Tuesday, April 22, 2008

Should Gov't Expenditures Stay a Constant Percentage Of GDP?

Liberals frequently like to point out that, no matter the meanderings of the government on tax and spending policy, government expenditures as a percentage of Gross Domestic Product (GDP) have remained fairly constant across the years. This, they argue, means that all-in-all government is not growing too large. Here is an example of the graph they like to point to.

It's a seductive argument accepted by many in academia. It is also one with which I strongly disagree. The details of this disagreement can be very useful in dissuading liberals of their wrongheaded beliefs.

GDP growth is composed of several factors. The three biggies are inflation, population growth and "other." The first two are just products of the expansion of the money supply and the society, respectively. As such, it makes perfect sense that government spending should grow as these do. The basic idea is that the government should spend roughly the same inflation-adjusted number of dollars per citizen each year.

It is the third, "other," category which lies at the core of the argument over the proper role of government. The reason I called this category "other" is because it is somewhat mysterious. One might wonder how the economy manages to produce growth above and beyond inflation and population expansion. Are we working more hours per year? Or maybe the "other" category is generally so small as to be irrelevant.

In fact, this third category is responsible for the entire improvement in human conditions since the stone age. It represents progress in all sorts of areas: transportation, technology and financial engineering, to name a few. Economists often term this category "efficiency," in the sense that each year we're able to accomplish more work per person-hour of work.

This makes intuitive sense when you think about an assembly line. In the early 1900s, each function in the factory had to be performed by an individual person. Gradually, automation took over, and today many assembly-line processes are done by robots. Today, we move raw materials more quickly with less wasted effort than ever before. This may come as a surprise to many liberals -- environmentalists in particular -- but the fact is that capitalism puts a huge premium on efficiency and conservation in every area. Less waste means higher GDP growth.

So, then, one might reasonably ask why government expenditures need to grow at the rate of GDP. To some extent, this might make sense. The advent of automobiles required that the government furnish paved roads, which cost considerably more than the dirt trails which dominated the 1800s. Similar arguments might be made about the Internet or biotechnology, both of which require significant infrastructure investments to keep things growing.

But in reality keeping up with these sorts of expenditures does not push government spending significantly ahead of population growth plus inflation. The real drivers of government spending increases are flawed budgeting processes and government's own internal inefficiency.

In large measure, the government provides us with the same services it did 25 years ago. In private enterprise, one would expect that to mean the number of employees dedicated to the task had declined, owing to the gains in efficiency during that period. Instead, the government employs far more people -- directly and indirectly -- than it did.

Even entitlement programs such as social security and medicare should properly grow only at inflation plus the rate of population growth. For the former, maintaining seniors' standard of living should require payments which grow at the rate of inflation. For health care, costs should actually decline as technology permits government to pay less money to maintain the same standard of care as in prior years.

Of course, this is not what actually happens. For better or worse, government views the efficiency-driven portion of GDP growth as a cookie jar permitting them to inject government into our lives in new and exciting ways. This is a why government becomes more intrusive each year, even as spending as a percentage of GDP remains constant.

It is also, I believe, a crucial reason why people want to be government officials. It must be great fun waking up each morning with a fresh new set of GDP growth to waste. Even if efficiency gains produce only a 1 percent annual excess GDP growth rate, that's a $35B annual party fund for government.

When viewing political debates, particularly in this presidential year, it's important to keep this analysis in mind. Candidates generally like to set up false dichotomies and choices for voters. While "universal health care" and "war in Iraq" are interesting issues in the short term, mostly what's going on is a sleight of hand to prevent voters from noticing government's ever-widening reach.

This growth is government's true nature, and it is this growth which makes government fundamentally problematic. As conservatives, the best we can do is to recognize it, expose it and oppose it wherever possible.

Reducing Welfare? In Alameda County?

I don't know if anyone else caught this brief article in the Oakland paper. Apparently the county is considering only permitting six months of welfare payments for those who can work rather than the current year. I'd like readers to weigh in on this. For starters, I had thought the 1990s welfare reform changed the system to prevent people sitting on welfare for such long periods. I guess I was wrong there, so I obviously would tend to support this change.

Another story I've heard anecdotally is of people who repeatedly take a job and get themselves fired every six months or so, thus basically permanently staying on the California unemployment insurance plan. I realize this is a separate matter, but I'd be curious if any readers have encountered this particular form of gaming the system.

Incidentally, I don't actually have a problem with gaming the system. I figure that if government is stupid enough to make it possible, why not do it. I actually rather enjoy the fact that those the government considers incompetent enough to require welfare somehow manage to get it together enough to outsmart the government. It makes you wonder who's really driving the bus.

Perata and Teachers Unions, Have You No Shame?

Don Perata took the microphone at a rally Monday, declaring that we should "raise taxes before cutting education."

This comes on the heels of the news last month that Alameda teachers decided to put kids in trash cans to protest budget cuts. The hyperbole never seems to end.I'd like to spend some time in a later posting on California's ridiculous taxation system, but suffice it to say that we already have the highest state income tax in the nation, including the absolutely preposterous 1% surtax imposed a couple years back for "mental health." Talk about Balkanizing your tax system: what's next, a special income tax bracket for the governor's Hummer?

But I digress. The state's teachers unions have spent years making sure they spend every dime they can possibly find in the budget. This is in an environment where tax receipts have risen dramatically from every source.

Any reasonable business enterprise would budget spending increases based on a logical economic footing -- raising spending annually at the rate of inflation plus population growth, for example.

Not so for the state. At the behest of the unions, the government budgets spending increases with one eye looking at how much money it will take in during the subsequent year. The entire goal of the budgeting process is to find ways to spend every dime. Literally no thought is ever given to the question of whether the government needs to be spending such vast sums.

Enter a modest decline in state revenues, and the unions are completely unwilling to even entertain the notion that the same process they used in good times should also work in the bad times. No, apparently the government's coffers are a one-way door. Any whiff of a problem with that, and teachers start running around putting kids in trash cans in protest.

The reality? The 1999-2000 California state budget authorized $79.8B in spending. The 2007-2008 plan authorized $131.5B. That's an increase of 65% during a period of very low inflation and moderate population growth.

Around 40% of the budget goes to K-12 education. So, it's little surprise that when tax revenues decline the education budget has to take some of the hit.

To me, the more relevant question is where that 65% increase in education funding went during the past 8 years. Did it just vanish into a black hole?

To hear Perata and the unions tell it, that must have been the case. But we know that's not true. As usual, the money was consumed in some combination of wasteful excess and ridiculous, unfounded educational experiments.

The bottom line is that the state government receives plenty of money to provide quality K-12 education. We must stand firm against any tax increases and require the government to live within its means.

Incidentally, I am quite certain that what Perata has in mind is an increase in California's already-highest-in-the-nation 10.3% top marginal tax rate. This is fodder for a separate blog post, but in my opinion it is an open question as to whether this would even help solve the problem. For every new dollar of tax revenue, California will push some number of high earners out of the state. This trend is already well established, and with the growth of information technology, it makes sense to me that many more people may follow suit. After all, Florida, Washington and Nevada aren't all that bad.

Friday, April 18, 2008

Oakland's Business-Tax Dragnet

This week, I received a letter from the city of Oakland indicating that I had failed to register the business I apparently run out of my house. The letter claimed I owed the city more than $5,000 in back-taxes.

I've read about these shakedowns in the past, and given the city's well-publicized revenue shortfall, I'm not surprised they're up the their tricks again.

So, on Tuesday, I dutifully collected together my past 3 years of federal tax returns, drove downtown and took a number at the city's business tax office.

After an hour of waiting, I spoke with a very helpful lady who indicated that I did not, in fact, owe anything. When queried about the matter of the $5,000, she replied that sending out letters with large dollar amounts is "the only way we can get people to come in."

I still have no idea how I was selected to receive this letter. But, I did take this chance to educate myself about Oakland's business tax system.

Like most of the policies of Oakland's city government, the business tax appears designed to scare off legitimate businesses from locating in the city. As you can see from the tax table, the city specifically targets what they call "Professional/Semi-Professional" businesses, including lawyers, accountants, etc.

Importantly, the 0.36% tax rate charged to these companies is based on gross receipts, not profit. So, for a business that has a profit margin of 25%, that's effectively a business income tax of more than 1%.

Back in 2001, the city received an analysis (pdf) indicating that its business tax is dramatically higher than those of surrounding cities. Shockingly, our tax on professional services business is 20% higher than that in San Francisco. Emeryville scores better in every single area -- a fact which probably helps explain their relative success at attracting business.

It's always surprising to me how hard the city of Oakland works to scare off businesses, and I'm always surprised when I go downtown that I see as many companies there as I do.

I came across another interesting facet of this story in my evening of worry before I cleared the matter up. I took a look at the relevant section of the Oakland municipal code.

What I found is a definition of "business" which is almost comically vague: "any activity, enterprise, profession, trade or undertaking of any nature conducted or engaged in, with the object of gain, benefit or advantage, whether direct or indirect, to the taxpayer or to another or others...."

So, basically, the city can construe anything you do as a business activity and tax you on it.

The code's definition of "gross receipts" is also extremely liberal. I won't quote it here, as it's pretty long. But suffice it to say that I'm pretty sure the city could find a way to construe almost any financial activity by a citizen as a "business" and then tax whatever money changes hands at a rate of up to 0.36%.

Someone needs to explain to the city that economic development is a competitive situation, and it depends strongly on such factors as a city's climate toward business. Setting business taxes at the highest levels in the region will not attract businesses to Oakland, no matter how much haranguing our city leaders do.

Sunday, April 6, 2008

Vote No On Oakland's LLAD Increase

If you own property in Oakland, by now you should have received ballots in the mail regarding the proposed increase in the "Landscape and Lighting Assessment District" fee. PLEASE VOTE NO!

This fee increase should be anathema to liberals and conservatives alike. Liberals should hate it because it's a regressive tax -- costing the same amount for a small house as for a mansion. Conservatives should hate it because, well, it's a stupid tax.

Back in May of 2007, the mayor's office said they would "make the case" to voters for why the increase was necessary. I've searched diligently for any information which makes this case, and I haven't found it. I think it's more likely they're hoping to conduct a stealth campaign of convincing large landowners and Leftists to vote yes, while keeping the rest of us in the dark.

Last time they tried this, in 2006, the Tribune seemed surprised that the city needed the LLAD slush fund to take care of such normal city activities as maintaining parks and providing lighting. I guess $2.2B doesn't go as far as it used to.

Honestly, these special districts are just a trick. I looked though the LLAD's PDF describing where the money goes, and I was unsurprised to see that they listed a bunch of things -- ballfields and the like -- which are hard to argue against.

It's a clever move. They know no one would be likely to vote for the increase if it went to fund Deborah Edgerly's salary. Though, on second thought, I'm not sure the increase would raise enough to cover that.

No, the city moves popular public services into special districts while hiding overtime and corruption in the general fund. This way, they get as much of our money to spend as they can possibly grab with as little oversight as possible.

My belief about the possibility of a stealth campaign was bolstered tonight as I reviewed the city's PDF about the resolution to increase the tax. Oddly, and somewhat comically, they seem to have inserted a bunch of text into this document just to confuse or bore the public to death. It reminds me of SPAM I sometimes receive in my inbox that reads like some sort of bizarre poetry. From page 18:
Turf mowing is more time consuming than any of the other cultural practices involved in caring for turf. Regular mowing with a sharp mower blade at the proper height will help keep grass growing vigorously and maintain adequate density to completely cover the soil surface. In addition, mowing with sharp blades will cut the grass blades cleanly rather than tearing and shredding as would be the case with dull blades.... Shredded ends of the grass blade are more susceptible to disease invasion.

I'm confused. What is the point of providing such inane information in a public filing? Who compiled this document, and why?

The city wants us to vote yes on this increase because of a purported budget shortfall. Well, I've got news for the Oakland city government. Real estate values and transaction volume across California are dropping like stones. The city's housing transfer tax (yet another egregious hidden tax) is bringing in around half the money it did in prior years. It's just a matter of time before residents begin requesting downward revisions in property values for property taxes. That line item grew 12% last year (an unsustainable number, even in the best of times).

I have a sneaking suspicion this is the real reason Deborah Edgerly plans to leave her post as city administrator. She knows the city is in for repeated rounds of brutal budget cuts, and she wants to leave before the blame game begins.

Only in a declining revenue environment can we hope to see true budget cuts and some rationalization of the city's priorities. But to make sure this happens, we must do our utmost to avoid "feeding the beast." Voting down the LLAD increase is a step in this direction.

Even if we vote this down, we can expect to see numerous additional proposals in the coming couple years, as the city and its parasitic twin, the public employee unions, lash out at us. Already this has begun with the teachers union.

We must stand firm and unwavering in our commitment not to give the government any more money than we possibly can. Vote no on the LLAD increase.

In Oakland, Felons Get All The Breaks

Oakland Mayor Ron Dellums is at it again, this time pushing to cease asking job applicants whether they've been convicted of a felony in the past.

As with most Leftist proposals, this "don't mind the felony" policy starts out with the best of intentions. How can Oakland's tens of thousands of former inmates get ahead so long as they must repeatedly explain away their past indiscretions?

Not only that, but Dellums did spend enough time thinking about the issue to suggest eliminating the question only for jobs where a past conviction "should not be an issue." So, at least for now we needn't worry about convicted child molesters working in the schools.

The policy contains, however, a deeper flaw which is common to many Leftist plans. While it laudably seeks to raise up the downtrodden, it completely ignores the plight of those situated just above the downtrodden. Call them the semi-downtrodden.

For example, suppose a young man with little work experience decides to apply with the city for a job as a plumber. Now, this man doesn't have a great resume, but he did graduate from high school, and he's never been in trouble with the law. He's poor, but he's willing to work hard for an honest day's pay.

Another applicant comes along, with some experience as a plumber. This 30 year old does have a gap in his resume, as he spent five years in San Quentin for shooting his ex-wife in the arm with an unregistered handgun.

Who deserves the job?

The real answer is, "it depends." The person making the hiring decision should consider all relevant factors, including character, in making the assessment. However, under Oakland's new policy, the manager would have no way to know that the second applicant did time. So, he appears a far better candidate than the first applicant, despite the fact that with the prison information, the first applicant might be the right call.

The point is that decisions such as hiring are ultimately zero-sum games. We all know that the city government pays well, so it should come as no suprise to see numerous applicants for any given opening. Needless to say, when the government hires one person, it is rejecting all the other candidates.

So, while Dellums' policy could initially be viewed as only uplifting ex-convicts, this is not the whole story. It is simultaneously harming those with clean records who might otherwise have gotten jobs.

Now, I have nothing wrong with hiring ex-felons. I think people should do that if it makes sense. But I do have a problem with whitewashing people's backgrounds in service of an agenda.

I also take issue with the creation of what amounts to an anti-meritocracy. That is, the person who has done the most wrong receives the most benefit from the powers that be.

Maybe the government should seek out non-troublemakers for hiring. Maybe they should spend more time worrying about the victims of crime than the perpetrators.

Just an idea.