Archive for the ‘ruling class’ Tag

Spying and the Administrative State   1 comment

History can teach us a lot if we study it. For example, the current administration’s spying on American citizens is not new.

I honestly had planned to end my series on the administrative state with my last post, but this came up and it’s timely. The National Security Agency (NSA) has a long history … a Woodrow Wilson history. That’s right. The Great Administrator was responsible for creating the predecessor of the NSA, the Cipher Bureau in 1917 as part of the First World War effort. It was part of Military Intelligence – an executive branch. However, and this is the salient part, the Department of State partially funded it.

Remember what I said about the administrative state’s hallmark features? Whenever you see a department that doesn’t quite fit under one department, you’re looking at the administrative state.

At least as far back as Franklin Roosevelt, the United States presidency has used national security and law enforcement offices to spy on their domestic enemies. Following the close of World War II, President Truman’s administration became concerned that there might be Soviet sympathizers in the United States, and so he extended the purview of military intelligence organizations that had previously operated only in wartime and entangled them with law enforcement agencies like the FBI. At one point, in 1946, the Federal Bureau of Investigation actually joined the NSA for a brief time. Around the same time, the Joint Chiefs of Staff – previously only convened during wartime – because a permanent fixture. Before Truman’s administration was done, there were proposals for a centralized security agency under the control of the Central Intelligence Agency. The idea was that military and non-military intelligence would be comingled and given even weight. Truman’s plan isn’t completely a reality now, but agencies like Homeland Security, the NSA, the FBI and the CIA often blur the lines between protecting the homeland from outside enemies and investigating domestic concerns that can and do sometimes dig up dirt on American citizens for political rather than law-enforcement or national security reasons. In other words, whatever the official delineation might be, the reality is that there’s a multi-armed kracken of intelligence agencies operating more or less autonomously and remaining in place from one administration to the next.

The Kennedy administration FBI wire-tapped Martin Luther King Jr.’s phone, Lyndon Johnson spied on Barry Goldwater’s president campaign, and Nixon had Watergate as the tip of his iceberg. Iran-Contra reflected badly both on Ronald Reagan and the first President Bush, who was former CIA, let us remember. The Clintons were famous for the dirt they collected. Bush 43’s administration conceived of the current spying system, so they bear equal responsibility for it even if it was the Obama administration that started keeping data on all of us.

At the risk of sounding like I have a one-track mind, it’s not about politics. It’s about the administrative state. Operating largely independent of the elective branches of government, bureaucrats in organizations like the FBI, the NSA, and ATF continue with their primary goal of consolidating their own power regardless of the goals of the politicians in power at the moment or the people who elected them to represent us. If these organizations didn’t exist or at least were called to account by our elected representatives, when a president wanted to dig dirt on political enemies, he’d quickly find himself being told – uh, we don’t do that and if we did, we’d all lose our jobs after the next Congressional review. And 200 million Americans would cheer robustly, I’m sure.

Washington has tried to deal with this penchant for constitutional violations in the past – most notably after the Watergate mess – but – from a non-partisan perspective – these efforts have been hindered by their partisan nature. It’s usually the party not in the White House that objects to the misuse of government authority and that lasts until their party gets into the White House and then it stops until their guy does something that gets the other party to investigate, which lasts until ….

It’s no wonder the American people are cynical. I can’t help thinking that the reason we’re confused is that the ones calling the steps aren’t elected officials at all, but career bureaucrats who operate just outside of our field of vision.

The current anti-corruption effort in Congress might be a little different because it is championed by the “civil liberties caucus” of Republican libertarians such as Sen. Rand Paul and Rep. Justin Amash and ACLU-type Democrats like Sen. Ron Wyden and Rep. Jared Polis, raising hopes for a transpartisan challenge to the national security state and its defenders in both major parties. By scrambling the usual partisan lines, the current effort may be more than just a red/blue food fight. Whether that small alliance can overcome the entrenched DC apparatus allied with a president who acts as if he has a voter mandate is still questionable. The reforms that were put in place after the Watergate mess are proof that reform is a tough show that has historically only had short-term effects.

“[Public scandals are] ritual moments in which the sacrifice of the reputation of one or more individuals allows many more to continue their scandalous ways, if perhaps with minimal safeguards and protocols that are meant to ensure that the terrible excess of the past will not occur again”. Nicholas Dirks (anthropologist)

The greatest challenge to transforming the system is to assure that we accomplish more than a political blood sacrifice. The Patriot Act was passed with a general consensus about what it meant or what it allowed. Twelve years later, we learn that the law Congress passed has been interpreted by the executive branch into something very different from that intention.

So what do we the people plan to do about it?

In the Pipeline   Leave a comment

Hundreds of costly new regulations are also in the planning stages, many of which derive from the Dodd–Frank statute, Obamacare, and the EPA’s global warming crusade.

The most recent Unified Agenda—a semi-annual compendium of planned regulatory actions by agencies—lists 2,305 rules (proposed and final) in the pipeline. Of these, 131 are classified as “economically significant.” This is two less than the number pending in the previous agenda (fall 2011), and still high by historical standards. This year’s 131 “economically significant” rules represent an increase of 133% from the 56 identified in 2001.

An unusually large number of rules are pending at the Office of Information and Regulatory Affairs (OIRA), the Administration’s regulatory review office. According to the latest OIRA data, 81 of the 150 regulations awaiting review have been pending for more than 90 days, exceeding the maximum time allotted under Executive Order 12866. Another seven were pending for more than 60 days (but fewer than 90 days).

Action on some of the Administration’s most ambitious regulations was postponed last year, including more stringent requirements for controlling ozone emissions. As proposed by the EPA, the rule would cost $90 billion or more annually and, potentially, millions of jobs. However, the President reportedly instructed then-EPA Administrator Lisa Jackson to hold off on the new standards until 2013, which means these items are due to come up any day now.

Also on hold were various regulations to control power plant emissions of so-called greenhouse gases that would dramatically increase energy costs, as well as the designation of coal ash as a “hazardous substance”—estimated to cost $79 billion to $110 billion and thousands of jobs.

If the delays in rulemaking were the result of more thorough analyses or consideration of regulatory alternatives, that would be good news for the economy and consumers. But there is no indication that the Administration has embraced a newfound skepticism toward red tape. In fact, the regulations are expected to emerge again this year, evidently regarded by the Administration as more advantageous timing — as in post-election.

Now that Obama has a second term, expect more and bigger regulation and far more red-tape.

Regulations Just for 2012   Leave a comment

Financial regulation dominated rulemaking in 2012, a direct result of the Dodd–Frank financial regulation act. In total, financial services regulators were responsible for 13 of the 25 new major rules issued during President Obama’s fourth year; led by the Commodity Futures Trading Commission (CFTC), with nine; followed by the Securities and Exchange Commission (SEC), with six (two rules were issued jointly by the two agencies).

The newly created Consumer Financial Protection Bureau (CFPB) chipped in its first major rule, imposing restrictions on money transferred electronically from U.S. residents to relatives and friends abroad. Although outside the scope of this report, the CFPB also issued four more major regulations in January and February 2013. Seven other proposed regulations by the CFPB are pending.

The most costly regulation were issued by the Environmental Protection Agency (EPA). Topping the list were new automotive fuel-economy standards, issued jointly by the EPA and the Department of Transportation, which the EPA calculated will cost $10.8 billion annually. The bulk of this cost will fall on drivers, who will pay an estimated $1,800 more for a new vehicle.

Coming in a close second was the EPA’s so-called Utility MACT regulation at more than $10 billion annually. This 210-page regulation requires utilities and other electricity generators that use fossil fuels to install the “maximum achievable control technology” (MACT) to limit emissions. So stringent are the standards that potentially dozens of coal-fired power plants will close, thereby undermining the reliability of the power grid and substantially raising the costs of electricity for consumers. The EPA is currently reconsidering the portion of this rule pertaining to new power plants, and has stayed its implementation of the rule for such facilities.

Obamacare is also imposing enormous costs on the private sector. For example, businesses with more than 50 employees must either provide health care or pay a fine to offset an insurance tax credit for workers who purchase their own coverage. Some insurers will be effectively forced to subsidize others at an aggregate cost of $18 billion annually by 2016. Although the law does not take full effect until 2014, there is already ample evidence of its grave economic consequences. According to the Federal Reserve Board: “Employers in several districts cited the unknown effects of the Affordable Care Act as reasons for planned layoffs and reluctance to hire more staff.” Because many of the new rules are structured as administrative requirements for states or the federal government, rather than prescriptive regulation, they are not fully reflected in our regulatory totals. But that does not mean that their impact is insignificant.

Excessive regulation, of course, cannot be blamed on this Administration alone, although the accelerated rate of regulatory expansion in President Obama’s first term appears unequaled. Congress ultimately authorizes all rulemaking, either through specific requirements, or through broad authorizations, leaving agencies great discretion to impose requirements. Moreover, a majority of rules adopted in the fourth year were promulgated by so-called independent agencies not subject to direct White House control (although they are managed by presidential appointees). Regardless of responsibility, however, the result is the same: more burdens for Americans and the U.S. economy.

We Don’t Know the Costs   Leave a comment

A necessary part of understanding the burden regulation puts on American society is knowing what it costs the government to implement the regulation and what it costs American society to comply with the regulation.

The actual cost of new regulations is probably considerably higher than the totals reported by the regulatory agencies, a portion that I detailed yesterday. I only listed “major” regulations because the Governmental Budget Office typically only performs cost-benefit analysis on “major” rules, although the costs non-major rules could be substantial. As it is, regulatory agencies failed to provide quantified costs for 10 of the 25 MAJOR regulations issued in FT 2012, so why would we trust any figures released for non-major regulations?

In fact, the quality of cost analyses by regulatory agencies is often substandard. A prime example is Dodd-Frank. Faulty cost-benefit analyses have caused the courts to invalidate many of the regulations issued by the Securities and Exchange Commission. For instance, the proxy access rule, adopted by the SEC in August 2010, would require publicly traded corporations and investment first to disseminate information about board nominations made by shareholders. Critics argue that this will make it difficult to retain executive talent while inviting special-interest groups to harass firms. The SEC claims the benefits justify the costs.

The U.S. Court of Appeals for the District of Columbia Circuit castigated the SEC’s cost analysis as “inconsistently and opportunistically framed” in a manner that constituted “statutory neglect,” adding that “[b]y ducking serious evaluation of the costs that could be imposed upon companies from use of the rule by shareholders representing special interests, particularly union and government pension funds, we think the Commission acted arbitrarily.”

Legal briefs are currently being submitted in another SEC case involving the “conflict minerals” rule, which requires firms to guarantee that its sources for four specific minerals are not fueling conflict in central Africa. The three business groups that filed suit allege that the commission failed to conduct a proper cost-benefit analysis and underestimated the costs of the regulation.

These are not isolated cases. One of the CFTC’s commissioners, Scott O’Malia, excoriated the CFTC last year for its shoddy analyses. In stating his opposition to a major Dodd–Frank regulation on swaps, O’Malia wrote: “I have reached a tipping point and can no longer tolerate the application of such weak standards to analyzing the costs and benefits of our rulemakings.”

Problems are not limited to financial regulators. A recent study by a business group of the EPA’s cost analyses for six major regulations identified systemic problems in agency methods; the EPA changed amortization scheduled for capital expenditures from 30 to 50 50 years, distorting the financial burden firms will experience to meet near-term compliance deadlines.

The EPA’s habit for ignoring the impacts on the supply chain when regulations create a surge in demand for emissions-control technologies and equipment, has “inevitably increased input prices and the compliance costs well above the EPA’s estimates, which are based on current prices in the pollution abatement industry.” The EPA’s penchant for regulation at any cost was laid bare in its analysis of the so-called Utility MACT rule:

“We may determine it is necessary to regulate…even if we are uncertain whether [the rule] will address the identified hazards.… We also may find it necessary to regulate…even if we conclude…that the imposition of the other requirements of the [Clean Air Act] will significantly reduce the identified hazard.”

In other words, regardless of the costs and in the absence of proof that it has improved air quality, the EPA will impose regulation as it sees fit.

Yeah, there’s no reason for us to be concerned! Pay no attention to the tentacle that just rubbed the bow of the ship. That’s nothing to be concerned about!

Measuring the Red Tape   Leave a comment

Unlike federal taxation and spending, there is no official accounting of total regulatory costs. Estimates range from hundreds of billions of dollars to nearly $2 trillion each year. However, the number and cost of new regulations can be tracked, and both are growing substantially.

The most comprehensive source of data on new regulations is the Federal Rules Database maintained by the Government Accountability Office (GAO). According to the GAO data, federal regulators issued 2,605 new rules during Obama’s fourth year in office. Of these, 69 were classified as “major,” generally defined as having an expected economic impact of at least $100 million per year. Forty-two of these major rules were administrative or budgetary in nature, such as Medicare payment rates or hunting limits on migratory birds; twenty-five were “prescriptive” regulations that imposed burdens on private-sector activity. Only two major rules decreased regulation. During the President’s first term there were 131 prescriptive rules. This compares to 52 such rules imposed during George W. Bush’s first term. And, no, I’m not saying this made Bush a good president in terms of regulation. I’m saying he produced less regulation than Obama.

Based on agencies’ own analyses, more than $23.5 billion in new annual costs were added last year, which brought Obama’s first-term total to $69.8 billion. In addition, there were $4.6 billion in one-time implementation costs in 2012, raising the first-term total for one-time implementation costs to nearly $12 billion.

Only two major rules adopted in 2012 reduced regulatory burdens, providing just $81 million in savings. For the entire first term, there were only 12 such rules, worth $857 million in savings—about 1.2 percent of the new costs. Four major regulations, representing $982 million in costs, also were invalidated by the courts. Subtracting these amounts from a gross total of $71.6 billion in new costs leaves the total increase of $69.8 billion. This compares to $15.7 billion during the first four years of the Bush 43 administration. For those of you who are math challenged, that’s a better than 4:1 ratio.

According to research by Washington University in St. Louis and George Washington University’s Regulatory Studies Center, federal spending on regulatory agencies increased more than 10% in President Obama’s first term. Staff levels grew by 21,654 full-time employees in the same period, which is an 8% increase.

No wonder the federal budget overflowth! And, the question remains – did any of these new regulations make us healthier, wealthier or happier?

Personally, my income did not go up, but my costs did, which means I’m eating lower quality food in smaller quantities and keeping my house a few degrees cooler. So, poorer and less healthy – CHECK.

Oh, wait a minute! I think I’m moving in the wrong direction. And, no, I’m not happy about it.

Life, liberty and the Pursuit of Happiness? Where did that go?

I didn’t see a tentacle! There are no tentacles! Any impression that you have lost rights or freedoms is purely a product of a propaganda-fueled imagination. The administrative state is our friend! Red tape is the price we pay for a well-ordered society.

There is absolutely NOTHING to WORRY about!

Uh, except THAT!


Regulatory Hang Man   Leave a comment

I’ve been blogging on the administrative state, sometimes called the “regulatory state”, the largely-invisible, increasingly powerful “shadow” government of unelected bureaucrats that control so much of American life. Like Jack Sparrow, we feel the presence of the Kraken, lurking just beneath the surface, ready to drag us down to our destruction, but we never quite put our finger on why we feel so off-kilter and most none of us know what to do about it. We sense that something has gone seriously awry with “life, liberty and the pursuit of happiness”, but we feel powerless to get the ship of state back on course.

Hangman - hangman photoCongress and the White House are currently focused on the federal budget. They should be, given the perennial deficits and the unsustainable levels of U.S. debt. However, federal spending accounts for only a portion of the burden government places on the American public. Regulatory costs, representing the largest cost of government, hinder job creation and innovation while undermining American liberty.

Woodrow Wilson, the American “father of administration”, thought that we would eventually come to see regulation as a form of liberty, because it would free the people from being involved in governmental “housekeeping”. Do we feel free in the 21st century? Does liberty abound in our modern era?

We may be free of responsibility, but we are certainly not at liberty to enjoy it.

President Obama and the sitting Congress of both parties talk a good game about reducing regulation, but the facts don’t match their rhetoric. President Obama’s first term saw a nearly $70 billion increase in regulatory burden as federal agencies imposed 131 new major regulations. In 2012, the Obama administration issued a total of $23.5 billion in new regulatory costs from 25 major rulemakings. Only two rules in 2012 decreased burdens. Sadly, a tsunami of regulation is following with another 131 major rules on the Administration’s agenda. These include dozens of rules for implementing Dodd-Frank and Obamacare. The magnitude of regulations is unmatched by any administration in the nation’s history.

The obvious solution is Congress exercising its oversight authority on the Executive branch, passing the REINS Act or something similar, which would require congressional approval of each new major regulation before it is implemented. Sunset deadlines should be set for all major regulations as well as so-called “independent” agencies, such as the Securities and Exchange Commission. If these regulations and independent agencies are vital to American society, they can go before Congress and make their case for an up or down vote. It’s a big job, but it is essential for the cause of liberty in our nation.

You’re not convinced? Don’t we need regulation to keep us safe, healthy, wealthy, etc.? I agree, we need some regulation, but the mountainous labyrinth of rules we have now is beyond the pale and may be damaging to safety, health, wealth, etc.

I’m planning to measure some of this red tape, so we understand just how bad it is and provide an understanding of why you need to write your congressional delegation.

Releasing the Kraken Part 2   6 comments

The question is: how did we get from a modest 1% income tax on fairly wealthy people to the current system?

It’s easy to say — well, it’s been a century, but actually it took a lot less time than that. Within the space of seven years, the income tax had grown beyond its modest beginnings to become something close to what it is now.

In 1913, newly elected President Woodrow Wilson included a call for tariff reform in his inaugural address, then reiterated the need for revenue reform in that joint session of Congress, with a particular emphasis on lower import duties. House Ways and Means Chairman Oscar W. Underwood (D-Va.) introduced a bill to lower tariff rates from an average of 40% to roughly 29%. To compensate for lost revenue, the bill also included an income tax. The House passed the legislation in May and the Senate four months later. When Wilson signed the bill in October, it included an income tax of 1% on individual income over $3,000 ($4,000 for married couples). It also featured a progressive surtax ranging from 1 to 6%, depending on income.

The Bureau of Internal Revenue established a Personal Income Tax Division to collect the new tax, including a Correspondence Unit of 30 employees dedicated solely to answering questions about the new levy. The four-page-long Form 1040 was considered by many congressmen to be too complicated.

That sounds sort of familiar, doesn’t it? Here we see a professional bureaucracy created to deal with a crisis it created. It’s still going on 100 years later. The solution might be to make the form less complicated, but that wouldn’t employ thousands of IRS agents, so ….

Of course, the administrative state never lets a crisis – even one not of its manufacturing – go to waste. World War I brought a sharp decline in international trade, further affecting tariff revenue, causing President Wilson to call for emergency revenue legislation, which featured a whole new slate of excise taxes. These consumption taxes were lucrative, but proved unable to close the fiscal gap, so Wilson joined Democrats in Congress to support a steeper, more productive income tax. 

The Revenue Act of 1916 set out to raise $205 million in new revenue, more than half coming from the income tax. The “normal” income tax rate rose from 1 to 2% on net incomes over $3, 000 ($4,000 for married couples). Surtax rates also rose from 6 to a maximum of 13% on incomes over $2 million. To avoid widespread protests, the changes made the personal income tax steeper, but left its base quite narrow as the levy still applied only to the nation’s richest taxpayers. Corporation income tax also increased from 1 to 2% and a new federal estate tax was introduced with an exemption of $50,000 and rates ranging from 1 to 10%. The law also included a novel munitions tax designed to appease opponents of American involvement in the war; levied on manufacturers of military equipment, it was advertised to prevent war profiteering. Finally, the law featured a host of excise taxes, as well as a capital stock tax on corporations. Because of widespread voter objections, the 1916 revenue law repealed the “collection at source” provisions of the 1913 tax. Instead, the law now required simply that income sources provide information to the government on the amount of income paid out to recipients.

In March 1917, Congress introduced a corporate excess profits tax, a major innovation to the federal tax system. This levy taxed any profits above a “reasonable” rate of return, which was originally set at 8% profit; if owners made more than that, then they paid taxes according to a steep rate schedule.

Supporters defended the new tax on equity grounds, but it also turned out to be the biggest money maker among new wartime taxes. It attracted bitter opposition from business groups, who considered the tax a threat to managerial prerogatives. They were certainly justified in their suspicion, since both Wilson and his allies in Congress considered the levy a legitimate means of business regulation that many hoped to retain it after the war ended.

The excess profits tax applied to individuals as well as businesses. Individuals were taxed at 8% on incomes over $6,000. This innovation applied mostly to professionals and other highly educated workers, prompting critics to call it a “brain tax”.

Additionally, regular income taxes now applied to incomes over $1000 ($2000 for married couples), imposing a 2% rate, with graduated surtaxes as high as 63% of income.

Federal revenue grew dramatically. From 1900 to 1915, the average annual revenue collection was $281 million. From 1915 to 1926, the average collection was $2.78 BILLION.  

That enabled the administrative state, naturally. Every new type of tax required new administrative machinery to interpret and administer the law and the resultant rates. The Bureau of Internal Revenue had 524 headquarters staff and 4,529 field staff in 1917. By 1920, it employed about 12,000 staff nationwide.

Rates were raised in 1919. Corporations were allowed to exempt the first $2000, but rates were raised to 12% on net taxable income and large income individual payers were forking over 77% of their income. Still, it remained a narrow levy. In 1920, only 5.5 million returns showed any tax due.

In May 1919, lame-duck President Wilson made his famous “politics is adjourned” speech, urging higher taxes on income, estates and excess profits and the Bureau of Internal Revenue began a massive recruitment campaign to reduce its personnel shortage.

There existed a broad consensus that the steep wartime tax rates were unsustainable, driven home by a mid-term election that ushered the Democrats out and the Republicans in. Even Wilson’s own Treasury secretaries, Carter Glass and David Houston, suggested cuts. Wilson himself even suggested reducing taxes in his 1919 State of the Union Address. Still, many Democrats and progressive Republicans were unwilling to roll back wartime tax reforms. They liked the newly progressive cast of federal revenue policy, especially the excess profits tax, which they saw as a blow for egalitarian ideals. They argued that it would shift the fiscal burden to the individuals and corporations whose wealth posed a threat to American society.

Voters disagreed, however.

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