Washington Post columnist/​blogger Ezra Klein recently echoed the latest White House rationale for additional “stimulus” spending for 2013–15 and postponing spending restraint (including sequestration) until after the 2014 elections. Klein argues for “a 10- or 12-year deficit reduction plan that includes a substantial infrastructure investment in the next two or three years.” In other words, a “deficit-reduction plan” that increases deficits until the next presidential election year.

Citing Larry Summers (who similarly promoted Obama’s 2009 stimulus plan while head of the National Economic Council) Klein says, “There’s a far better case right now for being an infrastructure hawk than a deficit hawk.”

“Deficit hawks tend to [worry that] … too much government borrowing can, in a healthy economy, begin to “crowd out” private borrowing. That means interest rates rise and the economy slows… That’s not happening right now. In real terms — which means after accounting for inflation — the U.S. government can borrow for five, seven or 10 years at less than nothing.… That’s extraordinary. It means markets are so nervous that they will literally pay us to keep their money safe for them.”

If low yields on Treasury and agency bonds simply reflected investor anxiety (unlike stock prices), rather than quantitative easing, then why has the Federal Reserve been spending $85 billion a month buying Treasury and agency bonds? Despite those Fed efforts, Treasury bond yields have lately been moving up rather smartly – even on TIPS (inflation-protected securities). The yield on 10-year bonds rose by a half percentage point since early May. It is not credible to assume, as Summers does in a paper with Brad DeLong, that today’s yields would remain as low as they have been even in the face of substantially more federal borrowing for infrastructure. Even the Fed’s appetite for Treasury IOUs has limits. 

A second worry of deficit hawks, according to Klein and Summers, “is a moral concern about forcing our children to pay the bill for the things we bought.…These are real, worthwhile concerns. But in this economy, both make a stronger case for investing in infrastructure than paying down debt.” Paying down debt?! Nobody is talking about paying debt. That would require a budget surplus. The debate is only about borrowing slightly less (sequestration) or substantially more (Obama).

The Summers-Klein argument for larger deficits is that interest rates are very low, so why not borrow billions more for a “substantial investment” in highways, bridges and airports? Summers says, “just as you burden future generations when you accumulate debt, you also burden future generations when you defer maintenance.” This might make sense if there was any link between government tangible assets and federal liabilities. In reality, though, this smells like a red herring. Politicians always say they want to borrow more to build or rebuild highways and bridges. But this is not how borrowed money is spent, particularly when it’s federal borrowing.

Accumulation of federal debt since 2008 − including the 2009 stimulus plan − had virtually nothing to do with investment. Nearly 90 percent of the 2009 “stimulus” was devoted to consumption — $430.7 billion in transfer payments to individuals, more than $300 billion in refundable tax credits, $18.4 billion in subsidies (e.g., solar and electric car lobbies), more pay and perks for government workers, etc. Stanford’s John Taylor shows that even the capital grants to states − ostensibly intended for infrastructure projects − were used to reduce state borrowing and increase transfer payments such as Medicaid.

In the National Income and Product Accounts (NIPA), the closest thing we have to a measure of “infrastructure” is government investment in structures. Federal borrowing in the NIPA accounts rose from $493.5 billion in 2008 to $1,177.8 in 2010, yet total federal, state and local investment in structures was unchanged − $310.1 billion in 2008 and $309.3 billion in 2010. Such investment was lower by 2012, but not because federal borrowing was “only” $932.8 billion that year. 

NIPA accounts show only a $12.9 billion federal investment in nondefense structures in 2012 and $8.5 billion for defense structures. By contrast, transfer payments accounted for 61.7 percent of federal spending in 2012, consumption for 28.2 percent, interest 8.5 percent and subsidies 1.6 percent. Consumption is mostly salaries and benefits. Transfer payments did include more than $607 billion in grants to states and localities in 2011, according to a new CBO study, but 81.7 percent of such grants were for health, income security and education, leaving only 10 percent for transportation. Transportation accounted only 3.2 percent of total federal spending in 2012 and nine percent of “discretionary” spending.

In short, direct federal infrastructure investment plus grants to states add up to only a little over $80 billion out of a budget that exceeds $3.5 trillion. If federal borrowing had anything to do with $80 billion a year in federal infrastructure spending, then we wouldn’t have been borrowing about a trillion a year for the past four years. 

Klein’s rephrasing of Summers’ rerun of the 2009 “infrastructure” excuse is not a plausible argument for increased federal debt. It is, at best, an argument for ending the chronic misuse of borrowed money to pay for transfer payments and government consumption so that we could prudently reallocate a greater share to transportation infrastructure. 

It’s widely accepted that George W. Bush was a big-spending president. He was a social conservative, but not a fiscal one. To his credit, however, even Bush recognized how wasteful and unfair farm subsidies are, and he vetoed the last major farm bill in 2008.

That bill “would needlessly expand the size and scope of government,” he said in his veto message. Unfortunately, Congress overrode Bush’s veto and the 2008 farm bill became law at an estimated taxpayer cost of $640 billion over 10 years.

Congress is moving ahead on another farm bill this year, with the Senate recently passing its version and the House to take up a bill shortly. The Senate-passed bill would spend $955 billion over 10 years—49 percent more than the 2008 bill that was too expensive even for Bush.

Four-fifths of the spending in this year’s farm bill is for food stamps, yet 18 Republican senators still voted for it. Perhaps those members hadn’t noticed that the cost of food stamps has quadrupled over the last decade. Perhaps they hadn’t noticed that federal government debt has doubled since 2008. To members who see themselves as fiscal conservatives, it should be obvious that a less expensive bill this time around is appropriate, rather than one that is far more expensive.

The farm bill to be considered by the House would spend $940 billion over 10 years, and thus is almost as irresponsible as the Senate version. Despite what farm bill supporters are saying, this year’s bill represents a huge spending increase, not a cut.

In his 2008 veto message, Bush noted that the farm bill “continues subsidies for the wealthy,” and he pointed to the high and rising incomes enjoyed by farmers. Farmers are doing even better today, with their incomes soaring over the last five years.

Today’s Republicans often admit that federal spending got out of control under President Bush. But now John Boehner is saying that he will support the new House farm bill that spends 47 percent more than the one Bush vetoed.

I periodically post TV interviews and the second-most-watched segment — edged out only by my debate with Robert Reich on Keynesian economics — was when I discussed how President Obama’s statist policies are bad for young people.

So there’s obviously some concern about the future of the country and what it means for today’s youth.

The Center for Freedom and Prosperity has examined this issue and taken it to the next level, cramming a lot of information into this six-minute video.

The video highlights four specific ways that government intervention disadvantages younger Americans.

1. Labor market interventions such as minimum wage mandates make it more difficult for young people to find employment and climb the economic ladder.

3. Young people are trapped in a poorly designed Social Security system and politicians such as Obama think the answer is to make them pay more and get less.

4. Government has created a major third-party payer problem in higher education, putting young people on a treadmill of ever higher tuition and record debt.

What makes this situation so surreal is that young people — as noted at the start of the video — are the one group who think the “government should do more”!

I hope you share this video with every young person you know and help them understand that statism is the enemy of hope and opportunity.

And maybe also show them this poster if they need some extra help grasping the problem.

Yesterday, the U.S. Senate passed a farm bill with a projected price tag of $955 billion over ten years. As my colleague Sallie James explains, neither the Senate farm bill nor the House version offer up much in the way of real “reform.” And as Chris Edwards notes, both the Senate and House versions would spend more than the previous farm bill.  

One reason why taxpayers are about to get handed another _____ sandwich is because the politicians responsible for crafting the legislation are, well, politicians. And out of the mouths of politicians often come statements that indicate a softness of thought. Take, for instance, the following comments from Senate Agriculture Committee chairwoman Debbie Stabenow (D‑MI) who just successfully shepherded a farm bill through the Senate: 

“I don’t think you can have an economy unless you make things and grow things. This bill is about growing things. That’s what we need to do in this country,” said Sen. Debbie Stabenow (D‑Mich.), who chairs the Senate Agriculture Committee.

The Senate just voted to take more money from average taxpayers and give it to higher-income farm households because we need to “grow things”? Things won’t grow unless the grower gets a check from the government? What in the world is Sen. Stabenow talking about? Grow things? 

Apparently, one need only to have watched Sesame Street to be qualified to centrally plan the nation’s agricultural economy:

I have blogged about the Internal Revenue Service’s attempt to tax, borrow, and spend $800 billion contrary to the clear language of ObamaCare, and how both Oklahoma (in Pruitt v. Sebelius) and a group of individuals and small businesses (in Halbig v. Sebelius) have filed suit to block this raw power grab. The Congressional Research Service writes that these challenges “could be a major obstacle to the implementation of [ObamaCare].” George Mason University law professor Michael Greve writes:

This is huge: all of Obamacare hangs on the outcome…If successful…[either] case will bring Obamacare’s Exchange engine to a screeching halt…In short, this is for all the marbles.

Last week, the Halbig plaintiffs asked the U.S. district court for the District of Columbia to speed things up. Though the IRS doesn’t have to respond to the Halbig complaint until July, the plaintiffs filed a motion for summary judgment asking the court to rule on the case before the end of 2013. According to the plaintiffs:

Plaintiffs need a determination on the merits far enough in advance of January 1, 2014, to allow them to conform their behavior to the law. Because the validity of the regulation turns on a purely legal question and the administrative record is closed, Plaintiffs are moving for summary judgment now, and hope thereby to avoid the need to litigate a motion for preliminary injunction or temporary restraining order at the eleventh hour.

The plaintiff’s motion for summary judgment cites my paper (with Jonathan Adler), “Taxation Without Representation: The Illegal IRS Rule to Expand Tax Credits Under the PPACA.”

On June 17, one week from today, Cato will host a policy forum on Halbig v. Sebelius featuring plaintiffs’ counsel Michael Carvin and other luminaries. Register here.

Former Treasury Secretary Larry Summers, in June 4 testimony before the Senate Budget Committee, offers a scatter diagram which allegedly shows “that countries that pursued harsher austerity policies in recent years also had lower real GDP growth.” He acknowledges, but does not adequately explain, that the causality may well be backwards: Bond markets would not allow countries in severe economic distress (Portugal, Ireland, Greece and Spain) to continue financing deficits at the peak levels of 2010.

Summers defines “austerity” as the three-year change (regardless of the level) from 2010 to 2013 in cyclically-adjusted “primary” deficits (excluding interest expense) as a percent of potential GDP. His scatter diagram then compares those changes to average real GDP growth from 2010 to 2013, using unexplained estimates for 2013.

Measuring fiscal stimulus by the change in budget deficits means several countries with little or no budget deficit in both 2010 and 2013 appear as employing the most “fiscal stimulus” in Summers’ graph. Sweden’s deficit is estimated at 0.1 percent of GDP for 2013, according to The Economist, and was literally zero in 2010. Keeping the budget balanced puts Sweden on the admirable left side of Summers’ diagram – the side ostensibly choosing growth rather than austerity. Germany is another country Summers counts as avoiding austerity, even though Germany’s brief cyclically-adjusted deficit of 3.5 percent of GDP in 2010 was cut to zero in 2012–2013.

When it comes to real GDP Growth, Hong Kong, Singapore, the Slovak Republic and South Korea appear near the top of Summers’ graph. It is revealing that Hong Kong is also far to the left on the pro-growth side of the austerity axis. This may appear paradoxical since Hong Kong ran budget surpluses in 7 of the past 8 years, and will do so again in 2013. No amount of cyclical adjusting could turn chronic surpluses into deficits. Simply because Hong Kong has not switched from a big deficit to a smaller one, that alone suffices to place it among the least “austere” economies on list. Similarly, South Korea’s budget surplus is estimated at 1.3–1.4 percent of GDP in both 2010 and 2013, according to the OECD, but keeping the budget in surplus between those years counts as stimulative policy in Summers’ reckoning.

The Slovak Republic also looks relatively strong on the growth axis, though fare worse on the austerity index because the budget deficit was trimmed from 7.7 percent of GDP in 2010 to an OECD-estimated 2.4 percent in 2013. A better explanation for what motivates a vigorous private economy would be obvious if Keynesians ever stopped obsessing about government borrowing long enough to glance at the supply side: The highest income tax rate in the Slovak Republic just happens to be 19 percent, which is comparable to the 20 percent top tax rate in Singapore but higher than the 15 percent top tax rate in Hong Kong, Lithuania, Costa Rica or Mauritius, or the 13 percent flat tax in Russia.

It is a mystery how New Zealand shows up as the very best on the austerity axis – apparently the most stimulative fiscal policy of these two dozen countries. Now, it is true that New Zealand cut the highest income tax rate from 39 percent to 33 percent between 2008 and 2011, which certainly qualifies as stimulative in my incentive-based micro model. Using Summers’ criterion of changes in government borrowing, however, the OECD shows New Zealand’s deficit falling sharply from 7.5 percent of GDP in 2010 to 2.4 percent in 2013. Perhaps cyclical adjustment and exclusion of interest could transform that seemingly austere drop in New Zealand’s deficit into a stimulative increase, but that would nevertheless be odd.

The most austere countries on the right side of the austerity axis are also the most austere on my list (confounding Krugman’s simplistic description of an “austerian”) but for an entirely different reason. The austere countries are Ireland, Spain, Portugal and the United Kingdom, and maybe Iceland. Deficits aside, these countries became more austere and uncompetitive in terms of supply-side incentives because they all increased their highest income tax rates — from 36.7 to 46.2 percent in Iceland, from 41 to 48 percent in Ireland, from 43 to 52 percent in Spain, from 42 to 46.5 percent in Portugal, and from 40 to 50 percent in the U.K. Why is anyone still surprised when countries with high and rising tax rates experience flat or falling GDP growth?

Unlike most countries on the good side of the austerity axis, OECD-estimated 2013 deficits within the “austerity” camp (except Iceland) look large – 6.4 percent in Portugal, 6.9 percent of GDP in Spain, 7.1 percent in Britain and 7.5 percent in Ireland. Yet Summers’ measure of cyclically-adjusted primary deficits came down by a modest 1.5 to 2.5 percentage points from 2010 to 2013, which supposedly defines these increasingly indebted and overtaxed countries as brutally frugal.

The weakness of the whole exercise is illustrated by the way it makes Iceland and Ireland look nearly identical in terms of both deficit reduction and feeble GDP growth. Unlike Ireland, Iceland really did make deep cuts in spending which resulted in slashing the deficit to 0.2 percent of GDP in 2013, by an OECD estimate. Iceland’s 0.2 percent figure is scarcely comparable to Ireland’s 2013 deficit of 7.5 percent of GDP. But recall that it is change that matters and Ireland started with a deficit that even dwarfed what the U.S. borrowed in World War II.

Comparing deficits in 2010 with those in 2013 appears to make Ireland as austere as Iceland. But Ireland went crazy in late 2010 and bailed-out creditors and depositors in a half dozen banks. The bailouts were temporary, paid-out after a couple of years, so the Irish deficit has dropped to “only” 7.5 percent of GDP. Because Ireland is no longer borrowing 30.5 percent of GDP, as it did in 2010, any reduction in that obviously unbearable deficit counts as “austerity” by the Summers standard.

The other axis, showing a three-year average of GDP growth, also misleads. Iceland’s GDP growth picked up in 2011, yet averaging only the years 2010–2013 makes Iceland’s growth appear nearly as weak as Ireland’s because Ireland’s economy fell sooner and faster in 2008–2009 while Iceland’s crisis was deeper in 2010.

Summers’ imaginative method of defining what is or is not a fiscal stimulus implies that (1) countries like Hong Kong and South Korea which routinely run budget surpluses are secretly practicing the dark art of Keynesian stimulus, while (2) countries like Ireland must forever keep borrowing nearly a third of GDP or else stand accused of the dreaded “austerity.” This is Keynesian Krugmania at its worst.

David Fahrenthold has another excellent article on waste in government in Sunday’s Washington Post. This time he finds a truly comic example of waste, duplication, and confusion:

[T]he U.S. government has at least 15 official definitions of the word “rural,” two of which apply only to Puerto Rico and parts of Hawaii.

All of these definitions matter; they’re used by various agencies to parcel out $37 billion-plus in federal money for “rural development.” And each one is different.…

There are 11 definitions of “rural” in use within the U.S. Department of Agriculture alone.

It’s laughable. But the real question is, Why does the federal government even need to define “rural”? Well, of course the answer comes back to the real purpose of our modern tax-and-transfer state: The definitions define who gets the subsidies.

Every year, there are billions available to fund projects in rural communities. Money for housing. Community centers. Sewer plants. Broadband connections.

In a sidebar to the story, we get some details. The Census Bureau has one definition of “rural” so it can tell us how many Americans live in rural areas. Here are the purposes of the other 14 definitions:

Used for a variety of loan and grant programs, all meant to foster rural development…for loans and grants for “community facilities” in rural areas… for aid for water and waste-disposal systems… for aid for improvements in telecommunications systems…by farm-credit associations making housing loans… for certain lending programs for rural community development…to determine areas served by Office of Rural Health…by the National Rural Development Partnership…for grants to rural institutions of higher education…to determine what areas of Hawaii are eligible for rural-aid programs…to determine what areas of Puerto Rico are eligible for rural-aid programs…by various rural development loan and grant programs.

So let’s see. People in rural areas pay federal taxes. People in urban areas pay federal taxes. All that money goes to Washington — where a great deal of it stays — and then some of it is used to provide programs and services in rural and urban areas. Maybe both rural and urban Americans would be better off keeping their money at home and paying for whatever services they think are actually worth the cost. And then the federal government wouldn’t have to pay handsome salaries to well-educated people to form task forces to determine 15 different definitions of “rural.” And states, cities, and rural areas wouldn’t have to hire expensive lobbyists to get a piece of that federal pie.