The Pig at the Trough

We continue to be amused, then depressed, by the debate over federal spending. While loud voices complain over radical/extreme/dangerous reductions in federal spending, the reality is federal spending is still, and is projected to remain elevated, for quite some time. 

From fiscal 2006 through fiscal 2011 US Government outlays increased from 2.654 trillion to 3.601 trillion. That is a 35.7% increase. This increase is far in excess of GDP growth, median household income growth, median weekly wages and inflation. The 36% increase in government spending is more than twice the 14.7% increase in GDP. It is about 5 times greater than the increase in median household income. It is 3x higher than the median weekly wage increase. It is almost 3x greater than the increase in the consumer price index. 

But what about the cuts we keep hearing about. The cuts that will jeopardize our weak recovery. The cuts that will result in layoffs for teachers and fireman and police officers. There are no cuts. The Office of Management and Budget (OMB), which "assists the President in overseeing the preparation of the Federal budget and evaluates the effectiveness of agency programs, policies, and procedures," in its September 2011 "Fiscal 2012 Mid Session Review" puts federal spending at 4.391 trillion in fiscal 2016, 21% higher than fiscal 2011 levels and at $5.6 trillion in fiscal 2021, 27% higher than fiscal 2016. (Table 6. page 22).

The projected growth in government outlays from fiscal 2011 to fiscal 2016 of 21% is lower than the 30% projected growth of GDP, but the projected 28% growth of government spending from fiscal 2016 to fiscal 2021 is higher than the 25% projected growth of GDP. As a percent of GDP federal spending is set to fall from 24% in fiscal 2011 to 22% in fiscal 2016 and rise again to 23% in fiscal 2021. 

There was, and remains, a loud wail from Washington about severe budget cuts. Much of this related to the Budget Control Act (BCA) which mandates $1.5 trillion of deficit reduction over the next 10 years. The Select Committee which was tasked with coming up with a plan to meet this mandate was unable to reach agreement. The BCA, in this case, calls for automatic cuts about equally shared between defense and non-defense discretionary spending. That is, no change to entitlements, which are primarily Social Security, Medicare and Medicaid. 

Let's assume the $1.5 trillion actually gets cut, and let's assume it is cut equally over the 10-year time horizon called for in the BCA. That's a cut of $150 billion per year to the projected outlays. So instead of federal outlays rising 21% from fiscal 2011 to fiscal 2016 they will rise 16%. Expenditures in the fiscal 2016 to fiscal 2021 time period will continue to increase 28%. Like we said, "What cuts?" 

We've come to believe the reason there is such a loud puling from Washington over "The 1%" and income inequality and the millionaires and billionaires not paying their "fair share" is a tactic to divert attention from the very large pig, aka, the Federal Government, chowing down at the trough. What has consistently grown faster than your wages, your household income, inflation and GDP? The Federal Government.

Pork Masquerading as Job Creation

Horrible. CT Public Act 11-1, or “An Act Promoting Economic Growth and Job Creation in the State,” can be described as nothing less than horrible. It's typical government mumbo-jumbo. The state increases taxes across the board as well as special taxes on certain groups, then turns around and gives special tax breaks. But who gets the breaks, and how are they chosen? These tax breaks are admissions that taxes impact behavior, and lower taxes can increase incentives to save and invest. Since that is the case, why did we just raise taxes?

John Ryan, in a recent Darien Times op-ed asks, "Are we seeing a more ‘business friendly’ Connecticut?" Ryan cites some of these lucky tax dodgers,  like those who "want to sponsor a Connecticut wine festival," or those,  "interested in remediating brownfields (Section 24-27) or want to set up an “airport development zone” (Section 39-45)." The language, even the limited language Ryan quotes suggests the tax breaks are written for very specific constituents. Sponsors of Connecticut wine festivals, we imagine, are not very numerous.

Ryan doesn't think much of these proposals. But the reason he doesn't think much of them is because they won't benefit Fairfield County. He almost admits they are a waste, but implies the waste would be OK if Fairfield County benefitted.

Let's put it in context. All of us just had our taxes raised, but we've now realized that high taxes can have a negative impact on job creation and job growth. So we're going to lower taxes, but only to an ambiguously defined group, like sponsors of wine festivals. And in Ryan's eyes, thats acceptable, as long as the sponsor lives in Fairfield County.

Ryan applauds a variety of other tax breaks, mostly to special interests without ever asking why these groups deserve such special treatment nor ever asking if taxes are too high, why did we just raise taxes? Ryan saves the worst for last: funding of a state-sponsored venture capital arm and tax breaks for movie production. We can think of only one idea worse than these two, and we're pretty confident alternative energy received special tax breaks as well. But venture capital and Hollywood.

Again, why? Why these two? Why is it reasonable to raise taxes on everyone in the state to benefit these two groups? Does it make sense that taking our money and giving it to a venture capitalist will create more jobs, or be more efficient than not taxing us to begin with?

What is even more inexplicable about Ryan's support of the venture capital arm is the recent well-publicized experience of the Department of Energy and Solyndra. Solyndra is in a long line of politicized investment decisions that turn out poorly for the taxpayer. Somehow, Ryan believes the state is immune to the issues that have led to billions of dollars of losses over 200 years with the Federal Government's interference in the capital markets. 

Finally, tax breaks for Hollywood. This one is so absurd on its face we are surprised it has such popularity with politicians. Our taxes have been raised so Steven Speilberg can make more money. That is our job creation plan?

We've unfairly singled out Ryan for our criticism. And we think he deserves every bit of it. But we level the same criticism of every senator and representative that voted for this horrible slop of pork. By the way, that's almost all of them. In the House this atrocity passed 147-1, and 34-1 in the Senate. The vote reminds us of the aphorism, "There are no atheists in foxholes, and no Republicans when they are handing out the subsidies." Partisan politics gets a bad reputation because it's unseemly and difficult to watch. But we much prefer partisan sniping to bipartisan assaults on logic, economics and our wallets.

The Ever More Costly Shuffle

The preliminary estimate for only a portion of the Shuffle is now up to $7.2 million. The $7.2 million includes $2.4 million for the BoE relocation and $4.8 million for the renovation of Town Hall.

This is far in excess of estimates Campbell provided in October of last year. Minutes of the RTM Finance and Budget Committee show Campbell stating "A study was conducted to determine the space requirements for the BOE and budget estimates were prepared by APC (A. Pappajohn Company) indicating that the cost to move the BOE to 35 Leroy would cost $1,598,801 and the cost to move the senior ctr. to Town Hall would cost $1,833,795."

The $7.2 million (and rising) price tag does not include demolition costs of the current Senior Center, nor the foregone costs of 35 Leroy, nor possible changes required by the Board of Ed because Superintendent Falcone needs at least 82 more square feet for his office.

All in, this looks like at least a $10 million project. Even the most ardent supporters of this project estimates about 400 members of the Senior Center. We doubt more than 100 come to the Center on any one day.

Why Campbell, Stevenson and Nielsen keep pushing this project is a mystery to us. It has disaster written all over it.

Why Did Himes Vote Against HR 2587?

HR 2587 is a bill that, "blocks the federal government's National Labor Relations Board from telling businesses where they can and can’t create new jobs."  The bill came about since the NLRB is trying to block Boeing from building its new Dreamliner in non-unionized South Carolina. Presumably, the NLRB prefers Boeing build the plane in unionized Washington. The NLRB claims Boeing is illegally "retaliating" against the unions for striking, while Boeing claims no employee in Washington is losing his/her job, no employee is getting a pay cut, so there is no harm, hence, no retaliation. Boeing has admitted, one of the reasons for locating the new production facility in South Carolina was to mitigate the risk of production disruptions caused by strikes. 


It seems rather simple to us. Boeing has the right to locate a plant where it desires and the NLRB's action has a chilling impact on Boeing, and all investors looking to build or expand production facilities in the US. Interestingly, if Boeing built the facility overseas the NLRB would have no jurisdiction. So in a perverse way, the NLRB is encouraging companies to move production out of the US.

HR2587 came up for vote on September 15, and Representative Himes voted against the bill. 

We have not heard any explanation from Mr. Himes for his rationale. In fact we've heard very little from Mr. Himes for the past 30 days, other than a couple of recent suggestions on how we could get more from the Federal Government and how his office was ready to assist us in that endeavor.  

We had relatively high hopes for Mr. Himes upon election. He seemed like a smart, moderate Democrat. Instead, like the President, he has shown himself to be a radical, implementing policies that make our economic situation worse.

Plastic Ban Cowards

We're not sure which is worse. Bayne and Sullivan who actually support the plastic bag ban. Or Campbell and Stevenson who DON'T support it, yet voted in favor of sending this mis-guided ban to the RTM.

Maybe the winner is the Orwellian named Choose to Reuse, a vocal minority imposing their wishes on the majority by simple force of obnoxiousness.

Will paper bags be banned next? After all, according to Choose to Reuse, "Paper bags generate 70% more air and water pollutants than plastic bags." and they ask, "Paper or Plastic? Neither!" What next will Choose to Reuse force upon us. May we suggest a new name? Choose to Reuse, or Else.!

Congratulations to Jerry Nielsen. You really should speak up more. Maybe with DC gone as First Selectman, you will.

The Dying Post Office

It seems to us the only possible salvation for  the Post Office is privatization.

The NY Times reports this morning the Post Office is on the verge of shutting down due to lack of cash required for a $5.5 billion payment, due September 30, to fund future health care expenditures for retirees.  In addition, in 2011 USPS is expected to lose over $9 billion, which would bring the five year losses to over $25 billion.

Conventional wisdom blames the Internet and email for the Post Office woes. Others blame unions and the high labor costs of the Post office, particularly relative to FedEx and UPS.

A recent article in the CT Post shows how Congress is also to blame.

The Post Office is attempting to close down two postal stations in Bridgeport. In fact, the Post Office wanted to shut both of these offices down two years ago. To the rescue is Jim Himes, pressuring the USPS to keep both open. Nothing unusual in this; most Congressman engage in this behavior. But when an organization can not respond to changes in the market, by adjusting its costs and product offering, it is almost certainly doomed. The only hope is extracting the Post Office from the grips of Congressional micro-management.

The Post Office doesn't have to die at the hands of email. UPS and FedEx both have thriving businesses, despite the growth of the Internet. The Post Office could as well, if the government would get out of the mail delivery business.

Malloy Taketh, and Giveth Away

According to the CT Mirror, http://ctmirror.org/story/13670/malloy-ubs-announcement, Governor Malloy is giving $20 million to UBS in exchange for keeping 2,000 positions in Stamford. How this makes any sense is beyond us.

Malloy's first priority in office was raising taxes (while New Jersey and New York were lowering or keeping their's flat) and now he's on a job tour to sprinkle tax breaks on a select group of companies that just had their taxes raised, so they will keep jobs in Connecticut.

The sequence has been raise taxes, drive employment lower, drive around the state and selectively lower taxes to keep employment steady. Where is the sense in this?

What measures are used to determine if someone gets a break? Who is making the decision? How big is the pot of tax breaks being doled out? What else can be done with that money? If taxes are too high to begin with, why were taxes raised?

At it's root, it's simply unfair. Let's look at it this way. We have five major grocery stores here in Darien: Stop and Shop at Heights, Stop and Shop at Goodwives, Palmer's, Trader Joe's and Whole Foods. Let's say Trader Joe's threatened to leave Darien unless it got a tax break. Here comes Governor Malloy and says, I'll give you $10,000 per worker you keep in Darien, which is the amount he gave UBS. Now Trader Joe's has a $10,000 per worker advantage over the other stores in town. How is this fair to Stop and Shop, Palmer's and Whole Foods? Why would Trader Joe's deserve such special treatment?

Why are we giving UBS $10,000 per worker? It makes no sense.

The Federal Budget-Part 4. A Couple of Summary Charts

Just a couple of more charts on the spending side. The first chart shows the total 12-month outlays, by month, for the US Treasury since 1980. The spike in spending since 2008 is apparent.

Source: Monthly Treasury Statement

This next chart shows the year-over-year change in spending over the same time period.

Source: Monthly Treasury Statement

The Federal Budget-Part 3. Six Numbers and Three Graphs

There are those who believe federal government spending, as a percent of GDP is up because of a weak economy. There are others who believe federal spending is up because spending has grown at a much higher rate than our economy.

The facts support the latter belief. GDP for 2011 is expected to be 4% higher than the peak of 2008. But federal spending is expected to rise 22% from 2008 levels. And little of this is due to automatic stabilizers or stimulus spending. Simply put, federal spending is high as a percent of GDP because federal spending has expanded dramatically over the past three years.


The graph below shows US GDP in 2008 and 2011 (estimate). The National Bureau of Economic Research dates the peak of the prior cycle in the December 2007 quarter, but we've used GDP for 2008 since according to CBO GDP in 2008 was higher than 2007. GDP fell in 2009. But as is obvious from the graph, GDP in 2011 is expected to be higher than the peak of the prior cycle, by about 4%. Economic growth is weak, but GDP is higher now than it was at the peak of the past cycle. That is, spending to GDP isn't up because GDP is lower, because GDP isn't lower at all. It is higher. All time high.

Source: "CBO The Budget and Economic Outlook: Fiscal Years 2011 to 2021," January 2011.

The next graph is Federal spending over the same time period. Federal spending is expected to grow about 22% over the past three years. One may ask how much of this is driven by automatic stabilizers (payments made by the federal government that rise with lower economic activity, like unemployment payments), and the answer is not much. CBO estimates about $63 billion of Federal spending in 2011 will be from automatic stabilizers.

Source: "CBO The Budget and Economic Outlook: Fiscal Years 2011 to 2021," January 2011.

Which leads to our third graph, federal outlays to GDP. Well, if the numerator goes up 22% and the denominator goes up 4%, it's pretty obvious what happens. Federal spending, as a percent of GDP has gone up from 20.7% to 24.1%.

Source: "CBO The Budget and Economic Outlook: Fiscal Years 2011 to 2021," January 2011.

The Federal Budget-Part 2

This post summarizes the major plans Congress and the President are considering.

This first graph is cumulative receipts for the Federal government for the ten years ending 1999, 2009 and the estimated amount for the ten years ending 2019 under the Simpson-Bowles, the President's alternative Baseline and the Paul Ryan plan. As you can see, NONE OF THESE PLANS anticipate a reduction in federal receipts.

Federal Receipts in billions of $

This next graph shows the cumulative outlays for the Federal government for the ten years ending 1999, 2009 and the estimated amount for the ten years ending 2019 under the Simpson-Bowles, the President's alternative Baseline and the Paul Ryan plan. As you can see, NONE OF THESE PLANS anticipate a reduction in federal outlays.

Federal Outlays in billions of $

Finally, this last graph shows the cumulative deficits of the Federal government for the ten years ending 1999, 2009 and the estimated amount for the ten years ending 2019 under the Simpson-Bowles, the President's alternative Baseline and the Paul Ryan plan. As you can see, NONE OF THESE PLANS anticipate a reduction in federal deficits.

Federal Deficits in billions of $

We will reiterate our point from yesterday. All of the plans to reduce the deficit $1 trillion over the next ten years are rather puny when placed in the context of what the federal government is spending.

Let's Talk about the Federal Budget-Part 1

Jim Himes hosted a telephonic town hall last week on the Federal debt, where in typical Himes fashion he supported ..... Wait. What did he support? I think he supported the Simpson-Bowles plan. Maybe. Sort of. Or was it the Gang of Six plan. Maybe. Sort of. Definitely not Paul Ryan's plan. Too radical. Not sure if he had an opinion on the President's budget, which was voted down by the Senate 97-0.

But we did learn some things. For instance, Himes is in favor of eliminating loopholes in the tax code so he can introduce more loopholes in the tax code. Specifically, he wants to get rid of deductions oil and gas companies take on their tax returns so he can replace that with deductions solar and wind energy producers will take on their tax returns. He wants to replace ethanol subsidies with green energy subsidies. Reminds us of The Who line, "Meet the new boss. Same as the old boss."

But the main topic of the call was the Federal deficit, the debt ceiling and the budget. Let's start with some numbers. In (fiscal) 2010 the Federal Government spent $3.456 trillion. The biggest items were $707 billion on Social Security, $693 billion on Defense, $622 billion on Medicaid and other Income Security programs. and $451 billion on Medicare.

The President commissioned a group to study the budget and suggest changes. This group, headed by Alan Simpson and Erksine Bowles published their conclusions late last year. They suggesting growing the Federal budget from $3.456 trillion in 2010 to $5.1 trillion in 2020.

President Obama submitted a budget that suggested increasing Federal spending from $3.456 trillion in 2010 to $5,629 trillion in 2020.

Finally, Congressman Paul Ryan, in April, put forth a plan to increase Federal spending from $3.456 trillion in 2010 to $4.544 trillion in 2020.

In brief:
Paul Ryan spending increase 2010-20 equals 31.5%.
Simpson-Bowles spending increase 2010-20 equals 45.0%
President Obama spending increase 2010-20 equals 62.9%.

For all of these plans, the US would still have a budget deficit in 2020. President Obama's would top $1 trillion.

Some more perspective. The cumulative spending, from 2012-2021, which is the period all of these budget debates are discussing is somewhere around $45 trillion. Simpson-Bowles suggest somewhere around $44 trillion, President Obama around $47 trillion and Paul Ryan around $40 trillion.

The debate on budget cuts are NOT debates on spending cuts; they are debates on cutting the growth of spending. They are debates on cutting proposed budgets. Exactly like the debate we had on the Board of Ed budget where reducing the growth of spending from 8% to 4% was characterized as a severe hardship. Bah.

The other thing to keep in mind is really how puny these cuts are. The President, as best we can tell, has agreed to a trillion or two of cuts to his budget, which would bring his ten year spending projection down to $45 trillion and a deficit in 2020 still in excess of $1 trillion.