The Trump administration’s 2019 budget would eliminate funding for the Manufacturing Extension Partnership (MEP) run by the Department of Commerce. The Wall Street Journal reported on the proposal the other day, although the article read more like an oped by program supporters.

The MEP shells out $140 million a year of taxpayer money to more than 50 offices around the country that aid local businesses. Tad DeHaven and I discuss some of problems with the MEP here.

One problem is that such corporate welfare necessarily favors some businesses over others. Companies receiving MEP aid are given an unfair edge over competitors. The MEP’s annual report does not actually say which particular companies have been aided. Instead, it is full of dynamic-sounding language such as “technology acceleration,” “learning organization,” “high-performance system,” “technology-centric operations,” “cultivate enduring collaborations,” and “actionable items for implementation.”

The MEP suffers from the usual waste and abuse of federal subsidy programs. In one classic case, the MEP charged taxpayers $1.1 million for a big party (I mean “conference”) at a resort in Orlando, with free food, booze, live music, and a trip to Disney World.

In another taxpayer rip off, the South Carolina director of an MEP-funded group (p. 29) submitted fraudulent documentation for $336,000 of expenses, including “contracts and payments to shell corporations that were controlled by friends, family members, and him/​herself for work that was not completed.” She was sentenced to 27 months in jail, and then was charged with trying to cover up a further $1 million in dubious MEP charges.

My assistant, Dave Kemp says, “What do you expect, it’s the government?” True, but the fact that such handout programs are routinely abused is a good reason to terminate them.

If we eliminated the MEP’s handouts, we could also eliminate the MEP bureaucracy. The agency has about 100 employees making an average $160,000 a year in wages and benefits, according to the federal budget.

To its credit, the Trump administration has proposed various cuts to corporate welfare, and it has reduced tax and regulatory burdens on businesses. Unfortunately, the administration’s protectionist trade actions are a form of corporate welfare that undermine the benefits of its pro-growth policies.

The MEP’s 2016 annual report leads off with a paean to Alexander Hamilton’s 1791 Report on Manufacturers, which was a call for economic central planning. Fortunately, the Jeffersonian free-enterprise view mainly held sway in subsequent decades, and American industry rose to greatness not because of Hamilton/MEP-style subsidies, but because of the sacrifices and struggles of generations of bold entrepreneurs.

From 1983 to 1999, the CBO issued two-year forecasts that added up to a 2.7% growth rate, which would now be widely dismissed as a “rosy” forecast. Yet actual growth averaged 3.7% from 1983 to 1999 – a full percentage point higher – despite a recession in 1991. Today, the CBO forecasts that even 2.7% economic growth is impossible, and claims only 1.9% is within reach. 

The Administration thinks the economy can grow a percentage point faster. The 2019 Budget estimates the economy will grow by 2.9% a year for ten years. The Committee for a Responsible Budget (CFRB) argues that this “strains credulity, especially if interest rates and inflation also remain under control, as the budget predicts they will.” [This appears to suggest higher inflation would be good for growth.]

“Given population aging and other economic fundamentals,” says the CFRB, “the United States is likely to ultimately achieve growth of 2 percent per year or perhaps less – not 3 percent. The Federal Reserve projects long-term sustained growth of 1.8 percent per year [1.7–2.2%], and the Blue Chip average for sustained growth is only slightly higher at 2.1 percent. Prior to the tax deal, CBO projected a long-run growth rate of 1.9 percent.”

Is the OMB unrealistic to estimate the economy can grow by 2.9% a year or is the CBO unrealistic to assume it can’t grow faster than 1.9%?

The real contest here is between current OMB projections after the tax deal, and CBO projections “prior to the tax deal.” Fed and Blue Chip forecasts are unofficial and unpersuasive.

The Federal Reserve does not make official long-term projections. The quarterly FOMC Summary of Economic Projections (SEP) defines “longer-run projections” as rates of growth to which “a policymaker expects the economy to converge over time – maybe in five or six years.” Last December 13, the 19 survey participants thought that after five or six years real GDP would settle down to 1.7% to 2.2%, but that is not a ten-year average since growth in the previous five or six years might be rapid.

Blue Chip Indicators collect monthly forecasts from over 50 business economists (I used to be one of them). It constructs a “consensus” by averaging a possibly wide array of different estimates. All such frequently-revised forecasts are most reliable as lagging indicators – becoming pessimistic after economic news turns bad and optimistic after things pick up. The models and techniques used to make monthly or quarterly forecasts have no predictive power at all beyond two quarters, if that.

What about the CBO? Their projection of 1.9% growth is a full percentage point below that of the Trump administration. Could the CBO possibly be that far off? Sure. They’ve done it before.

From 1983 to 2000, the CBO’s two-year forecasts of real GDP growth were exactly one percentage point too low, on average. A two-year forecast for 1983–84 was made in 1983 and combined estimated growth rates for both years, so the fact that 2‑year growth rates kept being underestimated repeatedly in all but two years (1990 and 1991) from 1983 to 2000 was a triumph of theory over experience.

The graph, from “The CBO’s Economic Forecasting Record,” shows the CBO systematically underestimated growth of real GDP after the Reagan tax rate reductions were phased in during 1983–84 and 1988–90 (TRA86), and again after the capital gains tax was slashed from 28% to 20% in 1997. Conversely, the CBO overestimated GDP growth after Bush 41 raised tax rates in 1990, after Obama raised tax rates in 2013, and during the high-tax bracket creep years of 1976–82. The CBO appears to suffer from a pro-tax estimating bias – assuming higher tax rates do no harm, and lower tax rates do no good.

The CBO argues that its “five-year forecasts of output and inflation are more accurate than its two-year forecasts of those variables, in part because long-term forecasts rest more on underlying trends in the economy than on short-term cyclical movements, which are very difficult to predict.” Unfortunately, CBO five-year forecasts also underestimated real GDP growth in all but one 5‑year period between 1981–1985 and 1999–2003. The exception was 1987–91, when the CBO estimate proved slightly optimistic (0.28%) thanks to recession on the heels of the ill-fated Bush 41 “tax increase.” A single mild recession (aggravated by higher taxes) can’t explain why the CBO consistently underestimated the 4.4% rate of real GDP growth for seven years from 1983 to 1989, or the same 4.4% pace for four years from 1996 to 2000.

A recent paper, “How CBO Produces Its 10-Year Economic Forecast” explains that “CBO projects potential TFP on the basis of historical trends in TFP growth. However, projecting trends in TFP is particularly challenging because it is, by definition, a measure of unexplained growth in output.” On the contrary, extrapolating “historical trends” is just lazy, not “challenging.”

The so-called “economic fundamentals” the CFRB mentioned essentially consist of projecting recent trends into the future. That means assuming output per hour (productivity) keeps growing at the anemic 1.3% pace of 2006 to 2015, and that hours worked grow at half that rate because labor force participation is assumed (“projected”) to remain extremely depressed and most part-timers are assumed to reject longer hours.

If you add 1.3% projected growth of productivity to 0.6% projected growth of the labor force, you end up with a 1.9% limit on potential economic growth (slower than 2010–2017 when the economy grew at a 2.2%). But productivity and labor force participation depend on incentives, not past trends. And incentives to invest and work just changed dramatically.

We know that the CBO is perfectly capable of underestimating economic growth by a full percentage point over a 10-year period since it already managed to do that over a 17-year period. If history is any guide, the CBO’s 1.9% long-term forecast is once again much too low, as it has been whenever the highest tax rates on income and/​or capital gains were reduced.

President Trump’s new budget for 2019 proposes privatizing federal assets such as airports, air traffic control, and electricity facilities.

The budget’s infrastructure section suggests that Congress “Authorize Federal Divestiture of Assets that Would Be Better Managed by State, Local, or Private Entities.”

It continues:

The Federal Government owns and operates certain infrastructure that would be more appropriately owned by State, local, or private entities.

For example, the vast majority of the Nation’s electricity needs are met through for-profit investor-owned utilities. Federal ownership of these assets can result in sub-optimal investment decisions and create risk for taxpayers.

Providing Federal agencies authority to divest of Federal assets where the agencies can demonstrate an increase in value from the sale would optimize the taxpayer value for Federal assets. To utilize this authority, an agency would delineate how proceeds would be spent and identify appropriate conditions under which sales would be made. An agency also would conduct a study or analysis to show the increase in value from divestiture. Examples of assets for potential divestiture include—

• Southwestern Power Administration’s transmission assets;
• Western Area Power Administration’s transmission assets;
• Ronald Reagan Washington National and Dulles International Airports;
• George Washington and Baltimore Washington Parkways;
• Tennessee Valley Authority transmission assets;
• Bonneville Power Administration’s transmission assets; and
• Washington Aqueduct.

These reform ideas are straight out of Cato’s playbook. The administration also renews its call to privatize the air traffic control system. That is, “shift the air traffic control function of the Federal Aviation Administration to a non-governmental, independent air traffic services cooperative.”

These studies provide background to the proposed reforms:

• Privatizing the Power Marketing Administrations
• Privatizing the Tennessee Valley Authority
• Privatizing U.S. Airports
• Privatizing Air Traffic Control
• Reforming Highway Policies

The budget also proposes reforms to allow for the “disposition of federal real property,” and you can read about that topic in this detailed study of federal privatization.

So regarding all those “sub-optimal investment decisions,” I say enough! We should move assets into the private sector and unleash entrepreneurs on America’s transportation challenges.

The White House released President Trump’s infrastructure plan today, which calls for spending $200 billion federal dollars as seed money to stimulate a total of $1.5 trillion on “gleaming new infrastructure.” Almost lost in the dozens of pages of documents issued by the administration is that the reason why the federal government supposedly needs a new infrastructure program is that our existing infrastructure is crumbling, and the reason it is crumbling is that politicians would rather spend money on gleaming new projects than on maintaining the old ones.

The White House proposes several new funding programs. The administration could have dedicated one or more of these programs to maintenance and repair of worn-out infrastructure. Instead, all $200 billion can be spent on new projects, and knowing politicians, most of it will be. To make matters worse, funds for most of the programs would be distributed in the form of competitive grants, but experience has proven that competitive grants are highly politicized. 

“In the past, the Federal Government politically allocated funds for projects, leading to waste, mismanagement, and misplaced priorities,” agrees White House economic advisor Gary Cohn. The administration’s solution, Cohn continues, is to “stimulate State, local, and private investment.” In other words, instead of most decisions being made by Washington politicians, they will be made by local politicians. But if local politicians were any better at maintaining infrastructure, then we wouldn’t have tens of thousands of local bridges classed as “structurally deficient” and the New York, Washington, Boston, and other subway systems wouldn’t be falling apart.

The White House says that the federal funds it proposes to allocate to infrastructure may be spent on either new construction or maintenance, which is an advantage over some existing federal programs that can only be spent on new construction. But just because they can be spent on maintenance, doesn’t mean they will be.

The New York subway system is falling apart because the city doesn’t have enough money to maintain it. Yet it has enough money to spend $10 billion on a tunnel between Penn Station and Grand Central Terminal for Long Island Railroad trains, which the New York Times has called “the most expensive subway in the world.” It also has enough money to build the eight-mile Second Avenue subway, which at $2.1 billion a mile must be the second-most expensive subway in the world.

The Washington Metro system is falling apart because the region is short $10 billion to maintain it. Yet Virginia was able to find enough money to build the Silver Line and Maryland to build the Purple Line; the costs of these two projects would have been enough to fix most of the existing Metro system.

The Boston rail transit network is also falling apart because the region can’t find the $470 million a year needed to maintain it. Yet is was able to find $2.3 billion to build a 4.3‑mile light-rail extension. In all of these cases, local politicians decided to spend money on new projects even though 50 to 80 percent of the money in each case could have been spent on maintenance.

The truth is that our infrastructure isn’t in as bad shape as some claim. State highways are in good condition; local roads less so. Rail freight systems are in good condition; rail transit systems less so. In general, infrastructure paid for out of user fees are in good condition; infrastructure paid for out of tax dollars less so. 

This means there is a simple way to take the politics out of infrastructure and make sure that managers maintain it: fund it out of user fees, not tax dollars. Managers of user-fee-funded infrastructure tend to do the best job of maintenance because they know users will stop paying to use their facility if it becomes unreliable.

To its credit, the White House program does make some token movements in the direction of more user fees. For example, it would allow states to charge tolls for all interstate highway, something that is now, for the most part, prescribed by Congressional edict. But even this depends on state politicians asking their constituents to pay tolls for something they have been getting for “free,” which is unlikely to happen.

In the end, however, the major impact of the Trump plan is to drop $200 billion new dollars onto state and local governments on top of existing federal spending programs. This will merely provide more insulation for state and local politicians from having to ask users to pay for the infrastructure they build. The result will be that most, if not all, of that $200 billion will go to build new infrastructure that we probably don’t need and can’t afford to maintain rather than maintaining what we have.

Quickly reading through the overviews of President Trump’s proposed FY 2019 budget, the good news is that funding coming through the U.S. Department of Education would be cut. The bad news is that the budget would potentially include up to $1 billion applicable to private school choice, which would threaten centralized regulation of choice, rendering such choice far less meaningful. Think Common Core for all!

Overall it appears spending by the U.S. Department of Education would decrease by around $3.6 billion—or about 5.4 percent—from 2017, based on quick calculations using the Department’s budget summary and data in an addendum that alters the summary due to the budget legislation enacted last week. As I’ve noted before, eliminating such ineffective—and unconstitutional—undertakings as the $1.2 billion 21^st Century Community Learning Centers would be solid policy, and frankly the evidence is compelling that the overall K‑12 and higher education federal endeavor has been an expensive mistake.

The bad news is that overall cuts would not be greater, while the budget would create a new, $1 billion Opportunity Grants program that would include money for private school voucher programs. The program would be broken into two pieces—Scholarships for Private Schools and Open Enrollment Grants—with only the former open to private choice programs. No specific funding split between the sub-programs is identified in any of the budget materials I’ve seen, so it is unknown how much of the funding would go to private choice. But even a small amount of money relative to overall education spending can be a powerful lever to get states and schools to open themselves to regulation—it just needs to look like a lot in news stories or ledgers—and that is the huge danger of federal school choice. Of course, the Constitution no more authorizes federal choice programs than it does other education undertakings.

The budget is likely dead on arrival, and there are certainly things I missed in a quick once-over. But at the very least it reveals an administration that has sort of the right inclination on education—shrink the federal footprint—but that will curb that inclination when it comes to school choice.

The Trump administration has released its federal budget for 2019. The document lays out various reform proposals and provides projections of revenues and spending through 2028. The projections are a little outdated already given the budget-busting spending deal reached last week, but it is still interesting to take a look.

The chart compares Trump’s proposed revenues and spending to the most recent CBO baseline projections from last June (which run through 2027).

Despite the large tax cut in December, the Trump administration is projecting federal revenues to be higher in years after 2023 than did the CBO before the cuts were enacted. The administration is assuming strong economic growth of about 3 percent in coming years, partly based on the benefits of tax reform and its deregulatory initiatives.

On spending, the administration projection assumes that it can move various cut proposals through Congress, generating large savings down the road. But with a spendthrift attitude currently prevailing in Congress, such reforms seem optimistic. Note that the CBO projections do not incorporate last week’s discretionary spending increases, whereas Trump’s figures include large defense increases and large nondefense cuts in coming years.

The Trump administration has rolled out its 2019 federal budget, which includes a plan to boost investment in the nation’s infrastructure.

I see five components to President Trump’s infrastructure policies so far.

First, Trump approved business tax cuts in December, which will boost private capital investment in pipelines, broadband, factories, and much else. The private sector owns more than three-quarters of U.S. infrastructure, so the tax cut will create wide-ranging benefits.

Second, the administration is taking steps to reduce costly regulations and speed permitting on infrastructure projects. The new budget proposes to “shorten the process for approving projects to 2 years or less.” The number of federal rules creating roadblocks to construction has increased over time. Kudos to Trump for removing some of the barriers.

Third, the budget proposes spending an additional $200 billion over 10 years of federal dollars on infrastructure, as summarized here. There is a new “Incentives” program, a “Transformative Projects” program, and a “Rural Infrastructure” program.

These new programs are unaffordable, especially given that last week’s budget bill exploded annual deficits to more than $1 trillion. Creating a new $50 billion program for rural areas is particularly ridiculous given that the government already has a range of wasteful rural subsidies.

In general, new federal subsidies for infrastructure are not needed. Any state wanting to improve its infrastructure can do so with its own funding. States can raise funds through taxes, debt, user charges, public-private partnerships (PPPs), and privatization. Federal infrastructure subsidies are often counterproductive, as I discuss here.

Giving Trump’s new subsides fancy titles such as “Transformative Projects” program” will not make them more efficient than current bureaucratic federal efforts. All federal spending for infrastructure comes from taxpayers who live in the 50 states, and there is no “transformative” magic that happens when cash is sent through Washington. 

Fourth, the Trump plan would boost incentives for the states to pursue PPP deals, including expanding various loan programs and broadening eligibility for private activity bonds. Here the end goal is a good one, but a better way to encourage PPPs and privatization would be to end federal subsidies altogether and repeal the tax exemption for municipal bond interest. That exemption dissuades the states from privatizing facilities such as airports.

Fifth, the Trump plan would make reforms to federal control over lands and structures. It would create a “capital revolving fund” to allow agencies to buy real property that they currently lease. That may save money, but the administration should instead focus on reducing the government’s size and its need for office space in the first place. (The government currently owns or leases 275,000 buildings). The Trump plan would also allow agencies to generate more revenues from public lands, and allow “for the sale or lease of federally owned assets.” That sounds positive.

In sum, Trump’s infrastructure plan includes both big government and small government policies. The plan states, “President Trump’s proposal will return decision-making authority to State and local governments, which know the needs of their communities.” But the best way to do that would be to end federal subsidies and all the related string-pulling from Washington.