Posts tagged government

Fiscal Drag Still Threatens the Recovery

Last week brought good news for the U.S. economy: according to the Labor Department, the headline unemployment rate fell to 8.3 percent as payrolls added 243,000 new jobs in January. That number climbs to 304,000 if you include the revised numbers for November and December, which underestimated employment by a full 60,000. And job growth was well distributed throughout the private sector, with impressive gains in professional and businesses services, leisure and hospitality, and manufacturing. “That sound you hear is champagne corks in the west wing,” tweeted Washington Post economics reporter Neil Irwin at the news.

But while it’s surely five o’clock somewhere (probably China, in this particular metaphor), champagne-soaked celebration would be premature. There are, as Ezra Klein points out, “fiscal bombs”—or perhaps more accurately a “fiscal minefield”—about to explode beneath our feet. 

The problem is this: if current law holds, the payroll tax cut and expanded unemployment benefits will soon end, followed by the expiration of the Bush tax cuts and the winding down of what remains of the stimulus money. Then comes the implementation of the $1.2 trillion automatic sequester, which will take a huge bite out of Medicare and other non-defense discretionary spending. According to the CBO—which, crucially, must base its analysis solely on current law—those higher taxes and lower deficits will costs us 0.5 percent of GDP in 2012 and 1.65 percent in 2012—enough to slow economic growth to just 1 percent. The IMF agrees: they estimate such “fiscal drag” could cost the U.S. as much as 2 percent of GDP in 2012—”the largest annual fall in at least four decades.”

Decisive action from lawmakers to extend the payroll tax holiday, reinvest in infrastructure, and support state and local governments would go a long way toward preventing that fiscal drag until the economy is more solidly on its feet. As Jared Bernstein notes, the Recovery Act demonstrated just how effective state fiscal relief was for preserving local government jobs. Unfortunately, that money was temporary; now that the stimulus has run its course, we have returned to a hemorrhaging public sector, with 14,000 jobs lost just last month. Immediate action to keep police, teachers, and other state government employees on the payroll would go a long way toward avoiding “fiscal drag” and giving our local economies time to secure a meaningful recovery.

Graph of the Day: U.S. Ranks Fourth Best in the World for Businesses

By Benjamin Landy

If Republican conventional wisdom is to be believed, government regulations are a primary “job killer” in the United States and a major obstacle to economic recovery. But according to the latest World Bank report, the United States is the fourth-easiest country in the world to do business, trailing only Singapore, Hong Kong and New Zealand.

The Bank’s annual Ease of Doing Business Index, released today, compares government regulations around the world, awarding higher rankings for countries with better, simpler regulations for businesses and stronger protections for property rights. The United States got high marks for availability of credit, protection for investors and enforcement of contracts, landing the number four spot overall—by far the best among large economies and democracies. 

The only category where the United States struggled was the ease of paying taxes. Based on the World Bank’s formula—which includes the number of tax payments made, the difficulty and time spent filing, and the overall tax rate—the U.S. ranked a dismal 72nd. On average, American businesses reported spending 187 hours per year filing taxes and paying statutory corporate taxes at a rate of 45.2 percent—considerably higher than any other nation surveyed. But the effective rate is, of course, substantially lower: 18.19 percent for first-year corporations and 31.99 percent thereafter. And, as Bruce Bartlett points out, the U.S. collects the lowest share of corporate taxes per GDP of all the member nations of the OECD, at just 1.8 percent.

With a number four ranking globally, the United states clearly remains one of the most desirable places to do business—despite its high corporate tax and the hysterics of Republican presidential candidates. The primary takeaway for policymakers, then, should be to redirect their focus from supposedly burdensome regulations to what economists agree is really killing jobs: a continued lack of demand. 

Graph of the Day: Privatizing Government is Bad Business

By Benjamin Landy

The unparalleled efficacy of the free market is the kind of conservative shibboleth that rarely involves qualification or nuance; for the modern GOP, the competitiveness of the private sector is nearly sacrosanct. The private sector can do anything cheaper and more effectively than the federal government, they argue, because private employees—with their typically lower incomes and worse benefits—face economic incentives to succeed that federal employees—with their inflated salaries and cushy pensions—need not concern themselves with. But when the independent non-profit organization Project on Government Oversight (POGO) investigated the issue, they found that privatizing government is actually far more expensive in practice than in theory. In fact, the average price paid to contractors is 83 percent higher than if the federal government had simply paid their own employees to do the same job.

Instead of focusing on the public-private pay differential, POGO examined the actual cost of the contracts auctioned to private businesses compared to the estimated cost of the same job being done in-house by public employees. After looking at 550 contracts across 35 different sectors and agencies, they found that in 94 percent of cases, the average billing rate of the contractors was nearly double what the government would have paid to do the job itself.   

The most egregious example of waste was the money spent on Claims Assistance and Examining, which involves the “examining, reviewing, developing, adjusting, reconsidering, or recommending authorization of claims by or against the federal government.” What should have cost the federal government $57,292 per year for a public sector employee (including benefits), or $75,637 for a fully compensated private sector employee, actually cost an average contractor billing rate of $276,598—nearly five times the in-house rate and 3.66 times the price of an outsourced private employee.

The authors of the report conclude,

“The current debate over pay differentials largely relies on the theory that the government pays private sector compensation rates when it outsources services. This report proves otherwise: in fact, it shows that the government actually pays service contractors at rates far exceeding the cost of employing federal employees to perform comparable functions.”

This is a serious failure of cost analysis and a major drain on the federal budget. Nearly a quarter of all discretionary spending now goes to service contractors. If, as POGO estiamtes, contractors cost the United States government an average 1.83 times more than if public sector employees had done comparable work, then many billions of taxpayers’ dollars are being wasted each year. According to the Washington Post, the number of federal contractors grew from an estimated 4.4 million in 1999 to over 7.5 million in 2005; that number is undoubtably even higher today. With over $320 billion spent on service contracts in 2010, it is high time we significantly reevaluate those outsourcing policies and start paying closer attention to the true cost of privatizing government.