Chris Edwards

Defense Cost Overruns

Wow, a bipartisan effort to actually do something about government waste. From the Washington Post today:

A bill to end cost overruns in major weapons systems would create a powerful new Pentagon position — director of independent cost assessments — to review cost analyses and estimates, separately from the military branch requesting the program.

Those reviews, unlike in the current process, would take place at key points in the acquisition process before a weapons program can proceed, according to legislation sponsored by Sen. Carl M. Levin (D-Mich.) and Sen. John McCain (R-Ariz.)

This seems like a step forward, but cost overruns are a big problem across the entire federal government, not just at the Pentagon. Federal financial management of energy, highway, and computer projects has been appalling, for example. I’ve written about this here and elsewhere.

The government needs to buy weapons, and so we should try to improve the Pentagon process as best we can. However, the federal government does not need to buy highways, airports, air traffic control computers and many other things that have chronic cost overruns. Those items should be privatized.

FutureGen Boondoggle

The Senate stimulus bill apparently contains $2 billion for “FutureGen.” Here is what my assistant, Harrison Moar, found out about this project:

FutureGen was launched in 2003 by President Bush as a public-private partnership to build a low-emission coal-fueled power plant and demonstrate technologies to capture carbon dioxide. The government was to share the cost of the project with 12 private energy companies. The project was originally estimated to cost $1 billion, but by 2008 the estimate had ballooned to $1.8 billion. By mid-2008, $176 million had been spent.

In 2007, the Department of Energy chose a single site for the project in Mattoon, Illinois. But after the project’s estimated cost started soaring, the department changed direction in 2008 and cancelled the Mattoon project. That was a good decision, but the government had still flushed $176 million down the drain. The department’s new idea was to focus on developing other clean coal projects in different locations at an estimated taxpayer cost of $1.3 billion.

FutureGen has involved pork barrel politics since the beginning. As the department originally considered various project sites in Illinois and Texas, the state governments in those states deployed aggressive lobbying to woo federal officials. Upon news of possible cancellation of the Mattoon project in 2008, Senator Dick Durbin of Illinois swung into action using all his tools as the second-ranking senator to continue the funding to his state. He even threatened to block appointments to the Department of Energy unless it reversed its cancellation decision.

$1.2 Trillion Deficit

Before 1987, Americans only needed to understand the word “billion” to get a handle on federal budget numbers. Today, the word “trillion” is the needed metric in budget discussions.

The Congressional Budget Office released an update to its budget projections today, and the figures show that the federal deficit for fiscal 2009 will be $1.2 trillion. That deficit represents 8.3 percent of GDP, the highest share of the economy since World War II. Thus, a burden the size of 8 percent of all income earned in the United States this year is being thrust onto tomorrow’s taxpayers.

Subsidies Beget Subsidies

Sorry, this blog has nothing to do with the Wall Street mess, despite the title.

Instead, consider this tiny story in the WaPo that reveals the general inanity of our subsidized nation. The article, “Federal Grant to Provide Help To Low-Income Students” reports on a $1 million federal grant to the state of Virginia. 

Will the grant money be used to buy books for poor kids, or to help pay their tuition? Nope. It will go to hire bureaucrats to train kids on how to grab more education subsidies: “The agency plans … to help educate students about college, with a sizable focus on how to obtain financial aid.”

For more about the follies of federal granting, see Federal Aid to the States.

Fannie and Freddie

The IBD has an excellent front page summary of the 1990s roots to the Fannie Mae and Freddie Mac disaster.

One issue IBD touches on is the ineffectiveness of the regulating agency OFHEO. OFHEO gave Fannie and Freddie a clean bill of health just last December.

One reason that having regulatory agencies is worse than having no suchagencies is the false sense of security provided to markets by such apparently off-base seals of approval.

$1 Trillion Budget Deficit by 2017?

The Congressional Budget Office released new figures on the federal budget yesterday, which show that the deficit will peak in 2009 at $438 billion and decline thereafter. But budget watchers and CBO economists know that these “baseline” projections don’t describe actual budget realities.

So I constructed a “business as usual” scenario for revenues and spending to get a sense of the fiscal picture that the next president will actually face. The figure illustrates that it will be much easier being the president who enters office in 2009 than the one who enters office in 2013.

Projected Fed Revenues and Spending chart

The revenue line in the figure assumes that all current tax cuts are extended and the alternative minimum tax is indexed for inflation. Extended tax cuts include income tax rates, dividends, capital gains, child credit, death tax, expiring business breaks, and other items.

The spending line assumes that discretionary spending rises as fast as GDP, the number of troops in Iraq and Afganistan is reduced to 30,000 by 2011, and Medicare payments to physicians are not cut back after 2010 as under the baseline. These adjustments are based on CBO data. I also estimate the extra federal interest costs of these assumptions.

Federal Worker Pay Blasts Off

Newly released data show that federal employee wages and benefits continue a rapid ascent above and beyond private sector pay levels. The data was released last week by the Bureau of Economic Analysis. (See tables 6.2, 6.3, 6.5, and 6.6).

The new data show that the 1.8 million federal civilian workers earned an average wage of $77,143 in 2007, which is 61 percent higher than the $48,035 average in the U.S. private sector. That 61 percent pay advantage has increased from a 34 percent advantage in 2000.

Looking at total compensation (wages plus benefits), federal workers earned an average $116,450 in 2007, which is more than double the $57,615 private sector average. The federal compensation advantage increased from 68 percent in 2000 to 102 percent today. Federal workers not only earn much more than private sector workers, their earnings advantage is getting more pronounced every year.

Federal compensation rose quickly during the 1990s, but even faster during the 2000s. I call this the “Bush Bounce” because it appears that the Bush administration has caved into federal union demands for expanded pay year after year. Between 2000 and 2007, average federal compensation increased at an annual average rate of 6.3 percent, which compares to the private sector increase of 3.5 percent. During the 1990s, average federal worker compensation increased at an average rate of 5.1 percent. The charts below illustate the “blast off” in federal wages and compensation. 

McCain, Obama, and Clean Coal

After you’ve watched federal policymaking for a number of years, you realize that the actual effectiveness of federal programs has absolutely no bearing on their survival or level of funding. That’s because the purpose of federal programs is not to solve problems, but to provide a menu of levers that politicians can pull to appeal to certain types of voters.  

We see this at play in the 2008 election with “clean coal,” which has attracted the attention of both candidates. Obama wants to “significantly increase the resources devoted to the commercialization and deployment of low-carbon coal technologies.” Meanwhile, McCain has pledged to spend $2 billion a year on clean coal technology if elected.

Since these pledges make for good bullet points in speeches, the campaigns don’t really care about the actual track record of federal subsidies to clean coal. But after the election, the next president should hesitate to increase such corporate welfare. Here is what I noted in Downsizing the Federal Government:

Fannie and Freddie

Paul Gigot has an outstanding piece on Fannie Mae and Freddie Mac today in the WSJ. “The abiding lesson here is what happens when you combine private profit with government power.” Exactly.

Here’s what I said about the twin-headed hydra in my 2005 Downsizing the Federal Government:

McCain’s Budget: Balance by 2013?

John McCainIn a new campaign document, John McCain detailed some of his economic proposals today. The promise that caught my eye is a pledge to balance the federal budget by 2013. That is curious promise for him to make.

The Joint Committee on Taxation projects that federal revenues in fiscal 2013 — with the extension of the current tax cuts and AMT relief — will be 17.6 percent of GDP.

This year federal spending will come in at about 20.6 percent of GDP. That means that in four years a President McCain would cut spending worth about 3 percent of GDP, or about $427 billion annually in today’s dollars.

That would be fabulous, and Mr. McCain can read my Downsizing plan to find out exactly where to cut. Indeed, he might have already read it (see the picture). However, today’s plan from McCain includes few specifics on discretionary spending cuts, and his (laudatory) entitlement reforms would probably not generate major savings in just the first four years.

Here’s where fiscal conservatives get nervous about Mr. McCain’s intentions. In the same campaign document. McCain repeatedly lauds bipartisan efforts to fix the budget. Thus, if elected, would he actually fight for $427 billion in federal spending cuts? Or would he just trim some minor waste and earmarks, and make up the vast bulk of the budget gap with tax increases in the name of bipartisanship?

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