From January 2009 to the present, President Obama and his team have repeatedly made grandiose claims about the economic benefits of shoveling money at shovel-ready projects or green jobs.  “It is largely thanks to the Recovery Act that a second Depression is no longer a possibility,” said the President.   He also claimed that lavish spending alone (not Federal Reserve actions or bank bailouts) is what prevented the unemployment rate from “getting up to . . . 15%.”

If any of that were remotely close to being true then, as a matter of simple accounting, rising federal spending would have shown up as a huge offset to falling GDP in 2009, and also as a major component of the modest increase in GDP growth in early 2010.   On the contrary, the table below shows that the increase in federal nondefense spending contributed only two-tenths of one percent (0.2) to the change in GDP in 2009.  That was no better than 2008 when the Recovery Act did not exist.  If nondefense spending had not increased at all in 2009 (unlike 2008) then GDP would have fallen 2.8% rather than 2.6% — scarcely the difference between a recession and a “second Depression.”  If nondefense federal spending had not increased at all in 2010, the economy still would have grown at a 3.6% pace in the first quarter, 2.1% in the second.  Cutbacks in state and local spending were a trivial damper on GDP growth last year, contrary to recent speculation, and real state and local spending rose significantly in this year’s second quarter (unlike the first).

This is just an exercise in crude Keynesian accounting, not economics.  Yet it nonetheless makes the stimulus bill look like a huge waste of money.  The reason Keynesian accounting is no substitute for economics is that governments can only spend other peoples’ money.  To claim that such spending is a net addition to “aggregate demand” is to ignore those other people — namely, current and future taxpayers.

Nobel Laureate Robert Lucas put it this way:

If the government builds a bridge . . . by taking tax money away from somebody else, and using that to pay the bridge builder — the guys who work on the bridge — then it’s just a wash.  It has no first-starter effect.  There’s no reason to expect any stimulation.  And, in some sense, there’s nothing to apply a multiplier to.  You apply a multiplier to the bridge builders, then you’ve got to apply the same multiplier with a minus sign to the people you taxed to build the bridge.  And then taxing them later isn’t going to help, we know that.

Writing in the Wall Street Journal, Peter Ferrara of the Institute for Policy Innovation explains that Washington budget deals don’t work because politicians never follow through on promised spending cuts. This is a very relevant argument, since President Obama’s so-called Deficit Reduction Commission supposedly is considering a deal featuring $3 of spending cuts for every $1 of tax increases (disturbingly reminiscent of what was promised — but never delivered — as part of the infamous 1982 TEFRA budget scam).

Washington’s traditional approach to balancing the budget is to negotiate an agreement on a package of benefit cuts and tax increases. President Obama’s deficit commission seems likely to recommend just this strategy in December. The problem is that it never works. What happens is the tax increases get permanently adopted into law. But the spending cuts are almost never fully adopted and, even if they are, they are soon swept away in the next spendthrift budget. Then — because taxes weaken incentives to produce — the tax increases don’t raise the revenue that Congress initially projected and budgeted to spend. So the deficit reappears.

In 1982, congressional Democrats promised President Ronald Reagan $3 in spending cuts for every dollar in tax increases. Reagan went to his grave waiting for those spending cuts. Then there was the budget deal in 1990, when President George H.W. Bush agreed to violate his famous campaign pledge — “Read my lips, no new taxes,” he had said in 1988 — in pursuit of a balanced budget. But after the deal, the deficit increased substantially: to $290 billion in 1992 from $221 billion in 1990.

As the excerpt indicates, Peter’s column is solid and everything he writes is correct, but it suffers from one major sin of omission. He should have exposed the dishonest practice of using “current services” or “baseline” budgeting. This is the clever Washington practice of assuming that all previously planned spending increases should go into effect and categorizing any budget that increases spending by a lower amount as a spending cut. In other words, if the hypothetical “baseline” budget increases by 7 percent, and a budget is proposed that increases spending by 4 percent, that 4 percent spending increase magically gets transformed into a 3 percent spending cut.
 
Politicians love “current services” or “baseline” budgeting for two reasons. First, it allows them to have their cake and eat it too. They can simultaneously shovel more money to interest groups while telling voters they are “cutting” spending. Second, it rigs the process in favor of bigger government. This is because lawmakers who actually propose to restrain the growth of spending can be lambasted for wanting “savage” and “draconian” budget cuts totaling “trillions of dollars” when all they’re actually proposing is to have spending grow by less than the so-called baseline. But since people in the real world use honest math rather than “current services” math, they assume that spending is being reduced next year by some large amount compared to what is being spent this year. And if the phony budget cut numbers sound too big (especially for specific programs such as Medicare or Medicaid), they sometimes conclude that it would be better to raise taxes.

Speaking of which, the same misleading process works on the revenue side of the budget. The politicians automatically get to keep whatever additional revenue is generated by population growth and higher incomes, which is not trivial since revenue in a typical year grows faster than nominal GDP. But when they do a budget deal featuring X dollars of tax increases for every Y dollars of spending cuts, the additional taxes are always on top of the revenue increases that already are occurring. And since the supposed spending cuts invariably are nothing more than reductions in planned increases, it should come as no surprise that the burden of spending always seems to increase.
 
Defenders of “current services” or “baseline” budgeting will respond by arguing that spending should automatically increase because of factors such as inflation and demographic change (i.e., more seniors signing up for Medicare). Indeed, they will point out that the government is legally obligated to spend more money for entitlement programs based on current law.
 
But that’s not the point. The issue is whether the American people are being presented with honest numbers. If the fans of big government want to argue that spending should increase by 7 percent for various reasons, they should openly and honestly explain what they are trying to do. And if they disagree with lawmakers who want spending to increase by 4 percent, they should be forthright and tell voters that “this proposal does not increase spending by enough because of…” and list the reasons why they want spending to grow even faster.
 
Unfortunately, deceptive budget practices in Washington are a feature, not a bug. But if you pay close attention, they are very revealing. If the President’s Deficit Reduction Commission uses “baseline” or “current services” budgeting as a benchmark for determining spending “cuts” and tax increases, that’s a good sign that the crowd in Washington wants to pull a fast one on the American people.

The “appearance of impropriety” is often considered the Washington standard for corruption and misbehavior. With that in mind, alarm bells began ringing in my head when I read this Washington Times report about Jacob Lew, Obama’s nominee to head the Office of Management and Budget. A snippet:

President Obama’s choice to be the government’s chief budget officer received a bonus of more than $900,000 from Citigroup Inc. last year — after the Wall Street firm for which he worked received a massive taxpayer bailout. The money was paid to Jacob Lew in January 2009, about two weeks before he joined the State Department as deputy secretary of state, according to a newly filed ethics form. The payout came on top of the already hefty $1.1 million Citigroup compensation package for 2008 that he reported last year. Administration officials and members of Congress last year expressed outrage that executives at other bailed-out firms, such as American International Group Inc., awarded bonuses to top executives. State Department officials at the time steadfastly refused to say if Mr. Lew received a post-bailout bonus from Citigroup in response to inquiries from The Washington Times. But Mr. Lew’s latest financial disclosure report, provided by the State Department on Wednesday, makes clear that he did receive a significant windfall. …The records show that Mr. Lew received the $944,578 payment four days after he filed his 2008 ethics disclosure.

Why did Citigroup decide to hire Lew, a career DC political operator, for $1.1 million? As a former political aide, lobbyist, lawyer, and political appointee, what particular talents did he have to justify that salary to manage an investment division? Did the presence of Lew (as well as other Washington insiders such as Robert Rubin) help Citigroup get a big bucket of money from taxpayers as part of the TARP bailout? Did Lew’s big $900K in 2009 have anything to do with the money the bank got from taxpayers? Is it a bit suspicious that he received his big windfall bonus four days after filing a financial disclosure?

See if you can draw any conclusion other than this was a typical example of the sleazy relationship of big government and big business.

Lest anyone think I’m being partisan, let’s now look at another story featuring Senator Richard Shelby. The Alabama Republican and his former aides have a nice relationship that means more campaign cash for him, lucrative fees for them, and lots of our tax dollars being diverted to such recipients as the state’s university system. Here are some of the sordid details:

Since 2008, Alabama Sen. Richard Shelby has steered more than $250 million in earmarks to beneficiaries whose lobbyists used to work in his Senate office — including millions for Alabama universities represented by a former top staffer. In a mix of revolving-door and campaign finance politics, the same organizations that have enjoyed Shelby’s earmarks have seen their lobbyists and employees contribute nearly $1 million to Shelby’s campaign and political action committee since 1999, according to federal records. …Shelby’s earmarking doesn’t appear to run afoul of Senate rules or federal ethics laws. But critics said his tactics are part of a Washington culture in which lawmakers direct money back home to narrow interests, which, in turn, hire well-connected lobbyists — often former congressional aides — who enjoy special access on Capitol Hill.

Some people think the answer to such shenanigans is more ethics laws, corruption laws, and campaign-finance laws, but that’s like putting a band-aid on a compound fracture. Besides, it is quite likely that no laws were broken, either by Lew, Citigroup, Shelby, or his former aides. This is just the way Washington works, and the beneficiaries are the insiders who know how to milk the system. The only way to actually reduce both legal and illegal corruption in Washington is to shrink the size of government. The sleaze will not go away until politicians have less ability to steer our money to special interests — whether they are Wall Street banks or Alabama universities. This video elaborates:

Free markets are characterized by voluntary exchange between buyers and sellers. Mapping that relationship is absurdly simply, as this image indicates.

Indeed, the only reason I even bothered to include that image was for purposes of comparison. Here is a new flowchart prepared for the Joint Economic Committee showing the healthcare system under Obamacare.

It’s worth noting, by the way, that the system already was a disaster even before Obamacare was enacted. In the health care sector, free markets are only allowed to operate in very rare cases, such as cosmetic surgery, laser eye surgery, and (for better or worse) abortion. The rest of the sector was heavily distorted by government intervention. Obamacare simply makes a bad situation worse.

The Washington Post published “5 Myths about unemployment” by Heidi Shierholz of the Economic Policy Institute.  The article is indeed full of myths, though not in the intended sense. 

“There are now roughly five unemployed people for every available job,” says Ms. Shierholz,  adding “there literally aren’t jobs for four of every five unemployed workers.” That statement has been repeated endlessly− in recent columns by Paul Krugman and Art Laffer, for example, and in a July 20 Wall Street Journal editorial which said “there are still five job seekers for every job opening.”

Regardless how often you hear this, the statement is completely false.  After all, the same survey that showed only 3.2 million “job openings” in May also showed 4.5 million people were hired that month.   If 3.2 million “openings” measured all available jobs, as Ms. Shierholz claims, then how did 4.5 million get hired?  I exposed this myth and others in my June 10 Wall Street Journal article. “The myth that there are nearly six job seekers for every available job,” I wrote, “arises from the misnamed BLS ‘Job Opening and Turnover Survey’ (JOLTS), which asks a few thousand businesses how many new jobs they are actively advertising outside the firm. But note well that this concept of ‘job openings’ does not purport to include ‘every available job.’ On the contrary, it is closer to being a measure of help wanted ads. ‘Many jobs are never advertised,’ explains the BLS Occupational Outlook Handbook; ‘People get them by talking to friends, family, neighbors, acquaintances, teachers, former coworkers, and others who know of an opening.’ Because many jobs are never advertised they are also never counted as job openings!  The BLS Handbook also notes that, ‘Directly contacting employers is one of the most successful means of job hunting.’ Those jobs are also not counted as job openings.” 

Unfortunately, I apparently failed to persuade even the Wall Street Journal editors about this statistical hoax.  So, let’s get a second opinion. 

The Minneapolis Fed recently interviewed Stanford economist Robert Hall, the famed co-author of Hall-Rabushka flat tax and (as he once told me) a “Clinton Democrat.”  For 32 years he has chaired the NBER committee that defines the dates of business cycles.  If he’s not an expert, who is?

Hall noted that “there’s been a decline in the profitability of hiring a worker without a corresponding decline in the wage. The incentive to create a job is the difference between what a worker will contribute to the business and what the worker has to be paid.”  But he also noted that the difficulty of finding a job is not just because fewer jobs are created, but because employers “do relatively little to try to recruit workers” when unemployment is high:  “Interestingly, the number of people who find jobs each month  is more or less a constant…,” said Hall, ”So, something like 4 million people find jobs every month.  Even with 10 percent unemployment, as recently, we’ve still seen the same thing. A very large number of people looking, very low job-finding rate for each individual, but the product—the number of jobs filled—is roughly a constant. It’s a very important fact about the labor market.  Think about a slack market from an employer’s point of view.  They see there are all kinds of highly qualified people out there they can hire easily, so they don’t need to do a lot of recruiting— people are pounding on the door.”

When job seekers are pounding on the door, the number of advertised “job openings” is a useless indicator of the much larger number who actually find jobs.   If the Washington Post were really interested in exposing myths about unemployment, they could start by debunking the myth that the “job openings” survey means “there literally aren’t jobs for four of every five unemployed workers.”  That is literally hogwash.

The debate on extending the Bush tax cuts has begun. Those opposed to extension argue that the cuts would greatly increase the federal deficit.

The first thing to note is that extending all the 2001 and 2003 tax cuts would lose the government about $216 billion a year in 2012 and rising amounts after that (see page 16). By contrast, federal spending in 2011 will be almost $2 trillion higher than in 2001 when the first Bush tax cuts were passed. Thus, in a rough sense, spending increases have had a nine times greater impact on our changed budget situation since 2001 than have tax cuts.

How big were the Bush tax cuts compared to previous tax legislation? One way to compare different tax bills is to look at the initial projections of the effects when they were passed. I assembled the figure below based on official scores of past tax legislation, as reported by the CBO at the time. The revenue effects of each tax bill are measured over the first five years as a share of GDP.

The figure shows that the Bush tax cuts were small compared to the Reagan tax cuts of 1981. The Revenue Act of 1978 was also a big tax cut. Note that the Tax Reform Act of 1986 was scored as being revenue neutral, and thus isn’t shown.

The figure also shows that the combined effect of tax cuts from 1997 forward were not large enough to offset the tax hikes under Reagan and the first Bush between 1982 and 1993.

I have a detailed discussion of federal tax policy between 1994 and 2004, here.

The debate on extending the Bush tax cuts has begun. Those opposed to extension argue that the cuts would greatly increase the federal deficit.

The first thing to note is that extending all the 2001 and 2003 tax cuts would lose the government about $216 billion a year in 2012 and rising amounts after that (see page 16). By contrast, federal spending in 2011 will be almost $2 trillion higher than in 2001 when the first Bush tax cuts were passed. Thus, in a rough sense, spending increases have had a nine times greater impact on our changed budget situation since 2001 than have tax cuts.

How big were the Bush tax cuts compared to previous tax legislation? One way to compare different tax bills is to look at the initial projections of the effects when they were passed. I assembled the figure below based on official scores of past tax legislation, as reported by the CBO at the time. The revenue effects of each tax bill are measured over the first five years as a share of GDP.

The figure shows that the Bush tax cuts were small compared to the Reagan tax cuts of 1981. The Revenue Act of 1978 was also a big tax cut. Note that the Tax Reform Act of 1986 was scored as being revenue neutral, and thus isn’t shown.

The figure also shows that the combined effect of tax cuts from 1997 forward were not large enough to offset the tax hikes under Reagan and the first Bush between 1982 and 1993.

I have a detailed discussion of federal tax policy between 1994 and 2004, here.

While Washington, D.C. and the newstalk-osphere are gripped by the story of forced-out USDA bureaucrat Shirley Sherrod, six appropriations subcommittees have advanced FY 2011 spending bills that will collectively spend over $4,000 per U.S. family. (They’ll get to the big ones later.)

Are you paying attention? What are you paying attention to?

There are important social and political kernels within the Sherrod story (and “Journolist”), but in the context of Washington policymaking, they might just be distraction.