Stimulus to Nowhere

Post image for Johnson-Crapo Is Phony Fannie-Freddie Reform

Ever since the phrase appeared in Shakespeare’s Romeo and Juliet, “A rose by any other name would smell as sweet,” and its variations, have become familiar expressions. A corollary is that garbage by any other name would stink just as badly, if not worse.

The latter phrase seems applicable to the “reform” of the government-sponsored housing enterprises Fannie Mae and Freddie Mac just introduced by Senate Banking Committee Chairman Tim Johnson (D-S.D.) and Ranking Member Mike Crapo (R-Idaho). The media often describe this plan as “ending” Fannie and Freddie.

And yes, it does “end” them in the sense that there will no longer be entities named Fannie and Freddie. But most of their functions would simply be transferred to a new giant government entity called the Federal Mortgage Insurance Corporation. Not only would the government’s role in subsidizing and micromanaging housing not be reduced, in some ways it would substantially be increased.

The legislation would create, for the first time, an explicit taxpayer guarantee of the GSEs’ $5.6 trillion in debt. The “affordable housing trust fund,” a slush fund for “housing advocacy” groups such as ACORN with political agendas until it was closed due to Fannie and Freddie’s financial woes, would be reopened and parked in the new FMIC.

Worst of all, and sending the worst possible signal to potential private sector investors in the housing market, Fannie and Freddie common and preferred shareholders would be wiped out permanently under the bill’s Section 604.

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An agency unnecessarily destroyed $170,000 worth of computing hardware, and planned to destroy $3 million more, in response to garden-variety, easy-to-guard-against malware that posed no “significant risk.” It would have destroyed far more, if it were not for the lucky occurrence of budget cuts. The agency that idiotically did this, the Economic Development Administration (EDA) “intended to resume this” destruction “once funds were available.” The fact that agencies do this sort of thing when they get enough money to afford such waste is yet another argument for budget cuts such as the sequester, which leave agencies with less money to engage in such folly. CEI has previously explained why the EDA is wasteful and economically harmful and should be abolished. (The EDA wastes money on “convention centers” that “are economic losers,” and its meddling resulted in “the loss of 331 jobs and millions of dollars in economic activity in Brisbane,” California.)

The sequestration’s automatic budget cuts will help the economy in the long run, as we previously pointed out, citing the Congressional Budget Office’s analysis of the so-called “fiscal cliff.” Wells Fargo’s chief economist now says that the sequestration will be economically helpful in the long term. As Wells Fargo economists noted, the sequester will “eventually help the economy grow faster than it would have otherwise,” since “the sequester will reduce future budget deficits — and with them the odds of federal borrowing costs increasing several years from now.”

In its unsuccessful attempt to repeal the sequester’s budget cuts, the Obama administration exaggerated the sequester’s short-run impact (such as falsely claiming it would result in budget cuts at a non-existent agency that had already closed its doors.) Obama administration officials claimed that there was little room for cuts in the federal budget. But they were plainly wrong. A June 30 Washington Post story provides additional evidence, noting that while “They said the sequester would be scary. Mostly, they were wrong.” “Before ‘sequestration’ took effect, the Obama administration issued specific — and alarming — predictions about what it would bring. There would be one-hour waits at airport security. Four-hour waits at border crossings. Prison guards would be furloughed for 12 days. FBI agents, up to 14. But none of those things happened.” All of these alarmist predictions by the Obama administration were false.

While the sequester will help the economy in the long run, less clear is its economic impact in the short run. Harvard University economist Jeffrey Miron argues the “sequester will be good for the economy” right now, helping the real economy by reducing government spending that includes “pure waste,” yet is classified as part of GDP; and by increasing production of things of real value. In his view, “the main problem with the sequester is that it is too small; it will reduce the deficit only slightly and scale back misguided government only a little. But it’s a start.” The economy grew after the sequester went into effect, although the unemployment rate has been consistently high for the last four and a half years, even as federal spending mushroomed upwards from 2008-2012, violating Obama’s 2008 campaign pledge of a “net spending cut.”

The sequester has already had an impact on wasteful government spending, such as cutting unnecessary agency “conference expenses.” As Cato Institute budget experts have noted, most of these cuts are long overdue, and would be justified even if the budget deficit were not so huge.

Cries throughout the media of “savage austerity” notwithstanding, only a handful of European countries have actually implemented austerity in the true sense of the term: reducing both public spending and taxation. On the other hand, most countries in Europe have either been following the exact opposite path—increasing spending and taxation—or have been implementing some combination of the two.

As I explain in my new study, The True Story of European Austerity: Cutting Taxes and Spending Leads to Renewed Growth, carrying out real cuts leads to real growth. The table below shows average annual growth rates for groups of countries (with greater than four members) that have followed varying kinds of austerity policies.

Table 2

The group of countries that shrunk the size of its public sector from both the spending and revenue sides (group #1) had the highest average annual rate of growth, and it was the only group to maintain this rate above 2 percent—the standard for economic healthiness.

Unsurprisingly, leaving more money in the pockets of businessmen and enterprising individuals leads to greater prosperity than taking more of it away.

Read the whole study here.

Don’t let the optimism surrounding last month’s job numbers fool you. The unemployment rate’s decline from 7.6 percent in March to 7.5 percent in April is more statistical artifact than progress.  Like that of our Western European neighbors—and the U.K. in particular—the U.S. economy is stuck in a rut. Why? The answer is simple. Government profligacy overburdens the economy while propping up private inefficiencies, as I explain in Investors Business Daily.

Since 2008, Washington policymakers have been pacing around the doctor’s office too afraid to take the bitter but effective pill America needs: slash federal spending and end the U.S. Fed’s life support for zombie banks.

Economically stagnant Britain shows us where this continued procrastination leads. Instead of dashing after our tea-drinking transatlantic neighbors, American policymakers should look to Estonia, which took its austerity meds and quickly returned to prosperity.

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Post image for Jerry Brown’s Legacy Train Wreck

California Governor Jerry Brown, along with an entourage of high-profile business and financial leaders from the Golden State, recently traveled to China on a trade tour. The agenda included government and private sector partnerships in electric vehicle production, trash-to-electricity technology, and green energy research and development.

But the tour’s main purpose centered on garnering Chinese financial interest in what Jerry Brown hopes to be his defining legacy: high-speed rail for California. (Embarrassingly for Brown, China indicted its former top rail official on corruption charges during the governor’s junket.) China is currently sitting on $3.4 trillion in foreign exchange reserves. Traditionally, these have been invested in foreign government bonds. But in recent years, China has moved to diversify its holdings away from government bonds—which have been yielding historically low interest rates—and into more lucrative brick and mortar assets. Needless to say, the China’s banks and sovereign wealth funds would be fools to invest in Jerry Brown’s white elephant for several reasons.

First, the project’s estimated costs are ballooning before construction has even begun. Since a statewide ballot initiative in 2008 authorized the creation of a high-speed rail network, projected construction costs for the entire endeavor have ballooned from $34 billion. In a revised business plan published in 2011, the California High-Speed Rail Authority estimates construction will now cost $98 billion to $117 billion, and the estimated completion date of the full first section was pushed back by 13 years. In 2012, the rail authority claimed it found $30 billion in estimated savings, primarily by abandoning the initial full-build plan that would have required completely dedicated and electrified infrastructure and moving toward a “blended” model. Basically, this means the initial system will not be true 21st century high-speed rail, in that it will share tracks with electrified mass transit and trains relying on diesel motive power. The downward cost estimates are also the result of modified inflation projections that assume rates over the course of construction will be lower than previously assumed. These are the estimates before a single track has been laid.

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Post image for Bill Would Prevent CDC’s Taxpayer-Funded Anti-Food Propaganda

Even in a divided Washington, everyone agrees on the importance of creating jobs in America. So why are some government agencies using taxpayer money to lobby against some food manufacturers?

At least one lawmaker, Rep. Aaron Schock (R-Ill.) thinks it’s time government officials stopped using taxpayer money to run smear campaigns against the makers of lawfully produced goods that consumers want. On April 15, Rep. Schock introduced the Stopping Taxpayer Outlays for Propaganda Act (STOP) Act (H.R. 1572), which would prohibit the use of federal funds for advertising and media campaigns to discourage consumption of any food or beverage that is lawfully marketed under the Federal Food, Drug, and Cosmetic Act. In a Politico op-ed this week, Schock explains that in this time of economic stress, using taxpayer money to harm American industry doesn’t make a lot of sense.

Not only do these government-funded campaigns harm American businesses, they are doing nothing to improve Americans’ health — and may even cause harm in some cases. Government is simply not very good at determining what is best or healthy for each individual. Studies funded by government grants are often cited by legislators to promote one-size-fits-all policies that fail to take into account a person’s health risks or specific dietary needs. Yet many such studies are based on limited data that often result in incorrect conclusions.

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Post image for Sequester Show May Not Have Jumped The Shark, But Its Format Has Changed

Are you watching the Sequester Show? In today’s Wall Street Jorunal, my friend Kim Strassel says the sequester drama has “jumped the shark,”  a phrase used when a TV show loses popularity. As I have pointed out in OpenMarket before, the phrase originated with “Happy Days,” in which many a fan pinpointed the exact moment of the show’s descent to an episode in which Fonzie literally jumped over a shark with water skiis.

Yet, I’m not sure “jump the shark” is the best phrase to describe what’s happened with the Sequester Show. It may not have jumped the shark, but changed formats and become even more popular — albeit to the detriment of the Obama administration.

Specifically, the show changed its format from melodrama to comedy. Try as it might,  the Obama administration just couldn’t convince the public of all the disasters that must occur because of a 2-percent cut in government spending. Many families and businesses have had to cut much more  in these rough last few years. Then free-market activists, followed by GOP politicians, began to point out all the waste that could be cut using Twitter hashtags such as #CutWaste and #SequesterThis (the latter of which was popularized by Competitive Enterprise Institute Fellow Bill Frezza).

Noting the disastrous stunt of suspending public White House tours, Strassel’s piece contained some excellent examples of waste and extravagance at the executive mansion. For instance, the White House pays almost $300,000 a year for three White House calligraphers.

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Harvard’s Jeffrey Miron argues “the sequester will be good for the economy” even in the near future, helping the real economy by reducing government spending that includes “pure waste,” yet is classified as part of GDP; and by increasing production of things of real value. In his view, “the main problem with the sequester is that it is too small; it will reduce the deficit only slightly and scale back misguided government only a little. But it’s a start.”

There doesn’t seem to be any serious doubt the sequestration’s automatic budget cuts will help the economy in the long run, as we previously pointed out, citing the Congressional Budget Office’s analysis of the so-called “fiscal cliff.” Wells Fargo economists say the sequestration will boost the economy in the long run, and even increase its size — although they also argue that in the short run, it could shave 0.2 percent off of this year’s GDP. The sequestration will cause localized short-term pain to areas that include disproportionate numbers of federal employees and contractors, such as Northern Virginia, as a March 3 New York Times story illustrates (“Virginia’s Feast on U.S. Funds Nears an End”).

In an unsuccessful attempt to repeal the sequester budget cuts, the Obama administration exaggerated its short-run impact (such as falsely claiming it would result in budget cuts at a non-existent agency that closed its doors last year). Cutting spending helps  in the long run by reducing debt-service burdens on the economy that crowd out productive private investment. For example, the Congressional Budget Office says the stimulus package enacted in 2009 will hurt the economy in the long run.

We know the story of Chicken Little. The little chick thought the sky was falling because he was hit in the head by an acorn. He convinced the other barnyard animals that the sky was falling and soon they were all in hysterics.

Well, when it comes to sequestration cuts impact on federal employees, union officials have adopted a Chicken Little approach. Feeding Big Labor’s frenzy is tomorrow’s March 1 sequestration deadline with no deal to delay budget cuts in sight.

For the past few weeks, federal union leaders have been lobbying anyone who will listen to deflect cuts away from federal workers in favor of anything else. Today in U.S. News and World Report, I criticize these union officials, which many never do any government work:

When President Carter signed the Civil Service Reform Act in 1978, he said he did so to “promote the general welfare, contribute to the effective conduct of public business and to facilitate and encourage amicable settlements of labor-management disputes.” He said nothing about creating dozens of jobs within government devoted solely to the conduct of union business. But that is precisely what has happened.

According to records obtained by Americans for Limited Government through Freedom of Information Act requests, the Department of Transportation had 35 employees who did nothing but union work in 2012, and the Environment Protection Agency had 17. All 52 made at least $72,000 per year, and 37 made more than $100,000.

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Post image for Wells Fargo Economists: Sequestration Helps The Economy In The Long Run

Yet again, the Obama administration is busy engaging in scare tactics about sequestration, inflating its impact on the government and the country (to the point of falsely claiming it will result in budget cuts at an non-existent agency that closed its doors last June).

But in reality, the sequestration’s automatic budget cuts will help the economy in the long run, as we previously pointed out. Wells Fargo’s chief economist now says that the sequestration will be economically helpful in the long run, much for the reasons I have given in the past. It will “eventually help the economy grow faster than it would have otherwise,” since “the sequester will reduce future budget deficits — and with them the odds of federal borrowing costs increasing several years from now.”

As Wells Fargo’s chief economist John Silvia and a colleague noted on page 3 of their recent report, “Should the Congress and the administration decide to cancel the sequestration completely without replacing the cuts, the result would be a lower long-run rate of economic growth stemming from higher budget deficits today and higher federal interest outlays in the future. In addition, there is a significant likelihood that the United States would face another debt downgrade, and, in turn, raise the possibility of higher interest rates.” “Should the sequestration be reversed or canceled,” noted Silvia and Wells Fargo economist Michael Brown this week, “the result would” come “at the cost of reducing the long-run rate of growth of the U.S. economy.”

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