According to Lloyd Chapman, the hyperbolic president of the American Small Business League, legislation introduced by Sen. Richard Burr (R‑NC) would close the Small Business Administration. Chapman actually stated on a Fox Business News show that Burr’s bill is “the worst idea in the history of America.” And here I thought it was Rick Santorum’s decision to run for president.

Unfortunately, Burr’s legislation does not close the SBA. It merely combines the SBA, the Department of Commerce, and the Department of Labor into one bigger bureaucracy that would be known as the “Department of Commerce and the Workforce.” In other words, it just rearranges the deck chairs. Title VI of the bill spells out what programs would be terminated (not much) and I don’t see any mention of the SBA.

Although I don’t consider Burr’s bill to be the worst idea in the history of America, I’m not excited about it either. Not only would it not cut federal spending in any meaningful way (if at all), it’s an idea that’s over a hundred years old. A Department of Commerce and Labor was created in 1903. In 1913, the Department of Commerce was born when the Bureau of Labor was split off to form a new Department of Labor.

The title of an anti-Burr bill piece recently penned by Chapman calls the SBA “the Most Important Agency in Washington Today.” That’s probably news to even the SBA. Chapman starts off by claiming that “Republican members of Congress have once again drafted legislation aimed at ending all federal programs that assist small businesses.” Huh?

Then there’s this whopper:

To think about closing the only agency in the country that helps small businesses is unconscionable. Clearly Republicans like Senator Burr, his supporters and groups such as the CATO Institute are directed like puppets by the defense and aerospace industry.

Sorry, Lloyd. The essay on terminating the SBA that I recently coauthored with Veronique de Rugy was not written at the behest of the defense and aerospace industry. And I don’t think the defense and aerospace industry has been behind Cato’s work on downsizing the Department of Defense either.

Whereas the essay I wrote with Veronique is primarily focused on why the SBA’s loan guarantee programs should be abolished, Chapman and his organization are primarily focused on making sure that small businesses get a certain percentage of government contracts. Chapman is correct that government contracting is fraught with fraud and abuse. In that regard, he says that the SBA needs to be cleaned up. But if the SBA has failed as an independent agency after all these years to please Chapman, why then would it be the end of the world to fold the SBA into a cabinet-level agency?

I’m probably just wasting my time asking the question. After all, this is same Lloyd Chapman who caused a ruckus a few years ago because Sen. Tom Coburn (R‑OK) had the audacity to invite Veronique to testify at a hearing on the SBA. In Lloyd’s world, the de Rugy invite meant that Coburn wanted to abolish the SBA. Coburn is now in his second term and still hasn’t introduced legislation to abolish the SBA.

I’m all for a serious discussion and debate on the SBA. The SBA’s loan guarantee programs benefit a relatively tiny number of small businesses at the expense of the vast majority of small businesses that do not receive government support. Moreover, the biggest winners from these loan guarantees are big banks who reap the profits but get to kick the bulk of any losses to the government. One would think a pro-small business/anti-big business guy like Chapman would be concerned by this. Instead, Chapman consistently resorts to wild exaggerations and conspiracy theories. As a result, I can’t take him seriously. It’s too bad policymakers do.

Is Rachel Maddow sure she wants the government to “think big,” as she says here standing in front of the Hoover Dam?

Maddow’s advertisement on MSNBC caught my eye because it captures the naïve liberal belief in the goodness of large government projects. Liberal pundits keep telling us that we need a giant boost in federal infrastructure spending to aid the recovery. But the pundits never seem to worry about the quality of government investments. And they seem blissfully unaware of the history of damage caused by governments that have thought big on infrastructure.

Hoover Dam was built by the U.S. Bureau of Reclamation, an agency with an appalling history of environmental damage and support of boondoggle projects. For most of the 20th century, the agency ran amok pouring concrete in every river system in the West, and in the process destroying wetlands and salmon fisheries. The government’s Corps of Engineers has a similar record of environmental damage and economic miscalculation on its big infrastructure projects.

It’s not just water infrastructure where “thinking big” by the government has been damaging. Thinking big led to the federal government’s disastrous high rise public housing projects in Chicago and elsewhere. Thinking big led to awful “urban redevelopment” projects that paved over city neighborhoods and replaced them with hideous Soviet-style office blocks.

I don’t want the federal government thinking big on infrastructure, and I doubt if Maddow would either if she knew more about the history. I encourage her to read the classic Cadillac Desert to get a better understanding of what government infrastructure spending on dams is all about. Then I would suggest she do her next MSNBC spot at the site of the Teton Dam in Idaho (see also this and this), which was an economic joke and a federal engineering disaster.

I was tied up when the massive Atlanta School District cheating scandal broke last month, and so didn’t get around to blogging it. [Recap: nearly 200 teachers and principals in half of the district’s 100 schools were involved]. But, with other large-scale cheating investigations still on-going, U.S. Education Secretary Arne Duncan was asked about the problem yesterday during a video-taped “Twitter town hall” (minute 12:00). Specifically, he was asked if the high-stakes tests mandated by NCLB are to blame (minute 16:50). Though Duncan made an off-hand comment that high-stakes NCLB-required tests may have contributed to the pressure that lead to the cheating, he repeatedly blamed the cheating on a uniquely “morally bankrupt culture” in Atlanta’s public schools. That didn’t convince interviewer John Merrow, who cited several other cities where cheating investigations are underway—nor should it convince you.

The problem is not that Atlanta is the Sodom and Gomorrah of public schooling. The problem is that state schooling separates payment from consumption. The accountability mechanism of competitive markets—the only such mechanism that actually works—requires the payer to also be the consumer, because the central incentive for any service provider is to please the payer. So if the consumer isn’t paying, he or she is rendered relatively unimportant in the eyes of the provider. Atlanta parents want their children to be well educated, but a lot of work is required to meet that goal. State and federal bureaucrats just want high scores on NCLB-mandated tests—that’s much easier to achieve by cheating than by doing an excellent job teaching. So there is an incentive for school officials to cheat because they are paid by the bureaucrats, not by the parents. Not every teacher succumbs to this incentive, of course, but the incentive is very clearly putting pressure in the wrong direction.

Now consider the incentive structure of schools paid directly by parents in tuition. The incentive in that scenario is to give parents what they want, which is usually a high quality education for their children. Certainly schools could try to lie to parents about how well their children are doing, but this is much harder than lying to bureaucrats. A great many parents will notice a discrepancy if their illiterate children are awarded A’s. And parents considering a school will notice a discrepancy if the “A”-graded graduates of that school somehow cannot gain admission to, or often drop out of, the next higher level of education. Word of mouth—and now word-of-social-networking-apps—is a powerful thing. So it’s much harder for parent-funded schools to get away with cheating, even if they were predisposed to use that strategy.

This is why no system of education that relies exclusively on third-party payment will ever match the quality and progress that we have come to expect in every other field. Indeed, it argues for finding ways of ensuring universal access to education that rely, as much as possible, on direct payment of tuition by parents. Of all the currently viable education policies, the one that fits that description best is the education tax credit—particularly direct credits for families’ own education expenses. And, among third-party payment methods, scholarship tax credits also have advantages over the alternatives.

This is a reality many folks will not want to hear or accept, but reality is not optional.

Do yourself a favor and click on over through this link to read Bill Kauffman’s WSJ review of a new edited collection of Ambrose Bierce’s work, including his famous Devil’s Dictionary. As Kauffman writes:

Bierce’s politics amount to an aristocratic libertarianism. “In a republic,” he writes, the rabble are “those who exercise a supreme authority tempered by fraudulent elections.” The “dominant and controlling” tribe in human affairs is that of the “idiot.” A revolution is “an abrupt change in the form of misgovernment.”

Bierce emerges from his dictionary not so much a misanthrope as a man who expects the worst and makes the best of it. He possesses a marvelously large vocabulary, which he deploys with Menckenesque glee. Why say “war of words” when you can use “logomachy”? Most of all, Bierce offers the pleasure of lacerating wit, felicitously phrased.

This welcome omnibus, rather than supplying a concluding sentence to the story of Ambrose Bierce, reintroduces a fantastically imaginative and unflappable cynic to an America that needs acutely honest humor now more than ever.

I may have to replace my yellowed old copy of Dictionary, which has tick marks just in the letter “P” section next to Bierce’s definitions of politics (“A strife of interests masquerading as a contest of principles. The conduct of public affairs for private advantage.”) and presidency (“The greased pig in the field game of American politics.”) But perhaps the highlight is his take on patriotism: “Combustible rubbish ready to the torch of any one ambitious to illuminate his name. In Dr. Johnson’s famous dictionary patriotism is defined as the last resort of a scoundrel. With all due respect to an enlightened but inferior lexicographer I beg to submit that it is the first.”

Are you aware of the budget plan that promises to cut federal spending by 25 percent per year and has been endorsed by seven Republicans running for president? I just found out about it this week in Steve Chapman’s latest column. Having checked it out, I think I know why I hadn’t heard of it: it’s the dumbest “plan” out there.

The so-called plan comes from an organization called Strong America Now, which bills itself as a “nonprofit organization dedicated to educating and mobilizing a bipartisan, grassroots effort focused on eliminating the national debt and deficit using a proven waste-elimination process called Lean Six Sigma.”

I say “so-called” because I don’t see any actual plan on the organization’s website other than this:

Strong America Now is proposing that every department, agency and program in the federal government go through the waste elimination process, Lean Six Sigma. This process is a proven method of eliminating waste with a focus on speed and quality. Mike George, the founder of Strong America Now, is the pioneer of Lean Six Sigma. He estimates that at least 25 percent all government spending is waste that can be eliminated. With the skyrocketing national deficit, Strong America Now believes the president has a duty to look at eliminating waste. The group’s plans to influence the next president to do just that.

Come again?

I don’t take issue with George’s guesstimate that 25 percent of all government spending is waste. But the notion that federal spending can be cut by 25 percent every year by implementing particular quality control procedures in government is crackpot.

As I recently stated in my testimony before a Senate committee hearing on the Small Business Administration, “waste, fraud, and abuse always comes with government programs — the same way a Happy Meal always comes with a toy and a drink.” It’s unavoidable, yet many policymakers would have the American people believe that our budgetary problems can be solved with a little house cleaning. Sadly, a lot of Americans do believe it.

From my testimony:

Most Americans agree that waste, fraud, and abuse in government programs is a problem. A recent poll of likely voters found that those surveyed believe an average of 42 percent of every dollar spent by the federal government is wasted. The same poll also found that 60 percent of those surveyed believe that problems with the federal budget can be solved by simply eliminating waste, fraud, and abuse. In fact, 40 percent strongly agreed with this position…

However, most people know very little about the breakdown of the federal government’s $3.8 trillion budget, and many don’t accept that huge deficits are caused by programs that benefit them. For example, the same poll found that 49 percent disagreed that Social Security and Medicare are a major source of problems for the federal budget. Attempting to reduce waste, fraud, and abuse is fine, but it won’t solve our deficit-spending problem.

Try as the “good government” gurus may, they’ll never get the government to operate like a business for the simple – and what should be obvious – reason that the government isn’t a business:

For decades, there have been efforts to end such abuses, but federal programs are extremely complex and they deliver benefits to thousands or millions of recipients. When it comes to waste, fraud and abuse, government programs are always chasing their tail. In the private sector, businesses have a financial incentive to stop abuses before they happen. No such incentive exists with government programs. Instead, government administrators usually only uncover abuses after the fact, and often only after outside auditors or the media have investigated.

I’m guessing that the Republican candidates who signed onto Strong America Now’s quixotic foolery probably did so because they considered it to be a harmless way to curry favor with some government reform crusaders. However, assigning their names to this “plan” is a disservice to voters. Instead, GOP candidates for the presidency should be explaining to voters exactly what federal agencies and programs they would cut in order to get spending under control.

 They can go here for lots of ideas.

The Congressional Budget Office has just released the update to its Economic and Budget Outlook.

There are several things from this new report that probably deserve commentary, including a new estimate that unemployment will “remain above 8 percent until 2014.”

This certainly doesn’t reflect well on the Obama White House, which claimed that flushing $800 billion down the Washington rathole would prevent the joblessness rate from ever climbing above 8 percent.

Not that I have any faith in CBO estimates. After all, those bureaucrats still embrace Keynesian economics.

But this post is not about the backwards economics at CBO. Instead, I want to look at the new budget forecast and see what degree of fiscal discipline is necessary to get rid of red ink.

The first thing I did was to look at CBO’s revenue forecast, which can be found in table 1–2. But CBO assumes the 2001 and 2003 tax cuts will expire at the end of 2012, as well as other automatic tax hikes for 2013. So I went to table 1–8 and got the projections for those tax provisions and backed them out of the baseline forecast.

That gave me a no-tax-hike forecast for the next 10 years, which shows that revenues will grow, on average, slightly faster than 6.6 percent annually. Or, for those who like actual numbers, revenues will climb from a bit over $2.3 trillion this year to almost $4.4 trillion in 2021.

Something else we know from CBO’s budget forecast is that spending this year (fiscal year 2011) is projected to be a bit below $3.6 trillion.

So if we know that tax revenues will be $4.4 trillion in 2021 (and that’s without any tax hike), and we know that spending is about $3.6 trillion today, then even those of us who hate math can probably figure out that we can balance the budget by 2021 so long as government spending does not increase by more than $800 billion during the next 10 years.

Yes, you read that correctly. We can increase spending and still balance the budget. This chart shows how quickly the budget can be balanced with varying degrees of fiscal discipline. 

The numbers show that a spending freeze balances the budget by 2017. Red ink disappears by 2019 if spending is allowed to grow 1 percent each year. And the deficit disappears by 2021 if spending is limited to 2 percent annual growth.

Not that these numbers are a surprise. I got similar results after last year’s update, and also earlier this year when the Economic and Budget Outlook was published.

Some of you may be thinking this can’t possibly be right. After all, you hear politicians constantly assert that we need tax hikes because that’s the only way to balance the budget without “draconian” and “savage” budget cuts.

But as I’ve explained before, this demagoguery is based on the dishonest Washington practice of assuming that spending should increase every year, and then claiming that a budget cut takes place anytime spending does not rise as fast as previously planned. 

In reality, balancing the budget is very simple. Modest spending restraint is all that’s needed. That doesn’t mean it’s easy, particularly in a corrupt town dominated by interest groups, lobbyists, bureaucrats, and politicians.

But if we takes tax hikes off the table and somehow cap the growth of spending, it can be done. This video explains.

And we know other countries have succeeded with fiscal restraint. As is explained in this video.

Or we can acquiesce to the Washington establishment and raise taxes and impose fake spending cuts. But that hasn’t worked so well for Greece and other European welfare states, so I wouldn’t suggest that approach.

I suspect not everyone looks forward to the latest issue of the Journal of Finance to the same extent I do. After all, most of the articles are fairly technical and generally lack a direct connection to public policy (my primary interest). The August issue, however, was a real exception, having a number of articles on issues related to the financial crisis. More importantly was a paper by Robert Novy-Marx and Joshua Rauh. The paper provides estimates for the unfunded liabilities inherent in our state public employee pension system. 

Under fairly reasonable assumptions, the authors calculate that the net present value of unfunded liabilities is between $3.2 and $4.4 trillion. While that might seem small compared to the unfunded liabilities inherent in Medicare and Social Security, it is still a massive number compared to either the size of the economy or state budgets. 

The authors do not offer a set of policy proposals. They simply give us a reasonable estimate of the size of the problem. Needless to say, this is a problem that isn’t going anyway and will only get worse the longer we refuse to address it.