October 19, 2011

To Reduce the Deficit, Eliminate Amtrak


The Wall Street Journal has an excellent editorial today about the burden of Amtrak on the federal government and the deficit. While Amtrak announced a new record of 30 million passengers in the last fiscal year, it also ran up an operating loss of $560 million, which was paid by the federal government. As the WSJ stated:

“Amtrak announced last week to great media fanfare that the national train service carried a record 30 million passengers last year. A banner year on its 40th anniversary of government ownership, right? Well, no.
Here's what Amtrak didn't trumpet: It lost a near-record amount of money in fiscal 2011, with some $560 million from the feds required to cover its operating deficit.
This isn't an operation that can make up losses with greater volume. The curse of Amtrak is that its operating costs are so high on most routes, and its fares so inadequate to cover those costs, that even as more people hop on board it still can't cut its losses. It currently loses about $54.50 per passenger, and the Sunset Limited line between New Orleans and Los Angeles loses $390 per ticket, according to the House Transportation Committee. Since Richard Nixon nationalized passenger rail service in 1971, Amtrak hasn't made money in a single year.”
I noted last week that the deficit was so large – – 36% of the federal budget – – that the problem could not be solved by cutting around the edges. Rather, entire departments and agencies would have to go. Amtrak is a prime candidate for total elimination. Certainly, all routes outside the Northeast could be eliminated without any damage to the public interest. On those routes, Amtrak competes with airlines, who offer higher frequency and lower fares. Most of Amtrak's loss would be eliminated the cancellation of those routes.

In the Northeast, it is likely that Amtrak could approach breakeven with its high density routes. If not, it could be subsidized by the states through which it passes, rather than by the federal government. In fact, the House Transportation Committee is drafting legislation to privatize the Northeast corridor so that private industry could build high-speed rail.  In any event, there is no need for continued subsidization of  train service by the federal government.

October 15, 2011

Michelle Bachmann Agrees With My Analysis of the Deficit Problem


I doubt that Michelle Bachmann has read my blog, but her analysis of the deficit problem is close to mine.  At the Republican debate in New Hampshire on October 11, she echoed my theme of several recent posts by quantifying the deficit as a percent of the total budget.  This shows the size of the deficit compared to total expenditures, a relationship of which most Americans are unaware.

The transcript is as follows:

REP. BACHMAN: -- “Our government right now -- this is significant.  We are spending 40 percent more than what we take in. We all paid a lot of taxes this year.  We paid $2.2 trillion in taxes. That's a lot of money from all the American people.  The American government spent a hundred percent of that 2.2 trillion (dollars). But the travesty is they spent 1.5 trillion (dollars) more than that. That's the problem.  Every year, we are spending about 40 percent more than what we take in.

Our answer has to be that we cut back on the spending so we get to balance.  We can't do this because all --

MR. ROSE:  Will cutting back on the spending --

REP. BACHMANN:  -- all around us are young people that are going to be paying for this burden.  And their tax rates won't be our tax rates.  Their tax rates could come at some point, their overall effective burden -- I'm a federal tax lawyer; that's what I do for a living.  And my background is in economics.  Their tax rates some day in their peak earning years, Charlie, could be as much as 75 percent. Who's going to get out of bed in the morning to go to work, if they're paying 75 percent tax rates?  We've got to get our spending house in order and cut back on spending.”

Good work, Michelle.  Keep it up.  Maybe we can educate the American public.

October 8, 2011

Debit Card Regulation Has Consequences Unintended by Democrats

Every now and then, we try to adhere to the purpose of this blog by focusing on some egregious example of the unintended consequences of a regulation.  The latest example is the debit card fiasco.

As you will recall, led by Senator Dick Durbin, Congress included a provision in the Dodd-Frank law that limited the amount of debit card fees that banks could charge to merchants.  They had previously been charging about $.48 per transaction, but the law now allows a maximum of $.24.  Economist and others warned that, if banks were required to reduce debit card fees, they would offset these losses of revenue by other charges to consumers.  That has now come to pass.

Shortly before the law's October 1 effective date, Bank of America announced that it planning to adopt a fee of $5 per month for depositors using debit cards to make purchases.  Other banks are testing similar fees, although at lower levels.  The B of A fee, in particular has drawn a tremendous amount of media attention and reported outrage from consumers, who have threatened to take their business elsewhere.

The response from Democrats has been predictable.  Since the didn't believe the warnings that restricting debit fees to merchants would lead to price increases elsewhere, they are shocked, shocked when banks follow through and actually raise such prices.  Senator Durbin said,

" After years of raking in excess profits off an unfair and anti-competitive interchange system, Bank of America is trying to find new ways to pad their profits by sticking it to its customers.  It's overt, unfair and I hope their customers have the final say.  Earlier this year the Federal Reserve determined that the interchange fees Visa and Mastercard fix for big banks grossly exceed the cost of processing a debit card transaction by some 400%.  These hidden fees were designed to boost big-bank profits by charging small businesses and merchants every time a debit card was swiped."

President Obama also criticized the increase, saying, "“You don’t have some inherent right just to, you know, get a certain amount of profit, if your customers are being mistreated, ... this is exactly the sort of stuff that folks are frustrated by.

The Federal Reserve rulemaking did determine the cost of processing a debit card transaction.  But it considered only the costs.  Thus it stated "As required by the statute, the final rule establishes standards for assessing whether debit card interchange fees received by debit card issuers are reasonable and proportional to the costs incurred by issuers for electronic debit transactions."

Neither the Dodd-Frank Act nor President Obama considered how business actually operate.  Businesses earn profits -- there is no basis for determining that they should not include a profit element in their fees to merchants.  If the pricing of interchange fees now excludes all elements of profit, the banks must recover those lost profits form the other party to the transaction -- the consumer.  Contrary to the President, businesses do have the inherent right to earn a profit -- that's what the whole capitalist system is about.

Obama's remark betrays a fundamental problem with his presidency -- his distrust, in part based on his years as a community organizer, of the American business system and his effort to restrict its freedom of operation.  His response in an informal interview undermines all the grandiloquent language in his teleprompter speeches and demonstrates his fundamental antagonism to American business.






October 7, 2011

Final FY 2011 Figures Confirm Enormity of Deficit

I have written twice in recent months about the enormous size of the federal deficit and how the political world talks about the deficit but never discussed its actual size.  The Congressional Budget Office has now updated its figures to the full fiscal year ended September 30, 2011, and has confirmed the enormity of the amount.  According to today's news reports, the deficit for the full fiscal year amounted to $1.3 billion.  The CBO report is available as a pdf on its website.  While the report gives the hard numbers, it fails to  provide the percentage figures that would place them completely in context.

The following table shows the basic numbers:

                                                              Fiscal 2011
                                                        (in billions of dollars)


                                                     Receipts                        2,302

                                                     Outlays                          3,600

                                                      Deficit                           1,298

Thus, the deficit as a percentage of outlays was 36.06% -- more that one/third of the federal budget was paid for by borrowing money.  Another way of looking at the problem is that we spent 56.4% more than our revenue.

Imagine a family spending $100,000 per year, when its income was $64,000.  Obviously, it would have to make substantial cuts in expense in order to survive.  The same goes for the federal government.  The current discussion of cuts of $1 or $2 trillion over ten years is only nibbling around the edges.  To achieve real reductions, entire programs and agencies wil have to be eliminated.