Category Archives: CATO Institute

What Should the Federal Government Do about Infrastructure?

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President Trump has proposed spending $1 trillion over the next decade on public and private investment in infrastructure. The CATO Institute’s Ryan Bourne has just published an excellent analysis of the whole issue.  Here are the highlights:

  • Any new federal spending must take into account that federal public debt now stands at 77% of GDP and is likely to keep rising given the demographic pressures on entitlement spending. This means that the long-term outlook for public finances is dire.
  • With a current low unemployment rate of 4.4% and a high of 6 million job openings, the economy does not need more government stimulus at the present time.

  • Bridge quality has improved substantially since 1990 (see chart) although roadway congestion has become more acute (second chart). Rail and transit systems appear to be the main areas with observable deterioration.

  • The difference between state highways (which are in good condition), local roads (which are in fair condition) and transit systems (which are in poor condition) is simple: state road maintenance is paid almost entirely out of user fees (gasoline taxes), local road maintenance is paid for by a combination of taxes and user fees (motor vehicle registrations and parking meters) while transit maintenance is paid for almost entirely out of taxes.

The above indicates that the following policy framework should be followed:

  • Privatize areas where government is not needed such as airports, air traffic control systems and railways (Amtrak).
  • Localize decision making as far as possible such as decentralizing responsibility for transportation infrastructure back to the states.
  • Remove payment barriers for charging users. This could reduce the cost of capital investment required for highway systems by 30%.
  • Level the playing field for private sector funding. Currently interest income received for investing in municipal bonds is tax free which is not the case for private debt.

Conclusion. “Rather than imposing further costs on taxpayers, the Trump Administration should prioritize localizing decision making, removing regulatory barriers to private investment, encouraging use of user fees and removing tax exemptions for public investment.”

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Corporate Tax Reform and the Border Tax

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Most informed observers of the U.S. economy agree that the Corporate Income Tax of 35% is too high and should be lowered to a rate which is more competitive with other developed countries. Republican Congressional leaders and the Trump administration have agreed that a 20% rate is about the right level.
Now the question is how to make up the tax revenue lost to the federal government from a lower tax rate.  One idea is to impose a Border Adjustment Tax on imports into the U.S. but exempting exports from such a tax.  Since the U.S. trade deficit is currently running at about $500 billion per year (see chart), a 20% tax on imports offset by a 20% tax credit for exports would raise the necessary $1 billion per year.


This week’s Barron’s points out several disadvantages of a BAT:

  • Economic theory predicts that a 20% BAT would mean that the dollar would rise in value by 20%, offsetting the higher costs of imports. But if this happens, then other industries, such as U.S. tourism, would take a big hit.
  • Other countries could retaliate in ways that would be unfavorable to us and cause a “Trump slump.”
  • If a BAT leads to an increase in exports and a decrease in imports, the $500 billion trade deficit will shrink and so the BAT will bring in less revenue than the predicted $100 billion per year.

The Barron’s article suggests much better ways to make up the $100 billion in tax revenue (on a static basis) which would be lost to a corporate tax rate cut to 20%. For example:

  • A corporate tax rate cut of this magnitude would be revenue enhancing (on a dynamic basis), easily raising an additional $50 billion in tax revenue.
  • The CATO Institute recently compiled a list of corporate welfare programs in the federal budget totaling $100 billion. Eliminating just half of this would save an additional $50 billion.

Conclusion. Cutting the corporate tax rate to 20% from its current level of 35% will contribute significantly to faster economic growth. It should be quite possible to keep such a tax rate cut revenue neutral by cutting back on crony capitalism.

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Why the Federal Government Fails So Often

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This blog is about the major fiscal and economic problems of our country and specifically our stagnant economy (2% real growth for the past six years) and massive federal debt (the public debt, on which we pay interest, is 74% of GDP, the highest since WWII). My major sources of information are the New York Times and Wall Street Journal but I also make use of reports from various think tanks. Today’s source is the recent report, “Why the Federal Government Fails,” by the Cato Institute’s Chris Edwards.
CaptureAccording to Mr. Edwards, there are five main reasons for this:

  • Top-Down Coercion. Federal agencies impose more than 3,000 regulations each year. Total regulations now span 168,000 pages. Benefits are distributed through more than 2,300 programs. Federal policies are often based on guesswork. Failed policies are seldom weeded out because they are funded by taxes and are not contingent on performance.
  • Lack of Knowledge. Private markets operate efficiently on the basis of price information. Government subsidies and regulations throw a monkey wrench into the price mechanism.
  • Political Incentives. Congress focuses on the benefits of programs but does not consider the full costs because benefits are delivered to narrow groups while the costs are spread widely. There are too many fiscal illusions to hide costs such as: paying with debt rather than higher taxes, taxing businesses which then just raise prices, conferring benefits by regulation (e.g. requiring employers to provide healthcare) rather than direct subsidy.
  • Bureaucratic Incentives. There are too many rewards for inertia and not enough for the creation of value such as the absence of profits and losses, rigid compensation, lack of firing, red tape, agency capture, etc.
  • Hugh Size and Scope. The $4 trillion annual budget is 100 times the average state budget of $40 billion. It is simply too vast for members of Congress, and other top officials, to understand what is going on. The more programs the government has, the more likely they will work at cross-purposes.

Mr. Edwards concludes that “the most important way to improve federal performance would be to greatly cut the government’s size” and to do this by shifting federal activities back to the states. With this recommendation I heartily agree!

Are Welfare Benefits Too High?

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The CATO Institute has just released a new study “The Work Versus Welfare
Trade-Off: 2013”, which analyzes the total level of welfare benefits on a state by state basis.  The authors, Michael Tanner and Charles Hughes, show that welfare pays more than a minimum-wage job in 35 states and, moreover, in 13 states, it pays more than $15 per hour. The authors recommend that Congress and state legislatures strengthen welfare work requirements, remove exemptions from working and narrow the definition of work.  Also many states should consider shrinking the large gap between the value of welfare and work by reducing current benefit levels and tightening eligibility requirements.
Clearly welfare benefits as well as disability payments, through the Supplemental Security Income (SSI) program of Social Security, have grown too large and have become a disincentive for many people to find a job.  Getting something for nothing is a moral hazard which induces an attitude of entitlement and helplessness.  It also causes the labor force participation rate to shrink and therefore hurts the economy.
Tightening up welfare payments and disability income are among the many actions
which Congress could take to speed up economic growth and lower government
spending.  We need more representatives in Washington who understand that change is needed and who can advocate effectively for policies which will get this done!