Tag Archives: Government spending

In which I express mock surprise at how well it pays to work for the President of the United States

Evidently, these salary increases are not connected to performance.

Gawker tells the story:

The White House says that many of those positions are considered nonpolitical jobs that come with their own pay schedules, and that what matters is that the total budget and average salary are decreasing slightly. But that doesn’t change the fact that White House staffers who stick it out are being rewarded, on average, for their continued service at a rate that far outstrips how the average white-collar worker is doing. The rhetoric behind the White House salary freeze was about making sure that the people engaged in leading the nation out of its economic mess share a sense of what American workers are experiencing. Unless roughly half of American workers saw their paychecks go up by an average of 8% last year (hint—they didn’t), that’s not the case.

Shocker.

Government revenues are down, but employee salaries are up. Well, not every employee’s salary–just those who work in the President’s staff. If this were a business (which it is not, and no, I’m not saying government should be run like a business), this would be the equivalent of the CEO giving his executives big raises while company revenues are falling.

In other words:

Lest you think that’s a partisan sentiment:

 

I’d love to hear what those highly paid special and deputy assistants advise on that one.

PS: I’m not opposed to government workers receiving compensation commensurate with their qualifications, job description, and market demand. However, I do oppose policies that have done little but strap us with greater spending liabilities with little to no effect on our revenues.

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From the WSJ: “Republicans and Mediscare”

WASHINGTON, DC - APRIL 05:   U.S. Rep. Paul Ry...

Image by Getty Images via @daylife

The reality is that Medicare “as we know it” will change because it must. The issue is how it will change, and, leaving aside this or that detail, the only alternatives are Mr. Ryan’s proposal to introduce market competition or Mr. Obama‘s plan for ever-tightening government controls on prices and care. Republicans who think they can dodge this choice are only guaranteeing that Mr. Obama will prevail.

via Review & Outlook: Republicans and Mediscare – WSJ.com.

Also, “Why Gingrich has no chance to win the nomination for the White House.”

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Federal budget outraces CPI by four times

Did you know that federal spending has increased  faster than consumer prices?

Four times faster?

From 2000 to 2010, federal spending has increased 106% while prices (according to the Consumer Price Index) have only increased 26%. In other words, while the cost of stuff has risen only 26%, the government is spending roughly four times more than if it had increased spending to match increased costs.

To be sure, a few things have happened in the last ten years that have affected the increase in federal spending faster than consumer prices. There was 9/11 and wars in Iraq and Afghanistan. There was a recession, and there still is a recession.  But even so, shouldn’t federal spending increases match consumer price increases, at least somewhat?

Mandatory Spending or Discretionary Spending?

Right now, a lot of the debate over the size of the federal budget  centers around “discretionary” versus “mandatory” spending. As one economist (Arnold Kling) points out, budget items in the later group aren’t so mandatory as they may seem.

The data indicate that it is not very difficult to increase Federal government spending, in spite of the large portion that is mandatory. Why not? Some hypotheses:

1. We tend to see discretionary increases in “mandatory” spending. As in the prescription drug benefit. Note that at the time the prescription drug benefit was enacted, nobody said, “You know, on the whole, the elderly are doing fine. We want to provide prescription drugs as an in-kind benefit, but maybe we should cut back on other transfers to the elderly in order to maintain generational balance.”

2. The government’s “cost of living” goes up much faster than the CPI. For example, with Medicare and Medicaid, outlays are tied to health care costs, and we all know that health care costs are rising faster than inflation.

Check out the rest of his analysis here. Noting that, with the exception of “net interest,” every major category in the federal budget has seen an increase in spending greater than the consumer price index, Kling argues that if we cut spending back to 2000 levels–without touching defense, Medicare, or Social Securitywe could slash $500 billion from the federal budget.

That’s a healthy chunk of change, and a simple idea. Roll spending back to 2000 levels, and then start looking at entitlement reform for other budget constraints and deficit reduction.

Here’s his data:

Spending, in billions, vs. Consumer Price Index

Spending Category 2000 level 2010 level Percentage increase
Consumer Price Index 174 219 26 %
Total Federal Outlays 1789 3721 108 %
Defense 294 719 144 %
International 17 51 197 %
Health 154 372 141 %
Medicare 197 457 132 %
Income Security 254 686 170 %
Social Security 409 721 76 %
Net Interest 223 188 -16 %
Other 240 526 119 %

Get it? Prices have risen only 26%, and federal spending should have risen about the same, even accounting for defense, Social Security, and Medicare. But it hasn’t. Federal spending has increased far faster.

Kling puts in a last word:

Or maybe the answer to the paradox is that when it comes to the Federal Budget, spending is discretionary when somebody proposes an increase in its rate of growth but mandatory when somebody proposes a decrease in its rate of growth.

Are politicians really just “the slaves of some defunct economist“?

The Federal budget is a curious thing. It alone in the world of finance and spending–from individual home budgets, corporate coffers, Wall Street, and state budgets–is controlled by persons whose primary interest is not responsibility, but reelection, and who spend based on good ideas for benefits, not the realities of economics.

Few things secure reelection like bringing home the bacon or signing a revolutionary new program. Yet the law of unintended consequences is stronger than all the political clout or well-meaning programs in the world.

So it is: well-meaning Congressmen (and Congresswomen), Senators, and Presidents head off to the marbled halls of Washington, D.C. to make plans and pass laws that their constituents will love back home, solve society’s problems, and make world a better place.

Then, the plans hit the real world, and little do  politicians know what results will really happen.

As I’ve quoted before, “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”

The road to hell, or rather, bottomless debt, is paved with good intentions. So, perhaps, is the road to Washington, no matter how little men “really know about what they imagine they can design.”

Recommended reading for more: The Road To Serfdom, by F.A. Hayak.

Cover of "The Road to Serfdom: Fiftieth A...

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(h/t Library of Economics and Liberty)

Does government spending have a multiplier effect on the economy?

If I didn’t lose you with that wonk-ish sounding title, there’s a good possibility I’ll lose you a little later, so let me summarize: new research suggests that government spending doesn’t actually help the economy all that much.

Bear with me as I explain.  Some economists of the Keynesian persuasion believe that in a recession the economy is really facing a demand and supply problem, and that the way to get a depressed economy going again is to increase the demand for products and services. Accordingly, governments should enact policies that increase demand, which would in turn provide increased employment to meet that demand. To do that, governments should spend money, on roads, on dams, even, according to theory, on digging holes. That worker will then go out and spend that money, providing further cash to businesses that will hire more workers, spend the money on wages, and so on.

Spending to recovery, is how it has been called. The money that the government inputs to the economy is said to have a “multiplier” effect, because as it is circulated its effect is multiplied. Conventional wisdom, then, is that the more money the government gets spent, the more it does to boost the economy…which is why we’ve seen so much “stimulus” talk in recent years. The money is supposed to stimulate the economy.

But what if the conventional wisdom was wrong? What if there is little, or no, multiplier effect? (and here is where I think I might lose you, again):

Research published in November of 2010 is indicating that there is very little multiplier effect. From the abstract of “In Search of the Multiplier for Federal Spending in the States During the New Deal,” by authors Price V. Fishback and Valentina Kachanovskaya:

If there was any time to expect a large peace-time multiplier effect from federal spending in the states, it would have been during the period from 1930 through 1940 when unemployment rates never fell below 10 percent and there was ample idle capacity. We develop an annual panel data set for the 48 continental states from 1930 through 1940 with evidence on federal government grants, loans, and tax collections and a variety of measures of economic activity. Using panel data methods we estimate a multiplier, defined as the change in per capita economic activity in response to an additional dollar per capita of federal funds. For personal income, which includes transfer payments as income, the estimate ranges from 0.91 for the combination of government grants and loans to 1.39 when only grants are considered. It is important to distinguish between the effects of farm subsidies and the combination of public works and relief grants. The personal income multiplier for public works and relief was around 1.67, while the effect of farm payments to take land out of production reduced personal income by 0.57. Multipliers for a more production-based measure of state income per capita after removing nonwork relief transfers and adding back payroll taxes are about 10 to 15 percent smaller. The multiplier for wages and salaries was substantially less than one, as was the multiplier for retail sales. The impact of the federal spending on employment was negligible and may have been negative. The results may help explain why measures of income have recovered more rapidly than measures of employment in both the 1930s and in the current era.

Get it? When the multiplier is “substantially less than one,” then the federal spending is not having much effect on the economy. Literally, there is not much “bang for the buck.”