If Iran Can Cut Subsidies, So Can We

A short Associated Press article in today's Washington Post print version (more detail online) reports that Iran's government is rolling back $30 billion of subsidies for food and energy starting today:

Iran's president on Saturday announced the start of a plan to slash energy and food subsidies as part of government efforts to boost the nation's ailing economy.

In an interview with state television, Mahmoud Ahmadinejad said the deep cuts to the subsidies "will start beginning Sunday" and vowed to fully cut all subsidies by the end of his term in 2013.

Economists say the unpopular plan could stoke inflation unofficially estimated to top 20 percent. The cuts also are widely seen as placing added burdens on Iranians, whose country is weighed down by international sanctions imposed on Tehran over its nuclear program.

Analysts say Iran pays about $30 billion in subsidies annually.

First, the suggestion that cuts in subsidies will lead to an increase in inflation is wrong. Inflation happens when the stock of money grows faster than the economy. Period. Food and energy prices are likely to go up, of course, but that will likely be offset by lower prices elsewhere in the economy.

Second, this was the right decision. It's painful to have life's necessities become more expensive, but subsidies and taxes obscure the true cost of the products, leading to resource misallocation and reducing economic efficiency. Although the article didn't address this, hopefully Tehran is pairing these measures with policies to increase economic freedom. An unambiguous lesson of history is that economic freedom leads to higher living standards, which makes adjusting to policy changes much easier.

Finally, America needs to cut subsidies too. The federal government spends about $30 billion a year in farm subsidies, $98 billion in food subsidies, $17 billion in various energy subsidies (as of 2007), among regulations that effectively subsidize various producers and consumers. Many would balk at eliminating these $145 billion in subsidies immediately, but phasing them out over a few years as the economy recovers is not unrealistic.

Five Years Later, Loss of Friend in Iraq Still Haunts

This past Tuesday marked five years since my friend Eric Slebodnik was killed in Iraq. We were good friends from college, drawn together by a number of mutual friends, but especially James Iman. We used to all eat lunch or dinner together several times a week (among lots of other things), and we'd have vigorous discussions about a whole range of topics, from evolution to politics to where the best food on campus was and to whether the social sciences or the arts was the best way to understand what it means to be human.

Eric had more integrity and sense of purpose than almost anyone else I've ever known. Even when we disagreed, I knew that his views were shaped by a sense of principle and righteousness that still resonates with me.

We didn't stay in touch very well after I graduated in 2004 and went to find my way in the world. But the news of his death hit me like a ton of bricks. Eric wasn't the first friend I had lost, but the others were accidents. The maliciousness of Eric's was entirely different.

I've gone back and forth on the wisdom of this conflict. In winter 2002/2003 I was part of the protests opposing the U.S. invasion (but was turned off by the socialist worldview of most of the others), and organized an interdisciplinary forum at my university to help students understand the context of the situation. It couldn't have been timed better--it was scheduled to and did take place on March 20, 2003.

While studying abroad in the subsequent months, criticism directed at the U.S. from my European friends stirred up stoked my patriotism in support of the efforts. I defended it as a just war (according to St. Thomas Aquinas' criteria) in a political philosophy final even though my excellent professor John Sitton had a different view, and I even expressed this to French reporters at a 2004 election party. And after Eric was killed, I wanted desperately to believe that his sacrifice wasn't in vain and because I wanted to honor his support for the mission, which he once expressed in a letter to the NY Times editor. The impulse remains but I can't do it.

This conflict doesn't make sense. It never did. So what if they had weapons of mass destruction (which they didn't)? We deter every other country with the threat of raining Hell down on them. Why was Iraq any different?

How about promoting democracy and freedom (which the Bush administration pivoted to when no WMDs were found)? Sure, they're free of a brutal dictator, but at what cost to them in lives, injuries, displacement, the tattered social fabric, and so on? Is Iraq anywhere close to being a functioning democratic state? Have other regimes in the region improved the treatment of their citizens?

What about us? What bounty has been won by the lives lost, the soldiers wounded and maimed, the vast expenditures, and the civil liberties encroachments? Has our geopolitical position improved as the result of Operation Iraqi Freedom or are we weaker as a result?

The Iraq mission was a mistake of historic proportions. Our politicians wasted Eric's life and the lives of many others with their incompetence over foreign policy and national security.

I miss Eric. He should be teaching history or doing military intel and thinking about starting a family. It sickens me that his fate was otherwise. It always will.

R.I.P. Eric Slebodnik, August 3, 1984-September 28, 2005.

An Agenda for State Governments

In "Let's reform state government" in yesterday's Politico, GOPAC chairman Frank Donatelli laid out his proposed agenda for state government reform (read the whole thing). His four suggestions are right at the top of my list too:

Public pension reform. State liabilities for pension funds have reached an astounding $5.2 trillion, with an additional $3 trillion shortfall. Many states provide inflation-protected, guaranteed benefits to government workers who retire as early as age 55. However, private-sector workers, who pay for this, have not done so well. Millions have lost jobs, and virtually all have seen their 401(k)’s shrink.

We need some tough reforms to control public pension costs, including changing the defined-benefit plans into defined-contribution plans, barring part-time government workers from receiving full benefits and ensuring that all enrollees contribute to their own retirement and health care plans. Republicans should follow the courageous example of New Jersey Gov. Chris Christie, who is seeking to bring these soaring costs under control.

Growth-oriented economic policies. While federal policies delay job growth, states can create more business-friendly environments to encourage private-sector job creation and economic growth. The quickest and most effective way for governors to boost their economies would be to reduce state income and investment income tax rates and to provide state tax credits so employers and small businesses can hire workers and expand. These governors could also provide more certainty for business on regulations and fees.

In addition, states must limit the destructive effects of Obamacare. Increased federal mandates have already caused premium hikes, averaging 9 percent for small businesses and individuals. States should look to scale back their own health care mandates to help moderate these costs to business.

Zero-based budgeting. States should conduct top-down assessments of every taxpayer dollar spent, to identify areas of waste, duplication and inefficiency. Just this year, Gov. Bob McDonnell of Virginia avoided a tax increase and balanced the budget by subjecting every state department and agency to strict scrutiny and performance reviews.

Many government departments and structures are badly outdated, incapable of delivering essential services efficiently. Each governor should consider setting up blue-ribbon commissions to conduct top-down reviews of state and local government programs and expenditures and then recommend solutions. States must be creative in delivering health care services through Medicaid, a program whose costs are scheduled to explode in the wake of Obamacare. Mandating the use of generic drugs, whenever possible, and creating health savings accounts, as proposed by Gov. Mitch Daniels of Indiana, could help moderate state health care costs.

Educational excellence. Even as state spending on education increases, student and teacher performance lags. States need to regain control from the U.S. Department of Education and demand better performance at the local level. School curricula should be redesigned to create a stronger connection between education and the skills needed for employment. States must also create an environment that allows parents to choose among competing educational opportunities. Charter schools, vouchers and other competition-focused programs are among the best ways to guarantee greater accountability and better-performing students.

Here's what I'd add:

De-unionize the public sector. The traditional rationales for unions--unsafe working conditions, exploitation of surplus unskilled labor, and so forth--don't apply to the public sector. On the other hand, the collective force of big labor special interests is pushing state budgets to the brink of insolvency. In addition to the unfunded liabilities of public pensions noted above, union heft pushes up government worker compensation and benefits, advocates for more workers than needed, and blocks cost savers like privatization and contracting.

Tort reform for civil litigation. Not the Texas variety with arbitrary caps on punative damages. I'm talking about limiting jurisdiction shopping to either the location of the alleged injury or the residence of the plaintiff, Daubert rules for the admissability of expert testimony, and "loser-pays" rules. "Loser pays" simply means that whoever loses pays the court costs and the other side's attorney's fees in addition to whatever damages might be awarded. Pretty much all other developed countries do this, but we don't have a good example here in the U.S., although some states dabble in it. One of the keys to making it work abroad is tort insurance, so if you have a good case but lose, you're only out the risk-rated premium. The plaintiff's attorney often pays for the tort insurance anyway abroad.

Education reform. Increasing choices for students can take many forms. Many states do not allow private or home schooled kids to participate in extracurricular activities at public schools even though their parents pay property taxes just like everyone else. That should change. Education tax credits are a great way to leverage additional private investment in education, taking the burden off taxpayers for expanding and running expensive public school systems, while also increasing choices for parents. Even letting families easily choose among public schools instead of being assigned to them could do some good.

Focus on core functions. State governments do many things that could be done at least as well in the private sector or that ought not be done at all. State and local policymakers should scour their budgets and lawbooks for things to put on the old chopping block. If there isn't a compelling reason why the relevant level of government must do something, then it probably shouldn't.

Much more could and should be done, of course, including in health care, transportation, taxes and spending policy, government transparency, privacy, criminal justice, and on and on. This is a historic moment, one that is ripe with the possibility of reform. It would be a shame to waste it.

Cutting Politicians' Pay Over Deficits May Backfire

Yesterday at Cato@Liberty Marian Tupy blogged:

Having inherited an 8 percent budget deficit from the previous socialist government, the new conservative-liberal government of Slovakia has come up with a novel way of keeping budget deficits under control in the future. Starting in 2011, salaries of government ministers will rise and fall depending on the evolution of the fiscus. Thus, a budget deficit of 5 percent will translate to a 10 percent decrease in salaries, while an (unlikely) budget surplus of 5 percent will translate into a 10 percent rise in salaries, etc. It will be interesting to see if this new measure will truly result in a more responsible fiscal policy in the years to come.

Maybe, but it might backfire. Here's how:

Politicans who favor deficits--for whatever reason--may be able to claim the moral high ground by playing the martyr. The financial harm they do themselves by deficit-induced salary cuts could allow them signal their commitment to the public good.

Rather than making hard choices about whose political favors to reduce or eliminate, they could effectively be off the hook as long as the pay cuts are less important to them than maintaining and expanding their political power (especially rich, big government types). Deficits could get worse if this dynamic further weakens the remaining constraints on politicians to run deficits.

I could be wrong. It depends on the combination of formal institutions, informal rules of conduct, culture, etc, in Slovakia. Which I know nothing about. So we'll watch and learn.

Still, it wouldn't be near the top of my list of effective ways to constrain government budgets.

Surprise! A Political Cheap Shot from "Think Progress"

Matt Yglesias opines:

Conservative Senators are currently saying that they will filibuster a middle class tax cut unless that tax cut is paired with tax cuts that exclusively benefit rich people. That’s because they care—a lot—about reducing taxes on rich people. If they cared about reducing the deficit they could threaten to filibuster tax cuts unless paired with spending cuts. But they’re not doing that because they don’t care about the deficit.

What’s more, conservative columnists could urge them to do this. So could Fox News hosts and conservative talk radio stars. So could the Heritage Foundation, the American Action Network, the American Enterprise Institute, or the Cato Institute. But none of them are doing so. It’s true, again, that they separately say they favor cutting spending but none of them are urging members of congress to make tax cuts contingent on offsetting spending reductions.

It’s a question of scope. Tax policy is a huge issue in itself, as is EACH of the big spending cuts favored by supporters of limited government. Policymakers can only grapple with so much at a time, and since the tax debate is occurring now, they’re focused on taxes.

Improving incentives for savings and investment is key to long-term growth. High-earners (i.e., high-producers) tend to save more and be more sensitive to tax rate changes than others (not to mention bearing the greatest direct burden of taxes). It is therefore good tax policy to reduce rates especially at the top, not for whatever goes to the rich, but because of the benefits to the rest of us from greater investment and productivity.

When this tax debate has passed, I expect free-market people will be happy to discuss spending cuts. But one thing at a time.

Why the Spending Fetish?

A headline on Bloomberg.com today blares, "Rich Americans Save Tax Cuts Instead of Spending, Moody's Says."

Timothy Homan reports:

Hand the wealthiest Americans a tax cut and history suggests they will save the money rather than spend it.

Tax cuts in 2001 and 2003 under President George W. Bush were followed by increases in the saving rate among the rich, according to data from Moody’s Analytics Inc. When taxes were raised under Bill Clinton, the saving rate fell.

The findings may weaken arguments by Republicans and some Democrats in Congress who say allowing the Bush-era tax cuts for the wealthiest Americans to lapse will prompt them to reduce their spending, harming the economy.

Later in the article, economist Chris Cornell is quoted, "Spending by the top 5 percent of households seems much more closely tied to business- cycle issues than it does to tax-cut issues."

The entire article is based on a false premise. Why is it that we should care only what the wealthy spend?

What they save, after all, can become business investment, which is what has been hammered during this recession and especially by the extreme regime uncertainty that has characterized the past two years. The images below from this recent post by Cato scholar Mark Calabria reveals that consumption is back to normal, while fixed private investment is down by 20%. The fixation on spending reflects flawed neo-Keynesian reliance on over-aggregation and mythical "multipliers."

On the empirical point about the wealthy saving much of tax cuts, that seems consistent with the permanent income hypothesis, which postulates that we try to smooth consumption over our lives. Something that changes expectations of lifetime wealth tends to affect consumption patterns.

Tax cuts that are expected to be temporary, therefore, would mostly be saved, while those expected to be permanent would be mostly spent. If the wealthy save tax cuts, it's a clear sign they expect them to be raised again when the bills come due for the current government spending binge.

Debt and Deficits: Only the Tip of the Angry Iceberg

Barely had I published my last entry, when the Washington Post came out with a story about how many Democrats are adding fiscal austerity pledges to their campaign platform. I'm unimpressed.

On one hand, it's good that politicians of both parties have finally come to understand that Americans are fed up with deficits and debt. On the other, Democrats in general and many Republicans are missing the bigger picture: the American people want a reevaluation of the proper role of government and how that role should be distributed among the levels of government.

It's not just about the money; it's about being accountability. And if private enterprise cannot successfully undertake some collective action and government can do better, it should be the most local government that can address it, which also happens to be the level most accountable to the people. Suggesting that a congressman from Ohio can be held accountable for education quality in Florida, or a senator from New York for road congestion in California, is simply preposterous.

It's also about being left alone. The decennial census is supposed to count inhabitants for the purpose of apportioning members of the House of Representatives, nothing more. Yet it has morphed into a vast treasure trove for social science researchers. It sounds benign, but besides the privacy issues, the conclusions of that research provide justification for any number of wasteful and often counterproductive interventions.

Americans want more than cheap talk about the federal budget. They want their national political representatives to fundamentally reconsider the role of the federal government, eliminating, privatizing, or transferring to the states those activities that are not within its proper scope.