Who’s Responsible for Today’s Deficits?

President Obama has increased spending to unprecedented levels. This has rightfully caused a great deal of consternation among broad swaths of American society. Hopefully it will result in the deaths of legislation that would restrict our health care and energy choices while killing economic growth.

But which president bears the greatest responsibility for our current predicament? As much as Obama has done to grow the federal government, George W. Bush still retains the dubious distinction as the architect of our current economic mess. As Ivan Eland of the Independent Institute points out:

The U.S. government is deeper in debt than it has been since just after World War II. When Bill Clinton, who actually reduced the federal deficit as a portion of GDP, left office, the Congressional Budget Office projected an $800 billion dollar yearly budget surplus for the years 2009 to 2012. Now CBO projects an annual budget deficit of a whopping $1.2 trillion.

Although Republicans are blaming Barack Obama for this gargantuan budget gap, George W. Bush is responsible for 53 percent of the total, according to the New York Times. Another 37 percent is due to the recession of the early part of the decade and the global meltdown that began in late 2007. Obama is responsible for only 10 percent of the total. Yet the reason that Obama’s portion is so small is because George W. Bush, a big-government Republican, was in office for eight years, and Obama has been in office less than six months. Obama has been spending at a phenomenal rate—on a pork-filled stimulus bill and an expansive domestic agenda.

Thus, Obama is guilty of making Bush’s legacy of massive red ink even worse. Obama’s budget would double the projected deficit over the next 10 years. By 2019, federal spending is projected to be an eye-popping quarter of the nation’s GDP. By contrast, for four decades federal taxation has averaged about 18 percent of GDP. These massive deficits, accumulating as a monstrous national debt, could cause hyperinflation and the prolonged economic stagnation (stagflation) that would make the 1970s look like an economic picnic.

The good news is that Obama still has time to pull the country out of this economic nose-dive. If he fails to restrain the federal leviathan, he’ll undoubtedly surpass Bush in the big-spending, big-debtor category.

Why Socialism Doesn’t Work (a case study)

The United States Postal Service is a truly socialist enterprise. Anyone who has to deal with the Post Office on a regular basis, especially if you have to go to the actual offices themselves, is aware of this. Of course, as has been well-publicized in recent months, the Post Office now faces massive financial problems.
Of course, in a socialist agency such as the Post Office, politics plays an incredibly large role. As this article from today’s New York Times illustrates, when it comes to cost savings, politics makes increased efficiency very difficult to achieve. With USPS facing a $6.5 billion deficit, “the agency continues to spend $46,000 a year for a challenging small-plane route that serves about 20 addresses secluded in the roadless wilderness of the northern Rocky Mountains.”
Inevitably, the story goes on “John E. Potter, the postmaster general, began getting calls, letters and e-mail messages from the owners of ranches on the river. People showed up on Capitol Hill in rafting sandals and cowboy boots.
Then, just before Mr. Potter was about to face a conference call with the four members of Idaho’s Congressional delegation, he decided that the high-flying weekly route through the Frank Church-River of No Return Wilderness, in place for more than half a century and the last air route into a wilderness area in the continental United States, should best be left as is.”
So, 20 or so people receiving a massive government subsidy succeeded in killing a reform that would have saved this so-called business money in it’s ongoing effort to break even. A private company, on the other hand, could easily make the decision to not serve such high-cost customers. Unfortunately, America is moving rapidly towards greater politicization of health care, energy policy, and manufacturing to name just a few areas of the economy that will become much less efficient under government control.

China Looking for a way to dump dollars

I hope you had an enjoyable Memorial Day weekend. We’re back to work here at the Rio Grande Foundation and I happened to check the Washington Post website to find this story by Sebastian Mallaby. He writes about the ramped-up efforts on the part of the Chinese to find a way to stop relying on the dollar. I’ve written previously about the debt we’re leaving our children.
This debt is of course of concern to our economic future, but, as Mallaby writes, “If the greenback declines, China’s government stands to lose a fortune.” Having so much money tied up with the drunken sailors in Congress and the White House cannot be a comfortable situation (I know I’m not comfortable with it), so the Chinese have been looking for ways to get out from underneath the dollar without harming the investment they already have made in the currency.
I don’t know if the Chinese can square that circle, but if they simply decide to stop digging the hold that they’re in by not buying any more dollars, we’ll be in serious trouble.

Soak the Rich and Lose the Rich

The Wall Street Journal had an excellent article about the negative impact of high marginal tax rates yesterday. The article discussed misguided efforts by politicians in California, Connecticut, Delaware, Illinois, Minnesota, New Jersey, New York and Oregon to increase income tax rates on the highest earners within their respective borders. While politicians facing massive, spending-induced budget deficits are certainly eager to get their mitts on “excess” earnings of the “rich,” the track record of these politicians in doing so without destroying wealth is rather spotty.
As the authors point out:

From 1998 to 2007, more than 1,100 people every day including Sundays and holidays moved from the nine highest income-tax states such as California, New Jersey, New York and Ohio and relocated mostly to the nine tax-haven states with no income tax, including Florida, Nevada, New Hampshire and Texas. Over these same years the no-income tax states created 89% more jobs and had 32% faster personal income growth than their high-tax counterparts.

So, the truth is that the taxing and spending policies of America’s most poorly run and rapacious states are simply pushing productive activity to more fiscally-responsible states like Texas. In fact, the authors point out, “Texas created more new jobs in 2008 than all other 49 states combined.”
To the credit of New Mexico politicians, income taxes were not increased during the last legislative session although such a move was considered as part of the education tax hike effort that subsequently passed the House in another form. Despite his failings in other areas, Governor Richardson should be applauded for his role in reducing New Mexico’s top income tax rate from 8.2 to 4.9 percent.

Dueling Film Studies: The Analysis

Ever wondered whether New Mexico’s film subsidies have a positive or negative impact on the state economy? We’ve certainly had a hunch for a long time that such targeted and generous economic incentives are unwise and not economically beneficial.
Well, now we know…and we were right. First, there was the Arrowhead Center Study which found that the subsidies provided a return of only $.14 on the dollar. Then there was the Governor’s study by Ernst & Young which found returns of $1.50 on the dollar.
Now, there is a third study by the Legislative Finance Committee (LFC) that was buried. As our investigative journalist, Jim Scarantino discusses in his new report “A Modern Spaghetti Western: Shooting Holes in the Ernst & Young Study of Film Industry Subsidies,” the LFC found numerous problems with the Ernst & Young Study.
Among the major problems:

* Instead of looking at payroll data, Ernst & Young utilized information collected from on-line and telephone surveys of the film industry – surveys coincidentally commissioned by a defensive Film Office. Furthermore, that information was collected at a time when the film industry was aware of the growing skepticism about the generous film subsidies they were receiving.
* Then Ernst & Young did something not seen in any other film industry study. They added in the income of millionaire movie stars, producers and directors, some of whom make 100 times or more the income of a film crew member. As a result, the average New Mexico film industry job income jumped to $91,396! That figure is also higher than reported in any other film industry study – higher than studies conducted in Louisiana, Arizona, Seattle, Florida, even New York City.
* Lastly, Ernst & Young excluded the cost to taxpayers of making interest-free loans to Hollywood. At a simple annual interest rate of 5% on a $15 million loan (the largest given out under the program), taxpayers are giving up $750,000 in interest annually. On a six-year loan, the loss to taxpayers exceeds $13 million. Yet, Ernst & Young completely excluded this enormous expense from its calculations of the cost to New Mexico of the film industry subsidies.

The fact is that New Mexico’s film industry is not a money-maker for taxpayers and with $60 million being spent annually to attract the industry, legislators need to cap or reduce the generosity of these subsidies. Using the leftover money to cut taxes on all New Mexico businesses would be a nice way to use the money to increase economic growth.

Privatize Double Eagle Airport

Albuquerque Mayor Martin Chavez is accused of having retaliated against Bode Aero Services Inc., an operator at Double Eagle II airport on the city’s west side for the operator’s unwillingness to provide the Mayor with free and discounted service.
Of course, what the Mayor is accused of doing is wrong. Being the Mayor should not entitle you to special treatment. But if the City privatized the airport entirely, would the Mayor even think about trying to get cut rate or free flights? I highly doubt it. Better still, according to the Reason Foundation, privatization can save between 15 and 40 percent while generating immediate revenue for cash-strapped governments.
Hopefully this apparent abuse of power will spur the discussion about real reforms rather than simply fading into the background as other scandals will inevitably come to light throughout New Mexico.

Earthstone: Another Eclipse

The Rio Grande Foundation released our latest story on the poor record of New Mexico’s State Investment Council this week. The release can be found here and the full story is available here. The story was also covered on Joe Monahan’s blog.
The gist of the story is as follows:

In 2004, at the urging of Governor Bill Richardson, the State Investment Council (SIC) loaned $9 million dollars to Earthstone International. Governor Richardson said he was “encouraged by Earthstone International’s pledge to create high-paying jobs in Doña Ana County.” The problem, Scarantino found, is that Earthstone appears to have used the state’s money to create jobs in Old Mexico and Arkansas instead of New Mexico.
Earthstone orignially pledged to construct a 200,000 square foot plant at Doña Ana County’s Santa Teresa border crossing. At least 200 new jobs were touted. In one report, Andrew Ungerleider, the company’s co-founder, said that plant would be operational within approximately 18 months from when the loan was approved.
In researching Earthstone and the company’s use of the $9 million loan the SIC made on behalf of taxpayers, Scarantino found that Earthstone never built a New Mexico plant. Instead, New Mexicans’ money has helped Earthstone shift money and jobs to Juarez, Mexico and Bentonville, Arkansas. The loan has never been repaid. In fact, it has been converted to an ownership stake in Earthstone itself.

Given this poor track record, it is clear that the SIC is in need of serious reform.

For Tom Udall, AIG is only the start

There is no doubt that AIG seems to be deliberately acting in ways to spur the moral outrage of politicians and taxpayers. If you are not completely familiar with the story as it stands now, click here.
New Mexico’s own Sen. Tom Udall couldn’t resist piling on, but he went a step further by explicitly threatening AIG. As economist Russell Roberts points out:

Udall doesn’t like to see our money going to a bad cause. Unless it’s friends of his. From KFDA in Amarillo:
As part of the $410 billion Omnibus Spending Bill, US Senator Tom Udall says he included over one million dollars for Eastern New Mexico industries.
Over $200 thousand is going to a dairy consortium so they can boost research on improved dairy production.
And more than $950 thousand is going to the Sapphire Energy Algae so that company can create and grow technology that turns the algae into fuel.
Udall says the algae company could create 100 jobs.
Love that word, “could.” Can’t wait to count them.
The Senator does not seem to understand that these two stories conflict with each other. AIG has failed to generate private capital to keep it afloat. It can only stay afloat with my money. AIG can’t raise private capital because it has lost the trust of potential investors. They’re bankrupt and exist only because of the government’s largesse funded by taxpayers. Why would you want to repeat the same mistake with that dairy consortium and Sapphie Energy Algae? If they’re good investments, let private investors take the risk and either reap the reward or lost their money. If they’re bad investments, why am I being forced to pay for them?

To his credit, Udall voted against the original bailout bill, but the point remains that throwing taxpayer money at AIG is not much different from throwing taxpayer money at politically-connected companies that pledge to create jobs. If he and others in Washington (not to mention Santa Fe) understood this, we’d all be in much better shape.
HT: Harry Messenheimer