History lesson for economists in thrall to Keynes
The following report was published on Progress.org, with this introduction: Will America go the way of former indebted empires? We trim, blend, and append three 2009 articles from: (1) Taxpayers for Common Sense, The WasteBasket: A Bulletin on Wasteful Government Spending, June 12, on contracting; (2) The News On 6, Jun 16, on stimulus waste by Jeffrey Smith (no relation to our editor); and (3) Financial Times, May 29, on Keynes by Niall Ferguson.
by TCS, by Jeffrey Smith, and by Niall Ferguson
A Contracting Pandemic
Contractors wasting billions of dollars in Iraq and Afghanistan is no longer news. The latest report warns that our withdrawl from Iraq presents a fresh danger of wasting dollars. It details many of the same problems we have heard from the various blue-ribbon panels, Inspectors General, and government auditors. It revealed some particularly vivid examples of waste--such as a brand-new, $30 million dining facility for Camp Delta built as the existing facility was being renovated.
We have handed so much of our government’s operations over to the private sector without accompanying transparency mechanisms that backward-looking audits are bound to be exercises in outrage instead of oversight.
The bailout and the stimulus passed earlier this year are also examples of how much of government is operated by contractors. Issues such as contracting regulations that prevent direct oversight of subcontractors cause problems throughout government contracting.
Coburn Questions 100 Stimulus Projects
Oklahoma Senator Tom Coburn, MD released a report detailing what he says are the 100 worst examples of waste in the “stimulus” spending. Coburn's list targets projects from coast to coast, and he says those unnecessary projects are costing taxpayers more than $5 billion.
Two projects on the list are even in his home state.
Coburn notes that small projects receive priority funding if they are shovel ready whereas larger construction jobs face a world of red tape. "One of the reasons a lot of these projects are shovel ready is because nobody ever considered them a priority until now. They have all this excess money to do them.”
Earl Devaney, head of the Recovery Act Accountability and Transparency Board, estimates that at least $55 billion of stimulus funds may be lost to waste, fraud, and abuse. However, the final number will likely be much higher. Perhaps the vast majority of stimulate dollars would have been better off staying in taxpayers’ pockets.
Wasteful spending authorized by the stimulus legislation could be a key issue with voters in next year’s off-term elections.
History lesson for economists in thrall to Keynes
Princeton economist Paul Krugman, the most recent recipient of the “Nobel” prize, and I sat on a panel in New York. I made the point that “the running of massive fiscal deficits in excess of 12% of GDP this year, and the issuance therefore of vast quantities of freshly-minted bonds” was likely to push long-term interest rates up, at a time when the Federal Reserve aims at keeping them down.
“We have a global savings glut,” countered Krugman, “which is why there is, in fact, no upward pressure on interest rates.”
“The only thing that might drive up interest rates,” he acknowledged, “is that people may grow dubious about the financial solvency of governments.”
On Wednesday last week, yields on 10-year US Treasuries -- generally seen as the benchmark for long-term interest rates -- rose above 3.73%. Long-term rates have risen by 167 basis points in the space of five months, an 81% jump.
The price of key commodities has surged since February. Monetary expansion in the US, where M2 is growing at an annual rate of 9%, well above its post-1960 average, seems likely to lead to inflation if not this year, then next.
Even if the White House’s optimistic growth forecasts are correct, that will still take the gross federal debt above 100% of GDP by 2017. And this ignores the vast off-balance-sheet liabilities of the Medicare and Social Security systems.
In the absence of credible commitments to end the chronic US structural deficit, the US must pay higher interest rates to sell its debt. It was Keynes who noted that “even the most practical man of affairs is usually in the thrall of the ideas of some long-dead economist”.
JJS: Government spending is not a necessary evil. We citizens could take over discretionary spending for desired social services from politicians who can’t curb their own profligacy. Plus, tie defense spending to one tax source.
To fund maintenance of order and defense of rights -- such as police, courts, military -- don’t use the general fund. Instead, have our legislators tax income above the bottom quintile, set the rate each year, and use only that revenue; no more borrowing. Don’t want to pay so much? Then don’t be so belligerent. Vote out the hawks. If contractors and generals can’t dip so deeply into the public treasury any more, you’d be surprised how peaceful the world would suddenly become, since the media would not any longer be prodded into promoting war.
Government generally operates infrastructure -- a natural monopoly -- efficiently, charging fees to users, such as the gas tax levied on drivers of public roads. To build infrastructure, government could sell bonds, as it does now, and pay them off from the rise in value of "improved" land. And get rid of counterproductive taxes, which would also boost commerce and thus location values.
But government could forget about social programs. Instead, allow providers of education and medical care to compete, lowering prices. Meanwhile, pay citizens a dividend from the commonwealth -- all the money we spend on the nature we use -- bringing up everyone’s ability to pay.
That’s how geonomics cuts out waste, shrinks public debt, and spreads bounty.
Jeffery J. Smith runs the Forum on Geonomics.