The IMF’s Destructive Advice for Germany

I wrote last November that Germany is in a period of fiscal decay.

Over the past eight-plus years, the burden of government spending has grown far too fast, violating the Golden Rule of fiscal policy.

As a result, the share of the economy being consumed by the public sector has jumped from 44 percent to nearly 49 percent.

That’s worse than Denmark!

So what should Germany do? A rational person, especially if that person had any knowledge of economics, would urge spending restraint.

But let’s instead look at what the Keystone Cops at the International Monetary Fund are recommending. They want Germany to weaken its fiscal rule to enable even more spending.

An aging population will also adversely affect public finances as tax revenue growth slows and spending on pensions and healthcare rises. …To accommodate rising spending needs, the authorities should consider moderately easing the debt brake. …Germany’s debt brake is set at a relatively tight level, such that the annual limit on net borrowing could be eased by about 1 percentage point of GDP while still keeping the debt-to-GDP ratio on a downward path. Such an easing would allow more room for much-needed public investment and other key priorities.

And, keeping with tradition, the bureaucrats at the IMF also want higher taxes in Germany.

Options that could be explored include eliminating environmentally harmful…tax expenditures, …raising taxes on real estate and on goods and services (as Germany’s revenue from such sources is below the advanced-economy average), and/or closing loopholes in inheritance taxes.

Adding more spending to Germany’s fiscal burden is bad news, but adding more taxes is equally offensive.

That part of the report merits two observations.

1. If the IMF cared about growth, it would recommend lower tax rates in the many areas where Germany is above the advanced-economy average, not pushing for higher taxes in the few areas where the German government has demonstrated a bit of restraint.
2. It is utterly hypocritical for IMF bureaucrats to push for higher taxes (in Germany or elsewhere) since their generous salaries are exempt from tax. Maybe if they had to pay taxes and live by the same rules as everyone else, they wouldn’t be so quick to urge bad policies.

P.S. I can’t resist citing one final bit of economic illiteracy from the IMF.

High energy prices following the shut-off of Russian gas contributed to surging inflation during 2022-23.

This is nonsense. Higher energy prices cause a shift in relative prices. Bad monetary policy (as we recently experienced in Europe, the United States, Canada, and the United Kingdom) is the reason for the increase in overall prices.

P.P.S. Given this statement by the previous head of the IMF (and current head of the ECB), you’ll understand why there’s a problem with economic literacy at that international bureaucracy.

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Italy’s Absurd Boondoggle Giveaway

I wrote a two-part series (here and here) in 2022 predicting that Italy was at risk of suffering a fiscal crisis.

If and when it occurs, it will be because investors decide that Italy’s government might default (i.e., be unable to make payments on its debt). Interest rates would spike, financial markets would get shaky, banks would be a risk, and there would be a lot of pressure for a Greek-style bailout.

Should that happen, my role will be to point out that the real problem is that the burden of government spending in Italy is excessive (same message I delivered a dozen years ago).

As shown by OECD data, it’s one of the most profligate nations in Europe.

And I suppose it’s worth mentioning that Italy’s demographic outlook is very grim, thus increasing medium- and long-run fiscal risks.

That’s the macro outlook.

Now let’s look at a specific example of why Italy is a fiscal mess. The Economist recently reported on a government giveaway that has become a nightmare.

…a home-improvements subsidy…has turned into the fiscal equivalent of King Kong: a monster running amok, wreaking havoc… Mr Giorgetti revealed that claims of the subsidy, known as the “superbonus”, made in the four years that the scheme has been running, together with claims of another that offsets the cost of renovating façades, would eventually drain the treasury of €219bn ($233bn). That is almost 10% of Italy’s GDP last year. …a left-populist coalition…introduced the superbonus in 2020… The idea was to stimulate the stricken economy… The government offered to pay homeowners 110% of the price of energy-saving renovations. …The cash was not to be reimbursed directly, but in the form of tax credits that could be sold on. …the superbonus has proved wildly popular. That should not have been a surprise: what is not to like about being repaid more than you have spent? Or not spent: since the tax credits are tradeable, many homeowners simply passed them on to their builders without having to part with a euro. A second reason is outright fraud. Last August Giorgia Meloni, Italy’s prime minister, said that contracts falsified to claim the subsidies constituted the biggest-ever rip-off of the Italian state. That was when they amounted to a mere €12bn; since then, the figure has risen to €16bn. A third problem is overpricing. Because the superbonus refund is greater than the outlay, actual or theoretical, it is in the interests of both the builder and the homeowner to inflate the cost of the work.

At the risk of understatement, this is one of the dumbest spending programs I’ve ever read about.

To put this in an American context, it’s sort of like adding together the fraud of the Trump-Biden pandemic spending, the perverse incentives created by Fannie Mae and Freddie Mac, and the third-party payer problem caused by government in the health sector.

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More Good Results from Argentina

The most important election of 2023 took place in Argentina, where that nation’s voters elected the libertarian candidate, Javier Milei, as their new president.

I discussed the outlook for Milei’s agenda on a recent appearance of the Schilling Show. Here’s a brief excerpt.

As you can see, I’m worried that Milei faces enormous obstacles. Argentina desperately needs big reductions in the size and scope of government. Yet the legislature is controlled by the Peronist politicians who have spend the past 75-plus years turning the country into a statist hellhole.

But I wrote two months ago that Milei was surprisingly successful in his first month. Thanks to his executive actions to reduce the burden of spending, Argentina achieved its first monthly balanced budget in more than 10 years.

That was a remarkable development.

But that was just the beginning. Here’s a chart showing that Argentina’s currency has dramatically strengthened since Milei took office.

The chart comes from a Bloomberg report by Ignacio Olivera Doll. Here’s some of what he wrote.

Four months into office, Argentine President Javier Milei has pulled off a critical feat in a country long ravaged by runaway inflation: He stabilized the currency. The peso has, in fact, not only stopped plunging day after day but in one key foreign exchange market…it’s actually rallying sharply. The peso has soared 25% against the dollar over the past three months in the market, known as the blue-chip swap… That’s more than the gains posted by any of the 148 currencies that Bloomberg tracks against the dollar. It’s a shocking statistic in a country where the currency is seemingly in a never-ending state of freefall. (The smallest annual decline in the past decade was 15%.) And it underscores the lengths that Milei has gone to to rein in bloated government spending…and tame inflation that’s skyrocketed to an annual pace of almost 300%. …The cuts he imposed add up to the equivalent of almost 4% of the country’s economic output, an adjustment so aggressive that central bank officials estimate it’s larger than 90% of all those carried out in the world over the last several decades.

Spending restraint has not only reduced inflation and strengthened the currency, it also produced a balanced budget in the first quarter of 2024.

Here are some details from an AFP report published by Yahoo!Finance.

Argentina’s spending-slashing new President Javier Milei has hailed his country’s first quarterly budget surplus since 2008 as an “historic achievement.” In the first quarter of 2024, the South American country recorded a budget surplus of about 275 billion pesos… This amounted to a surplus of 0.2 percent of GDP. …”If the state does not spend more than it collects and does not issue (money), there is no inflation. This is not magic,” the self-described “anarcho-capitalist” said. …Thousands of public servants have lost their jobs. “Don’t expect a way out through public spending,” Milei warned on Monday.

To give you an idea of what Milei has accomplished, a 4-percentage point reduction in the burden of government spending would be over $1 trillion in the United States. If we had a leader like Milei, we could almost immediately eliminate three-fourths of the deficit.

I now feel very squishy since I’ve merely been recommending that American politicians cap the growth of spending.

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Trump and the Flat Tax?

There’s going to be a big tax fight in Washington next year, regardless of who wins the House, the Senate, and/or the presidency. That’s because major portions of Trump’s 2017 Tax Cuts and Jobs Act will expire on December 31, 2025.

Will those tax cuts be extended? Will they be expanded? Will they be curtailed? Politicians will be forced to choose.

In general, I’m rather pessimistic about the outcome for the simple reason that there’s been a huge increase in the burden of government spending.

I wrote about that problem two days ago and highlighted how politicians used the pandemic as an excuse to permanently increase the cost of government.

One result of all that wasteful spending is that we now have enormous deficits. And even though I don’t worry much about red ink (the real problem is spending, not how it’s financed), the practical reality is that it is well nigh impossible to have good tax policy when there is bad spending policy.

But that doesn’t mean we shouldn’t try. In an article for Bloomberg, Stephanie Lai, Amanda L Gordon, and Enda Curran write about the advice Trump is getting on tax policy.

Donald Trump is under pressure from economists in his circle to embrace a flat tax rate… The efforts demonstrate how people around the former president are already lobbying for their preferred economic policies ahead of a potential second term where both taxes and tariffs will be top priorities. …Forbes said…he is advocating for Trump to support a flat 17% tax rate for all income brackets with “generous” exemptions… For a family of four, he said, he would suggest the first $54,000 of income be exempt from federal income tax. …Whoever wins the White House in November will be forced to negotiate a tax deal next year because key portions of Trump’s 2017 tax cuts — including individual rates — expire at the end of 2025. That will set up a complex negotiation — particularly if control of Washington is split between Republicans and Democrats… Trump has not detailed what his tax plan would look like.

I’m glad that people are pushing Trump to be bold on taxes, but that advice needs to be augmented by a big push to make him better on spending.

Alas, that’s one of his worst areas.

Not as bad as he is on trade, but he record on spending is nonetheless mediocre. And that was the case even before the pandemic spending orgy.

The bottom line is that Trump needs to change his mind on entitlements if we want to have any hope of better tax policy. I won’t be holding me breath.

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Everything You Need to Know About America’s Decaying Fiscal Status

There was a lot of wasteful spending during the pandemic.

That was bad news, but what’s far more worrisome is that politicians used the pandemic as an excuse to permanently increase the spending trendline.

Here’s a chart based on CBO’s historical data and future projections. I added a yellow line to show the trend line based on spending growth from 2000 to 2019.

As you can see, spending soared above the trend line during the pandemic, came down slightly in 2022 and 2023, but now is projected to stay way above pre-pandemic levels.

At the risk of understatement, this added spending burden is the main reason America is in fiscal trouble.

To get an idea of how much spending has exploded in recent years, it makes 2008-2010 (Bush’s corrupt TARP bailout and Obama’s failed stimulus) look like a tiny blip by comparison.

Now I’ll add a caveat. Even without the pandemic spending orgy, America’s budgetary was on track to deteriorate. The retirement of the baby boom generation, combined with poorly designed old-age entitlements, translates to a higher spending trend line.

That being said, Trump and Biden combined to make a bad situation much worse.

Another caveat is that the headline on this column is an exaggeration. I simply like using everything-you-need-to-know as a rhetorical device when I have a very compelling visual or example.

I’ll close with the optimistic observation that it’s still relatively simple to solve America’s fiscal problems. All that is required is multi-year spending restraint.

P.S. The United Kingdom is suffering from the same problem of temporary emergency spending morphing into a permanent increase in the burden of government.

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The Rise and Fall and Rise of Sweden

Since this is my last full day in Sweden, I want to build upon my previous two columns (on long-run tax policy and pandemic spending policy).

We’ll start with this video explaining that Sweden is not socialist.

Johan Norberg is correct. Sweden does not have genuine socialism, which involves government ownership, central planning, and price controls.

The best way to describe Sweden is that it is a free market economy with bad fiscal policy.

But it used to have good fiscal policy. Very small government and no welfare state.

Unfortunately, policy veered in the wrong direction, especially starting in the 1960s.

But things have gotten better in recent decades. Ten years ago, I wrote about a very impressive period of spending restraint in the 1990s. That was worthy of praise, but what’s noteworthy is there has been no backsliding.

Indeed, IMF data shows that Sweden has continued to make progress, albeit at a slow pace.

It goes without saying (but I’ll say it anyhow) that the burden of government spending is still far too high. But a government that consumes 48 percent of GDP is better than one that consumes 52 percent of GDP.

And 52 percent of GDP is far better than 66 percent of GDP.

Moreover, Sweden has partially privatized its Social Security system, so it’s long-run fiscal problems are not severe – at least not compared to the United States.

But Sweden has made progress is areas other than fiscal policy. Here are some excerpts from a 2014 report by Stefan Fölster and Johan Kreicbergs of the Reform Institute.

The seventies and eighties saw Sweden’s tax burden rise from an average European level to the world’s highest. The public sector expanded vastly. All facets of the welfare system were made more generous… Meanwhile, labour market regulation increased… Throughout these years, Swedes’ individual after-tax real income stagnated, private sector job creation ceased, and public debt spiralled higher. This culminated in a severe economic crisis in the early 1990s. …many Swedes began to react to the country’s lacklustre economic performance… At first, a few public utilities and the financial markets were opened to competition, and an important tax reform was implemented. …emphasis at the time was placed on reforms that opened significant sectors in the economy to greater competition. …significant changes were introduced to the tax system, macroeconomic policy framework, and social insurance system. …The results of this wave of reforms are remarkable. During the twenty years before 1995, GDP and productivity growth was substantially lower than in other countries. Virtually no net jobs were created in the private sector and government debt increased rapidly. Moreover, disposable income of Swedish households grew only in a very slowly. Since 1995, every aspect of the Swedish economy has changed. GDP and productivity growth have been higher than in comparable countries. Employment in the private sector has grown by more than 1% annually, while public sector employment has decreased. Public finances are now stronger than in most countries. Furthermore, median disposable income of Swedish households has grown 4 times faster after 1995, compared to the previous 20 years.

Here’s my favorite chart from the report.

It shows how the numbers of bureaucrats skyrocketed in the 1960s and 1970s, while jobs in the economy’s productive sector languished.

As a result of reforms, however, the number of bureaucrats has decline and jobs in the private sector have increased.

The net effect of all the reforms – lower tax rates, reduced spending burden, deregulation, etc – has been very positive.

Sweden was losing ground during the era of expanding government and now it is once again gaining ground.

Let’s close with an amusing look at how Sweden’s reforms are making it difficult for the left to cite Sweden as a role model.

That’s not good news for Bernie Sanders.

The bottom line is that Sweden is not Singapore. It’s not Switzerland, either.

But it’s better than people think. And its economic history shows that bad policy lowers living standards and that good reforms improve living standards.

P.S. Sweden also has nationwide school choice.

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The Pandemic and Swedish Fiscal Policy

When I wrote about long-run policy lessons from the pandemic, I mostly focused on the incompetence of the bureaucrats at the FDA and CDC.

I also wrote that Sweden had a very sensible approach. Politicians did not panic. They advised prudence, but kept schools open and did not mandate lockdowns.

Interestingly, Sweden also had better fiscal policy during the pandemic. Trump squandered $2 trillion-plus in 2020 and Biden squandered $1 trillion-plus in 2021.

According to IMF data, by contrast, Swedish fiscal policy was much more responsible, with the burden of government spending increasing at a much slower pace. And that’s true whether looking at the change between 2019 and 2020 or the change between 2019 and 2021.

Sweden even did a better than Switzerland, the country that usually has the best fiscal policy in Europe. Swiss politicians increased spending by 12 percent in 2020, more than twice as fast as overall spending increased in Sweden that year.

But, thanks to its spending cap, Switzerland is doing much better over time. If you look at the past five years, it easily wins the prize for fiscal responsibility (the “debt brake” allowed a big emergency spending increase in 2020, but it also has required extra spending restraint in subsequent years to compensate).

By the way, nobody will be surprised to learn that Switzerland was much more prudent than the United States during the pandemic.

P.S. Sweden had a very good period of spending restraint in the 1990s.

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Great Moments in Canadian Government

Canada  has (or had) some very sensible policies involving school choice, welfare reform, corporate tax reform, bank bailouts, regulatory budgeting, spending restraint, the tax treatment of saving, and privatization of air traffic control.

But those policies are in spite of the current Canadian Prime Minister.

Justin Trudeau has been moving Canada to the left with class warfare and wasteful spending.

And “wasteful” is not an idle adjective when writing about Canadian fiscal policy.

Here are some excerpts from a story from Bloomberg about a pipeline being built by Canada’s government. And since it’s being built by government, there are giant cost overruns.

The expansion of the Trans Mountain oil pipeline will cost about $3.1 billion more than the Canadian government-owned company running the project projected in May, another financial setback for a project beset by spiralling expenses and years of delays. …That brings the total cost to about $34 billion, more than six times the original estimate of $5.4 billion in 2013. …another setback for a project that Prime Minister Justin Trudeau has expended significant political capital on. …The expansion, years behind schedule, is set to go into operation in the second quarter, a delay from the previous first quarter start date, according to Trans Mountain.

Wow, from $5.4 billion to $34 billion.

This is scandalously similar to California’s infamous “train to nowhere.”

Or New York City’s subway to somewhere.

Or D.C.’s streetcar to nowhere.

The bottom line that almost every government program delivers less and costs far more than initial estimates.

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Fiscal Patriotism

Given what I recently wrote about America’s long-fun fiscal outlook, it is easy to understand why I expressed pessimism as part of a conversation with David McIntosh of the Club for Growth.

The presidential candidates are a big reason for my dour outlook. Joe Biden and Donald Trump have chosen to ignore  the massive long-run fiscal problems with Social Security and other entitlement programs.

Their kick-the-can-down-the-road approach is a recipe for fiscal chaos in the future. The result would be either massive tax increases, massive debt increases, or massive money printing.

Probably all three.

Given the track record (Barack Obama and Hillary Clinton both embraced big tax increases), I’m not surprised that Biden and congressional Democrats are bad on the issue.

And since Trump is a big-government populist rather than a Reaganite, his approach also is predictable.

But I have wondered whether congressional Republicans would take the same head-in-the-sand approach.

Fortunately, it appears many of them have – as I noted in the above interview – a more patriotic perspective. Andrew Biggs of the American Enterprise Institute wrote about a new budget proposal from the House Republican Study Committee. Here are some excerpts.

To the RSC’s credit – and, honestly, to my own surprise – the RSC took on the dangerous issue of reforming Social Security, standing up not only to Democrats looking to demagogue the issue but to former President Trump’s efforts to duck the issue. The RSC’s proposals “include modest and delayed changes to the Primary Insurance Amount PIA) benefit formula, the retirement age, auxiliary benefits for high income earners, and gradually moving towards a flat benefit.” If you don’t want the biggest tax increase in history, those are the sorts of things you have to do. …cheers for the RSC: They’ve stood up to Congressional Democrats by at least putting a plan on the table. And, more importantly, they’ve stood up to Donald Trump’s position that Social Security reform can be ignored or hand-waved away.

If you want to learn more about the Republican Study Committee’s plan, click here and here.

It also includes Medicaid reform and Medicare reform.

So kudos to the RSC members. They want to do what’s best for the nation, even if it means exposing themselves to demagoguery.

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Fiscal Fights with Friends: Tax Increases Don’t Improve National Well-Being

Last year, I filled out a do-it-yourself federal budget prepared by the Washington Post and another one put together by the Committee for a Responsible Federal Budget.

In both cases, my main complaint was that they did not give enough options to shut down counterproductive departments and/or offer enough proposals for much-needed entitlement reform.

Today, I’m going to write about a do-it-yourself budget from the American Enterprise Institute. But I’m not going to bother to share my results because I think the model has a fatal flaw.

To illustrate, here is the model’s baseline estimate for national well-being (in this case, “welfare” refers to the overall prosperity of the nation rather than redistribution spending). As you can see, the model assumes that national well-being eventually begins to shrink if we leave government policy on autopilot.

Because the burden of government spending is projected to dramatically increase in coming decades, I don’t have any problem with the assumption that living standards will begin to decline.

After all, if America becomes a European-style welfare state, it’s perfectly reasonable to expect European-style economic malaise.

But here’s where things go awry. To show how the model is messed up, I made these two choices.

• The biggest-possible increase in income taxes.
• The biggest-possible increase in payroll taxes.

I then clicked “run model” and here are the results. In every single year, it shows that national well-being improves with these two big tax increases.

Before explaining how and why this is wrong, here is an explanation of the model’s methodology.

In our October 2023 working paper, we…explain, justify, and show the results of our macroeconomic projection model of the U.S. economy and federal budget. …As a companion to our working paper, we have developed a dashboard which allows users to adjust assumptions and implement their own policies to reduce future levels of debt and improve welfare for generations to come. By adjusting the sliders on the left-hand side of the screen, users can, e.g., increase income taxes, increase levels of investment, reduce Social Security benefits, and change projected health care elasticities. …Users can adjust various assumptions or implement policy changes using the sliders on the left, then click “Run Model” to produce new projections using this new set of assumptions. For example, to reduce deficits, one could increase income and Social Security payroll tax rates by one percentage point each, cut non-health federal spending by ten percent, and increase the average Social Security replacement rate by five percentage points. New projections after making these changes are shown… The solid circles continue to show baseline assumptions while the empty circles represent outcomes under the new set of assumptions.

So why does the modal produce screwy results?

Here’s what you need to know.

…welfare improves as, in our model (based on assumptions made by CBO), deficits crowd out investment, reduce capital, and slow economic growth, so efforts to reduce the deficit will generally improve welfare.

There is nothing wrong with that bit of analysis, but it’s fatally incomplete.

It fails to account for how tax increases would negatively impact national well-being. And it also fails to account for how a rising burden of government spending will adversely impact national well-being.

To put it in simple terms, projecting the economy based solely on what happens to deficits and debt is like predicting the outcome of a baseball game by looking at what happened in the 2nd inning. That’s part of the answer, but grossly inadequate.

Which is an analogy I should have used in this video from 2009, which explains that spending is the problem, not red ink.

If you don’t want to spend a few minutes with the video, this short column tells you why fixating solely on deficits leads to absurd results. And this column is a must-read for people who think tax-financed spending somehow is less harmful than debt-financed spending.

P.S. I write about “Fiscal Fights with Friends” when I think someone is well meaning but is pushing bad policy or bad analysis. Previous editions have focused on Medicaid reform, tax increases, parental leave, the value-added tax, fiscal policy, the flat tax, and the carbon tax (twice),

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More Good News Thanks to Colorado’s TABOR Spending Cap

Colorado has the best fiscal rule in the United States. The Taxpayer Bill of  Rights (TABOR) limits state government spending so that it cannot grow faster than inflation plus population.

Does Colorado’s spending cap work perfectly? Of course not.

Politicians in the Centennial State have spent decades coming up with ways evade and avoid TABOR’s restrictions.

But let’s not make the perfect the enemy of the good.

A study published last year shows that TABOR has saved taxpayers $8.2 billion.

And taxpayers in Colorado may soon keep even more of their money according to an article by Brian Eason in the Colorado Sun. Here are the relevant excerpts.

…the budget will be squeezed primarily by two seemingly minor factors. One, U.S. Census estimates now say the state’s population grew by less than the state’s demographer had anticipated. That means the state revenue cap under the Taxpayer’s Bill of Rights, which tracks inflation and population growth, can only increase by 5.8% this budget year rather than the 6.1% legislative forecasters were expecting. Two, the state is now expected to collect $185 million more in road usage fees and retail delivery charges this year than last, under the legislative staff estimates. Taken together, the two forecast changes mean state lawmakers could have to issue larger than expected TABOR refunds to Coloradans next year, leaving the state with fewer General Fund tax dollars to spend… That would translate to a nearly $400 refund for the average single-filer in 2025 under the current refund formula, which is tiered based on income.

I’m tempted to call this the feel-good story of 2024. Politicians get less money to waste and taxpayers get more of their money returned.

No wonder TABOR is the gold standard for good fiscal policy at the state level. And Switzerland shows that spending caps also are very effective at the national level.

By contrast, there is very little evidence that balanced-budget rules produce good results.

P.S. Perhaps the best evidence for TABOR is that the pro-spending lobbies in Colorado are always trying to trick voters into approving ballot initiatives that would allow more spending. But as we saw in 2013, 2019, and 2023, the voters of left-leaning Colorado keep voting to to maintain their spending cap.

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Beware Bad Budget Deals, Part III

I’ve already written two columns (here and here) about why a “bipartisan” budget deal would be a recipe for higher taxes and bigger government.

To start our third installment in this series, here’s a clip from my recent appearance on Vance Ginn’s Let People Prosper.

Simply stated, America’s long-run fiscal problems are entirely the result of government being too big and growing too fast.

So there is no need to make our bad tax system even worse with tax increases. Especially since (as I explained in the above video clip) politicians almost surely would spend any extra revenue.

By the way, my opposition to “putting taxes on the table” is practical rather than ideological. Back in 2012, I wrote that I would accept a big tax increase, but only if the other side would accept various changes to control the burden of government spending.

Needless to say, none of those options are acceptable to the big spenders in Washington. Not in 2012 and not today.

Since I’m focusing on practicality, I’ll share two additional pieces of evidence against having a pro-tax increase fiscal commission.

1. In 2011, a reporter from the New York Times inadvertently showed that the only budget deal that actually led to a balanced budget was the 1997 agreement that cut taxes. All the other budget deals raised taxes and the net result was more spending and continued red ink.
2. Tax burdens in Europe have dramatically increased over the past 50-plus years, usually because politicians claimed people needed to surrender more money in order to reduce red ink. But over that same time period, government debt more than doubled because politicians spent all the new revenue.

Given all this data, you might think I’m happy about this tweet from a Bloomberg reporter.

But I’m only half-happy. I’m glad the Speaker of the House is ruling out tax increases.

However, his anti-tax position is not credible when he also says that entitlement programs can’t be touched.

That’s the Biden–Trump view and it’s a recipe for fiscal chaos and – sooner or later – huge tax increases on lower-income and middle-class Americans.

The bottom line is that there’s an unavoidable choice to be made in the United States. We either reform the entitlement programs or we agree to let politicians take more of our money.

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The 2024 Version of America’s Dismal Fiscal Future

The Congressional Budget Office has released its new Long-Term Budget Outlook and I will continue my annual tradition (see 2018, 2019, 2020, 2021, 2022, 2023) of sharing some very bad news about America’s fiscal future.

Most budget wonks focus on what CBO says about deficits and debt. And those numbers are grim.

But it’s much more important to focus on the underlying problem of excessive spending. After all, red ink is merely one of the symptoms of a government that is too big.

So here’s CBO’s forecast of spending and revenue over the next three decades. As you can see, both taxes and spending are becoming bigger burdens.

The bad news is that the tax burden is rising over time

The worse news is that the spending burden also is rising over time. And the worst news is that the spending burden is rising even faster than the tax burden in rising.

Here’s what CBO wrote in the report.

In the Congressional Budget Office’s projections, deficits…grow larger over the next 30 years because…spending…increases faster than revenues over the subsequent 30 years. Both federal spending and federal revenues equal a larger percentage of the nation’s gross domestic product (GDP) in coming years than they did, on average, over the past 50 years. Under current law, total federal outlays would equal 23.1 percent of GDP in 2024, remain near that level through 2028, and then increase each year as a share of the economy, reaching 27.3 percent in 2054… From 1974 to 2023, outlays averaged 21 percent of GDP; over the 2024–2054 period, projected outlays average about 25 percent of GDP… The key drivers of that increase over the next 30 years are higher net interest costs, which result from rising interest rates and growing federal debt, and growth in spending on major health care programs, particularly Medicare, which is caused by the rising cost of health care and the aging of the population.

To elaborate on that final sentence, our next visual is CBO’s forecast for both health entitlements and Social Security.

You can see that Social Security is becoming a bigger burden, but programs such as Medicare and Medicaid are easily the nation’s main budget problem.

By the way, this chart is why there is an inevitable and unavoidable choice to make.

We either have entitlement reform or we have massive tax increases. Sadly, the two main presidential candidates in 2024 prefer the wrong option.

P.S. Here’s one final excerpt from the report. CBO acknowledges that higher tax burdens will be bad for growth.

The agency’s economic projections…incorporate the effects of changes in federal tax policies scheduled under current law, including the expiration of certain provisions of the 2017 tax act. Under current law, tax rates on individuals’ income are scheduled to increase at the end of 2025, when those provisions are scheduled to expire. Those changes aside, as income rises faster than inflation, more income is pushed into higher tax brackets over time. That real bracket creep results in higher effective marginal tax rates on labor income and capital. Higher marginal tax rates on labor income reduce people’s after-tax wages and weaken their incentive to work. Likewise, an increase in the marginal tax rate on capital income lowers people’s incentives to save and invest, thereby reducing the stock of capital and, in turn, labor productivity. In CBO’s projections, that reduction in labor productivity puts downward pressure on wages. All told, less private investment and a smaller labor supply decrease economic output and income in CBO’s extended baseline projections.

This may seem obvious, especially for people familiar with the academic research on this topic, but CBO used to have some very silly views on tax policy.

P.P.S. CBO also used to produce some very silly analysis on spending policy, but in recent years has been much better.

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Washington’s Fiscal Ponzi Scheme

My book on fiscal policy, co-authored with Les Rubin, is now officially published.

I wrote a sneak-peak column about The Greatest Ponzi Scheme on Earth last week.

There are three main takeaways from our book.

• The problem is spending
• The problem is spending
• The problem is spending

Okay, I’ll admit those bullet points are an oversimplification.

But there’s a reason for that.

Our book does show how we got into our current fiscal mess (because of too much spending).

And it shows why things will get worse in the future if we leave government on autopilot (because of too much spending).

Moreover, we have lots of evidence for the right way to avert a fiscal disaster. Richard Rahn wrote about our book in his Washington Times column.

In a new book, “The Greatest Ponzi Scheme: How the U.S. Can Avoid Economic Collapse,” Leslie A. Rubin and Daniel J. Mitchell provide a well-written and informative history of how much of the world and particularly the United States managed to get into the current fiscal mess. …British Prime Minister Margaret Thatcher said it best: “The problem with socialism is that you eventually run out of other people’s money.” Before World War I, government spending in almost every country was a small share of gross domestic product. …In the United States, things began to change in the 1930s with the development of welfare programs… Mr. Rubin and Mr. Mitchell review many of the so-called entitlement programs that are the real budget busters. The payments from these programs consistently grow faster than the economy or tax revenue and now consume the bulk of the federal budget. Anyone who can do basic math can quickly understand the problem. When a country reaches the point where it is borrowing just to pay interest on the debt, game over.

That’s the bad news in the book. And Richard captures some of that bad news with this table showing how the burden of government spending has significantly increased over the past 100-plus years.

But our book also has good news, as Richard explains.

Fortunately, there are a number of success stories that serve as role models of what to do. …Switzerland is perhaps the best model for fiscal responsibility in a highly developed country, in that for the most part the Swiss keep government spending growing no more rapidly than the private sector.

As you might expect, I like his conclusion.

Mr. Rubin and Mr. Mitchell have done a great service in providing a highly understandable book, outlining the disaster about to engulf us if we do not change quickly, but equally important, a road map for getting out. Every policymaker and concerned citizen ought to buy this book and refer to it often — an economic bible of sin and salvation.

I want you to buy the book, but if you are a regular reader of this column, you already know the only practical way of averting a fiscal crisis in the United States. Simply follow the Golden Rule. And, because of its spending cap, Switzerland is a good role model.

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In One Image, Everything You Need to Know about California’s Fiscal Troubles

Two days ago, I shared some California humor. Today, we’re going to look at some California tragedy.

I’ve often explained that the most important variable in fiscal policy is the the growth of government, More specifically, good fiscal policy occurs when the burden of government spending over time grows slower than the private sector.

As you can see from this chart (based on data from the National Association of State Budget Officers), California has the opposite of good fiscal policy.

At the risk of understatement, it’s not good when government grows more than twice as fast as inflation.

I was motivated to create this chart after reading this article in National Review.

Written by Will Swaim, it discusses how California got in trouble. It starts by looking at how red ink forecasts have dramatically worsened ins a very short period of time.

In the summer of 2022, California governor Gavin Newsom, apparently high on the smell of cash, announced that California had just smashed through the state-budget equivalent of the first four-minute mile: a one-year surplus of $100 billion. …Just one year later, Newsom announced — this time without the trumpet blasts, chest-thumping and press tour — that California was $32 billion in the red. Today, the governor is staring into the business end of a $78 billion deficit. You didn’t have to be a prophet to see the financial chaos coming. In this state’s notoriously mercurial tax system, which depends largely on revenue from just 150,000 wealthy Californians and massive, occasional paydays to investors in the state’s tech sector, what went up in 2022 was certain to fall hard, fast, and soon.

But volatile tax revenues are not the problem.

California is in trouble because of too much spending. Governor Newsom and other politicians in Sacramento can’t resist buying votes in every possible way.

…back in 2022, when Newsom was still feeling like the casino’s biggest whale, he spent as if there’d be money forever, boosting spending to $308 billion, more than double Jerry Brown’s last, 2019 budget of $140 billion. In the Year of the Historic Surplus, there were gifts for almost everyone and a soundtrack of Vegas slots paying off. …He announced that the state will pay $5 billion to cover health-care insurance for illegal immigrants. And though he has already spent a remarkable $20 billion to reduce homelessness — while the number of people on the street continues to grow — Newsom asked voters on March 5 to approve a $6.4 billion bond program that would feed California’s voracious homelessness–industrial complex but almost no one else.

I did a poll back in 2018 about which state will be the first to go bankrupt. Illinois has a big lead, for understandable reasons. But you won’t be surprised to see that California is in second place, ahead of even the basket case of New Jersey.

P.S. The NR article discussed the volatility of tax revenues. Because of its class warfare-based tax system, California is especially vulnerable to big swings in tax revenue (and big revenue losses because of successful people fleeing the state). But this is also a nationwide challenge, which helps to explain why a spending cap (like Colorado’s TABOR) is a much better policy than a balanced budget rule.

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America’s Destructive Welfare State

If I want to educate someone about the harmful impact of America’s counterproductive welfare state, there are several items I like to share.

• A complex and crowded flowchart of various Washington programs to redistribute money.
• A chart showing that poverty stopped falling when politicians declared a “war on poverty.”
• A cartoon capturing how redistribution programs undermine incentives for self-sufficiency.
• A chart showing the explosive growth of social welfare spending in Western nations.
• A chart showing how redistribution programs create very high implicit tax rates.

I augment those visuals with other analysis, such as my two-part series (here and here) on the right and wrong way to reduce poverty (Hint: the ultimate goal should be reducing dependency).

And I just read a sobering article by John Goodman that I’ll add to my list. Here are two shocking/depressing findings that he shared.

First, in many cases, households that mooch get more money than households that work.

…the bottom fifth of households in 2017 had an average (after tax and after transfer) income of $33,653 per person. …The per capita income of second fifth in 2017 was $29,497; and for the middle fifth it was $32,574. Those with the least earned income had more actual total income than those in the next two higher quintiles! The average household in the bottom fifth received 14 percent more income than the average second-fifth household and 3.3 percent more than the average middle-income household.

As you might predict, people respond to incentives. John reports that the excessive welfare state has greatly undermined incentives to be productive.

Since the War on Poverty started in 1965, the labor force participation of the bottom one-fifth of households has dropped from 70 percent to 36 percent. As a group, this one-fifth now receive more than 90 percent of their income from government. For this group, our welfare system has substituted in-kind benefits for labor market income.

These two sets of numbers are horrific. We basically have a system that tells people they are chumps if they work. Their reward for work is to pay taxes.

But if they become wards of the state, they can play video games all day and get lots of freebies.

That’s a recipe to destroy societal capital.

P.S. For readers who want some international evidence, I have a three-part series (here, here, and here) on how the welfare state is hurting European nations.

P.P.S. The Biden Administration wants to lie about the definition of poverty. Which may or may not be worse than their celebration of dependency.

P.P.P.S. Here’s a ranking of which states exacerbate the problem of redistribution.

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The 2024 Version of Do-It-Yourself Budgeting

Last year, the Committee for a Responsible Federal Budget (CRFB) released an online budget game called “Fix the National Debt.”

I would have preferred a game called “Reduce the Size of the Federal Government,” since that would have put the focus on the real problem.

But I dutifully answered all the questions, got my results, and then had two big complaints.

1. There were not nearly enough options to restrain and/or cut spending and zero options for shutting down departments (such as  Education, Energy, HUD, Agriculture, and Transportation).
2. There was no data on what happens to the burden of government spending as a share of GDP, which is a more important indicator of good policy than what happens to debt as a share of GDP).

We now have a 2024 version of the CRFB game.

Unfortunately, it still focuses on the symptom of red ink rather than the real problem of excessive spending.

But I can’t resist this kind of budget exercise. So, once again, I went through all the options and picked the reforms that would be good policy.

Here’s CRFB’s starting point.

And here are the debt levels based on my choices.

Since CRFB wants lower levels of debt, both by 2034 and 2050, I supposedly failed.

But the criticisms I made last year still apply. If more options had existed to reduce or eliminate counterproductive programs, I easily would have reached CRFB’s debt benchmarks.

More important, I would have substantially reduced the burden of government spending, thus allowing much greater prosperity.

By the way, here’s the breakdown of my choices. I had a small net tax cut and opted for just about every possible spending cut (keep in mind that CRFB uses the dodgy Washington definition of a budget cut).

I’ll make two final observations.

First, the “investments” category deals with spending on education and infrastructure. Since the federal government has a horrible track record in those areas, such spending is more accurately characterized as “mal-investments.”

Second, the CRFB game assumes that fiscal policy has no impact on the economy. You get zero credit even if you dramatically reduce the burden of taxes and spending. Likewise, there’s no penalty for people who choose more spending and higher tax burdens.

At the risk of understatement, that grossly unrealistic.

Then again, CRFB would probably choose an inaccurate feedback mechanism (based on levels of red ink), so maybe it’s good they don’t have any economic assumptions.

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Understanding Biden’s New Budget in Three Tweets

I wrote yesterday to announce my new book on America’s fiscal crisis.

Today, let’s look at how Joe Biden’s new budget will make that bad problem even worse.

I’m going to start with two charts. The first one shows that government spending in recent years has climbed above the trendline (and the trendline showed excessive spending growth even before the fiscal orgy that took place under Trump and Biden).

The second chart shows that taxes also are above the trendline.

These two charts come from a tweet by Brian Wesbury.

And they basically tell you everything we need to know about our current fiscal mess.

But there’s more bad news to share.

Next, here’s a tweet from Preston Brashers about Biden’s plan to further bloat the IRS budget in order to have more audits of families and small businesses.

Biden’s proposal is based on the notion that a massive expansion of the IRS will magically generate additional tax revenue to finance ever-larger government.

History tells us that this perpetual-motion-machine approach won’t work.

Last but not least, we have this tweet from Steven Moore about Biden’s preposterous claim that he has reduced red ink.

All politicians lie. They are not good people. But Biden is an extreme example.

Here’s what really happened: Yes, the deficit fell in 2022, but only because there was a massive amount of one-time pandemic spending in 2021.

But if you look at the actual effect of Biden’s policies, he has increased red ink in every single year.

P.S. Remember that our real fiscal problem is too much spending. Red ink is merely one of the symptoms of that problem (as are punitive tax burdens and money printing).

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Must-Read Book on Fiscal Policy

I’ve been complaining for decades about excessive and wasteful government spending. I’ve also been grousing for just as long about counterproductive, class-warfare tax policy.

Thanks to profligacy in Washington, we’re stumbling and bumbling our way into becoming a sl0w-growth, European-style welfare state.

So I finally decided to do something about it. Or, to be more accurate, I said yes when my friend Les Rubin decided we should co-author a book about America’s fiscal crisis.

So here it is, The Greatest Ponzi Scheme on Earth. Officially released on March 19.

We didn’t write this book to become rich. If we actually sell enough copies to earn royalties, I’ll be delighted.

Not because of the money, but rather because that will actually show there’s some interest in saving the country from fiscal decay.

To help introduce the book, Les and I just wrote a column for the Foundation for Economic Education. Here are some highlights.

The United States is in fiscal trouble. The burden of government spending has increased by nearly $3 trillion over the past 10 years—nearly doubling in just one decade! And that…is bad news whether the spending is financed by taxes, borrowing, or money printing. To make matters worse, the burden of spending will get even heavier in the coming decades, mostly because politicians have saddled the nation with poorly designed entitlement programs… To raise the alarm, we’ve written a book, The Greatest Ponzi Scheme on Earth, that explains America’s fiscal mess. It explains how we…will suffer an economic crisis if we leave policy on autopilot. That’s the bad news. The good news is that our book shows that the…reasonable solution…is for government spending to grow slower than the economy. …Politicians could still increase spending, but only by modest amounts. Maybe 2 percent annual spending increases rather than the 7+ percent spending increases that we’ve seen over the past 10 years. In our book, we show examples of countries that have long-run spending restraint (super-successful economies such as Switzerland and Singapore). But we also show examples of nations that dug themselves out of fiscal trouble merely by having multi-year periods of spending restraint. And if countries such as New Zealand, Canada, and Sweden can address their fiscal problems, surely we should demand the same from the crowd in Washington.

As you might expect, we also show how countries like Greece got in trouble.

We also describe the entitlement reforms that are needed to save America from that fate.

And it goes without saying (but I’ll say it anyhow) that we explain how a Swiss-style or TABOR-style spending cap is needed to impose some discipline on reckless, self-serving politicians.

I’ve never used my daily columns to raise money for my group, the Center for Freedom and Prosperity, but peddling the book is different because it will be a tangible and mutually beneficial exchange. Isn’t the free market wonderful?

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America’s Top Fiscal Problem Is…?

I narrated a six-minute video in 2009 to explain why America’s fiscal problem is spending rather than red ink. Here’s the same message in just 51 seconds.

If 51 seconds is too much, here’s a visual I created using the latest long-run forecast from the Congressional Budget Office.

The key thing to understand is causality. America’s ever-growing burden of government spending is causing rising levels of debt.

This is a point I’ve made several times in the past.

But there are two reasons why I’m revisiting the issue today.

First, Mark Warshawsky of the American Enterprise Institute has a new article explaining that the federal government’s deficit is much bigger if you use accrual accounting rather than cash-flow accounting. Here are some excerpts.

Last week, the Treasury Department released…the massive Financial Report (FR) of the US Government. Using an accrual accounting basis, rather than a cash basis, the FR shows a much poorer picture of the current finances of the federal government than the conventional budget. …The budget deficit under the conventional cash-basis terms increased from $1.4 trillion in 2022 to $1.7 trillion in 2023, or about 6.2 percent of GDP… The alternative measure presented in the FR of…$3.4 trillion in 2023…was double the cash basis deficit.

In other words, the symptom of red ink, measured on an accrual basis, is twice as bad as shown in the official numbers.

But I point this out because the real lesson to be learned is that our spending problem is worse than what is shown in the official numbers (blame entitlements).

Second, I want to again share this visual from 2021. It shows that debt-financed spending is bad for prosperity, but also shows that tax-financed spending and inflation-financed spending are similarly bad.

One takeaway from this little flowchart is that replacing debt-financed spending with tax-financed spending doesn’t solve the problem.

If we correctly identify spending as the problem, by contrast, then the only practical solution is to restrain spending.

P.S. This analysis is why a spending cap amendment (like TABOR or the Swiss Debt Brake) is much better than a balanced budget amendment.

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A Victory Over Big Government

Today I’m going to share some good news. A needless government bureaucracy was officially abolished last year.

• Sadly, it was not the Department of Education
• Sadly, it was not the Department of Transportation
• Sadly, it was not the Department of Agriculture
• Sadly, it was not the Department of Energy
• Sadly, it was not the Department of Housing and Urban Development

No, Washington politicians did not get rid of a significant bureaucracy.

But a journey of a million miles begins with the twitch of a first step. So I’m happy to annouce that our Lords and Masters were finally convinced to get rid of…(drum roll, please)…the Federal Tea Board.

Eric Boehm wrote about this (underwhelming) victory in Reason. But if you don’t have a subscription, here’s an excerpt from the official notice from the Federal Register last September.

The Food and Drug Administration (FDA or the Agency) is announcing the termination of the Board of Tea Experts by the Federal Tea Tasters Repeal Act of 1996. This document removes the Board of Tea Experts from the Agency’s list of standing advisory committees. FDA is also updating the statutory citation to the Federal Advisory Committee Act to reflect recodification. This technical change aligns with the desire of Congress to incorporate various provisions that were enacted separately over a period of years.

I’ll add one final detail to this story, something that will illustrate the breakneck speed of bureaucratic action.

Here are some excerpts from a 2017 article published by Smithsonian, and pay close attention to the final sentence.

For 99 years, the United States government employed a group of people to check the quality of incoming tea by tasting it. …The Board of Tea Experts, as they were called, was created as part of the Tea Importation Act of 1897. …thus the Board of Tea Experts, a group of men with finely-tuned tongues on the lookout for bad teas. “Tea tasters, working in FDA offices around the country, examined every lot of imported tea, using standard teas selected by the Board for comparison,” the FDA writes. …At the time the office was closed, it employed a head tea taster, chemist Robert H. Dick, an assistant tea taster, Faith Lim, both based in Brooklyn, and two further tasters at the ports in Boston and San Francisco. Its total annual cost: $253,500, or about $400,000 in today’s money. …It wasn’t until 1996 that the government passed the Federal Tea Tasters Repeal Act.

Amazing. A low is enacted in 1996 and we have to wait until 2023 for the Federal Register to put the final nail in the coffin.

Almost makes Amtrak and the Postal Service seem fast by comparison.

P.S. Thanks to the Federal Reserve’s bad monetary policy, $253,500 in 1996 is akin to about $500,000 today.

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The Practical Case Against Higher Taxes

As clearly shown by the Congressional Budget Office, America’s long-run fiscal challenge is an ever-growing burden of federal spending. Particularly entitlement programs.

Moreover, because the tax burden is projected to gradually increase (largely because of “real bracket creep“), it is accurate to say that more than 100 percent of America’s fiscal problem is excessive government spending. And it’s been that way for a long time.

This is one reason why tax increases would be bad public policy. Why increase the burden on American families when the problem is excessive spending by politicians?

Especially since we can deal with the symptom of red ink with some modest spending restraint.

Unfortunately, some Republicans get seduced into thinking that if they surrender on the tax issue, Democrats may get serious about spending restraint.

These are members of what I call the Charlie Brown Club.

The latest example is Congressman Jodey Arrington of Texas. Here are some excerpts from a Semafor report by Kadia Goba.

The chair of the House Budget Committee has a message for his fellow Republicans: If they ever want to fix Washington’s finances, they’ll have to talk about raising taxes. “It’s only fair to have both revenue and expenditures on the table,” Rep. Jodey Arrington, R-Texas recently told Semafor… The fiscal commission he’s championed would be charged with crafting a plan to stabilize the federal debt as a share of the economy… Washington has seen versions of this movie before. The blue ribbon Simpson-Bowles commission famously failed to approve its own plan in 2010… Arrington argues…pressure for a bipartisan budget solution… “Without discussing the revenue side, you will never have a commission and you will never have Democrats show up for a consensus solution,” he said.

I’ve already explained why Arrington is wrong. We have a spending problem, not a revenue problem.

But the Texas Congressman obviously is convinced we have a deficit problem, and this misplaced focus leads him to think Republicans need to surrender on the tax issue.

Today, I won’t to show why he’s wrong. And we’ll start by accepting his misguided premise that America’s fiscal challenge is too much red ink.

There are two scenarios for how to reduce deficits and debt:

1. With divided government, have a bipartisan budget deal based on higher taxes and spending restraint.
2. Wait for GOP control and resuscitate something akin to the Ryan budget, based on entitlement reform.

From a practical perspective, even if the only goal is controlling red ink, the second option is the way to go. Republicans were pushing such an approach last decade.

The first option, by contrast, is a recipe for a bigger fiscal mess.

This is because tax-hiking budget deals have a terrible track record. Simply stated, they don’t reduce red ink. There are three big reasons why that happens.

• The economy suffers because of the tax increases, and that means less taxable income. So the projected tax increases don’t raise as much revenue as politicians think.
• Once tax increases are part of the discussion, any hope of genuine spending restraint goes out the window. Indeed, politicians usually respond with spending increases.
• The supposed spending cuts aren’t real spending cuts, just reductions in previously planned increases. And the likelihood of structural reform is vanishingly small.

I’ll close by (sort of) contradicting everything I just wrote.

As I explained way back in 2012, I would accept a big tax hike. But only if taxpayers got a major benefit in exchange such as real entitlement reform, eliminating wasteful departments, and/or enacting a flat tax.

Today, I’ll add a fourth potential item for trade. I’ll accept a big tax hike in exchange for an ironclad spending cap, sort of like the one that has been so successful in Switzerland.

Needless to say, the odds of getting any of these four things from Joe Biden or Chuck Schumer are the same as the odds of me playing centerfield this year for the New York Yankees.

P.S. If you want an example of failed bipartisan deals, check out the Simpson-Bowles package.

P.P.S. I admit that GOP control won’t solve the problem if the president is a big spender like Trump.

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The Negative Consequences of Big-Government Toryism

I was very optimistic about the United Kingdom less than five years ago. The Conservative Party had just won a landslide election and that presumably would lead to an acceptable form of Brexit, followed by some form of Singapore-on-Thames.

Well, the Tories did deliver on Brexit, but everything else want awry.

Instead of restraining spending and lowering tax rates, the Conservative Party went in the opposite direction: Higher taxes and a bigger spending burden.

We have witnessed the triumph of big-government conservatism.

But good news for “wet” Tories has been bad news for the people of the United Kingdom. Making Britain more like France has produced economic anemia.

And that means the Labour Party probably wins the next election in a landslide – which means even more bad policy.

The Wall Street Journal has an editorial about the envervating statism of the Conservative Party.

…the Tories have no one to blame but themselves. At least their predicament is a warning for others. ….Prime Minister Rishi Sunak…and Chancellor of the Exchequer Jeremy Hunt…rode into office promising a more “responsible” path to economic growth built around balancing the government budget. This became a plan by Mr. Hunt to tax the economy back into growth, which is the sort of nonsense voters expect from parties of the left. …Now British voters are stuck with high taxes and slow or no growth. Tax revenue at 36% of GDP is the highest since the immediate aftermath of World War II. ….The Tories have squandered former Prime Minister Boris Johnson’s 2019 majority because they fell for the idea that tax-and-spend policies and onerous climate regulation would appeal to a coalition of working-class voters in the north and urban Tory wets. …They have earned their looming political demise.

That’s a very grim assessment.

However, writing for the U.K.-based Telegraph, Allister Heath is even more pessimistic.

We are an increasingly impoverished and indebted nation… We crave French-style levels of “free” public services… We have lost interest in working hard, in deferred gratification, in getting up in the morning even when we don’t feel like it, but want to retain our triple-locked pension, subsidised public transport and generous welfare state, policies backed by Tories and Labour alike. …we feel able to spend even more on the NHS and constantly hike the minimum wage. We want to spend and spend and spend yet more, encouraged by demagogic politicians who tell us that we can have it all, but have forgotten that the world doesn’t owe us a living. With no economic growth, and a dire outlook caused by 25 years of social-democratic idiocy, …The tax take is already at its highest level since the late 1940s, and yet the state is incapable of delivering its core functions. …Meanwhile, billions are being spent on the rush to net zero, on “free” museums for the middle classes, on rocketing benefits bills and on endless woke madness. …In 1972, there were 4.5 workers per pensioner, today, it’s 3.3 and by 2072 there will only be 1.9 workers per pensioner.

As you can see, Allister isn’t just worried about bad policy.

He’s worried about the perfect (in a negative way) storm of bad policy, eroding societal capital, and demographic decline.

I realize that some readers may not care about the future of the United Kingdom. That being said, there are some ominous parallels with the United States.

Big-government Republicans haven’t copied all the mistakes of the big-government Tories, but there are enough similarities that we should be worried.

P.S. Some Tory apologists argued that at least you get managerial competence when the Conservative Party is in charge. If you read this, this, and this, you’ll be disabused of that notion. The failure of the NHS, after being showered with more tax dollars, is a perfect (in a bad way) example.

P.P.S. Those apologists also say that bad policy is sometimes necessary for political reasons. But it appears that Tories will suffer a giant defeat in the next election, so perhaps they should have tried good policy rather than claiming that the era of “free-market fundamentalism” was over.

P.P.P.S. At the risk of understatement, the U.K. needs another Margaret Thatcher.

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Three Cheers (so far) for Argentina’s Libertarian President

The world’s most sensible political leader is President Javier Milei of Argentina.

But that doesn’t mean he will succeed in rescuing his nation’s Peronism-warped economy. Especially since left-leaning parties control the legislature.

But he’s definitely trying.

Let’s start with some good news. Here’s a tweet from Daniel Di Martino.

This is a remarkable achievement. Using his executive powers, he unilaterally clamped down on the growth of government.

And by having government grow slower than the private sector (the Golden Rule of fiscal policy), he’s quickly made progress.

Here are some excerpts from a report in Barron‘s.

The Argentine government in January saw its first monthly budget surplus in nearly 12 years, as new President Javier Milei continues to push for strong spending cuts, the Economy Ministry announced. January was the first full month in office for Milei, a far-right libertarian who took office in December, and it ended with a positive balance for public-sector finances of $589 million at the official exchange rate, the government said late Friday. The figure includes payment of interest on the public debt. …Milei, an economist, has advocated sharp cuts in spending and a reduction of public debt on the way to a dollarization of the economy. ..The year 2023, the final year of the center-left government of Alberto Fernandez, ended with a 211 percent inflation rate. With poverty affecting 45 percent of the population, Milei has predicted an economic rebound within three months.

Now for some bad news. What you just read is a report on the initial skirmish in a long war.

Given my unfamiliarity with Argentina’s fiscal system, I don’t know how much progress he’s made. But I’m guessing he only solved 5-10 percent of the problem with his executive actions.

The main battle will involve whether Milei can now somehow convince a hostile legislature to approve structural reforms. And that won’t be easy.

That being said, he presumably has some ability to veto budgets (do they have “government shutdowns” in Argentina?).

And he arguably has the ability to “dollarize“, which in the long run would be very important since the government would lose the ability to finance the budget by printing money.

Fingers crossed that President Milei can save his country.

P.S. I was going to speculate whether Milei could be the Ronald Reagan or Margaret Thatcher of Argentina, but he faces a much bigger challenge. If he succeeds, he will be the global role model for how to deliver an economic renaissance.

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Washington’s Spending Problem

Three days ago, I explained that modest spending restraint could solve America’s fiscal problems.

In today’s column, let’s expand on that topic. We’ll start with this clip from a recent interview.

If you don’t want to spend a couple of minutes watching the interview, I made six points.

1. We have a long-run fiscal problem.
2. Spending is the problem, not red ink.
3. A spending cap is the solution.
4. Entitlement reform is needed.
5. The alternative is massive tax hikes.
6. Ordinary Americans will be pillaged,

For purposes of today’s column, I want to build on the second point.

Here are two charts based on data from the Congressional Budget Office.

The first chart shows what has happened to federal spending over the past six decades. It shows a steadily increasing burden, punctuated with one-time spending sprees for the financial crisis (2008-2009) and the pandemic (2020-2021).

The second chart adds CBO’s projections for spending over the next 10 years, assuming the budget is left on autopilot.

As you can see, a bad situation will get much worse.

These are sobering charts.

But not necessarily frightening charts. If you adjust the numbers for inflation, the spending increase doesn’t look quite as bad.

And if you measure spending relative to the economy (share of GDP), the upward trend is further muted.

So the budget numbers are grim, but we have not passed a point of no return.

Heck, I wrote back in 2015 that Greece’s problems were solvable. And it that’s the case, then the same must be true in the United States.

We just need to spendaholics in Washington to comply with the Golden Rule.

But that rosy scenario assumes politicians will try to solve the problem with spending restrain rather than making it worse with new spending burdens.

Sometimes I feel optimistic about achieving the former. But then I look at who is running for president (the Tweedledum and Tweedledee of big government) and it is much more realistic to expect the latter.

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Spending Restraint Is the Simple Answer to America’s Fiscal Woes

Way back in 2010, and then over and over again in subsequent years, I have showed that it is very simple to balance the budget.

All that is necessary is some reasonable spending restraint, sort of like what happened during the Tea Party era in the early part of last decade.

Today, let’s see if that’s still true. The Congressional Budget Office just released its Economic and Budget Outlook, which includes a 10-year forecast of what will happen if spending and revenue are left on autopilot.

As I almost always do when that happens, I calculate what amount of spending restraint would be necessary to balance the budget over 10 years.

As you can see in the chart, limited spending so it grows by 1.4 percent yearly is all that is needed to balance the budget.

The budget can be balanced much quicker with a spending freeze. And the deficit can be largely eliminated if spending grows by 2 percent annually.

By the way, CBO projects that inflation will average close to 2 percent over the next decade.

So the main takeaway is that we can basically eliminate red ink if the federal budget grows slightly less than the rate of inflation.

There are two points worth mentioning.

• There is no need for any tax increases. Revenues already are projected to grow by 4.2 percent yearly, nearly twice the estimated rate of inflation. Plus, tax increases would surely give politicians an excuse to increase spending.
• Spending restraint is a simple concept, but it would not be politically easy. Interest groups want to leave spending on autopilot, or have it grow even faster. Plus, some entitlement reform almost surely would be necessary.

One further point is that the CBO baseline assumes that the Trump tax cuts expire at the end of 2025. Extending those tax cuts would lower the revenue baseline, thus requiring additional spending restraint to achieve a balanced budget over the 10-year window.

P.S. Balancing the budget is a good idea, but spending restraint should be the main goal of fiscal policy. Fortunately, the evidence shows that spending restraint is the only effective way of achieving fiscal balance (whereas tax increases have a track record of failure).

P.P.S. The ideal long-run policy is a spending cap.

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Mexico’s Irresponsible Populist President Proposes Election-Year Giveaway

I’ve written many columns about Venezuela, Chile, and Argentina, but only one column specifically about Mexico.

Since I’m currently in Mexico City doing some meetings and research about Mexico’s economic policy, time to make up for that lack of attention.

The first thing I did when preparing for my trip was the check the IMF’s database to see what’s been happening to the burden of government spending.

Sadly, policy has moved in the wrong direction ever since leftist/populist President Andrés Manuel López Obrador (AMLO) was elected in 2018.

That’s the bad news.

If you’re waiting for me to share some good news, that’s not going to happen.

Instead, I’ll augment the bad news with some worse news.

Mark Stevenson of the Associated Press reported two days ago that “AMLO” has a new vote-buying scheme that would be economically ruinous.

Mexico’s president said Monday he will propose guaranteeing people pensions equal to their full salaries at the time they retire, something done by no other country, not even those much richer than Mexico. It…has almost no hope of getting passed in the eight months he has left in office, but which could be part of a bid to attract voters in the June 2 presidential elections. …In announcing the measures Monday, the president claimed it was an attempt “to recover holy rights, guaranteed to Mexicans by God.” It was among a package of reforms that included guaranteed annual increases in payments to the elderly and increases in the minimum wage and above the rate of inflation. …To cover the whole population with something approaching a ‘full wage,’ López Obrador’s program would have to increase the Afore pension fund by 2.5 times to meet the median wage, and then double it again to cover informal workers.

This is spectacularly bad policy. It makes Biden’s costly per-child handout scheme seem cheap by comparison.

Almost every nation in the world is in fiscal trouble because of aging populations and falling birthrates.

Responsible governments are trying to figure out how to curtail old-age entitlements.

AMLO, however, cares about buying votes rather than about Mexico’s economic future.

P.S. As you might expect, the tax-free bureaucrats at the Organization for Economic Cooperation and Development have been recommending huge tax increases in Mexico. But if AMLO’s proposal is ever enacted, even the pro-tax bureaucrats in Paris would be hard pressed to propose enough tax hikes to keep pace with that radical expansion in the burden of government.

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Stifling VAT Burdens in Europe

I wrote 10 days ago about why a value-added tax would be a mistake for the United States.

To help reinforce that argument, here’s a new map from the Tax Foundation showing VAT rates on the other side of the Atlantic Ocean.

With a few exceptions (notably Switzerland), these hidden taxes are enormous burden. Indeed, the average EU VAT rate is approaching 22 percent, a huge increase over the past five decades.

From a tax policy perspective, high VAT rates are misguided since they increase the gap between pre-tax income and post-tax consumption. And lower-income households are especially disadvantaged.

But high VAT rates also are misguided since they enable bigger burdens of government spending.

Here’s a chart based on OECD tax data and OECD spending data. As you can see, when compared to the United States, higher VAT burdens among EU/OECD members are associated with higher spending burdens.

The bottom line is that the VAT is a money machine for bigger government.

As such, American politicians should not impose this levy and make the US more like Europe.

Unless, of course, the goal is slower growth and less prosperity.

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The CPI-X Spending Cap

The ideal fiscal policy is a spending cap and the specific design is not terribly important so long as the net effect is to have government spending grow slower than the private sector.

Switzerland’s Debt Brake complies with this requirement.

Colorado’s Taxpayer Bill of Rights complies with this requirement.

Today, let’s look at another proposed spending cap, one that aggressively seeks to return government to a more manageable size.

In a study published by the Heartland Institute, Darren Nelson proposes a “CPI-X” approach that would impose formulaic restrictions on various parts of the budget over a 15-year time period.

And those restrictions would mean genuine cuts, not the fake Washington definition (a slower-than-planned spending increase becomes a cut). And that tougher approach would mean huge savings. Here’s some of what he wrote.

Decades of profligate spending has led to a perilous economic situation. …the solution would tether federal spending to the Consumer Price Index (CPI), with a wrinkle. It is called CPI-X (or “CPI minus X”). What works to keep publicly regulated utilities in check can also keep federal spending in check. …The period for cuts would cover the next three presidential terms and would bring federal spending back to 2008 levels. …That is a 50 percent cut, and the savings of $75 trillion would result in complete debt retirement plus $19,347 in annual relief for taxpayers.

Here’s a chart from the study that looks at social welfare spending left on autopilot (green bars) compared to spending under the CPI-X rule.

And here’s the same approach when looking at subsidies and other spending that is in the category of crony capitalism.

The CPI-X approach dramatically slashes this spending (orange bars) compared to the autopilot trendline (green bars).

The good news is that a CPI-X spending cap would dramatically shrink the burden of government spending.

The bad news is that there’s no possibility of getting that kind of approach anytime soon. Especially with two big spenders running against each other for the White House.

Heck, there’s not even a chance of getting a far-more modest spending cap that would merely be designed to balance the budget over a 10-year period.

But at least we know the right approach if Ronald Reagan ever gets reincarnated. Or Calvin Coolidge.

P.S. Here’s one final point that deserves attention. The author points out that balanced budget requirements are not very effective, particularly since politicians would use such a rule as an excuse for tax hikes.

A spending rule, by contrast, actually addresses the real problem of excessive government.

…some fiscal conservatives tout solutions like a Balanced Budget Amendment as a cure-all for the constant increases in federal spending, this is a half-baked idea because it would also likely lead to steep tax increases… CPI-X addresses the problem directly by actually imposing extensive and long-overdue reductions in federal spending.

For what it’s worth, spending caps have attracted support from unexpected places. There are pro-spending-cap studies from left-leaning bureaucracies such as the International Monetary Fund (here and here) and the Organization for Economic Cooperation and Development (here and here). There are also similar studies from the European Central Bank (here and here).

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Kenya Crashes on the Laffer Curve

The Laffer Curve is the common-sense notion that there is not a simplistic mechanical relationship between tax rates and tax revenue.

You also have to consider potential changes to what’s being taxed.

I’ve cited interesting case studies from Canada, Denmark, Hungary, Ireland, Italy, Portugal, Russia, France, and the United Kingdom.

Today we’re going to add Kenya to our list.

But before looking at Kenyan tax policy, let’s first look at some IMF data on the rapidly growing burden of government spending in that East African nation.

That’s a very depressing chart, showing about 10 times as much spending today compared to 20 years ago. But keep in mind that there’s been inflation.

If you look instead at spending as a share of economic output, the government budget is now consuming about 22.5 percent of GDP compared to 15.5 percent of GDP two decades ago.

A very troubling development, though not as bad as implied by the chart.

As is usually the case, bad spending policy has led to bad tax policy. Kenyan politicians have been trying to squeeze more money out of the private sector.

However, as reported by Victor Amadala for the Star, higher taxes are backfiring.

Kenyans…talked to the Star on measures they take to survive in a tough economic environment characterized by the high cost of goods and services due to high taxes… Last year, the government introduced several tax measures in the Finance Act, 2023 that added pressure on taxpayers, pushing up the cost of living. It, for instance, doubled Value Added Tax to 16 percent on fuel… Others are the introduction of a housing levy and raised deductions on national health coverage and social protection. …An analysis of official data by both the Kenya National Bureau of Statistics and the Energy and Petroleum Regulatory Authority (EPRA) shows kerosene consumption dropped by almost half, three months after VAT on fuel doubled in July last year. Only 15.3 million litres of kerosene were sold in the review period compared to 28.8 million litres same period in 2022, the lowest in past five years. …The state is on the receiving end as consumers become creative to escape high taxes. The latest report by the Parliamentary Budget Office (BPO) shows Kenya Revenue Authority (KRA) missed the tax revenue collection target for quarter one of the current financial year by Sh72.5 billion. …”You cannot defy the Laffer Curve theory and survive. Tax measures must be of mutual benefit between the public and the state. This is just the tip of the iceberg, winter is coming,” an economist Shem Mutonji opines. …This sentiment is echoed by his colleague, Joe Ngatia who says you cannot overmilk a cow to prosperity for “It will throw a hoaf in desperation.”

Sounds like we need Shem Mutonji and Joe Ngatia working for the U.S. Treasury. Maybe they could convince Joe Biden that overtaxing the American economy is not a good idea.

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