due to this absurd reaction to a trivial spending cut.  I have about zero hope that Federal spending will ever be reigned in.  Politicians of both parties and the special interests that support them will spend and spend until we find ourselves calling Greece asking for a bailout.

Sequester Madness

If the Republicans are supposed to be the voice of fiscal responsibility in Washington, then we are doomed.  They are absolutely as bad as Obama, running around in panic that the trivial cuts required by the sequester (not 8% this year or 5% or even 2% but 1% of Federal spending).  I have never seen a private organization with a large administrative staff that could not take a 5% reduction and generally be better off for it.   I absolutely guarantee that I could take 5% or more off the top of every agency's budget and you would never notice it.

This includes the military.  In fact, this includes the military in particular.  The military is never asked to prioritize.   We still have armored divisions in Germany.  It is always incredible to me that Republicans, who doubt that the government can ever manage or spend wisely, suddenly cast aside all these doubts when it comes to the military.   I understand the honor that folks accord to front-line soldiers vs., say, DMV workers.  But they are not the ones spending the money.  I am tired of such honor for the troops being used to bait and switch me from a very reasonable focus on DOD spending and waste.

When it comes to the military, Republicans use the same "closing the Washington Monument" tactics that Democrats use for social programs, essentially claiming that a 5% (or 1%) spending cut will result in the cessation of whatever activity taxpayers most want to see continue.  This process of offering up the most, rather than the least, important uses of money when spending cuts are proposed as a tactic to avoid spending cuts is one of the most corrupt practices imaginable.  No corporate CEO would tolerate it of his managers for a micro-second.

About two years ago at Forbes I imagined a hypothetical budget discussion at a corporation that followed Congressional budgeting practices.

The Sequester if Falling, The Sequester is Falling

I cannot believe the sky-is-falling panic around the sequester.  It is all so much BS.  The sequester represents a trivial percentage reduction in spending down to levels we have not seen for, like, 2 years or so.  But apparently everyone is getting into the act claiming the world will end if we cut a couple of percent from the growth rate of government spending.  As an illustration, this is the over-wrought absurd email I just recieved:

If implemented, the US Navy directed cancellation of ship repair and maintenance due to lack of an approved Defense budget and sequestration will have a drastic impact on the commercial ship repair industry across the nation.   The more than 150,000 expert ship repair professionals that have been cultivated across the nation cannot be easily replaced by a new workforce.    In addition, many of our yards nationwide do both defense and commercial work.  The Navy cancellations would severely undermine their ability to continue operating in a high quality, efficient  manner.

The Virginia Ship Repair Association urges you to learn more and voice your concern. We have provided templates for mailing  letters to your members of Congress, as well as contact lists to make phone calls. Please join us in this effort to preserve our maritime interests, protect our shipyards and secure the future of our workforce.

US Shipyards among the great pork-barrel spending stories in this country's history.  Show me a shipyard with lots of defense business (e.g. Ingalls in Pascagoula) and I will show you a Senator from that state who wielded immense power on Congressional defense committees.

A Couple of Nice Observations on Technocracy and Budgets

From South Bend Seven come a couple of comments I liked today.  The first was on the Left and current budget plans:

If I was on the Left I would look at these figures and then begin to think long and hard about whether knee-jerk opposition to things like Medicare block grants or defined-contribution public pensions is such a good idea. The biggest threat to redistribution to the poor is existing redistribution to the old.

To the last sentence, I would add "and redistribution to upper middle class public sector workers."  I am constantly amazed at the Left's drop-dead defense of above-market pay and benefits for public sector workers.  This already reduces funding for things like actual classroom instruction and infrastructure improvements, and almost certainly the looming public pension crisis will reduce resources for an array of programs much loved by the Left.

The second observation relates to a favorite topic of mine, on technocracy:

Often enough I think "you know, we need more scientists in charge of things." Then I remember that the scientists we get are Steven Chu and I think "yeah, maybe not so much."

Then I think about all the abominable committee meetings and discussion sessions I've been in with scientists and I think "perhaps best not to put scientists in charge."

Then I look over at my bookshelf, notice my cope of The Machinery of Freedom, and think "why are we putting anybody in charge at all?"

If this Administration has any one theme, it is a total confidence that a few people imposing solutions and optimizations top-down  is superior to bottom-up or emergent solutions.   Even the recent memo on targeted killings reflects this same philosophy, that one man with a few smart people in the White House can make better life-or-death decisions than all that messy stuff with courts and lawyers.   Those of us who understand our Hayek know that superior top-down decision-making is impossible, given that the decision-makers can never have the information or incentives to make the best decisions for complex systems, and because they tend to impose one single objective function when in fact we are a nation of individuals with 300 million different objective functions.  But the drone war / targeted killing memo demonstrates another problem:  technocrats hate due process.   Due process for them is just time-wasting review by lesser mortals of their decisions.  Just look at how Obama views Congress, or the courts.

Arguing Against Personal Interest

The best time to argue for general principles is when they work against one's own interest, to firmly establish that they are indeed principles rather than political opportunism.  Two examples:

First, from a topic rife with political opportunism, the Supreme Court a three-judge panel recently ruled Obama's NLRB not-really-recess appointments were unconstitutional.  I think that was the right decision,  but a President has got to be able to get an up or down vote in a timely manner on appointments.  As much as I would love to see all of Obama's appointments languish for, oh, four years or so, and as much as I really don't like his activist NLRB, having to resort to procedural hacks of this sort just to fill administrative positions is not good government.  The Senate rules (or traditions as the case may be) that even one Senator may put a hold on confirmations is simply insane.  While I am a supporter of the filibuster, I think the filibuster should not apply to certain Constitutionally mandated activities.  Specifically:  passing a budget and appointment confirmations.

Second, readers of this blog know how much I dislike our sheriff Joe Arpaio.  He was unfortunately re-elected a couple of months ago, though the vote was closer than usual.  This week, an Arizona group who also does not like Joe has announced it is going to seek a recall election against him.  Again, as much as I would like to see Arpaio ride off into the sunset, this practice of gearing up for recall elections just days after the election is over is just insane.  It is a total waste of money and resources.  While I don't like to do anything that helps incumbents, there has to be some sort of waiting period (perhaps 1/4 of the office term) before we start this silliness.

Bizarre Alternate Reality

Kevin Drum is claiming that the government has already done much fine work on deficit reduction, reducing spending by $1.8 trillion and increasing taxes by $600 billion.

This is fantasy, pure and simple, and perhaps why the term "reality-based community" has fallen out of favor among Progressives.   There has been and will likely be no reduction in spending -- these "spending cuts" are merely reductions in spending growth rates from the Administration's initial wet dream spending proposals. I am sure the tax increases are probably real, but Obama and the Congress were already proposing to spend most of those in new stimulus and other boondoggles right in the end of year tax legislation.

The tax numbers are characteristic of the stupid budget games played by both parties.   For example, the recent tax law represents a tax increase over law in place on 12/31/2012, but represents a massive tax cut vs. law set to be in place on 1/1/2013.  This gives the administration cover to call it both!  When it wants to portray itself as a deficit hawk, as in this case, it was a tax increase.  When it wants to portray itself as being populist, it was a tax cut.

Charts like this are absolutely worthless.  We will likely get deficit reduction over the next few years, but it will be entirely due to rising tax revenues from an improving economy.

And here we are back to my constant theme -- if you want to posit a trend, then show the trend.

Words That Have Been Stripped of Any Meaning: "Spending Cuts" and "Austerity"

I have already written that the supposed European austerity (e.g. in the UK) is no such thing, and "austerity" in these cases is being used to describe what is merely a slowing in spending growth.

Apparently the same Newspeak is being applied to spending cuts in the US.  How else  can one match this data:

With these words from President Obama (my emphasis added)

"If we're going to raise revenues that are sufficient to balance with the very tough cuts that we've already made and the further reforms in entitlements that I’m prepared to make, then we’re going to have to see the rates on the top two percent go up"

Seriously?  The only small reductions in the budget were because some supposedly one-time expenses (like TARP bailouts, war costs, and stimulus spending) were not repeated.  Allowing one-time costs to be, uh, one-time does not constitute "tough cuts."

Tough cuts are when we knock government spending back down to 19-20 percent of GDP.  Clinton level spending in exchange for Clinton tax rates.   That's my proposed deal.

Government Spending Ratchet

In 2010, Arizona v0ters passed proposition 100, a 1% "temporary" sales tax increase that was meant to help fill in the budget hole created by the recession.  The tax was only to last 3 years.

It is pretty clear that by the end of 2013, when the tax expires, the rationale for the temporary tax cut will have passed.  Already the state's finances are improving and all signs are that by 2014 the economy and real estate market should be greatly recovered.

But, having got taxpayers used to paying the higher tax, supporters of big government and public employees unions have put a proposition on the ballot this year (204)  to make the 2010 tax increase permanent.  The tax extension will go to a mish-mash of new programs.

This is how the government spending ratchet works.  A "temporary" tax increase is justified in a fiscal emergency to fill in a recession-created hole.  Government insiders decide they like having more money, and make the tax permanent.  The new money is used to create brand new programs.  Then, in the next recession, when all these brand new programs are now "essential" and "beyond the reach of even the worst austerity", a new, even higher "temporary" tax increase is necessary.

A Good Reason To Get Obama Out of Office

OK, there are lots of reasons to get Obama out of office.  The problem is, that for most of them, I have no reasonable hope that Romney will be any better.  Corporatism?  CEO as Venture-Capitalist-in-Chief?  Indefinite detentions?  Lack of Transparency?  The Drug War?   Obamacare, which was modeled on Romneycare?  What are the odds that any of these improve under Romney, and at least under Obama they are not being done by someone who wraps himself in the mantle of small government and free markets, helping to corrupt the public understanding of those terms.

But here is one issue Obama is almost certainly going to be worse:  Bail outs of states.  States will start seeking Federal bailouts, probably initially in the form of Federal guarantees of their pension obligations, in the next 4 years.  I had thought that Obama would be particularly susceptible if California is the first to come begging.  But imagine how fast he will whip out our money if it is Illinois at the trough first?

Now that Chicago's children have returned to not learning in school, we can all move on to the next crisis in Illinois public finance: unfunded public pensions. Readers who live in the other 49 states will be pleased to learn that Governor Pat Quinn's 2012 budget proposal already floated the idea of a federal guarantee of its pension debt. Think Germany and eurobonds for Greece, Italy and Spain.

Thank you for sharing, Governor.

Sooner or later, we knew it would come to this since the Democrats who are running Illinois into the ground can't bring themselves to oppose union demands. Illinois now has some $8 billion in current debts outstanding and taxpayers are on the hook for more than $200 billion in unfunded retirement costs for government workers. By some estimates, the system could be the first in the nation to go broke, as early as 2018....

For years, states have engaged in elaborate accounting tricks to improve appearances, including using an unrealistically high 8% "discount" rate to account for future liabilities. To make that fairy tale come true, state pension funds would have to average returns of 8% a year, which even the toothless Government Accounting Standards Board and Moody's have said are unrealistic....

Look no further than the recent Chicago teachers strike. The city is already facing upwards of a $1 billion deficit next year with hundreds of millions of dollars in annual pension costs for retired teachers coming due. But despite the fiscal imperatives, the negotiation didn't even discuss pensions. The final deal gave unions a more than 17% raise over four years, while they keep benefits and pensions that workers in the wealth-creating private economy can only imagine.

As a political matter, public unions are pursuing a version of the GM strategy: Never make a concession at the state level, figuring that if things get really bad the federal government will have no political choice but to bail out the pensions if not the entire state. Mr. Quinn made that official by pointing out in his budget proposal that "significant long-term improvements" in the state pension debt will come from "seeking a federal guarantee of the debt."

I had not paid much attention to the Chicago teacher's strike, except to note that the City basically caved to the unions.  The average teacher salary in Chicago, even without benefits, will soon rise to nearly $100,000 a year for just 9 months work.  But I am amazed at the statement that no one even bothered to challenge the union on pensions despite the fact that the system is essentially bankrupt.  Illinois really seems to be banking on their favorite son bailing them out with our money.

The Medicare Problem -- A Reminder

There is no free lunch.

As I have written before, the problem with Social Security is not a mismatch of taxes and benefits - it's simply that 40 years of Congresses have spent the premiums, and now they no longer exist to pay benefits.

The problem with Medicare is actually more difficult.  By these numbers, Medicare taxes are not even a third of what they need to be to pay for actual benefits.  There are only two solutions that don't involve running up Federal debt:  1)  Triple Medicare taxes.  or 2) Cut back benefits and/or eligibility by 2/3.

Interestingly, neither party is suggesting either of these solutions, which makes all the light and noise from the Conventions totally meaningless on this issue.  The Left's notion that cost control will close the gap is sheer fantasy -- already Medicare is getting an effective cross-subsidy from non-Medicare customers and price controls have gone about as far as they can.  In fact, the cost mismatch above is understated as many Medicare costs (e.g. buildings, revenue collection) are actually not charged to the program but to other agencies.  The Right's pitch that small cuts around the edges that Grandma won't notice at all will balance the budget are equally a fantasy.

Believe it or not, I have come around to the solution that we need to raise the Medicare tax.  I would like to privatize the whole thing, and in particular see a reintroduction of individual shopping and out-of-pocket expenditure to the system.  But in the interim we have to acknowledge that there is no way substantial changes to Medicare benefits or delivery is going to happen.  The program remains incredibly popular, though one reason for this is that it is priced wrong.  I am sure Aston-Martin sports cars would be staggeringly popular if sold for a third of their true cost.  In my mind, there is nothing more dangerous to an economy than an artificially incorrect price, and Medicare prices are WAY off.  We need to raise taxes to match the current benefits package, and THEN let's talk about reforming the program.

Government Spending Bait and Switch

New taxes are frequently sold as protecting police, fire, and education, though these together represent barely 25% of all US government spending.  Where does the rest go?  It's a giant bait and switch, made worse by the fact that even within these categories, new headcount is more likely to be added in administrative and overhead roles rather than in promised functions such as "teachers".  This is the subject of my Forbes column this week:

There is a way to reconcile this:   While increases in education spending are sold to the public as a way to improve results in the classroom, in reality most of the new money and headcount are going to anything but increasing the number of teachers.

Let’s start with an example from the city of Phoenix, New York.  Why this town?  Am I cherry-picking?  In fact, I was looking for data on my home town of Phoenix, Arizona.  But I have come to discover that while school districts are really good at getting tomorrow’s cafeteria menu on the web, they are a little less diligent in giving equal transparency to their budget and staffing data.  But it turns out that Phoenix, New York, which I discovered when I was looking for my home town data, publishes a lovely summary of its budget data, so I will use it as an example that helps make my point.

The city’s budget summary for 2012-2013 is here.  Overall, they are proposing a 0.4% increase in spending for next year, which initially seems lean until one understands that they are projecting a 4% decline in enrollment, such that this still represents an increase in spending per pupil faster than inflation.  But the interesting part is the mix.

What are the two things politicians are always claiming they need extra money for?  Classroom instruction and infrastructure.  As you can see in this budget, only two categories of spending go down:  classroom instruction and facility maintenance and cleaning.  Administrative expenses increase 4% (effectively 8% per pupil) and employee benefits expenses increase just under 1% despite a total decline in staffing.  Though I am not very familiar with the program, one irony here is that the fastest growing category is the 8.7% growth (nearly 13% per pupil) in spending with BOCES, a New York initiative that was supposed to reduce administrative costs in public schools.  In other words, spending increases are going to everything except the areas which politicians promise.

I don’t think these trends are isolated to this one admittedly random example.  The Arizona auditor-general recently did a study on trends in education spending in the state.  They found exactly the same tendency to reduce classroom spending to pay for increases in administrative headcounts.

Read it all, as they say.

My Annual Mockery of Arizona Budget Games

If it's June, it must be time for me to mock Arizona budget games.  To save re-writing the old post over and over, here is what I wrote several years ago.

In May of this year I got a form from the Arizona Department of Revenue that said my company was now large enough to make estimated sales tax pre-payments.  Some states do this when you are large enough - they don't like you holding their sales tax money a whole month until the reporting deadline, they want their cash in hand.  Its a pain, so I sighed, but we did it.  We prepaid estimated full-month June sales tax in mid-June as required, rather than in mid-July when the payment would normally be due.  Note that we still have to fill out all the sales tax reports in July, so paperwork is doubled, not to mention the extra work to reconcile between the estimate and actual results.

So this month, I was looking for the July pre-payment form.  I figured the July pre-payment must be due soon, so I called the Department of Revenue and asked where my form was.  They said there was no form for July.  The pre-payment is only one time.  I said, "its only for June?" and they said yes.  You can see the blank form online is hard-coded for June.

Then it dawned on me:  Arizona is on a June 30 fiscal year.  The entire point of this exercise is to pull July revenues into June to artificially inflate the prior fiscal year financials.  Wow - all those pious government workers artificially manipulating results just like an evil old corporation.  Because there is absolutely no other reason to do this for just one month.  The time value of money gained is dwarfed by the costs of changing your payment processing approach for just one month, and is certainly dwarfed if you consider the extra taxpayer effort required (which of course the government never does).

But it's even worse!  Because, in effect, this only worked one time -- the first time.  The first time they did this, they helped the fiscal year.  But now, pulling forward July this year just offsets losing the July revenues from last year.  So politicians have saddled us with a tax process that costs the government more money and the taxpayer more time and has no benefit beyond generating a slightly more positive press release about the budget for some politician several years ago (whatever year this was first implemented).

Privatization Updates

While this may be familiar territory for readers of this blog, I have a post up at the Privatization blog on the history of private operation of public parks.  In this article I quoted one of my favorite over-wrought criticisms of private operation of parks, this time from the San Francisco Chronicle:

The question is, how will these agreements work over time? If parks remain open using donations, what is the incentive for legislators to put money for parks in the general fund budget? And who is going to stop a rich crook or pot dealer from taking a park off the closure list and using it for fiendish pursuits?

LOL.  "Fiendish pursuits?"

I also had an article there a while back about government accounting systems and how they make such privatization efforts difficult:

Back when I was in the corporate world, "Make-Buy" decisions -- decisions as to whether the company should do some task itself or outsource it to companies with particular expertise or low costs in that area -- were quite routine.  Even in the corporate world, though, where accounting systems are built to produce product line profitability statements and to do activity-based costing, this kind of analysis is easy to get wrong (in particular, practitioners frequently confuse average versus marginal costs).

But if these analyses are tricky in the private world, they are almost impossible to do well in the public sphere.  Grady Gammage, a senior and highly respected research fellow at Arizona State University's Morrison Institute, has as much experience with public policy analysis as anyone in the state.  Several years ago, he spent months digging into the financial numbers of Arizona State Parks, with the full cooperation of that agency.  A critical question of the study was how much it actually cost to operate a park, vs. do all the other resource and grant management tasks the agency is asked to perform.  Despite a lot of effort by Gammage and his staff, he told me once that the best he could do was make an educated guess --plus or minus several million dollars -- as to how much of the Agency's budget is spent actually operating parks vs. performing other tasks.

The reasons that this is so hard is that the parks agency's budgeting process was not set up to determine true net operating gains and losses at parks.  It was set up, like most public accounting systems, to enforce accountability to different pools of money that have been allocated by the legislature for certain tasks.  This tends to lead to three classes of problems that cause public make-buy decisions, as well as ex post facto third-party analyses, so difficult.  Since I am most familiar with the parks world, I will discuss these three issues in the context of parks:

Great Moments In Public Sector Compensation

I can't confirm this by Randal O'Toole is usually pretty much on top of Portland transit issues:

Portland’s TriMet agreed to allow transit workers to retire at age 55 after as little as ten years on the job and gave them and their families free medical care (with a $5 co-pay, no deductible) for life (plus 16 years after the retiree’s death for their families). As a result, health-care costs have grown from $18 million in 2000 to $68 million next year and projected to rise to $153 million–40 percent of the agency’s 2010 operating budget–by 2020.

 

Myth-Making By the Left on Europe Continues

The Left continues to push the myth that government "austerity"  (defined as still running a massive deficit but running a slightly smaller massive deficit) is somehow pushing Europe into a depression.  Well, this myth-making worked with Hoover, who is generally thought to have worsened the Depression through austerity despite the reality that he substantially increased government spending.

It is almost impossible to spot this mythical austerity beast in action in these European countries.  Sure, they talk about austerity, and deficit reduction, and spending increases, but if such talk were reality we would have a balanced budget in this country.  If one looks at actual government spending in European nations, its impossible to find a substantial decline.  Perhaps they are talking about tax increases, which I would oppose and have been occurring, but I doubt the Left is complaining about tax increases.

Seriously, I would post the chart showing the spending declines but I can't because I keep following links and have yet to find one.  I keep seeing quotes about "commitment" to austerity, but no actual evidence of such.

Let's take Britain.  Paul Krugman specifically lashed out at "austerity" programs there are undermining the British and European economy.  So, from this source, here is actual and budgeted British government spending by year, in billions of pounds:

2007: 544.0

2008: 575.7

2009: 621.5

2010:  660.6

2011:  683.4

2012:  703.4

2013: 722.2

Seriously, I will believe the so-called austerity when someone shows it to me.  And this is not even to mention the irresponsibility of demanding more deficit spending without even acknowledging the fact that whole countries already have so much debt they are teetering on the edge of bankruptcy.

Here is the European problem -- they are pouring hundreds of billions of Euro into bailing out failed banks and governments.  They are effectively taking massive amounts of available resources out of productive hands and pouring it into failed institutions.   Had they (or we) let these institutions crash four years ago, Europe would be seeing a recovery today.  The hundreds of billions of Euros used to keep banks on life support could have instead been used to mitigate the short term effects of bigger financial crash.

First Rule of Budget Politics

Proponents of higher taxes and larger government often criticize small government folks in Congress for being "obstructionist" and "not willing to compromise."

But here is the problem:  Coyote's first rule of budget politics is to never trade current tax increases or "temporary" spending increases for future spending cuts, because the future spending cuts never happen.  Ever.  Not once.  In fact, I would not agree to trading current tax increases for current spending cuts, because taxes will stay forever but spending cuts will just be over-ridden in a few months.

Here is a recent example:

Last summer, Republicans in Congress agreed to increase the federal debt limit in exchange for the Democrats’ pledge to cap future spending at agreed-upon levels. The compromise was embodied in the Budget Control Act; discretionary spending was to increase by no more than $7 billion in the current fiscal year. I wrote yesterday about the fact that the Democrats intended to violate the Budget Control Act by increasing deficit spending on the Post Office by $34 billion. The measure probably would have glided through the Senate without notice had Jeff Sessions not challenged it. Sessions insisted on a point of order, based on the fact that the spending bill violated the Budget Control Act. It required 60 votes to waive Sessions’ point of order and toss the BCA on the trash heap.

Today the Senate voted 62-37 to do exactly that. This means that the consideration that Republicans obtained in exchange for increasing the debt limit is gone. Moreover, some Republicans–I haven’t yet seen the list–voted with the Democrats today.

One principal lesson can be drawn from this experience. It happens all the time that Congressional leaders will trumpet a budget agreement that allegedly saves the taxpayers trillions of dollars–not now, of course, but in the “out years.” But the out years never come. Tax increases are rarely deferred to the out years; they take place now, when it counts. But spending cuts? Never today, always tomorrow.

Purported agreements about what federal spending will be years from now are utterly meaningless. Congressmen will make a deal, brag about the ostensible savings in the press, and then walk away from it the moment our backs are turned, as the Democrats (and a handful of Republicans) did today.

When folks say, "we just want a compromise" on budget issues, what they are really saying is "we want to roll you.  We are hoping you are stupid enough to trade for future cost reductions that will never happen.  We can get away with this because we have an ally in the press, who always treats promises of future cost reductions as entirely credible and believable and thus paint those who are skeptical of them as radical obstructionists."