The Cato Institute
WASHINGTON -- Proposals for economic growth and job creation
The following testimony by Chris Edwards, director of fiscal policy at the Cato Institute, was given before the Senate Finance Committee on Tuesday, Feb. 11.
"Mr. Chairman and members of the committee, thank you for inviting me to testify today on economic growth proposals, in particular on proposals for a federal bailout of the states.
"Across the nation, substantial budget gaps are forcing state governments to make tough fiscal policy choices. Budget gaps are estimated to be as much as $50 billion for the states as a whole. In the short term, states should close budget gaps by cutting spending. In the long term, states should reform their budgets and shift to less volatile tax bases to avoid a fiscal crunch during the next slowdown.
"A federal bailout of the states makes no sense for either the federal or state governments. The federal government has a roughly $300 billion deficit and cannot afford further spending increases. Any federal spending increase ultimately falls on federal taxpayers -- the same taxpayers who pay the bills at the state level. Thus, increased federal aid to the states simply moves money from one pocket to another with no net economic effect.
"For the states, a federal bailout also does not make sense. Current state budget woes are not the result of revenue shortfalls, but of spending excesses built up during the 1990s. The solution for states should fit the problem: State spending should be frozen or cut. A federal bailout would simply delay the tough spending adjustments that are needed in the states. Like all subsidy programs, a federal bailout now would probably lead to another bailout down the road because it would create a bad precedent and allow states to avoid needed budget restructuring.
"Despite the word 'crisis' being thrown around by state officials, aggregate data for the 50 states do not reveal a crisis. There has simply been a spending slowdown from prior rapid growth rates. The problem is akin to a motorist having to slow down when he exits the freeway onto a slower road.
"Today's state budget gaps appeared after general fund spending growth of 7.0 percent in fiscal year 1999, 6.6 percent in fiscal 2000, and 8.0 percent in fiscal 2001. Even as economic growth slowed and budget gaps appeared, state spending still increased in fiscal 2002, and is expected to increase slightly in fiscal 2003. States need to reverse some of these increases and pare back programs to a manageable size.
"Looking at the tax side of state budgets, total state tax collections grew 7.1 percent in fiscal 1998, 5.2 percent in fiscal 1999, 8.0 percent in fiscal 2000, and 3.7 percent in fiscal 2001. For the first three quarters of 2002, total state and local receipts rose 3.4 percent. While income tax receipts have fallen, sales tax receipts have risen. Once the economy returns to robust growth, revenues can be expected to grow quickly once again.
"Some pundits are blaming state tax cuts in the 1990s for current state budget troubles. Net state tax cuts in the late 1990s (fiscal 1995 to fiscal 2001) totaled $33 billion. But those cuts were not enough to return to taxpayers the $36 billion in net state tax increases that occurred during the early 1990s (fiscal 1990 to fiscal 1994). And note that during the tax-cutting years, state tax revenues grew a total of $186 billion despite the cuts.
"Note also that federal grants-in-aid to states have soared. Federal grants to state and local governments increased from $285 billion in fiscal 2000 to a proposed $399 billion in fiscal 2004 under the new Bush budget.
"I would ask the committee to take a skeptical view of the supposed state budget 'crisis.' Budget gaps are nearly always called revenue 'shortfalls,' yet are better described as 'spending excesses.' Consider that the budget gaps are partly fictions created by prior budget forecasts that were far too optimistic-sort of like sales growth forecasts for telecom companies in the 1990s.
"Suppose that a fictitious Governor Spendthrift had planned for a 6 percent rise in her state budget, but Governor Frugal planned for an increase of 3 percent. Then suppose that actual revenue growth in both states turned out to be 3 percent. That would be no problem for Frugal. But Spendthrift would describe her situation as a 3 percent 'shortfall.' Yet Spendthrift's actual problem is a 'spending excess' caused by an overly optimistic budget plan.
"It is revealing to examine long-term state budget trends since 1990. Inflation averaged just 2.8 percent annually from fiscal 1990 to fiscal 2001, yet state general fund spending grew at an average annual rate of 5.7 percent. On the tax side, I have completed an analysis showing that state tax revenues grew substantially faster during the 1990s than a benchmark of inflation plus population growth. If state budgets had grown at this benchmark rate since fiscal 1990, state budgets would have been $93 billion smaller than they are today -- roughly twice the size of today's budget gaps.
"One problem is that during economic expansions, tax revenues tend to grow excessively quickly. Income taxes are generally progressive, thus taxpayers pay higher average rates when their earnings rise. Also, most states do not index tax brackets for inflation as the federal government does, thus subjecting state taxpayers to bracket creep. State budget growth has also been fueled by rapid growth in capital gains taxes. The easy money of the late 1990s encouraged legislators to spend with less restraint. Thus one solution is to limit spending growth during the booms by rebating excess revenues to taxpayers so that budgets are not overly expanded.
"California is probably in the poorest fiscal shape of any state. The current budget gap is estimated to be $35 billion. The budget gap was caused by a remarkable run-up in state spending in the late 1990s. Indeed, spending doubled between fiscal 1994 and fiscal 2001 from $39 billion to $78 billion. State spending jumped 15 percent in fiscal 2000 and then another 17 percent in fiscal 2001.
"California state employment has expanded rapidly as well. Employment, measured in full-time equivalents, jumped from 296,000 in fiscal 2000, to 311,000 in fiscal 2001, and to 326,000 in fiscal 2002, even as a large budget gap was opening.
"While general fund spending jumped almost $12 billion in fiscal 2001, spending was only reduced by just over $1 billion in fiscal 2002. Yet, as in other states, news headlines make such modest fiscal restraint sound draconian. A recent Los Angeles Times story declared 'Wrenching Changes Likely With Budget Cuts,' but the 'wrenching' changes listed included such items as the first university fee increase since 1994, small increases in admission charges for state parks, deferral of some transportation projects, and a modest tightening in eligibility for the state's low-income health program. Those are hardly wrenching changes in a sprawling state government.
"The boom-bust budget cycle in California and other states can be tamed by moving away from volatile income and capital gains taxes, which fueled much of the excess spending in the late 1990s. In fiscal 2003, tax revenue from capital gains and stock options in California dropped to $5 billion after reaching a high of $17 billion in fiscal 2000. Such taxes on capital are not only bad for high-tech economic growth, they leave state governments more vulnerable in downturns.
"A federal bailout would encourage states to continue overspending, which is the problem that got them into the current fiscal problems. Ultimately, states will have to live within their means, so there seems little point in postponing necessary restructuring on the spending side of state budgets.
"A federal bailout would either increase federal taxes or increase the federal deficit. The federal deficit is already roughly $300 billion, so it makes no sense to simply trade a larger federal deficit problem for a smaller state deficit problem. Ultimately, federal taxpayers pay for all increases in federal spending. Yet the taxpayers who pay the federal bills are the same ones who live in the 50 states and pay state taxes. Why try to fool taxpayers about the cost of state programs by making them pay more in federal taxes?
"One effect of a bailout would be to reward fiscally irresponsible states with tax money from citizens in fiscally responsible states who have no need for a bailout. Taxpayers in states that have balanced budgets and have restrained spending would effectively transfer their hard earned dollars to the fiscally irresponsible governments of California and other states.
"Budget solutions for the states:
"Pursue economic growth policies. The surest way to help states return to fiscal health would be to support policies that will spur the nation's economy to a higher economic growth path. States should get behind President Bush's tax cut and other pro-growth tax reforms to restore growth to all the states.
"Cut spending. States should turn current budget problems into opportunities to weed out excessive and wasteful spending added during the boom years. For example, in Virginia, Governor Warner is using the current budget gap as an opportunity to cut waste, such as reforming the state's Department of Motor Vehicles. Former Virginia Governor Wilder has identified hundreds of millions of dollars of possible savings in the state budget. Also, states should consider cutting funding to local governments because many cities and counties have seen substantial increases in revenues as property assessments in many areas have soared even as the economy has faltered.
"Limit budgets during booms. States should start planning now to avoid the next boom-bust cycle. To avoid budget gaps during economic slowdowns, states should limit spending growth during booms with a mandatory budget cap that provides automatic taxpayer rebates when revenues grow faster than a benchmark, such as inflation plus population growth. Then, if revenue stagnates during a downturn, annual tax rebates could be temporarily suspended. That action, along with use of rainy day funds and spending cuts, should be sufficient to balance state budgets without federal bailouts or tax rate increases.
"Shift state tax bases away from volatile capital gains and income taxes. Reductions in capital gains tax revenues have played a role in the fiscal troubles of California, Virginia, and other states. Capital gains, corporate profits, and income are more volatile tax bases than consumption. I recommend that states move away from taxing capital gains and corporate profits, in particular, and toward consumption taxes to stabilize their revenues. Capital gains and corporate profits taxes are not only volatile, they are perhaps the most economically damaging taxes.
"In conclusion, I do not think that the federal government should provide a special bailout for state governments. State budget problems are not as serious as many newspaper headlines suggest. Overall state spending has not fallen, and revenues will recover when the economy resumes a stronger growth. Besides, the supposed economic stimulus effect of further federal or state government spending is a mirage. Added government spending simply shifts money from some citizens' pockets to others, without adding anything to the productive or supply side of the economy.
"Thank you for holding these important hearings, and I look forward to working with the committee on these issues."
The Ludwig von Mises Institute
(The LVMI is a research and educational center devoted to classical liberalism -- often known as libertarianism -- and the Austrian School of economics. Grounded in the work of economists Ludwig von Mises and Murray N. Rothbard, LVMI seeks a radical shift in the intellectual climate by promoting the market economy, private property, sound money and peaceful international relations, while opposing government intervention.)
AUBURN, Ala.-- Not in stacks
by Gregory Bresiger
The Queens, N.Y., library system is one of the largest systems in the nation. But just because a unit of government is big doesn't mean it is efficient, as I have seen in years of borrowing books from this badly run system.
Our large, unaccountable library system proved to me, once again, that the public sector fails at just about everything it tries, whether it is something seemingly easy like loaning books and tapes or the obviously impossible, like managing a complex society and global economy.
My wife needed a special videotape on electricity for one of her courses at the College of Aeronautics.
She looked it up on the Queens Library online catalogue. According to the catalogue the tape was available at the central branch. We were delighted. The tape would help with her studies.
Still, my wife, who has lived here for more than two decades and for some reason has grown very skeptical of the bureaucrats and other hired help that rule us, nevertheless insisted on telephoning the video division of the library.
"We have it. We have it," the lady at the video division replied to repeated queries.
Did the library have the video? Was it in her hand? "We don't want to make a trip for nothing," my wife said.
"We have it. We have it" was the repeated response. One might as well have asked for anything -- "Have you got any crack? I just ran out" -- and she sounded as though she would have answered: "We have it."
So I, who likely would have stayed en casa this Sunday to pig out on corn dogs and watch the modern day version of gladiatorial combat on the tube, set out on foot. The central library is about 3 miles away from our abode in beautiful downtown Kew Gardens. (I walked because I have the same prejudices as my wife. I want as little contact as possible with the MTA (Metropolitan Transportation Authority) madmen, especially those government bus drivers who go crazy on the power brakes and turn some of their passengers into human missiles).
After standing in several lines in the video room, finally a courteous lady looked for the video. She looked several times without success.
"Yes, the video is here," she said. "It hasn't been taken out since September, but now it's lost."
Would the library, I asked, have the video at another branch?
"No," the clerk said, "we only have it here, but we don't have it here."
I tried to sum up as people behind me were becoming impatient with my defective medulla. I continued: "You have it here, but you don't have it here." I was trying to get into the wonderful spirit of the Queens Borough Library System.
"That's right," she smiled at the benighted boob who finally got it.
I swear on the honor of Bobby Orr that this is how the conversation went. And for those snickering cynics let me say, no I didn't have a Colt .45 breakfast on this Sunday. Maybe I can state this in plain English sans the newspeak of one of our leading government bureaucracies.
Based on what I have been told by many of the disgruntled employees of our magnificent libraries, the system will list books and videos that people will look up and think are there. Sometimes they're not there. You may think they're there. But they're not really there. Got it? The online system is faulty and confuses people. Any better?
Well, given these problems -- and maybe they're problems and maybe they're not. Hey, I'm catching on! -- I predict this: When the ayatollahs of the library system read this they will have the same reaction as every other government bureaucracy in the city, state, and federal government, in every other nation of the world and on every other planet including Uranus. They will say, "It ain't our fault. Geez, why don't the thoughtless taxpayers give us more money and power?"
I already feel bad. I, a thoughtless philistine who doesn't appreciate the social engineers who are trying to save me, decided to visit the library system online. I considered it my sacred duty to help my masters in their noble work.
I looked for the icon that said "contact us" or the one that said, "Write a letter to the Queens Borough Library Board."
I was looking for quite a while.
I figured it would be right next to the icon that said, "give us your opinion." I also figured I would come across these icons on the same day that aliens would appear in Forest Park and give me secret instructions on how my beloved Boston Bruins could win the Stanley Cup this year. I never found them; the icons that is. I'm also still waiting for the aliens and the second coming of Bobby Orr.
It's been a long wait.
I called the Queens Library. I asked for the e-mail address of the Library Board.
"Oh, they don't have one. You'll have to send the letter through the mail," said the clerk. That reminds me, someone mailed me a check from Manhattan in early December.
I still haven't gotten it.
(Gregory Bresiger, a business writer and editor living in Kew Gardens, N.Y., is assistant managing editor of Traders Magazine.)
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