The economist Greg Mankiw reports some disturbing news. In 2009, a majority of households in the United States received more in government transfers than they paid in taxes. The middle quintile have recently changed from being a net contributor to government (they paid more in taxes than they received in transfers) to a net recipient. Perhaps the recent recession caused that change, but as Mankiw notes, the deep recession of 1982 did not have the same effect on the middle quintile.

Under pure majority rule, we might expect that the wealthiest 50 percent of the population will pay all taxes while the poorest 50 percent will consume all government spending. The United States is not governed by pure majority rule, but we might wonder if we are on the way to outcomes consistent with it.

This week, likely on Wednesday, the full House of Representatives will take up the defense appropriations bill passed out of the Armed Services Committee in May. Although most of the floor debate will focus on restoring or cutting funding for individual programs and weapons platforms, fiscal hawks should fix on a seemingly esoteric issue to make a point about truth in budgeting and basic transparency: the arbitrary decision by the Obama administration to shift approximately $5.6 billion dollars from the DoD’s base budget to the Overseas Contingency Operations (OCO) account. The move is ostensibly intended to pay for some of the troops fighting in Afghanistan over the next few years, but the particulars are murky, and the rationale is dubious, at best.

The OCO budget has always been a slush fund of sorts, but the potential for mischief has risen because last year’s Budget Control Act (BCA) explicitly exempted war spending from budget caps. This particular gimmick — funding supposedly temporary active-duty personnel out of the OCO account — has attracted some notice. House Budget Committee Chairman Paul Ryan called attention to it in a hearing on February 29th. POGO’s Ben Freeman wrote about it in March, pointing to a letter sent by six House Republicans, including Jim Jordan, head of the Republican Study Committee, and Arizona’s Jeff Flake, to Harold “Hal” Rogers, chair of the House Appropriations Committee. Along with my co-authors Carl Conetta, Charles Knight and Ben Friedman, I mentioned it in the “Defense Sense” paper (.pdf) published in May.

Although the “Defense Sense” paper reported the amount of the shift at $4.5 billion, the Pentagon explained that the OCO request included $6.1 billion for a temporary end strength increase in the Army and Marine Corps (see page 6–7 here: .pdf). Last week, the Congressional Budget Office’s definitive report on the FY 2013 budget concluded that the active duty troops in the OCO budget would cost $5.3 billion in 2013, and $15.2 billion over five years. (See Box 2–1 on page 15, here: .pdf). My current read puts the figure for next year closer to $5.6 billion.

Regardless of the exact amount, it might not seem like much in the grand scheme of things, and it isn’t. The budget passed out of the HASC weighs in at a whopping $519 billion, $3 billion more than the Pentagon requested. Moving the OCO money would actually increase the amount of the base budget, but that should then force members to offer actual cuts to bring the budget below the targets established by last year’s BCA.

The point is not to get into the weeds; different people can disagree about how much of the base budget has been shifted into the war budget. But no amount of money should be moved from one to the other for the purpose of evading the BCA limits.

I would reiterate what we said in “Defense Sense” a few months ago. Rescinding

the planned shift of DoD personnel costs from the base budget to the Overseas Contingency Operations (OCO) account [would] preserve the integrity of the deficit reduction process. Success in this process depends on foreclosing the use of accounting measures to give the false appearance of savings or to shield any part of discretionary spending from deficit reduction.

The Senate will soon vote on a new version of the DISCLOSE Act. This new version is likely to fail to gain enough votes.

Instead of looking at the national fight in detail, let’s consider a current local case that tells us something about disclosure and campaign finance.

Three members of the District of Columbia city council have called upon the current mayor to resign. Why? Some former supporters of the mayor have alleged that a city contractor spent an undisclosed $600,000 on his behalf in the last election. This donor held a $300 million health care contract with the city.

That contract had been awarded by the administration of the former mayor, the man the current mayor defeated with the putative help of the $600,000. So the contractor faced the following problem: He could stick with the guy that awarded him the contract, but if the former mayor lost the race (as he did in fact), the new mayor might well give someone else (a supporter perhaps?) the $300 million contract. So maybe the contractor should support the former mayor’s challenger. But what if the former mayor had won? He would then take away the contract of his former supporter who had bet on the wrong horse, so to speak. The contractor could solve this problem by supporting the challenger (now current mayor) in secret. Maybe none of this happened, but it is, as they say, a plausible theory.

D.C. is the one of the most leftwing places in the United States, so its political class is condemning the alleged non-disclosure and suggesting the mayor bears responsibility for the deed. Hence, the calls for his resignation.

Yet, there is another lesson in all this. In D.C., business never gained independence from the city government. Firms are nothing more than another point of distribution of government largesse. No capitalism, just cronies. In this world, governing is about helping friends and harming enemies. Disclosure of campaign spending reveals you to be one or the other, and for those dependent on the government, deciding to be a friend or enemy is not an option.

The United States is not yet like the District of Columbia: civil society is not yet wholly dependent on the federal establishment. As government expands, however, the DC disclosure problem will grow: an expectation of retaliation will become the norm. This small scandal in DC thus tells us something larger about unlimited government. The more government matters to economic life, the less resistance to elected officials we can expect. An expanding government militates against a liberal politics.

Last Friday, President Obama revisited Elizabeth Warren’s reasoning for higher taxes on the wealthy. Like Warren, the President stated that:

If you’ve been successful, you didn’t get there on your own… If you were successful, somebody along the line gave you some help. There was a great teacher somewhere in your life… Somebody invested in roads and bridges.

The President then took Warren’s reasoning up a rhetorical notch and said “If you’ve got a business — you didn’t build that. Somebody else made that happen.”

President Obama’s statement begs an obvious question: If it is so easy to be a businessman — just put together all the services that the government provides you with — why isn’t everyone a successful businessman?

As Israel Kirzner reminds us, successful businessmen tend to be people who are alert to the opportunities that surround us but others cannot see.

Kirzner describes alertness as the fundamental quality of the entrepreneur. Alertness is the entrepreneur’s ability to perceive new economic opportunities that no prior economic actor has yet recognized… The entrepreneurial function is possible due to the presence of sheer ignorance on the part of some economic actors. Sheer ignorance, in Kirzner’s definition, consists of not only not knowing a given piece of information but also of not knowing that one does not know it: no consideration of the information – positive or negative – even enters the economic actor’s mind.

That goes for Art Fry who invented the humble Post-it note as well as for Bill Gates’ vision of a personal computer in every household. Thus, while there are many practical reasons for not begrudging the wealth of successful businessmen — they often risk their own capital, provide us with goods and services we need, create employment and pay taxes — let us not lose sight of the moral angle either.

Paradoxically, President Obama comes close to undermining his entire argument later in his speech. He says:

I’m always struck by people who think, well, it must be because I was just so smart. There are a lot of smart people out there. It must be because I worked harder than everybody else. Let me tell you something — there are a whole bunch of hardworking people out there.

Precisely. There are a lot of good hard-working people out there. But not everyone has the aptitude to be a businessman. If it were otherwise, I would not be typing these words. I would be out there inventing the next iPhone.

A favorite talking point among redistributionists is to say the tax code was much “fairer” under President Bill Clinton, than it has been since the Bush tax cuts of 2003. New Congressional Budget Office (CBO) figures show that the top 1% paid 21.3% of all federal taxes from 1993 to 2000, when Clinton was president, but they paid 25.1% from 2003 to 2008, after the Bush tax cuts. If 21.3% was a fair share in the Clinton years, then the top 1% has been paying much more than its fair share since 2003.

In a June 12 Wall Street Journal article, James Carville and Stanley Greenberg write that “Some conservatives seem breathlessly excited by new academic studies … that put middle-income gains at princely 37% over three decades—failing to note that … most of the gains came in the Clinton era when taxes were raised on the wealthiest and government tax credits expanded for the working poor.” The source of that 37% figure is undisclosed, but the number is way too low. Bruce Meyer of the University of Chicago and Francis X. Sullivan of Notre Dame estimate that “between 1980 and 2009, median after-tax income plus noncash benefits grew by 58 percent.”

Similarly, the CBO finds that after-tax median household income rose by 48.8 percent from 1980 to 2009, after properly adjusting for shrinking household size (more singles, fewer children). The table below, constructed from CBO data, shows what happened when.

In the CBO’s after-tax estimates, real median income rose 18.1% from 1992 to 2000 (thanks to the Internet and cellphone revolutions), but median income also grew by another 13.9 percent from 2000 to 2007. Comparing pretax and after-tax estimates shows the Bush tax cuts and refundable credits helped quite a lot, particularly in the crash from 2007 to 2009.

The CBO’s Gini coefficient (a broad measure of inequality) was 0.426 in 2009 – essentially unchanged from 0.424 in 1988. Like the strong 1992–2007 increase in real median income, the absence of any sustained upward trend in such broad measures of inequality is unlikely to be treated as newsworthy during an election year.

In late 2011, by contrast, the CBO grabbed a lot of media attention with a supposedly new report saying, “The share of income received by the top 1% grew … to over 17% in 2007.” In a Wall Street Journal article last December, I asked why the report stopped with the frothy cyclical peak of 2007, since I could easily calculate from IRS data that “the share of after-tax income of the top 1% by my estimate fell to 11.3% in 2009.” Now that the CBO has finally gotten around to releasing estimates for 2008 and 2009, it turns out that my estimate was almost exactly on the mark: the top 1 percent’s share of after-tax income fell to 11.5% in 2009.

Perhaps it is time for the CBO to issue a corrected report saying, “The share of income received by the top 1% fell from 11.8% in 1985 to 11.5% in 2009.”

Cross-posted from Overlawyered:

• How’d we get shortages of hospital and community sterile injectables? Check out the role of FDA Good Manufacturing Practice (GMP) regs, warning letters, and resulting plant closures [Tabarrok, with comments controversy; earlier here, here, here, etc.].
• California orthopedist sues, wins damages against medical society that took action against him based on his testimony for plaintiff in liability case [American Medical News; earlier here, etc.].
• Can’t have that: medical apology should be opposed because it “can create an emotional connection with an injured patient that makes the patient less likely to ask for compensation” [Gabriel Teninbaum (Suffolk Law), Boston Globe].
• Feds’ war on painkillers is bad news for legit patients and docs [Reuters, Mike Riggs/​Reason].
• New federal pilot project in Buffalo will provide concierge-style home care to emergency-department frequent fliers. Spot the unintended consequence [White Coat].
• Dastardly drug companies? Deconstructing Glaxo SmithKline’s $3 billion settlement [Greg Conko, MPT]. Paging Ted Frank: “HIPAA’s Vioxx toll” thesis may depend on whether one accepts that the premised Vioxx toll has been established [Stewart Baker, Ted’s recent post].
• United Kingdom: “Lawyers seizing lion’s share of payouts in NHS negligence cases” [Telegraph].
• Silver linings in SCOTUS Obamacare ruling? [Jonathan Adler and Nathaniel Stewart] “DNC Scientists Disprove Existence of Roberts’ Taxon” [Iowahawk humor]. Did Ginsburg hint at the court’s direction on the HHS contraception mandate? [Ed Morrissey, Hot Air]

If you like Overlawyered roundups, we run them regularly on legal and regulatory topics that include prosecution and police, environmental law, food and farm policy, judges, free speech, and torts.