SOME BIG CAMPAIGN ISSUES
1. The Plight of Middle Income and Poor People and General Economic Stagnation
2. Tax System
3. Federal Regulation
4. The Federal Budget
5. Bureaucracy and Waste Reduction – Civil Service Reform
6. Areas for Immediate Direct Cuts to Federal Spending
7. Federal Asset Divestiture for non-tax Revenues in Future Budgets
8. Regulation Takings and Private Property Compensation for Takings
9. The Sharing Economy (Uber)
10. Housing and Urban Development and Gifting Public Housing Projects to Poor Americans Living in Them
1. The economic plight of middle income and poor people.
Games Progressives Play: “Show and Tell” coupled with “Hide and Seek”
Child-like games politicians play are destroying this country. Progressives hand us what looks like a gift, they show it to us, the benefits, and tell us how much they care and why we should vote for them. The costs come out of our pockets in stealth ways. The game switches to the fraudulent game of hide and seek. Deny the costs, shift the costs, hide the costs, Americans, you go find the costs. These two games are setting us up for fiscal insolvency where our children ironically will be ones crushed under that debt that political adults play with the America people.
Certain people have perfected these games and have profited very handsomely from them. Politicians make careers from this strategy, lobbyists and special interest groups have made great fortunes lining their pockets with our money and most disturbing, burying our children and grandchildren under crushing federal debt. Bureaucrats managing all of this reckless and immoral game have guaranteed life time employment. None of these are poor people.
A. The national debt, the fiscal gap and deceptive financial reporting
Point: The current funded National Debt is $18 trillion +
This is one dollar bills laid end to end reaching to the sun and back almost 10 times.
Point: The unfunded liabilities are more than $200 trillion or a fiscal gap of anywhere between 7 ½ % to 14 ½% GDP each year. (Source: July 2010, IMF Staff Papers Country Report 10/248)
This is one dollar bills laid end to end reaching to the sun and back 100 times.
Note: The EBF on the CBO books (Extended Baseline Forecast) Assume the same trend with no change in liabilities coming due because of demographics.
The AFS is taken off the CBO reporting of the fiscal books (Alternative Fiscal Scenario). The AFS is where the $200 trillion + shows up, but have been removed by CBO in its reporting. The demographic called the “baby boom” cohort of the population will absolutely change the trend of obligations for Social Security and Medicare.
So there is now a double set of books used by Congress. Enron executives might wonder why they were prosecuted for their financial fraud.
America needs an honest assessment of what the hidden costs (burdens) are and who pays (distributions) them as well as the proposed gifts given and if they are really gifts (unintended consequences). Economics teaches that negative unintended consequences follow even the most well intention policies. The Great Society has destroyed millions of families (liberal Senator D.P. Moynihan noted this as well as libertarian Charles Murray); changed their behaviors on the road to “show and tell compassion.” The hidden costs of out of wedlock births, broken families, the destructive incentives for employment and savings undermine the best elements of civic culture: family, employment, charity and responsibility. The road to “progressive caring” has not been very caring for those who have been run over by this corrupt and bloated transfer state. In short, poor people get the short end of the stick by people who often are very affluent, politicians, bureaucrats and special interest groups.
Let the light of truth shine on this government so that it will pull this nation out of the darkness of division and despair.
B. Economic stagnation over the last 15 + years.
Point: The rate of real GDP per capita in the US is trending below ½ of the long run rate over most of American history.
Over the last 15 years the economic growth rate is less than half of what it trended for the prior 150 years. We are told to accept this as the new normal. We cannot because this is not normal. Something has structurally occurred that is now crushing growth rates, standard of living and our ability to deal with fiscal problems in the future. In spite of some of the most marvelous technology in science as well as the huge discoveries and development of energy resources, we are still trending below half of the long term growth rate of our past. Let’s look at some very disturbing numbers.
From the year 1850 to 2000 the real per capita GDP increased at a 1.86% annual trend rate. (Source: Max Roser and Angus Maddison, “GDP Growth of the Last Centuries,” Our World in Data 2015)
The real per capita GDP was $1,806 in 1850 (in 1990 PPP or real dollars). In 1999, this stood at $27,735. Thus, on average, a 1.86% real improvement in the per capita standard of living, every year for 150 years.
Contrast this with the last 15 years performance. From July 1, 2000 to April 1, 2015 the real per capita GDP grew only from $44,628 to $50,855 (Note this data is in 2009 inflation adjusted dollars). This was a growth of 0.9%. (Source: Bureau of Economic Analysis and US Census, “US Real GDP Per Capita by Year”)
What difference does this 15 year downward shift in the real growth rate mean for Americans? A whole lot!
If the long run historic trend rate had continued over the last 15 years (1.86%) as opposed to the actual performance (0.9%), the real per capita standard of living would have increased to $58,822 instead of $50,855. In other words, on average Americans would have $7,967 more purchasing power more than they now have.
Fifteen years of anemic growth has not only made Americans incomes relatively poorer than they would have been, it has reduced employment and tax revenues, while it has increased poverty and government expenditures (transfer spending). This also exacerbates the short run national debt—but much more ominously, if that trend continues makes it even more impossible to manage the $200 trillion in future unfunded liabilities.
The difference of a continuous 1% downward shift in real per capita GDP from 2015 to 2072, means that Americans will then have only ½ the real standard of living they otherwise would have had (if the long run historic trend would have continued).
This downward shift in real GDP per capita is caused by a clear collapse in labor productivity. (Source: Bureau of Labor Statistics, Oct.11, 2015, “Major Sector Productivity and Costs—Series PRS85006092”) Below are the percentage rates of change in output per hour from the prior year.
2000 3.3 2005 2.1 2010 3.3
2001 2.7 2006 0.9 2011 0.2
2002 4.3 2007 1.6 2012 0.9
2003 3.7 2008 0.8 2013 0.0
2004 3.1 2009 3.2 2014 0.7
This downward trend is negative .05% per year on average. Thus, over this 15 year series, labor productivity has fallen approximately three fourths of 1% or .75. This accounts for a large fraction of the .96 drop in real GDP per capita since 2000. The last 10 year trend (2005 to 2014) is an even more dramatic collapse.
According to the Frasier Institute’s index of Economic Freedom in the World, America has fallen from the 3rd freest economy in the world in 2000 to the 12th in the year 2012. The 5 categories that comprising the index include: size of government, private property rights protection and the rule of law, sound money, freedom to trade internationally and regulation. The index score in 2000 was 8.65 out of 10 (with ten as a completely free marketplace). In 2005 America dropped to 8.2 and as 2012 it stands at 7.81 or a drop of .84. This decline in economic freedom has ominous implications for real GDP. Statistically, across all the nations of the world measured, a mere one point drop in the index reduces real GDP between 1% and 1.5% per year! (Source: What America’s Decline in Economic Freedom Means for Entrepreneurship and Prosperity, Donald Boudreaux, 2015)
Reversing the catastrophic “new normal” is imperative. The depressants on productivity are also clear in economics.
1) High marginal personal and business tax rates. America has one of the most punitive corporate tax rates in the world at 39.1%. Thus the $2.1 trillion in unrepatriated corporate profits. This immediately depresses capital investment and future productivity. The only countries with higher corporate taxes are Chad and the United Arab Emirates.
Thus, we have an urgent need to waive the corporate tax rate and possibly direct it towards enterprise/empowerment zones.
A complicated tax system with over 4 million words in the code and millions more words in the regulatory interpretations of the tax code. The tax code has been changed about 5,000 times since the year 2000. The National Taxpayers Union estimate the annual cost of compliance at $233 billion in 2015 (Tax Foundation has $168 billion in 2013). There is also the lost productivity of 6.1 billion hours on individual and business record keeping for the IRS. Tax freedom day is April 24, 2015. On April 25 Americans start working for their needs.
Thus, we have an urgent need for a simple and efficient flat or Fairtax.
2) Over burdensome federal and state regulations. The federal regulatory system annually produces about 75,000 pages of new regulations. One study has the estimated annual costs that exceed $1.8 trillion or about $6,000 for every man, women and child in America. (Source: Center for Regulatory Studies, in Clyde Crews, 10,000 Commandments: A Snapshot of the Federal Regulatory State 2011). Another study estimates that cost at $2.028 trillion or 12% of GDP in 2012 (in 2014 dollars). (Source: Mark Crain and Nicole Crain, “The Cost of Federal Regulation to the U.S. Economy, Manufacturing and Small Business,” Report for the National Association of Manufacturers 2014). Every regulation that cannot pass a cost-benefit test that is imposed directly on businesses depresses productivity.
None of this includes any state level regulations
America’s fall in the Economic Freedom of the World Index over the last 15 years also illustrates a serious problem for new business formation. According to economist Russel Sobel, the drop of .84 points means that on average approximately 740,000 fewer new businesses were started each year! This has grave implications. Instead of a dynamic growing economy for all Americans, we are left with stagnant economic growth, anemic employment, persistent poverty, and slow growing tax revenues etc. (Source: What America’s Decline in Economic Freedom Means for Entrepreneurship and Prosperity, Donald Boudreaux, 2015)
Two more major empirical studies corroborate this problem with regulations and new business formation. 1) “Starting Smaller; Staying Smaller: America’s Slow leak in Job Creation” by E.J. Reedy, Robert Litan, the Kauffman Foundation Research Series: Firm Formation and Economic Growth. 2) “The Secular Decline in American Business Dynamism”, 2014 University of Maryland, Ryan Decker et al)
Thus, we have an urgent need to cost/benefit test every regulation.
3) America has a very dysfunctional primary educational system in quality and quantity (large dropout rates in inner city schools). While the federal government does not directly control most of the details of local public schools it is still a huge problem for human capital and therefore productivity. In the early 1980s, A Nation at Risk report was presented to President Reagan outlining this danger. It has continued to trend in the wrong direction ever since the report.
A few points need to be considered. Over ¼ million high school students every year either drop out of school or are considered nongraduates from only 25 school districts (among the 11,000 districts with high schools). Nationally, it is over 1 million students leave school before graduation each year. (Source: Christopher Swanson, “U.S. Graduation Rate Continues to Decline,” in Education Week June 10, 2010)
The spread between urban and suburban on time graduation rates in the 50 largest US cities as of 2009 stood at 53% in urban schools and 71% in suburban schools. The central city of Detroit has less than 25% of freshman graduate with a high school diploma. For example other cities include:
Cleveland 38% urban 80% suburban
Baltimore 41% urban 81% suburban
New York 54% urban 83% suburban
(Source: Sam Dillon, “Large Urban-Suburban Gap Seen in Graduation Rates”, New York Times, April 22, 2009)
A 25 year old median student graduating high school in 4 years (but no college) versus those that never get a diploma (drop outs) will earn over $9,000 more per year. (Source: Bureau of Labor Statistics, News Release USDL-15-1431, July 21, 2015)
Thus, an urgent need to move to education vouchers and parental choice.
4) Erratic monetary policy called “quantitative easing” can steer investment into speculative bubbles with 7 years of near zero interest rates. Federal Reserve policy since the financial crisis in October 2008 has led to over $2.5 trillion interest accruing excess reserves with the Federal Reserve. The Board of Governors are now in dangerous and uncharted waters at this point. When investors worldwide hinge on every whisper of Chairwomen Janet Yellen, the economic foundation is not conducive to long-term investments that yield greater sustainable growth of productivity.
Monetary policy has accommodated the prior reckless federal housing policy which caused the housing crisis (steered into financial institutions) that created the financial crisis (and TARP) that dramatically expanded the Federal Reserve Balance sheet. Here are a few (nowhere near all) of the policies that caused the crisis in 2008.
---The tax code steering into housing (mortgage interest deduction)
---The artificially low interest rates from 2001 to 2007 (Federal Reserve helped finance the run up of unsustainable housing prices)
---The Community Reinvestment Act (Housing ownership as civil right)
---GSE’s (Fannie Mae and Freddy Mac on the secondary mortgage market and their implicit taxpayer loan guarantees)
---Housing and Urban Development (encouraged sub-prime loans by lowering credit and underwriting standards)
---Changes in Mark to Market Accounting Rules FAS “157” (asset values adjusted to current values as opposed to historic values can be very volatile when current market conditions suddenly change)
(Source: Financial Crisis Inquiry Commission: Dissenting Statement, Peter Wallison and Arthur Burns, January 2011).
Since the financial crisis, and the ensuing 838 page Dodd-Frank legislation, small regional and community banks have been greatly harmed; while it benefitted large banks already thought of as “too big to fail.” (Source: Tayna Marsh and Joseph Norman, “Reforming the Regulation of Community Banks After Dodd-Frank,” St. Louis Federal Reserve Bank 2013). Furthermore, 5 years after Dodd-Frank financial regulations were put into place, the estimated direct compliance costs of the law are $24 billion, plus 61 million paperwork hours. (Source: American Action Forum: “AAF Examines the Impact of Dodd-Frank”. July 15, 2015). If we estimate median income wages for legal paperwork costs, the costs increase by $15 billion more (my calculations). While the number of jobs in financial regulatory agencies has increased over 19%, the number of small financial firms (with 10-19 employees declined .3% and those with 20-49 employees declined by 1%) over the same period.
Thus, the urgent need to anchor the monetary authorities under fixed predictable rules (growth rule, commodity standard or free banking). When monetary discretion is allowed, “moral hazard is created for the legislature” to behave in ways that destroy efficiency and productivity.
5) America has an expansive transfer state. We are a very generous nation. However, good intentions are NOT always good results. The problem most of the overlapping redistributive means tested welfare programs present (Food Stamps, Housing Allowances, Medicaid etc.) is the creation of “poverty traps.” In a poverty trap, the marginal tax rate on earned income can exceed 100%. A worker tries to get off transfer programs by work, and may lose let’s say 10% of their benefits from 15 different programs and that worker is effectively paying 150% marginal tax rates! Few people can overcome that type of disincentive to be productive and work. People that fall into this trap of the transfer state rarely leave, even when the economy is growing at a healthy rate. When we have economic stagnation (like present) this trap becomes an “economic black hole” for productivity.
On the other hand, the federal regulatory state disproportionately harms poor people, since facially neutral regulation is usually regressive in its distributional burdens. The $1.8 trillion dollars of regulatory compliance costs and the broad based nature of federal regulations means returns on investments are lower, wages and employment are reduced; and prices are higher than otherwise would be by this amount. However, because that burden is implicit and hidden in all of this, no one can see any of that regulatory tax. Again the game of hide and seek. Approximately 80% of the first $20,000 of disposable income on average will show up as regulatory burden for which there are little discernable benefits to point to.
Without question poor people pay or face the highest tax rates in America. We have an urgent need to remove those burdens and hurdles so they can access their potential productivity.
The Obama Administration has heralded the fact that unemployment is at a 7 year low of 5.1 %. Of course this number is as about as honest as Hillary Clinton’s responses to her lost emails. This number is pure fiction as a measure of the health of the US labor market. While it is true, the way the Bureau of Labor Statistics calculates the unemployment rate, that’s the number that comes out. However, those who leave the labor force because they are discouraged are not considered unemployed. Last month (September), 635,000 discouraged workers left the labor force. They are not counted as unemployed. This biases the actual rate of unemployment downward significantly. Hence we have statistical illusion.
In addition, there were 6.5 million working people last month that were employed part time but wanted full time employment. In addition, 1.7 million people have strung together multiple part time jobs because they could not find full time regular employment. (Sources: BLS LIST A2 AND A16 TABLES) It is estimated that at least 1 million Americans are now forced into “involuntary part-time employment” because of Affordable Care Mandates. (Source: David Macpherson, “The Affordable Care Act and the Growth of Involuntary Part-Time Employment”, IZA Discussion Paper September 2015)
When we dig deeper the picture looks worse. The employment population ratio rate tells a more accurate measure and very troubling picture. For all Caucasians it is 59.7%, for teens 16-19, it was only 30.8 %. This represents a decline of 22 percentage points since 1978 for teens! (Source: Congressional Research Service, “Youth and the Labor Force: Background and Trends,” May 10, 2012 Adrienne Fernandes-Alcantara) Less than 1 out of every 3 teenagers of age to be employed is actually employed. The unemployment rate for white teens is currently sitting at 13.9 %.
For blacks the news is devastating. The employment rate is at 55.8% and the unemployment rate is still 9.2%. For black teens ages 16-19 the employment rate is 19.7%. In other words, more than 4 out of every 5 black teenagers of age to work are not working. Since 1989, this has been a drop of approximately 10 percentage points. (Source: Congressional Research Service, “Youth and the Labor Force: Background and Trends,” May 10, 2012 Adrienne Fernandes-Alcantara) The unemployment rate among black teens is a staggering 31.5%, but significantly higher in the inner cities of America. Even more ominous is that among low income minority teens, the employment rate is barely 10%. (Source: Center for Labor Market Studies, “The Continued Crisis in Teen Employment in the U.S. and Massachusetts,” March 2012, Andrew Sum et al)
For Hispanic teens it is also bleak. Last month, the Hispanic teen unemployment rate stood at 18.6%,while the employment rate was a mere 24% (down from 39% in 2000). Only 1 in four Hispanic teens of age to work are actually working.
(Sources: BLS A-3 Table, October 5, 2015, ibid. CRS 2012)
When youth are so insulated from employment in the labor market, they do not acquire human capital, job experience, work skills, training and income that will set the stage for their future growth. Economic studies in America and OECD (Organization for Economic Co-operation and Development) consistently demonstrate that when a young person is out of work their future wages are reduced. In America, a six month period of unemployment leads to a real wage decline by 8% over the next full year of work, and will stay below the wage rate that otherwise would be expected for up to 9 years later. In the United Kingdom, one year of unemployment leads to a decline in real wages by 13% to 22% for up to 20 years into the future. (Source: ibid. CRS 2012) When this is coupled with failed public education, especially for minority and lower income communities, hopes and dreams for a better life disappear. Instead of opportunity they are surrounded by despair. Six years and three months after the US economy recovered from the last recession, these numbers are worse than they were before the 2008 downturn. This is unacceptable. When America is at its lowest employment rate of over 37 years, the economy is stuck in neutral and is not normal.
According to the Year Up Organization (trains youth for first time employment) approximately 6 million youth age 18-24 are not working while simultaneously not in any type of educational institution.
MEDIAN HOUSEHOLD INCOME
In 1999, the median household income was $57,843 dollars per year. In 2014, the latest data from the Census, that number is $53,657 about 8% less than 15 years ago and about 8% less than it was in 2007 BEFORE the recession. In fact, there has only been a $351 improvement since 1989. The economy is clearly stuck for median income households.
For Hispanics, the median household income in 1999 was $43,700. In 2014, it was $42,491. Hispanics are on average 3% poorer than they were 15 years ago and only $2,066 increase (5%) better than in 1989.
For blacks, it is even worse, in 1999, the median household income for blacks was $39,669. In 2014, it was $35,398. This is a decline of about 11% in 15 years. Something is clearly wrong. (Source: Bureau of the Census Tables H-6 through H-9)
Not only is the employment rate and median income rate for minorities and poor people stagnant, this also shows up in poverty rates. In the year 2000 the official US poverty rate was 11.3% while today it’s 14.5%. For African Americans and Hispanics these numbers look like this: Blacks: 27.4% of the black population is in poverty. Hispanics: 26.6% in poverty. Among single mothers: 31.6% are in poverty. In total, there are over 45 million people in poverty, and we are exactly where we were in 1965 at the dawn of the “war on poverty” when 15% of the population was in poverty. The war is over, and poverty has won.
(Note: The poverty rate for married couples, its 6.2%)
Sources: US Bureau of the Census: Income , Poverty and Health Insurance Coverage in the United States 2010 and US Census: Income and Poverty in the United States 2013.
2. The Tax Code
The Tax Foundation is currently scoring both the flat tax at 10% and 15% rates, as well as the Fairtax at 12%, 15% and 23%. We should have that data this week on revenue and economic growth. With respect to the differences between the plans, see handout exhibits.
3. Federal Regulations as an Implicit Tax
America has far too many over burdensome federal and state regulations. The Federal regulatory system annually produces about 75,000 pages of new regulations. In fact, the Code of Federal Regulations in 2013 contained 175,496 pages. One study has the estimated annual costs exceed $1.8 trillion or $6,000 for every man, women and child in America. (Source: Center for Regulatory Studies, in Clyde Crews, 10,000 Commandments: A Snapshot of the Federal Regulatory State 2014). Another, more recent study suggests that cost at $2,028 trillion or 12% of GDP in 2012 (in 2014 dollars). Source: Mark Crain and Nicole Crain, “The Cost of Federal Regulation to the U.S. Economy, Manufacturing and Small Business,” Report for the National Association of Manufacturers 2014). Every regulation that cannot pass a cost-benefit test imposed directly on businesses depresses productivity and reduces the standard of living.
The above estimated costs do not include state regulations
The broad based nature of the $1.8 trillion to $2.028 trillion dollars of regulatory compliance costs means productivity is reduced, returns on investments are lower, wages and employment are reduced; and prices are higher than otherwise would be by this amount.
We are Regulatory Taxing the Poor
The burden or incidence of regulations is borne in many ways and they act economically the same as a tax. Higher prices for consumers, lower wages, less jobs and employment, lowers returns on investments, and higher direct taxes (mandates imposed on states by the federal government). The broad based nature of this blizzard of regulations means that poor people bear a disproportionate burden on what is in effect the most hidden, as well as most implicit regressive tax imaginable. Even after subtracting for benefits at their estimated upper boundaries of $700 billion, the NET LOSS is about $4,000 per capita. For a family of 4 in poverty, the first $16,000 of income goes to pay the regulatory tax---with nothing to show for it in return! However, because that burden is implicit and so hidden from accountability, that regulatory tax burden gets overlooked. For Bill and Melinda Gates, $8,000 of annual loss is insignificant. For the family of 4 in poverty, it is virtually everything. Again the same corrupt game of hide and seek.
We are Regulatory Taxing Consumers’ Money and Health
According to Chris Conover of Duke University, as of 2004, health care regulations added $339.2 billion in higher costs for health care in America. Even after subtracting an estimated $170.1 billion in potential benefits, the net loss was $169.1 billion per year, or a $1,500 per average household. Additionally, 22,000 more people died due to this regulatory cost, as opposed to the estimated 18,000 that died from lack of health insurance. (Source: Policy Report Cato Institute, Chris Conover, “Health Care Regulation: A $169 Billion Hidden Tax” October 4, 2004).
The FDA safety and efficacy standards have also led to “drug lag” in licensing of new chemical entities. The average time to get a drug through the formal approval process takes years longer than our European counterparts. According to the Tufts Center for the Study of Drug Development, the cost to get a new chemical entity to the market is $1.3 billion per drug. Most researched drugs do not make it through this rigorous process. When these costs are included, the 12 largest US pharmaceuticals spent $802 billion in R&D expenditures from 1997 to 2011, to get 139 drugs approved or $5.8 billion per approved drug (in 2000 US dollars). (Source: Manhattan Institute, Avik Roy, “Stifling New Cures: The True Cost of Lengthy Clinical Drug Trials,” April 5, 2012)
The monetary cost is not the only or even the most important expense of regulatory overkill. Thousands of people each year needlessly die while waiting for lifesaving drugs to get formal FDA approval. In fact, the increased safety of these exorbitant costs and delays leads to negligible decreases in “bad drugs” reaching the market as compared to European countries with faster approval process. Post market withdrawal of harmful drugs is virtually the same in the US as it is in many European nations. (Source: Independent Institute: “Theory, Evidence and Examples of FDA Harm”, Alex Tabarrok)
We are Regulatory Taxing New Firm Start-ups
Researchers have tracked out the creation of new firm start-ups in the U.S. economy since the financial crisis as compared to the same time frames for all post WWII recessions. The results suggest that new firms start out with fewer employees and they are growing at a much slower rate than for firms coming out of previous recessions. The new financial regulations have harmed small banks which are a large source of capital for small business start-ups. The Sarbanes-Oxley 404 (b) accounting regulations imposed by the Securities and Exchange Commission have added $1.8 million in annual costs per firm. (Source: American Action Forum: “Testimony on SEC Reform: Measuring the Costs and Benefits of New Rules”, April 25, 2012. The Affordable Care Act regulations also imposed large burdens on growing companies, including $27.2 billion in costs, $8 billion in unfunded state mandates, and over 159 million paperwork hours. In short, the annual regulatory costs of the ACA exceed the benefits by 2 ½ times their value. (Source: American Action Forum, Sam Batkins, “The Affordable Care Act at Four: Regulatory Cost Exceed Benefits by Twofold,” March 24, 2014)
Other major studies illustrate this problem with regulations and new business formation. 1) “Starting Smaller; Staying Smaller: America’s Slow Leak in Job Creation” by E.J. Reedy, Robert Litan, the Kauffman Foundation Research Series: Firm Formation and Economic Growth. 2) “The Secular Decline in American Business Dynamism”, June 2014, University of Maryland, Ryan Decker et. al).
We are Regulatory Taxing Small Manufacturing Companies Out of Business (2012 in 2014 dollars)
Nowhere is American business more adversely impacted than in smaller manufacturing companies. The annual costs of federal regulations (the direct levied business portion is only 56% of the total $2,028 trillion of costs) for all firms are $233,182 per firm or 21% of average payroll. For manufacturing firms the average compliance costs is $864,125 per year! When we look at the manufacturing firms with < 50 employees (that is 224,858 firms with over 2 million employees) or over 90% of manufacturing companies in America, the regulatory costs are $34,671 per employee! The average wage in these small manufacturing firms according to the Census Bureau stands only at $41,035. Thus, the regulatory cost is wage is 84.5% of the wage. This acts a massive tax on hiring and employing labor.
Another disturbing problem also emerges from these studies. That is, larger firms while also burdened by federal regulations actually pay lower costs per employee because of economies of scale on compliance. Medium size firms between 50 and 99 employees the costs is $18,243 (average wages $45,241). With the largest manufacturing firms with > 100 employees, the annual compliance costs are $13,750 per employee (average wages $55,998).
In short, the federal government is regulating small businesses out of business to the relative benefit of giant businesses who are hurt disproportionately less. Furthermore, while small manufacturing firms will likely shut down, larger firms when overly burdened simply relocate and take jobs overseas. Either way, American workers lose— both jobs and wages. The only discernable winners here are the larger firms that either monopolize the domestic market, or foreign countries that get American capital reallocated out of the United States to their economy.
When we look at manufacturing jobs and falling median income we should not be looking at China, India or Mexico for what is happening. The problem for American workers is not what is done in foreign capitals’, but the reckless disregard in Washington DC. It is Congress and the bureaucracies that have reduced our standard of living!
(Source: Mark Crain and Nicole Crain, “The Cost of Federal Regulation to the U.S. Economy, Manufacturing and Small Business,” Report for the National Association of Manufacturers 2014).
Therefore, every federal regulation should be tested for a cost benefit analysis by the GAO, or more preferably some independent agency outside the federal government: the American Economics Association; the National Bureau of Economic Research, National Economic Research Associates, American Institute of Certified Public Accountants; or National Society of Accountants. Also, a regulatory agency should not be able to mandate the assumptions to be used in a cost benefit analysis. Politicians can force any assumption no matter how ridiculous to achieve a fraudulent outcome. Politically rigged studies do not yield accurate scientific results. Anything that cannot pass that test need to automatically be suspended until it can pass the test.
New regulations that are considered “economically significant” by the Congress are those that would have over $100 million of economic impact. However, the GAO has noted that 97 new regulations imposed (that meet that standard) between 2008 and 2013, yet only one was submitted for any type of cost benefit analysis (Source: “Independent Agency Regulatory Analysis Act of 2015,” Senators’ Rob Portman, Mark Warner and Susan Collins). The beneficial idea of cost/benefit testing federal regulations crosses not only the political divide it crosses nations. For example, the Economic Action Plan of 2015 in Canada goes beyond required a simple cost/benefit test. Canada became the first nation in the world to implement a “one for one rule”, so for every new administrative regulation introduced, a previous regulation must be removed. (Source: Action Plan Canada, “Reducing Red Tape”, October 16, 2015). We should learn from our northern neighbors.
The recent Supreme Court ruling on the EPA can be cited here.
Michigan vs. EPA Air pollution standards for utility companies and coal
(Proposed regulations must demonstrate costs as well as benefits)
Another case in point is the recent proposed EPA regulations for ozone standards. The EPA wants ground level ozone to decrease from 75 parts per billion currently to 60 ppb by 2020. While the EPA estimates an upper boundary of benefits between $19 and $38 billion per year by 2025, the non-partisan National Economic Research Associates estimates the cost of compliance with those standards at $270 billion per year, or over $3 trillion in GDP from 2017 to 2040 (in present value terms)! Moreover, this rule will cost the US economy 2.9 million jobs per year. (Source: National Economic Research Associates: “Assessing Economic Impacts of a Stricter Ambient Quality Standard for Ozone,” July 13, 2014, Dr. David Harrison et.al)
The EPA uses flawed economic reasoning for their cost estimates in regulatory mandates. The reason is because of they ignore the law of diminishing marginal returns.
Diminishing Returns and the Need for Cost/Benefit Rules
Example: Suppose a little creek is polluted, and EPA wants it cleaned 90% of a particular toxin in the water. Removing the first 90% is the least costly given available technological standards. However, if they then require another 90% reduction of the remaining 10% of toxin, this becomes much more expense in costs (with fewer incremental benefits). If they want to reduce the remaining 1% another 90% the costs rise exponentially while the new benefits race toward zero. In effect, regulatory burdens skyrocket as regulators chase an absurd “receding zero” without the realistic constraints of cost/benefit analysis.
4. The Federal Budget
The American government absurdly wastes far too much money. It is precisely because Congress spends so much that progressives want to tax so much on the very wealth creators that drive our economy. While we are going to pursue a flat tax system with very low rates, we also cannot accept the current level of federal waste in the budget. For approximately 60 years federal revenues as a percentage of the growth domestic product has averaged between 18-19%. This was true when the top marginal tax rate was over 90% or when it was at 28%. This statistical regularity was called Hauser’s Law, after the Stanford financial economist Kurt Hauser first discovered it. Clearly high tax rates do not collect high levels of revenue over the long run; they just kill the economy at those rates.
While the campaign has not settled on what the tax structure will look like be it a flat tax on income or a fair tax i.e. national sales tax, we must propose a reduction of expenditures down towards the level of about 15%. We can achieve tremendous economic growth with such a low rate and no exemptions. Growth brings forth more revenues, but we also have to cut the spending (as well as divest a certain quantity of government held assets that perform nothing of functional need) in their current state i.e. selling gold in Fort Knox, most of NASA facilities, idle government land, strategic petroleum reserves and so on (See section 7).
Step 1 Immediate Action for a Balanced Budget
Public expenditures can be reduced. We need to institute a flex-freeze capping of the overall budget. Federal spending in the most recent fiscal period is approximately 20 of GDP, down from 24% in 2011 (primarily due to the last debt ceiling constraints and sequestration). The fiscal deficit for 2014 was $486 billion, about 3% of GDP and could continue to fall to about 2% of GDP in a year or two if the total budget is capped at 2015 levels of spending. The growth of revenues (even from the current slow growth rates) will balance the budget in a few short years. Estimated federal revenues in 2015 are $2.9 trillion while spending is $3.4 trillion (Source: Inside Gov.: 2015 US Budget Estimate). The options to balance the budget shrink quickly and reverse in direction over the next few decades when predictable demographic shifts financially emerge.
The growth of mandatory expenditures for entitlements for the elderly would have to come from reducing the rest of the budget for a few years following tax reform. Balancing the budget this way means any additional cuts or efficiencies in spending will accumulate mounting fiscal surpluses from the much higher economic growth a low flat tax type system. Only then will America be better positioned to deal with the long term fiscal gap.
Step 2 A Balanced Budget Amendment to the Constitution
Rules Govern Behavior—Constitutional Rules Bind Political Behavior
Given the mounting future liabilities that comprise the fiscal gap, it is imperative some form of constitutional spending cap be put into place as quickly as possible. The actual specifications of such an amendment need to be worked out to allow emergency exemptions (such as declarations of war). Other specifications would include the percentage of super majority Congressional vote for exemption (let’s say ¾ vote by both House and Senate), specified time limits for the exemption, exclusion of off-budget contracting, as well as the actual percentage of federal spending to GDP ratio. Therefore, along with any tax reform proposal needs a Constitutional Amendment sent to the states for ratification.
5. Bureaucracy and Waste Reduction
The efficient management practice lean six sigma is certainly useful here. Large private sector firms currently utilize this management technique to save money. Government bureaucracies should be put to this test to streamline operations and catch system errors in operations to improve performance and save taxpayer money.
Another Grace Commission is needed. President Reagan created a private sector initiative called the Grace Commission in 1981 to find the waste, fraud and abuse in the federal budget. The Grace Commission recommended over 2470 specific private sector practices to run the government more like their individual businesses. Proven business methods with detailed outlines guided each recommendation—not theory. Grace executives discovered that making the administrative bureaucracy more efficient would not require cuts or elimination of existing programs (We should eliminate many actual programs as well for further savings). Had the Grace recommendations been implemented, the federal government could have saved at least $424 billion dollars in the first 3 years (approximately 18% of all federal spending). Of course very few of those recommendations were implemented outside of the executive branch. We need another Grace Commission, but this time with some pre-binding agreements across both political parties. Once recommendations are made they can be implemented without congressional interference. After-the-fact favoritism to appease special interest groups would only kill the endeavor to eliminate waste.
The base closure commissions for military bases are an example where recommendations have an all or nothing bundle effect.
The American people recognize the government wastes far too much money and is rife with corruption, cronyism and fraud. The federal government is so bloated and complex that nobody understands exactly what’s going on or what to do to stop it. By giving concrete physical examples highlight the urgent need for this type of change.
In 2007 Charlene Corley and her sister Darlene Wooten were caught in 2007 in a mass Pentagon billing fraud involving over 20 million dollars stolen from our US tax payers and diverted away from our military men and women in the line of fire. Fortunately an internal audit in the Pentagon caught Ms. Corley and her sister cheating the taxpayer with fraud. Here are some examples of what they uncovered:
The mailing charges billed to the Pentagon for two (2) $.19 cents steel washers were $998,798. For one (1) $11 thread plug they charged $402,097 to mail. For ten (10) cotter pens which cost $1.99 each, they charged $499,569.
Obviously some people get very rich off of the opaqueness and hiddenness of our federal government and its books. The taxpayers suffer, our military suffers, and our national security suffers, and our children are going bankrupt because of this activity.
Let’s look at Medicare billing fraud. Accordingly HHS.gov, May 14, 2013, $223 million dollars of false billing was discovered from the Medicare Fraud Strike Force, which has only investigated eight (8) cities. In Miami, one case had three people that took $20 million dollars for Medicare home health services that were never provided to anyone. Instead they purchased a slew of luxury items including two Lamborghini’s, a Ferrari and a Bentley. This fraud strike task force has only done this six times and have found over $2 billion dollars of fraud.
Why isn’t this done across hundreds of cities as opposed to just a select handful, and why is this not done every day as opposed to once a year?
The elderly deserve better. The American taxpayer deserves better. The question is how much is still going on every day that is unaccounted for?
Instead of hiring 17,000 new IRS agents to regulate our health care system under Obama Care, the money would be better put to use by hiring 17,000 more independent accountants and auditors to scrub the federal budget line by line.
Implement Bundled GAO Report Recommendation Cuts
According to Scot Faulkner, Chief Administrative Officer of the U.S. House of Representatives and a member of President Reagan’s White House Staff,
There is $650 billion dollars in annual documented waste that could guide budget cuts. The Government Accountability Office (GAO), and 73 Agency and Department Inspector Generals, publish an average of 9,000 reports every year that document this waste to specific accounts and programs. These public reports also provide specific recommendations for how to stop the ongoing hemorrhaging of tax dollars.
In 2015, the House Appropriators held 128 hearings relating to agency funding requests. Only four of those hearings included Inspector Generals. None included the GAO. None of these hearings included outside oversight groups who document and publicize government waste. (Source: Scot Faulkner, “Budget Bacchanal 2015”, Washington Examiner, September 8, 2015)
It is the complicated nature of the current tax code that leads to all the corruption and gaming. It is also the complicated blizzard of the expenditure side that creates the darkness haven for waste, corruption and influence peddling none of which benefits poor people.
Cut Federal Employment
Scot Faulkner also notes:
None of the House passed Appropriation bills call for hiring freezes or any slowdown in expanding the number of bureaucrats. Each year the Federal Executive Branch loses over 60,000 employees to retirements or voluntary departures. There was not one single hearing by Republicans to discuss ways to stop the treadmill of filling every vacancy no matter how obsolete or redundant. Federal agencies have 9 to 23 layers of management between front line workers and top officials.
(Source: Scot Faulkner, “Budget Bacchanal 2015”, Washington Examiner, September 8, 2015)
Federal Government Employees: What Has Shrunk?
1962 5.3 million (2.8 million are military)
2000 4.1 million (1.4 million military)
Today 4.185 million (1.45 million military)
Note: The decrease in federal employment over the last 52 years has come entirely from a decrease in the military.
This does not include contracting out employees that do not show up counted as government employees. (Historical Workforce Tables: Office of Personnel Management Management.Gov)
A hiring freeze with attrition is needed. If for every 3 people (non-military) leaving the federal workforce, only one is hired (not replaced by contracting out), the CBO estimates that the federal government will save $43 billion between 2015-2023 (CBO November 13, 2013, “Reduce the Size of the Federal Work Force Through Attrition”).
NEW PROPOSAL Civil Service Reform
The federal government needs complete federal civil service overhaul. A federal employee has a higher probability of dying from natural causes then from being fired from the federal government. Employees working for the federal government are fired at the rate of 0.5% per year while the private sector is 3.0%. (Source: USA Today, “Some Federal Workers More Likely to Die Than Lose Their Job”, 7/29/2011)
All federal employees should work with four year renewable contracts. There should be no more implicit lifetime tenure in federal employment. At the end of each year, one quarter of the federal workforce will have to compete for their jobs against new applicants. It is easier to NOT HIRE then to fire under the current system. Executive agencies can set hiring limits and the appropriate reductions, and inefficient, corrupt or incompetent employees can just not have their contracts renewed.
The president does not get automatic life time employment but must stand for re-election every four years, senators every six years, and congress every two years. Our brave men and women in uniform do not get lifetime employment guaranteed. They must re-enlist at the end of their tour of duty approximately every four years. If it is good enough for the President, the US Congress, or our military, it is good enough for all other government employees.
Note: It is my understanding that the Marine Corp Commandant has changed the first in line re-enlistment preference. In other words, marines must bring their best game each time. This should be extended to the rest of the federal government. We not only want our best and brightest defending our country, we need our best and brightest in government service in all areas. If someone wants to make public service a lifetime career they can, but they are always held account.
NEW PROPOSAL Veterans Health Savings Accounts
The recent Veterans Administration scandal opens up the need for policy changes. In the Phoenix Veteran’s Administration facility, the “wait times” were fraudulently recorded and as a result up to 40 people died waiting to see a doctor and up to 1,300 were made to wait up to 6 months for an appointment. These types of problems were evident in other cities such as Memphis, Biloxi, Albuquerque, Miami etc. Even more astonishing, very few administrators were fired and tens of thousands of “performance” bonuses were paid amounting to $400 million. (Source: Forbes, “The VA Scandal One Year Later,” Adam Andrzejewski May 24, 2015)
Winston Churchill might see the VA this way, “Never have so many veterans suffered so much abuse at the hands of so many bureaucrats and yet so few of them ever being fired.” The incompetence, indifference and corruption of the VA illustrates why civil service reform is now needed. Only then (coupled with health savings accounts) will the abuse of our veterans come to an end.
Veteran’s benefits are earned wages, not welfare. Veterans do not need bureaucrats to manage them. They need their full pay and freedom of choice to be properly honored. Member of the US Armed Forces should have their health benefits invested into health savings accounts (HSA) each year of service. Once they leave the military (honorably discharged), they should have those accounts continuously funded (at an amortized estimated costs for veterans not injured in service) throughout their entire life to pay for their own health care costs. They should be able to spend that account anywhere in the US health care system they choose and never be hostage to inefficient and indifferent VA bureaucrats. If they accumulate HSA reserves (maybe they have private sector coverage with private employment so they have double coverage), they should be able to pass that value of military HSA on to their children or reinvest those funds anywhere they choose after an appropriate period of time after leaving the armed forces. Certainly those injured in military service need to medically rehabilitated and made “whole” again (Walter Reed Medical etc.). Afterwards, veterans should be given a fully funded HSA. Health benefits are NOT welfare they are real wages promised to and earned by America’s veterans.
Furthermore, by turning various veterans’ earned benefits in pre-funded savings accounts, veterans take control over their life and end the need for bureaucrats to manage them. They are no longer subject to the continual of budget battles, debt ceiling gamesmanship or anything else subject to politics influences outside their control. We can structurally shut down most of the VA with thousands of useless government employees. It is ironic that the veterans that protected America from communism are treated in the VA system of hospitals with old Soviet or current North Korean style medicine. This must change. Delayed treatment (sometimes months) is breach of contract, lower quality service is breach of contract—all when these particular veterans are in their most tragic situation.
However, with all HSA funding it is imperative that all costs associated with America’s veterans be expensed out under the Department of Defense budget. This is honest accounting and is transparent. This will reveal the true cost of the US military, and the accurate cost of foreign military adventures becomes obvious. Economic theory predicts that anything artificially “underpriced or under expensed” gets over utilized beyond an optimal point. By honest accounting classifications, marginal engagements become less likely, fewer military personnel maybe be needed, fewer injured in the military, and lower military costs over the long run. We must stop the game of accounting “hide and seek.”
6. Areas for Immediate Direct Cuts to Federal Spending
In addition to bureaucracy overhaul, we need program cuts: The federal budget must be cut from the top down. The immediate candidates that should be include for elimination or drastic reductions in “Unauthorized Appropriations and Expiring Appropriations” part of the federal budget. According to the January 15, 2015 CBO report, $302 billion was allocated in 2014 for expired programs, and $294 billion appropriated in 2015 for such programs.
Programs that have expired, yet still receive funding! Moreover, approximately 60% of the 2014 fiscal budgetary deficit ($486 billion) could have been reduced by letting the funds expire with the programs. A fiscal “sunset law” can be promoted. When a new program has a defined time authorization established, it should be either voted on by the Congress for specific re-appropriation or shut down by law. There are even more programs and agencies that can be cut to reduce the deficit and government spending toward much lower GDP ratio.
Other Areas to Cut
International Monetary Fund
National Endowment for the Arts
Department of Commerce
Department of Education
Department of Energy
Department of Interior
Department of Agriculture (food stamps)
Department of Housing and Urban Development
Furthermore, what is not directly cut could also be block granted and decentralized back to the states (food stamps), as well as most other federal anti-poverty programs.
Clarity creates transparency, which creates efficiency and equity. The current system is a haven of everything wrong. The restructuring and cuts must come from the top down while economic growth must come from the bottom up.
7. Federal Asset Divestiture for non-tax Revenues in Future Budgets
Part of the strategy to getting to a very low flat rate tax system also includes asset divestiture. The federal budget must run budgetary surpluses in order to pay down the funded national debt of $18+ trillion or ever be positioned to handle the fiscal gap of $200 trillion. The low tax rate, coupled with deregulation will ignite tremendous long run economic growth. Immediate spending cuts will also move America toward budget surpluses on a sustained basis. However, even in the very short run (let’s say 5-10 years) we still can guarantee budget surpluses regardless of revenue projections from lower rates before the higher growth yields greater revenues alone. This is where asset sales from the federal government come to the forefront.
When other countries of the world run into fiscal crisis, it is automatic for bankrupt nations to sell off money losing state owned enterprises as well as other assets. In fact, in a recent Economist article (“Setting Out the Store”, January 11, 2014) makes the case for divestiture for 12 countries including the United States. Britain, for example, produces a National Asset Register with all government assets listed including their estimated market values. New Zealand goes further and imposes the standards of the International Federation of Accountants (IFAC) used by the private sector “accrual” instead of the traditional bureaucratic “cash basis” (costs counted when the bill comes due, not when the obligation is incurred) of the public sector. Furthermore, New Zealand even imposes a “capital charge” against departmental budgets which encourages the sale of assets. America should follow their lead.
How much value is potentially available for federal sale in the United States? Look at a very small sample of items.
Liquid Federal Assets
International Reserve Assets (gold held by Treasury in Fort Knox, IMF reserve positions and Special Drawing Rights). This is estimated as of June 2011 at 261.5 million troy ounces of gold. At a price of approximately $1,200 per ounce this is in excess of $300 billion. Since gold serves ZERO monetary purpose since 1933 domestically and 1971internationally, there is no downside here.
The Federal “Credit-Market Instruments Portfolio including (GSE-backed securities, student loans, TARP equities etc.) amounted to $786 billion as of 2011. (Source: Pacific Institute, “Privatizing Federal Assets,” Robert Murphy July 4, 2011)
Crude Oil in the Strategic Petroleum Reserve amounted to 726 million barrels of crude oil as of November 2010. At an estimated price of approximately $50 per barrel, this amounts to another $36 billion in value. As of 2009, America had 363,459 active private oil wells producing billions of barrels of output. The oil in the SPR in the ground will change ownership it does not disappear by sale. The true security from energy bottlenecks in times of major emergencies and protracted warfare comes from a broad and diversified energy portfolio. We achieve that by opening up a more integrated system of drilling and fracking though deregulation and reversing Obama anti-energy policies (Keystone, restricting drilling on federal lands etc.). (Sources: US Energy Information Agency “Distribution of Wells by Production Rate Bracket,” October 16, 2015; ibid. Murphy)
Oil in ANWAR and other energy sources is another tremendous asset of great value. According to the 2013 report by the Institute for Energy Research entitled, “Federal Assets Above and Below Ground” the inventory includes:
10.4 billion barrels of oil (ANWAR)
86 billion barrels of oil and 420 trillion cubic feet of natural gas (outer continental shelf of the lower 48 states)
896 million barrels of oil and 53 trillion cubic feet of natural gas (Naval Petroleum Reserve-Alaska)
25 billion barrels of oil (outer continental shelf of Alaska)
90 billion barrels of oil and 1,669 trillion cubic feet of natural gas (north of Artic Circle)
982 billion barrels of oil shale (Green River formation in Colorado, Utah and Wyoming)
Note: This value rises into tens of trillions of potential market value. The federal government leases less than 2% of offshore oil and gas lands, and less than 6% of onshore lands.
Coal Resources in the lower 48 states owned by the federal government include 957 billion tons (550 billion tons located in the Powder River Basin of Wyoming and Montana) at an estimated market price of $15 per ton. Alaskan coal reserves exceed the lower 48 states reserves by 60% (not included). Thus, the minimum estimated value of federally owned coal stands at over $22 trillion dollars.
In total, the IER estimates the oil, mineral and gas value of federal energy owned assets, exceeds $150 trillion dollars.
Federal Lands for Sale are another area for possible sale on the world market. The federal government owns more than 600 million acres of land in America. If only a miniscule 10% of these holdings are put up for world auction, and an estimated $5,000 per acre price (my approximation) the potential value of divesting 60 million acres amounts to another $300 billion.
Federal Buildings for Sale is another possible divestiture of assets. According to the GAO as of 2009, the federal government owned 45,190 underutilized buildings losing taxpayers $1.66 billion per year. In effect, sale of these building stops that financial hemorrhage and also raises tens of billions in immediate revenue.
Amtrak and other federal government railroad assets include $17 billion worth in railway infrastructure control by the Department of Transportation. As opposed to being heavily subsidized, this would raise funds for deficit reduction. We do not have a government run airline or bus line. Why a railroad?
The Tennessee Valley Authority inefficiently operates electricity companies in America. The TVA owns 16,000 miles of wholesale transmission assets as well as 113 hydropower units, multiple nuclear reactors, multiple reservoirs and numerous land assets. The estimated net equity from taxpayer subsidy for the TVA is $5.6 billion. This value, it should be noted is a drastic understatement because the assets are still held at their historic book values some going back as far as the 1930’s). (Source: Heritage Foundation, “Time for the Sun to Set on the Tennessee Valley Authority,” Ken Glozer May 6, 2014).
NASA launch facilities can also be auctioned off for revenue. Elon Musk’s SpaceX Corporation is currently building private launch facilities in Texas. Others are entering the market for outer space commercialization including entrepreneurs Jeff Bezos and Richard Branson. Federal commitment for NASA has declined while the private sector is moving forward. While NASA facilities are the most technologically advanced assets worth potentially tens of billions of dollars, a familiar problem is present. NASA does not actually have an inventory of their assets. (Source: Office of the Inspector General Audit Report: “NASA’s Infrastructure and Facilities: An Assessment of the Agency’s Real Property Leasing Practices,” August 9, 2012). Hence, we need a detailed National Asset Registry like England.
While this is a very small sample of potential assets it should illustrate the fact that we can raise hundreds of billions of dollars each year over the next decade. The broad portfolio can be sold increment by increment to avoid “fire sales” where particular asset prices might be adversely affected against the taxpayer receiving maximum potential value.
8. Regulation Takings and Private Property: Federal Regulation and Compensation for Takings
The broad based nature of the $1.8 trillion to $2.026 trillion dollars of regulatory compliance costs means returns on investments are lower, wages and employment are reduced; and prices are higher than otherwise would be by this amount. However, because that burden is implicit and hidden in all of this, no one can see that regulatory tax burden. Again the game of hide and seek.
Therefore, every federal regulation should be tested for cost benefit analysis by the GAO, or more preferably some independent agency outside the federal government: the American Economics Association; the National Bureau of Economic Research, the National Economic Research Associates, American Institute of Certified Public Accountants; or National Society of Accountants. A regulatory agency should not be able to mandate the assumptions in a cost benefit analysis. Politicians can force any assumption no matter how ridiculous to achieve a fraudulent outcome. Politically rigged studies do not yield accurate scientific results. Anything that cannot pass that test need to automatically be suspended until it can pass the test.
Furthermore, federal regulations imposed on states as mandates need to be funded from the federal government out of the budget of the mandating agency. Passing unfunded mandates onto the states shifts the tax burden and violates the federalist’s principles of our constitutional republic. For instance, suppose the EPA prohibits water withdrawal from a stream to protect salmon. The EPA should pay for the costs to farmers and others previously using that water to compensate them for their losses. Otherwise, the EPA imposes a “regulatory takings” where the value of property is taken without any compensation in violation of the 5th Amendment to the Constitution.
Under federal protective habitat status for endangered species (USFWS) means that if a threatened species is found on private property the property owner loses most of the value of the property. In fact because they receive no compensation, they have every incentive to harm or remove that species before it is ever discovered. Thus the current law works against expansion of available habitat, private land owners as well as the US Constitution. Compensation for regulatory takings realigns all three factors into harmonious balance.
The 1993 case of Ben Cone of North Carolina illustrates everything wrong with the current regulatory environment. Cone had 1,560 acres of his 7,000 acres of land taken by the Endangered Species Act to provide habitat for the re-cockaded woodpecker. The legal restrictions on land use made his property lose 96% of its value (dropping from $2.23 million to $86,500 upon discovery of 29 woodpeckers). He was not compensated for this loss. These woodpeckers cost Cone $73,914 each—a cost he alone must pay. As a result, he began clear cutting the remaining 5,540 acres to make the rest of his land unattractive to the spread of these woodpeckers. He sent a letter to adjacent property owners informing them of their potential liabilities under the law and loss of value if these woodpeckers nest in their trees. They then in turn began clear cutting their land. The regulators, wanting more protected habitat for endangered species—got less habitat because of their refusal to compensate property owners. Property owners lose and so do endangered species.
Moreover, the people who are harmed most by regulatory takings are poor people. Poor people cannot afford to fight the federal government or higher a legal staff to fight the federal government when it is clearly over-reaching.
9. The sharing economy (Uber)
With current information technology and peer to peer connectivity the market place is undergoing significant changes from the ground up called the “sharing economy.” Servers like Ebay, Uber, Lyft, Airbn, Craigslist and others are now generating hundreds of billions of dollars of economic activity every year. What the sharing economy does is allow people to directly trade bypassing state, local or federal monopoly, bypassing union protection, and other entrenched barriers to directly have free trade.
This technological trend should be embraced.
Take the example of taxi cabs. In many American cities taxis companies operate like local monopolies. In New York City, a single taxi medallion costs a taxi company up to $1 million dollars per car. This is a barrier to entry, and significantly harms the consumer, people who tend to be poorer than others on average. Uber allows ride sharing for people with their private cars. If Joe has a car he only uses 10% of the time for his own personal needs, 90% of the rest of the time, he can be connected with someone in his area that needs a ride in exchange for fee.
This does many things: (1) increases competition and lowers prices (2) is a source of income for Joe (3) creates more efficient utilization of existing idle resources (4) improves quality and access for those who cannot afford the existing structures of either owning a car or renting one through a local monopolized service. Free market competition always helps poor people the most.
For Airbn, home owners can rent out their unused spare rooms to travelers that cannot afford hotel rooms in expensive cities. This multi-billion dollar company connects people with open space to those who need it for a fee. If Joe is out of town for three weeks, and someone would like to use his home for three weeks, he can access income towards his house payment while the tenant pays prices below hotel rates. This is a win-win situation.
The progressives are in a political bind about the sharing economy and what to do about this technology in free markets. Some have embraced it whole heartedly (Governor Cuomo in New York in contrast to Mayor Di Blasio in New York City over the taxis). Advocates see the benefits to poor people and minorities in their role as entrepreneurs and consumers. Other old/style progressives want to stamp it out because it by-steps federal, state and local regulatory policies. It also cuts out the well-connected political insiders that profit from that type of regulation. In short, regulation often creates monopoly, dependency and empowers unions. The progressive desire control market outcomes stems from an ideology hostile to free enterprise. Socialist theory and policy, Ronald Reagan correctly noted, “Belongs on the ash heap of history.” The sharing economy’s technology puts socialist planning right there where it can do no more harm.
With respect to the Obama Administration, the National Labor Relations Board and the IRS are trying to resist this trend. Uber drivers are now seen by the IRS as employees of the company as opposed to independent contractors. They do this to make audits easier and get quicker increased tax receipts. The IRS is standing in the way of development of small independent firms.
The National Labor Relations Board and the Obama Administration are also trying to undermine America’s franchising system. A recent NLRB ruling has declared McDonalds as “joint employer of its franchisees workers.” The ruling benefits labor unions since it makes it easier to organize franchised establishments. At the behest of labor unions and activists, the NLRB now holds the parent corporation liable for the treatment of the workers in their independent franchise operations. So notice what happens. Historically, the business franchise system has been an efficient entry way for thousands of first time entrepreneurs to reach for the American Dream. However, the Obama Administration has placed the interest of labor unions and regulatory agencies ahead small business creation.
There are legitimate issues about the sharing economy such as equalizing the rules and tax burdens between types of businesses (online vs. brick and mortar). These issues can be addressed to level the playing field without undermining the basic principle of growth from the bottom up.
10. Housing and Urban Development and Gifting Public Housing Projects to Poor Americans Living in Them
According to (HUD.gov 9/13/15), HUD’s budget was $45 billion in 2014. They claim 1.2 million housing units are managed by 3,300 different public housing authorities. While HUD spends this money on a broad of array of subsidies, 45 billion turns out to be $38.6 thousand per year per unit (equivalent to a $3,000 per month mortgage). Not all HUD spending goes for public housing since some of their budget is used for non-project housing subsidies; however, if the purpose is to help the poorest of the poor, the question remains: where is all this money going? It is obviously not being spent on quality public housing.
HUD bureaucrats that manage public housing projects for poor people are doing so very badly, very expensively, and often with crony corruption. Building contractors who are not poor profit from this. Unions also profit from these overinflated construction costs because of the “prevailing wage—union wage” mandates under the Davis-Bacon Act. The Davis-Bacon Act also needs to be repealed. Urban renewal in the hands of the federal government has been an urban disaster over the past 50 years.
The federal government as the world’s biggest slum lord and responsible for creating volatile urban ghettos full of poor people living in unacceptable conditions. This is why we need a full privatization of public housing projects to be turned over to their tenants as “a gift” to illicit proper ownership incentives, pride, and sweat equity investment to change this situation. To act as a responsible owner and steward of property, people must actually own the property to have a vested interest in its future quality and value. We can follow Margret Thatcher’s lead in successfully privatizing a large share of British public housing in the 1980’s. Finally, even liberal mayors in large US cities are warming up to the idea of partial privatization of public housing projects (Rahm Emanuel of Chicago come to mind).
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