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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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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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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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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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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Part II: Another European Fiscal Crisis?

Back in April, I warned that European governments were spending too much, sewing the seeds of another fiscal crisis (aided and abetted by the European Commission).

Let’s expand on that issue today, focusing specifically on the eurozone (the European nations that use the euro currency).

Here’s some OECD data on the burden of government spending in the major eur0-using countries.

That’s a depressing chart. All of those nations are far above the growth-maximizing size of government.

But a fiscal crisis doesn’t happen simply because a country has too much government. It also matters how much of the spending burden is financed by borrowing. And much existing debt there already is.

Speaking of which, here’s some OECD data on existing government debt in those nations.

Greece and Italy have the biggest debt burdens, but France, Spain, Portugal, and Belgium also have debt levels above 100 percent of GDP.

By the way, the future outlook also matters.

On that basis, Europe is in even greater danger, largely thanks to entitlements and demographics.

The OECD does not have country-specific projections of future debt, but here’s a chart from that bureaucracy’s recent Economic Outlook. It shows a 60 percent increase in debt for OECD governments over the next two decades.

I’m guessing a chart for eurozone nations would also show a big increase in debt levels (just like we saw a big jump last decade).

It is very likely that all the new spending and all the new debt will produce bad results.

Here are some excerpts from Desmond Lachman’s article in National Review.

Some 25 years after launching the euro, there has been continued divergence between the public finances and economic performances of the euro zone’s northern members and its southern periphery. While Germany and the other northern member countries have enjoyed prosperity and generally pursued responsible budget policies, income levels today in countries like Greece and Italy are practically unchanged from where they were some 15 years ago. Meanwhile, public-debt levels in the euro zone’s economic periphery have risen to record highs. …there is every reason to think that economic divergences will be exacerbated. That will raise new questions about the euro’s survivability once the European Central Bank (ECB) finally ends its bond-buying activities.

He’s right about the pernicious role of the European Central Bank.

That bureaucracy enabled more spending and more debt, and that means an ever bigger bubble that will cause more damage when it bursts.

And Lachman writes that it’s a matter of when, not if.

Up until last year, high public-debt levels were not of much concern when interest rates were low and when the ECB was buying massive amounts of bonds to support the euro zone economy. However, those days are long gone. In the wake of the recent inflation spike, the ECB…is about to finally end its bond-buying program. That will substantially increase the cost of rolling over the large amount of public debt that will come due next year. All of this makes it all too likely that it is a question of when — and not if — we will have another round of the European sovereign-debt crisis.

For what it’s worth, I think he’s right about another debt crisis.

And Italy will probably be where it starts.

P.S. While the European Central Bank has contributed to the problem, the European Commission also has enabled more profligacy.

As originally envisaged…, the euro zone contained no provisions allowing for rescues financed from within the currency union. This was designed to stop the historically less fiscally responsible members from free-riding… But it did not work out… To avoid taking the currency union into territory where one or more of its members might default, the euro zone (after adopting various ad hoc financing mechanisms and participating in a number of bailouts) now has institutionalized an emergency-funding regime.

P.P.S. The Maastricht criteria failed in part because they targeted the wrong variable.

In an effort to ensure responsible budget policies, the euro zone adopted the so-called Maastricht criteria, which were meant to guide each country’s budget policy. Members were supposed to restrain their budget deficits to no more than 3 percent of GDP. They were also supposed to bring their public-debt levels down to 60 percent of GDP. It would be an understatement to say that the Maastricht criteria have been observed in the breach. …Greece, Italy, Portugal, and Spain…all had budget deficits in excess of 3 percent of GDP and public-debt-to-GDP ratios exceeding 100 percent.

The right solution is a Swiss-style spending cap, and even the German government seems to understand that’s the right approach. And if some nations don’t want to adopt this solution, they should be allowed to default.

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Knowingly Flunking Budget Math

The United States is in fiscal trouble because of over-spending by Washington. And the problem will get worse in the future because of poorly designed entitlement programs.

But it also will get worse because Washington is filled with politicians who knowingly lie and simply don’t care.

To illustrate, here’s a viral tweet from Congressman Ro Khanna of California, which received 4.5 million views, followed by two correcting tweets (here and here) from Brian Riedl of the Manhattan Institute.

Sadly, neither of Brian’s tweets received much attention (less than 10,000 views compared to 4,500,000 views for Khanna’s nonsense).

Yet every honest person (including some honest leftists) knows Brian’s analysis is correct and Congressman Khanna is doing nothing but providing vapid and fraudulent clickbait.

Megan McArdle wrote about this for the Washington Post. Here are some excerpts.

Khanna’s assertions about the debt are simply not true, not even in the low, Washington sense of facially correct, yet wildly misleading. And I assume Khanna knows better. …everyone in Washington is playing the same damned game, a noxious hybrid of “let’s pretend” and “not it.” The budget hawks in the GOP have been effectively vanquished by the Trump faction, and the days when Democrats strove to claim the mantle of fiscal responsibility are long gone. …there is no excuse for failing to balance the books, except that the political trade-offs are hard, and — contra Khanna — almost certainly involve making changes to Social Security and Medicare. Together, these programs account for about one-third of spending, and that share is growing.This is America’s real budget crisis. And yet it pales in comparison with the biggest problem of all: politicians who keep trying to pretend our troubles away, rather than face up to what needs to be done.

Megan is right about Khanna, and she’s also right about Trump pushing aside fiscally rational Republicans.

So we have two parties in Washington controlled and led by people who are doing bad things, probably know they are doing bad things, but they simply don’t care (just in case anyone wonders why I think politicians are disgusting and reprehensible).

P.S. Megan’s column is wrong in that she also wrote that Ronald Reagan was “the most profligate of the bunch” in part because of his “failure to restrain spending.” That’s wildly wrong. A comprehensive study on fiscal history from the Mercatus Center showed LBJ and Nixon were the worst of the worst, while Reagan got the best marks. If you want to understand Reagan’s track record on spending, click here, here, here, and here.

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The Academic Case for Spending Limits

Since I’m a big fan of spending caps in Switzerland and Colorado, I’m always on the lookout for research and analysis about fiscal rules.

For instance, 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).

We can now add to that research with a new working paper from Switzerland’s Federal Finance Administration.

Authored by Thomas Brändle and Marc Elsener, it’s a very helpful review of different fiscal rules.

Let’s start by sharing a chart from the study on the number of fiscal rules. As you can see, the most dominant types of rules are anti-deficit (gray line) and anti-debt (black line).

Since I don’t think those rules are very effective, I’m more encouraged by the growing number of expenditure rules (blue line).

Here are some of the findings from the report.

A rich empirical literature investigates the impact of fiscal rules. First, the focus is on surveying recent studies that investigate the relationship between fiscal rules and “traditional” fiscal performance measures, such as public debt and budget balances. …For EU countries and the period 1990-2012, Nerlich and Reuter (2013)…find that the introduction of fiscal rules is related to lower public expenditures as well as to lower revenues. As the impact on revenues is smaller, the primary balance improves. This impact is stronger when fiscal rules are enacted in law or constitution and supported by independent fiscal institutions and effective medium-term expenditure frameworks. Fiscal rules have the strongest limiting impact on social spending, compensation of public employees.

Here are some additional studies that are cited in the paper.

Based on a panel of 30 OECD countries, Fall et al. (2015) find that fiscal rules are related to improved fiscal performance. In particular, a budget balance rule appears to have a positive and significant effect on the primary balance and a negative and significant effect on public spending. Expenditure rules are associated with lower expenditure volatility and higher public investment efficiency. …Focusing on expenditure rules, Cordes et al. (2015) present an analysis for 29 advanced and developing countries for the period 1985–2013. Using a dynamic panel estimation approach, the analysis shows that these rules are associated with better spending control…and improved fiscal discipline. …Asatryan et al. (2018) study whether constitutional-level fiscal rules – expected to be more binding – impact fiscal outcomes. …they find that the introduction of a constitutional balance budget rule leads to a lower probability of sovereign debt crisis. For their most preferred sample of 132 countries between 1945 and 2015, they find that the debt-to-GDP ratio decreases by around 11 percentage points on average with constitutional balance budget rules. Most of these consolidations are explained by decreasing expenditures rather than increasing tax revenues.

I’m most interested in controlling the burden of government spending.

For my friends who are mostly fixated on red ink, it’s worth noting that Switzerland’s spending cap – which took effect in 2003 – has caused a dramatic shift from rising debt to falling debt.

Debt did increase during the pandemic, of course, but Switzerland’s debt increase was very small compared to the United States.

And Swiss lawmakers will now be required to impose additional spending restraint to make up for that extra red ink.

Needless to say, there is no similar “clawback” requirement in the United States.

I’ll close by sharing this table from the study, which summarizes the recent academic research on fiscal rules.

My takeaway from all this research is that spending restraint is the only practical solution to protect against “goldfish government.”

Especially given the demographic changes that are making modern-day welfare states unsustainable,

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More Taxes = More Spending = More Debt

I’ve been warning for many years (including less than two weeks ago) that it would be a big mistake to have a “grand bargain” budget deal that includes tax increases.

This is not because of math. It is possible, of course, to have an acceptable budget agreement that includes tax increases.

But only in theory. In reality, we have gobs of evidence (even from the New York Times, albeit inadvertently) that budget deals with higher taxes don’t work.

The reason is that politicians can’t resist the temptation to increase spending whenever they think more tax revenue might be available.

In other words, Milton Friedman was right when he warned that “History shows that over a long period of time government will spend whatever the tax system raises plus as much more as it can get away with.”

Unfortunately, some people don’t understand history. Or they don’t care.

For instance, Fareed Zakaria argues in the Washington Post that politicians should impose a value-added tax. Here are some excerpts.

Total debt is now more than $33 trillion, the deficit is over 7 percent of gross domestic product, and this year’s net interest payment on the debt will probably be over $650 billion… For almost a generation, policymakers have been able to avoid seriously confronting deficits… Fortunately, there is a simple solution staring us in the face… Adopt a national sales tax, like every other advanced economy in the world. …According to the Congressional Budget Office, a broad 5 percent tax of this kind could raise $3 trillion over the next decade… On average, European Union countries get roughly 20 percent of their tax revenue from a VAT; the United States is getting zero. …It is time for the United States to join more than 160 other countries with a value-added tax and ask all Americans to chip in to set the country on a firmer fiscal path for decades.

Zakaria’s numbers are accurate. A VAT would raise a lot of money, as predicted by the CBO. And European nations generate a lot of VAT revenue.

But what about his analysis? Is Zakaria correct that a VAT would put America on “a firmer fiscal path”?

Since he cites Europe, let’s look at the evidence. I did this back in 2012, looking at the nations in Western Europe that are most similar to the United States, and comparing tax and debt levels both before and after value-added taxes.

And I did the same thing in 2016. In both cases, I used five-year averages to ensure that the numbers were not misleading because of the business cycle or anything else that might produce quirky data for a year or two.

In both cases, I found that politicians imposed massive tax increases, with VATs playing a big role. But I also discovered that politicians spent even more money (just as Friedman predicted), so the net result was more red ink.

Let’s now update that research.

We’ll start with this chart, which shows yet again that there has been a massive increase in tax revenue in Western European nations over the past five-plus decades.

If Zakaria and other pro-tax increase people are right, all that new revenue should have produced “a firmer fiscal path” of less debt.

Our second chart shows that government debt in the late 1960s averaged about 45 percent of GDP in Western Europe.

So what actually happened?

Did debt get paid off? Did debt get reduced? Was Western Europe put on “a firmer fiscal path”?

Of course not

As shown in our final chart, debt levels in the past five-plus decades have doubled to nearly 90 percent of GDP.

By the way, I’m mixing and matching data from several sources, so I’m sure that the numbers from the late 1960s are not a perfect match for the IMF numbers I used for 1919-2023.

That being said, there’s no arguing with the core finding. Massive revenue increases resulted in much higher levels of red ink because politicians increased the burden of government spending even faster.

Needless to say, analysis from “public choice” tells us that the same thing would happen in the United States.

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Beware Bad Budget Deals, Part I

Even though America’s long-run fiscal outlook is very grim, I wrote a two-part series earlier this year (here and here) to explain why the situation is not hopeless.

First and foremost, I noted that the only good solution is long-run spending restraint. Fortunately, that’s been done before. There have been three periods of good fiscal policy in recent decades.

• Under Reagan.
• In the 1990s.
• The Tea Party.

And I also explained that we already know what specifically needs to be done to fix entitlements (which unambiguously are the cause of our long-run problems).

In other words, we know the problem, we know how to solve it, and history shows that periods of fiscal restraint are possible.

I’m not the only one who is expressing optimism.

Two former Senators, Rob Portman (R-OH) and Kent Conrad (D-ND), have a column in yesterday’s Washington Post about the need to address America’s fiscal problems.

And they also don’t think the situation is hopeless. Here’s their core argument.

The deficit has doubled in the past year, and the national debt — some $33 trillion… — is diminishing our standing in the world. It is immoral to leave this level of debt to our children and grandchildren, and it is already affecting our economy. …But this is not a hopeless situation. …it is time to try an approach that removes some of our divisive politics from the picture: Congress must establish a bipartisan commission to put the country on a sustainable fiscal path. …Democrats will resist many of the necessary spending reductions, Republicans will resist needed revenue increases, and Democrats and Republicans alike will balk at the needed reforms to entitlement programs. But this approach has repeatedly helped move the country out of stalemate in the past. …our near- and long-term fiscal outlook is dangerously unsustainable. A fiscal commission should explain in objective terms the fiscal crisis we face and its consequences, scrutinize the entire federal budget, and make specific recommendations on revenue and spending, including what should be done to rescue our entitlement programs from insolvency. …A bipartisan commission might be our best chance to bestow upon future generations a stable financial future rather than an overwhelming financial burden and an America in decline.

I’m glad that these two former lawmakers are calling attention to our fiscal mess.

That being said, I have two big concerns with their argument.

1. They focus on red ink, which should be viewed as a symptom. The real problem is excessive spending. Real-world evidence shows that if you cure the underlying disease of excessive government, you automatically solve the symptom of deficits and debt.
2. They explicitly – and mistakenly – open the door to tax increases. But once taxes are on the table, we know from history that the result will be a deal filled with (very bad) tax increases and make-believe (and quickly vanishing) spending restraint.

Interestingly, the New York Times accidentally did some research that proves my case.

In an article back in 2011, Catherine Rampell looked at various bipartisan budget deal to measure the ratio of tax increases to (supposed) spending cuts.

What she found was that only one budget deal had zero tax increases, the one in 1997. Indeed, that budget deal actually cut taxes.

And guess what? That was the only budget deal that produced a budget surplus.

The moral of the story should be obvious.

P.S. Senators Portman and Conrad seem to think that Simpson-Bowles budget plan is a good framework, but I explained in 2012 and 2013 why that plan would be an unmitigated disaster.

P.P.S. My opposition to higher taxes is practical rather than ideological. Back in 2012, I listed three big tax increases I would accept assuming politicians would be willing to make some long-overdue spending reforms. Suffice to say nobody on the left has been willing to accept that offer.

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Understanding Washington’s Spending Problem

The burden of federal spending today is too high, diverting resources from the productive sector of the economy and sapping America’s economic vitality.

Unfortunately, today’s bad news about excessive government spending will become tomorrow’s terrible news.

The problem is entitlement programs.

When politicians created programs such as Medicare, Medicaid, and Social Security, they did not understand (or did not care) about what might happen if people started living longer and/or having fewer children.

These demographic changes are profoundly important because they translate into an ever-growing burden of government spending. Simply stated, the United States is becoming a society with more and more people expecting benefits from the government and fewer and fewer taxpayers to pay for those goodies.

The Center for Freedom and Prosperity has just released a three short studies to explain this problem. Authored by Robert O’Quinn, who has held senior positions in both the executive and legislative branches, this three-part series will make you better informed than most so-called budget experts in Washington.

Part I of the three-part series is a primer on the federal budget. It explains all sorts of wonky topics such as the differences between “mandatory spending” and “appropriations.” Readers will learn about the importance of “budget reconciliation” and “federal debt held by the public.” This paper does not look at policy choices, but readers will learn about the process of making fiscal policy (something I explained with far less detail back in 2018).

Part II of the three-part series a primer on federal spending, revenue, and red ink. Readers will learn how federal spending and revenue have changed over time (hint: both have increased, but spending has grown at the fastest rate). The paper explains the economic impact of spending, taxes, and deficits. For those who don’t have time to read the study, here’s the most important thing to understand.

Federal outlays are growing significantly faster than the U.S. economy, while federal receipts are growing slightly faster than the U.S. economy. Consequently, federal budget deficits and federal debt held by the public are widening as a percent of GDP. …the key problem is the growing burden of spending. Replacing debt-financed spending with tax-financed spending would leave the nation’s fiscal burden unchanged. Or it might make a bad situation even worse if politicians increase spending because of an expectation of additional revenue.

Part III of the three-part series is a primer on entitlement programs. It explains that entitlements are responsible for America’s growing burden of government spending. Readers will learn about the fiscal consequences of Medicare, Medicaid, and Social Security. Everyone should read this report, but for those of you with limited time, this chart is the most important thing to understand. You can see the burden of different spending categories in 2000, 2023, and 2054, and the problem areas are quite obvious.

All three studies are primarily designed to inform readers about basic facts so they have a real-world understanding of America’s deteriorating fiscal outlook.

I’ll conclude this column, though, by making a very important point about public policy. Simply stated, the United States will not be able to issue endless amounts of government debt.

As a result, this means that the nation will have to close the huge long-run gap between spending and revenue by making an unavoidable choice between massive tax increases and genuine entitlement reform.

Because of their opposition to entitlement reform, politicians such as Joe Biden and Donald Trump prefer giant tax increases. And because there are not enough rich people to finance big government, the Biden-Trump tax increases will target lower-income and middle-class households.

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Biden’s Reckless Spending Binge

The 21st Century has been bad news for advocates of limited government. Every president over the past two decades has been a big spender.

Including Joe Biden.

Yes, there was a brief dip in the spending burden in 2022, but that was only because of the massive temporary surge of pandemic-related spending in 2020 and 2021.

Now that we’re back to normal (at least by Washington standards), the fiscal situation once again is heading in the wrong direction.

The above chart is featured in an article in the Washington Post about America’s budgetary woes.

The good news is that the article, authored by Jeff Stein, calls attention to the nation’s fiscal problems. The bad news is that it mostly focuses on the symptom of red ink rather than the real problem of excessive spending.

The federal deficit is projected to roughly double this year… Budget experts now project that it will probably rise to about $2 trillion for the fiscal year that ends Sept. 30… The unexpected deficit surge, which comes amid signs of strong growth in the economy overall, is likely to shape a fierce debate on Capitol Hill about the nation’s fiscal policies… Biden and House Speaker Kevin McCarthy (R-Calif.) approved a deal in June to raise the nation’s borrowing limit, but it did little to alter the long-term debt trajectory. …The surge in red ink has confounded many economists’ expectations. Typically, deficits contract when the economy grows, because businesses and consumers owe more in taxes and the government does not need to spend as much to protect those who have lost their job.

If you read to the ninth paragraph, though, you eventually discover the real problem. There’s too much irresponsible spending.

From August 2022 to this July, the federal government spent roughly $6.7 trillion…. That represents a total increase in spending of 16 percent relative to last year…a number of…spending increases contributed to the rising deficit — Social Security payments increased because they are indexed to inflation; the government spent more on education, veterans benefits and health care; and the bipartisan infrastructure law, as well as the 2022 Inflation Reduction Act, started sending billions of dollars out from the government’s accounts.

That 16 percent increase between August 2022 and July 2023 is utterly reckless and that includes what must be a one-month record of more than $917 billion in spending last September (presumably bureaucrats rushing to spend money before the end of the fiscal year), according to data from the Treasury Department’s Monthly Statement.

But even if we ignore that monthly spending binge and just look at spending for the 2023 fiscal year (which started last October), we find that the spending burden is about 10 percent higher than it was in the 2022 fiscal year.

At the risk of repeating what I’ve stated before (over and over again), bad fiscal policy is when the spending burden grows faster than the economy.

So America is getting bad fiscal policy now and 30-year projections show bad fiscal policy in the future. Staying on our current budgetary path is a sure-fire recipe for a very grim outcome, regardless of whether spending is financed by taxes or borrowing.

P.S. There is a solution to America’s fiscal mess.

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America’s Declining Fiscal Position

I’m not a big fan of Moody’s, Fitch, and Standard & Poor’s.  As I explained in this 2011 interview, these credit rating firms don’t provide much insight, at least with regards to assessing whether governments can be trusted to honor their debts.

That being said, I don’t object to Fitch’s decision to reduce America’s rating from AAA to AA.

Here’s some of what the company wrote.

Fitch Ratings has downgraded the United States of America’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to ‘AA+’ from ‘AAA’. …The rating downgrade of the United States reflects the expected fiscal deterioration over the next three years, a high and growing general government debt burden, and the erosion of governance relative to ‘AA’ and ‘AAA’ rated peers over the last two decades that has manifested in repeated debt limit standoffs and last-minute resolutions. …Additionally, there has been only limited progress in tackling medium-term challenges related to rising social security and Medicare costs due to an aging population.

While I agree with the downgrade, I have a couple of observations.

• The US is in strong shape in the short run: There is zero chance that bondholders will lose money in the next 20 years. Even if Republicans and Democrats had a bigger-than-normal fight over the debt limit, leading to some bondholders not getting paid on time, lawmakers would fully compensate them in any eventual agreement.
• The US is in terrible shape in the long run: American politicians are grotesquely irresponsible. They mostly understand that America faces an entitlement crisis, but most of them are unwilling to address the problem. Heck, some of them want to dig the hole deeper by expanding the welfare state.
• America’s long-run fiscal problem is bipartisan: Starting with LBJ and Nixon, politicians from both parties have expanded the burden of government. The deterioration has continued this century with two Republican presidents and two Democratic presidents pushing for more spending.

By the way, there’s little reason for future optimism. Trump and Biden attack anyone who wants to do the right thing on entitlements, so that makes it more likely that politicians eventually will compound the damage of higher spending by enacting higher taxes.

P.S. A big problem with the credit rating firms is that they seemingly think tax increases and spending restraint are equally acceptable ways of reducing red ink and improving creditworthiness. But since higher taxes lead to less growth and encourage more spending, the inevitable result is that tax increases lead to more debt. Just look at what’s happened in Europe.

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Do-It-Yourself Budgeting

I sometimes disagree with the Committee for a Responsible Federal Budget because they mistakenly focus on reducing deficits and debt, which makes them very vulnerable to supporting counterproductive tax increases (such as Biden’s misnamed Inflation Reduction Act).

But they generally provide useful analysis, so I regularly read CRFB publications.

And when they put together online quizzes (whether well designed or poorly designed), I can’t resist seeing my score.

Which is why I just filled out their online test to see if I could “Fix the National Debt.”

They start with projections of what debt will be in 2033 and 2050 if we leave fiscal policy on autopilot.

If you take the test, you get all sorts of options to increase spending, reduce spending, raise taxes, and/or cut taxes.

When I finished, here are the projections for debt levels in those two years.

The test did not require much time, so that’s good.

But there are three pieces of bad news.

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).
3. You don’t even get to see whether the budget is balanced or in surplus by 2033 or 2050, which is not that important but nonetheless would be interesting to see (here’s how it can happen).

That being said, the test was fun to take and I recommend others give it a try. Feel free to list your results in the comments.

P.S. Here are the shortest and longest quizzes that I’ve shared.

P.P.S. Here’s the Washington Post‘s budget quiz for those who want to focus on fiscal policy.

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A Spending Cap Amendment Is Far Better than a Balanced Budget Amendment

The Swiss Debt Brake and Colorado’s TABOR work because they limit spending. Balanced budget requirements, by contrast, have a weak track record.

My point in the above discussion with the Soul of Enterprise is mostly based on economics.

Our fiscal challenge in the United States is excessive government spending. And the problem is projected to worsen in coming decades because of demographic change and poorly designed entitlement programs.

So it makes sense to directly address the problem with a spending cap.

By contrast, a balanced budget amendment is merely designed to inhibit debt-financed spending. That’s a good goal, but it won’t lead to good results if politicians react by simply increasing tax-financed spending. Or if they finance spending with bad monetary policy.

As I point out in the video, balanced budget requirements and anti-deficit rules have not produced good results in American states or EU nations.

The takeaway is that good policymakers should push for spending caps for theoretical reasons and practical reasons.

P.S. I was very pleasantly surprised when the German government recently endorsed EU-wide spending caps.

P.P.S. Remarkably, 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).

P.P.P.S. It should go without saying, but I’ll say it anyhow, that a spending cap should be set at a level that actually results in less government.

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Social Security’s $60 Trillion-Plus Problem

The 2023 Social Security Trustees Report was released yesterday, and just like I did last year (and the year before, and the year before that, etc), let’s look at the fiscal status of the retirement program.

There is a lot of data in the Report. But the most important set of numbers can be found in Table VI.G9.

As you can see from this chart, these numbers show the amount of revenue coming into the program each year, adjusted for inflation, as well as the amount of yearly spending. Both are rising rapidly.

Since the orange line (spending) is climbing faster than the blue line (revenue), the obvious takeaway is that Social Security has a deficit.

But that would be an understatement.

As you can see from the second chart, the cumulative deficit over the next 77 years is more than $60 trillion.

You’ll notice, of course, that I added a bit of editorializing to both charts.

That’s because it is reprehensible that Joe Biden and Donald Trump are opposed to reforms that would modernize the program.

They won’t admit it, but their approach necessarily and unavoidably means huge tax increases on lower-income and middle-class households.

P.S. If you are not Biden or Trump and want to do what’s best for America, I suggest learning about reforms in Australia, Chile, Switzerland, Hong Kong, Netherlands, the Faroe Islands, Denmark, Israel, and Sweden.

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The Most Important Thing to Understand about Biden’s New Budget

President Biden has released his 2024 budget, which mostly recycles the tax-and-spend proposals that he failed to achieve as part of his original “Build Back Better” plan.

It is not easy figuring out his worst policy.

• Is it one of the proposed tax increases, such as the higher corporate tax rate or the increased burden of the death tax?
• Is it one of the expansions of the welfare state, such as the per-child handouts that would gut Bill Clinton’s welfare reform?

I could probably write dozens of columns (as I did the past two years) about the many bad policies that Biden is pushing.

For today, though, let’s focus on the aggregate numbers.

We’ll start with the fact that Biden’s budget violates the Golden Rule of fiscal policy. He wants the burden of government spending over the next 10 years to increase at twice the rate of inflation (based on Table S-1 and S-9 of his budget)

If you want raw numbers, Biden wants the spending burden to rise from about $6.4 trillion this year to $10 trillion-plus in 2033.

On the revenue side, he wants the tax burden to jump from $4.8 trillion this year to nearly $8 trillion in 2033.

To be fair, spending and taxes automatically increase every year, thanks to inflation, demographic change, and previously enacted legislation.

You can see those “baseline” numbers in Table S-3 of Biden’s budget.

So if we want to see the net effect of what Biden is proposing, we should compared the “baseline” data to his budget numbers.

And when we do that, we find that he wants an additional $1.85 trillion of spending over the next 10 years. Even more shocking, he wants an additional $4.85 trillion of tax revenue.

I’ll close with a couple of observations.

First, Biden has a giant gimmick in his budget. If you look at the details for his proposed per-child handout (Table S-6 of his budget, bottom of page 142), you’ll notice that he’s only proposing the policy for one year.

Why? Because it is enormously expensive, with an annual cost of more than $250 billion.

Yet we know the White House and congressional Democrats want this policy to be permanent. So if we extended the cost of the per-child handout for the full 10 years, the amount of new spending in Biden’s budget would be much closer to the level of new taxes in his budget.

Second, Biden’s budget shows why supporters of good fiscal policy should not focus on deficits. A myopic fixation on red ink allows a big spender like Biden to claim the moral high ground because his proposed tax increase is even bigger than his proposed spending increase.

The variable that matters is the overall burden of government spending. And the goal should be reducing that burden, regardless of whether it is financed with taxes, borrowing, or printing money.

P.S. At the risk of stating the obvious, Biden’s tax-and-spend agenda would cause considerable economic damage.

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Deficit Spending and Inflation

In this segment from a December interview, I explain that budget deficits are most likely to produce inflation in countries with untrustworthy governments.*

The simple message is that budget deficits are not necessarily inflationary. It depends how budget deficits are financed.

If a government finances its budget deficits by selling bonds to private savers and investors, there is no reason to expect inflation.**

But if a government finances its budget deficits by having its central bank create money, there is every reason to expect inflation.

So why would politicians ever choose the second option? For the simple reason that private savers and investors are reluctant to buy bonds from some governments.

And if those politicians can’t get more money by borrowing, and they also have trouble collecting more tax revenue, then printing money (figuratively speaking) is their only option (they could restrain government spending, but that’s the least-preferred option for most politicians).

Let’s look at two real-world examples.

• Consider the example of Japan. It has been running large deficits for decades, resulting in an enormous accumulation of debt. But Japan has very little inflation by world standards. Why? Because governments bonds are financed by private savers and investors, who are very confident that the Japanese government will not default..
• Consider the example of Argentina. It has been running large deficits for decades. But even though its overall debt level if much lower than Japan’s, Argentina suffers from high inflation. Why? Because the nation’s central bank winds up buying the bonds because private savers and investors are reluctant to lend money to the government.

If you want some visual evidence, I went to the International Monetary Fund’s World Economic Outlook database.

Here’s the data for 1998-2022 showing the average budget deficit and average inflation rate in both Japan and Argentina.

The bottom line is that prices are very stable in Japan because the central bank has not been financing Japan’s red ink by creating money.

In Argentina, by contrast, the central bank is routinely used by politicians as a back-door way of financing the government’s budget.

*To make sure that my libertarian credentials don’t get revoked, I should probably point out that all governments are untrustworthy. But some are worse than others, and rule-of-law rankings are probably a good proxy for which ones are partially untrustworthy versus entirely untrustworthy.

**Borrowing from the private sector is economically harmful because budget deficits “crowd out” private investment. Though keep in mind that all the ways of financing government (taxes, borrowing, and money creation) are bad for prosperity.

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The Simple (but Definitely not Easy) Way to Avert America’s Fiscal Crisis

Every six months or so, the Congressional Budget Office produces a 10-year forecast and most fiscal experts focus on the projections for deficit and debt.

Those are important (and worrisome) numbers, but I first look at the data showing what will happen to taxes and spending.

And you can see from this chart that the fiscal burden of the federal government is projected to grow at a very rapid pace over the next decade.

Other fiscal experts fret that deficits and debt are increasing between now and 2033, but the above chart shows that the real problem is that the spending burden is rising faster than the tax burden.

The real fiscal fight in Washington is how to close the gap between the red spending line and the green revenue line (supporters of Modern Monetary Theory say we can just print money to finance big government, but let’s ignore them for purposes of today’s column).

Since I think Washington is spending far too much, I want to close the gap by restraining the growth of government.

So here’s a second chart illustrating what would happen if there was some sort of spending cap. As you can see, a spending freeze (like we had from 2009-2014) would balance the budget by 2030.

And spending would have to be limited to 1.3 percent annual growth if the goal is to balance the budget within 10 years,

We can solve the problem. That’s the good news.

The bad news is that politicians don’t want to restrain spending.

And, even if they did want to do the right thing, adhering to a 1.3 percent spending cap would require serious entitlement reform. So don’t hold your breath hoping for immediate progress.

P.S. The numbers are out of date, but here’s a video that explains how spending restraint is the key to fiscal balance. And here’s a video on how some other nations made enormous progress with multi-year spending restraint.

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Donald Trump Supports Massive Tax Increases on Middle-Class Americans, Part II

Regular readers know that I generally don’t get overly agitated about government debt (I get far more upset about counterproductive spending, regardless of how it is financed).

But even I recognize that there is a point where debt becomes excessive.

So let’s start today’s column with the simple observation that America’s current fiscal trajectory is unsustainable.

The burden of federal spending is projected to jump over the next several decades up to 30 percent of GDP while taxes “only” increase to about 19 percent of GDP.

It is inconceivable that all that new spending will be – or can be – financed by borrowing. Simply stated, domestic and international investors will decide that bonds from Uncle Sam are too risky.

So that leaves only two options.

1. Spending restraint, inevitably requiring entitlement reform.
2. Massive tax increases, inevitably targeting middle-class Americans.

Regarding those two choices, Donald Trump supports massive tax increases.

He’s not overtly admitting that agenda, but that’s the unavoidable outcome based on what Joshua Green of Bloomberg recently reported about his opposition to entitlement reform.

Trump is hoping to reverse his fortunes and revive his moribund presidential campaign with a…short video message. …he looks straight to camera and declares, “Under no circumstances should Republicans vote to cut a single penny from Medicare or Social Security.” …In fact, he has been remarkably consistent and outspoken over the years in his attacks on Republican efforts to cut Social Security and Medicare. …he was viewed as the least conservative Republican nominee in decades. He favored lots of infrastructure spending…and he made a big deal about protecting Social Security and Medicare.

The story also explains that Trump was the big-government candidate among Republicans in 2016 (as I noted at the time) and suggests he will hold to that position as the 2024 race develops.

Trump’s position set him apart from the other 16 Republican presidential candidates, who generally shared Ryan’s belief, prevalent among House Republicans, that cutting Social Security and Medicare was a fiscal imperative. That’s where DeSantis comes in. …DeSantis was also one of the founding members of the House Freedom Caucus, which drove the effort to cut entitlements when he was in Congress. DeSantis voted repeatedly — in 2013, 2014, and 2015 — for budgets that slashed spending on Social Security and Medicare

By the way, the article is flat-out wrong on a few points.

It is grossly inaccurate to assert that the Ryan budgets “slashed spending.” Overall spending increased in the budgets that Ryan, DeSantis, and other Tea Party Republicans supported back in 2013, 2014, and 2015.

All that happened is that spending would not have been allowed to grow as fast as previously planned.

Also, while the Ryan budgets included genuine Medicare reform (and much-needed spending restraint), they did not address Social Security reform. So the report was wrong on that as well.

But I’m digressing. The key thing to understand is that Ryan, DeSantis and other Republicans in the House last decade tried to do the right thing.

Donald Trump, by contrast, did the wrong thing. And he wants to do the wrong thing in the future. And that means huge future tax increases on you and me.

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Does America Have an Under-Taxation Problem?

When leftists (or misguided rightists) tell me that Americans are under-taxed and that the government has lots of red ink because of insufficient revenue, I sometimes will direct them to the Office of Management and Budget’s Historical Tables in hopes of changing their minds.

I’ll specifically ask them to look at the data in Table 1-3 so they can see what’s happened to federal tax revenue over time. As you can see from this chart, nominal tax revenues have skyrocketed.

The reason that I send them to Table 1-3 is that they can also peruse the numbers after adjusting for inflation.

On that basis, we see the same story. Inflation-adjusted federal tax revenues have grown enormously.

The two charts we just examined are very depressing.

So now let’s peruse at a chart that is just mildly depressing.

If you look at federal tax revenues as a share of economic output, you’ll see that Uncle Sam currently is collecting slightly more than 18 percent of economic output. Since the long-run average is about 17 percent of GDP, that’s not a horrific increase.

However, there are still some reasons to be quite concerned.

• The Congressional Budget Office projects the tax burden as a share of GDP will expand even further over the next few decades.
• That means that politicians in DC not only are getting more money because of inflation, but also because the economy is expanding.
• Third, not only are politicians getting more money because the economy expanding, they’re slowly but surely expanding their share.

That’s very bad news for those of us who don’t like higher taxes and bigger government.

Some people, however, have a different perspective

In one of his columns for the New York Times, Binyamin Appelbaum argues that Americans are undertaxed.

…the United States really does have a debt problem. …Americans need more federal spending. The United States invests far less than other wealthy nations in providing its citizens with the basic resources necessary to lead productive lives. …Measured as a share of G.D.P., public spending in the other Group of 7 nations is, on average, more than 50 percent higher than in the United States. …There is another, better way to fund public spending: collecting more money in taxes. …If the debt ceiling serves any purpose, it is the occasional opportunity for Congress to step back and consider the sum of all its fiscal policies. The nation is borrowing too much but not because it is spending too much. The real crisis is the need to collect more money in taxes.

I give Appelbaum credit for honesty. He openly advocates for higher taxes and bigger government, explicitly writing that “Americans need more federal spending.”

And he is envious that spending in other major nations is “more than 50 percent higher than in the United States.”

But this raises the very obvious point about whether we should copy other nations with their bigger welfare states and higher tax burdens. After all, European nations suffer from weaker economic performance and lower living standards.

Does Appelbaum think we’ll have “productive lives” if our living standards drop by 50 percent?

Does he think that “invest” is the right word for policies that lead to lower economic performance?

The bottom line is that I’m completely confident that Appelbaum would be stumped by the never-answered question.

P.S. Dishonest leftists claim tax increases will lead to less red ink while honest leftists like Appelbaum admit the real goal is a bigger burden of government.

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Washington’s Fake Spending Cut Charade

Two days ago, I dug into the C-Span archives to share a 15-year old clip of me explaining the theoretical virtues of a national sales tax.

Let’s now go back more than 30 years for this segment from a 1990 interview.

So why am I sharing my thoughts on Washington’s use of misleading budget rhetoric?

Because while I’ve pontificated about this issue in the past (three times in 2011 and two times in 2012), it’s definitely time for a refresher course.

I’m motivated by this chart from the folks at the Committee for a Responsible Federal Budget. They want readers to believe that balancing the budget over the next 10 years would require drastic spending cuts.

To understand what’s wrong with this CRFB chart, let’s go to the latest 10-year forecast from the Congressional Budget Office.

You’ll notice that this year’s federal budget is $5.87 trillion. And you’ll also notice that revenues in 2032 are projected to climb above $6.66 trillion.

At the risk of showing off my amazing math skills, $6.66 trillion is more than $5.87 trillion. Indeed, nearly $800 billion higher.

And what does that mean? Well, it means that we can balanced the budget by 2032 so long as spending does not increase by more than $800 billion between now and 2032. As illustrated by this chart.

To be fair to the CRFB crowd, they didn’t use make-believe numbers.

Their estimate is based on what would happen if the federal budget is left on autopilot, which means the budget grows every year because of factors such as inflation, demographic change, and previously legislated program expansions.

They then compared that artificial “baseline” to projected revenues. That’s how they came up with an estimate of a 26 percent budget cut.

In reality, though, government would be spending more than 13 percent more in 2032 when compared to 2023.

Here’s the bottom line: If CRFB or anyone else wants to argue that the budget should grow by more than 13 percent over the next nine years, they can make that argument. They can say that various programs are important and that overall spending should increase because of inflation. Or demographics.

Heck, they can even say spending should grow at a rapid pace because AOC and Bernie want bigger government.

We can then have an honest and fair debate. I’ll argue we need a TABOR-style spending cap and they can argue we should be like Greece or Italy.

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Control the Burden of Government Spending

As part of my annual “Hopes and Fears” column, a rejuvenated interest in spending restraint was at the top of my list.

This clip from a recent interview summarizes the economic issues.

If you don’t want to watch the video, here are the three things to understand.

1. Tax-financed spending is bad for prosperity.
2. Debt-financed spending is bad for prosperity.
3. Monetary-financed spending is bad for prosperity.

And if you understand those three things, then you realize that the real problem is spending.

At the risk of over-simplifying, taxes, borrowing, and printing money should be viewed as different ways of doing a bad thing.

Since I mentioned over-simplifying, I’ll close with a couple of observations that are somewhat contradictory.

• First, I don’t worry very much about whether there is a surplus or a deficit in any particular year, but it is a good idea to have long-run fiscal balance (compared to the alternatives of financing the budget with borrowing or printing money).
• Second, while taxes are the most appropriate way to finance spending, tax increases are a reckless and irresponsible option because we have so much evidence that politicians will respond with additional spending and additional debt.

Which brings us back to the main lesson, which is that spending is the problem and spending restraint is the solution.

Not just a solution. The only solution.

P.S. This video is a bit dated, but all of the economic analysis is still completely accurate.

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Understanding Biden and Red Ink

I don’t worry much about budget deficits. Simply stated, it is far more important to focus on the overall burden of government spending.

To be sure, it is not a good idea to have too much debt-financed spending. But it’s also not a good idea to have too much tax-financed spending. Or too much spending financed by printing money.

Other people, however, do fixate on budget deficits. And I get drawn into those debates.

For instance, I wrote back in July that Biden was spouting nonsense when he claimed credit for a lower 2022 deficit. But some people may have been skeptical since I cited numbers from Brian Riedl and he works at the right-of-Center Manhattan Institute.

So let’s revisit this issue by citing some data from the middle-of-the-road Committee for a Responsible Federal Budget (CRFB). They crunched the numbers and estimated the impact, between 2021 and 2031, of policies that Biden has implemented since becoming president.

The net result: $4.8 trillion of additional debt.

By the way, this is in addition to all the debt that will be incurred because of policies that already existed when Biden took office.

If you want to keep score, the Congressional Budget Office projects additional debt of more than $15 trillion over the 2021-2031 period, so Biden is approximately responsible for about 30 percent of the additional red ink.

Some readers may be wondering how Biden’s 10-year numbers are so bad when the deficit actually declined in 2022.

But we need to look at the impact of policies that already existed at the end of 2021 compared to policies that Biden implemented in 2022.

As I explained back in May, the 2022 deficit was dropping simply because of all the temporary pandemic spending. To be more specific, Trump and Biden used the coronavirus as an excuse to add several trillion dollars of spending in 2020 and 2021.

That one-time orgy of spending largely ended in 2021, so that makes the 2022 numbers seem good by comparison.

Sort of like an alcoholic looking responsible for “only” doing 7 shots of vodka on Monday after doing 15 shots of vodka every day over the weekend.

If that’s not your favorite type of analogy, here’s another chart from the CRFB showing the real reason for the lower 2022 deficit.

I’ll close by reminding everyone that the real problem is not the additional $4.8 trillion of debt Biden has created.

That’s merely the symptom.

The ever-rising burden of government spending is America’s real challenge.

P.S. If you want to watch videos that address the growth-maximizing size of government, click here, here, here, here, and here.

P.P.S. Surprisingly, the case for smaller government is bolstered by research from generally left-leaning international bureaucracies such as the OECD, World Bank, ECB, and IMF.

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America’s Fiscal Problem Is Excessive Government Spending

I don’t spend much time worrying about why the United States has a big budget deficit. I’m much more concerned about the fact that the federal government is too big and that it is spending too much.

Moreover, there’s plenty of evidence that we can quickly get rid of deficits with some long-overdue spending restraint. In other words, deal with the underlying disease of excessive government and the symptom of red ink goes away.

But since many people focus first and foremost on fiscal balance, let’s take a look at why budget surpluses at the turn of the century have turned into big budget deficits.

I’m motivated to address this issue because of this chart from Brian Riedl’s impressive collection. It shows spending increases are responsible for 97.5 percent of the shift.

Some of you may be wondering if the chart is accurate. I can easily imagine my friends on the left exclaiming, “What about the Bush tax cuts and the Trump tax cuts?!?”

Those tax cuts did happen, but they were mostly offset by Obama’s “fiscal cliff” tax increase and real bracket creep (the tax burden tends to increase over time since even small increases in economic growth will push households into higher tax brackets).

So the net result of all these factors is that there has been a very small reduction (0.2 percentage points) in tax revenue as a share of economic output.

Others of you may be wondering if the spending numbers may be exaggerated because of pandemic-related spending.

That is a fair question since the crowd in Washington used the opportunity to spend a couple of trillion dollars. But the silver lining to that dark cloud is that it was almost entirely one-time spending that took place in 2020 and 2021 (for what it’s worth, budget experts have mocked Biden’s claim of deficit reduction this year since it is simply a result of expiring emergency outlays).

There is some one-time spending in 2022. As noted in the chart, Biden’s reckless student loan bailout is a big chuck of the increase in “other mandatory spending.”

As such, I suppose I should say that higher spending is “only” responsible for 96.8 percent of today’s higher deficits, not 97.5 percent.

The bottom line is that all 21st-century presidents (and Congresses) have been big spenders.

P.S. According to the long-run forecast from the Congressional Budget Office, a bad situation will get even worse over the next 30 years. And more than 100 percent of that future decline will be the result of excessive spending (something that’s been true for many years).

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European Fiscal Policy Week, Part II: The Right Response to Italy’s Fiscal Crisis

I wrote yesterday to speculate about a possible fiscal crisis in Italy.

Today, here are my thoughts on why there should not be a bailout if/when a crisis occurs.

I have moral objections to bailouts, but let’s focus in this column on the practical impact.

And let’s start with this chart, which shows debt levels in Portugal, Italy, Greece, and Spain (the so-called PIGS) ever since the misguided bailout of Greece about a dozen years ago.

As you can see, OECD data reveals that there’s been no change in these poorly governed nations. They have continued to over-spend and accumulate ever-higher levels of debt.

This certainly seems like evidence of failure, in part because of Greece’s continued bad policy.

But I’m equally concerned about how other Mediterranean nations did not change their behavior.

So why did those nations accumulate more debt, even though they had an up-close look at Greece’s fiscal collapse?

I suspect they figured they could get bailouts, just like Greece. In other words, the IMF and others created a system corrupted by moral hazard.

Defenders of bailouts assert that Greece was forced to engage in “austerity” as a condition of getting a bailout.

I have two problems with that argument.

• First, notice how Greece’s debt has continued to go up. If that’s a success, I would hate to see an example of failure.
• Second, the main effect of the so-called austerity is a much higher tax burden and a somewhat higher spending burden.

If there’s a bailout of Italy (or any other nation), I suspect we’ll see the same thing happen. Higher taxes, higher spending, and higher debt.

I’ll close by acknowledging that there are costs to my approach. If Italy is not given a bailout, the country may have a “disorderly default,” meaning the government simply stops honoring its commitments to pay bondholders.

That is bad for individual bondholders, but it also could hurt – or even bankrupt – financial institutions that foolishly decided to buy a lot of Italian government bonds.

But there should be consequences for imprudent choices. Especially if the alternative is bailouts that misallocate global capital and encourage further bad behavior.

The bottom line is that the long-run damage of bailouts is much greater than the long-run damage of defaults.

P.S. Just like it’s a bad idea to provide bailouts to national governments, it’s also a bad idea to provide bailouts to state governments. Or banks. Or student loan recipients.

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European Fiscal Policy Week, Part I: Italy’s Looming Fiscal Crisis

I’m in Europe to give a couple of speeches about fiscal policy, so I’m going to spend all week commenting on the continent’s (mostly miserable) fiscal policy.

Let’s start with comments about Italy, the nation most likely to suffer a crisis.

Normally, I tell people to focus on government spending rather than red ink. After all, the economy is hurt whether spending is financed by taxes or borrowing (or printing money).

But I’ve also noted that governments sometimes spend so much money and incur so much debt that investors decide it is very risky to buy or hold debt from those governments. In other words, they begin to fear default.

When investors (sometimes known as “bond vigilantes”) reach that stage, they probably try to get rid of their holdings and definitely refuse to buy more debt. The net result is that profligate governments have to offer much higher interest rates to compensate for the risk of a possible default.

That happened earlier this century in Greece.

And if peruse this data from the OECD, you find that Italian government debt has jumped to levels that may be unsustainable.

So why has Italy avoided a crisis?

As noted in this article by Desmond Lachman, published by Inside Sources, the nation is being propped up by the European Central Bank.

In Europe, when the European Central Bank (ECB) soon dials back its bond-buying program, we are likely to find out that it is the Italian economy that has been swimming naked. This should be of deep concern for the Eurozone and world economies. While the Italian economy might be too large for its Eurozone partners to allow it to fail, it also might prove to be too large for them to bail it out. …The main factor that has allowed the Italian government to finance its ballooning budget deficit on favorable terms has been the ECB’s massive government bond-buying…the ECB used its emergency bond-buying program to more than fully finance the Italian government’s borrowing needs. …it must be only a matter of time before we have another round of the Italian sovereign debt crisis. …no longer being able to count on ECB bond-buying, the Italian government will have to increasingly finance itself in the market. It will have to do so with its public finances in a worse state than they were in during the 2012 debt crisis.

In the article, Lachman thinks a crisis is all but inevitable because the ECB is unwinding its pandemic-era money creation.

I agree about the ECB’s harmful role, but I fear the central bankers in Frankfurt will continue to do the wrong thing.

P.S. I mentioned demographics at the start of the video. Here’s some more information about how aging populations are contributing to fiscal meltdown.

P.P.S. Italy can solve its problems, but I doubt it will choose the only effective solution.

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The Absurdly Named Inflation Reduction Act

I don’t like shoveling more money at a corrupt IRS, hurting jobs with higher taxes on “book income,” price controls on prescription drugs, or green-energy pork.

But, as explained in this video clip, the insult added to injury is that the resuscitated “Build Back Better” is being sold as the “Inflation Reduction Act.”

If a private company said that candy bars help you lose weight or that it is okay to stick your hand under a running lawnmower, it would be dragged into court for false and/or dangerous advertising.

But when politicians make utterly dishonest claims about legislation, we have to grit our teeth and endure their lies.

The bottom line is that rising prices inevitably are a consequence of bad monetary policy.

That’s true in the United States, and that’s true elsewhere in the world.

So why, then, did Biden, Schumer, and Manchin decide to affix such an inaccurate label to their tax-and-spend package?

The answer presumably is political. Inflation is a problem for the incumbent party, so why not pretend the budget plan will somehow reduce inflation. Heck, if they could get away with it, they would probably call it the “Inflation Reduction and Cancer Elimination Act.”

But, to be fair, perhaps some of them actually believe a big-government plan will have an impact on inflation. For instance, the misguided but honest folks at the Committee for a Responsible Federal Budget released an endorsement letter from 55 supposed experts based on the assumption that higher taxes will lead to lower prices.

Here are some excerpts.

With inflation at a 40-year high…, we are writing to encourage you to pass legislation to reduce budget deficits in a manner that would help counter inflation… As President Biden has explained, “bringing down the deficit is one way to ease inflationary pressures.” …Given the current state of the economy, we believe passing deficit reduction would send an important message to the American people that their leaders are serious about tackling inflation.

There are two big problems with the letter.

First, it is based on Keynesian economics, which assumes higher prices are caused by excessive “aggregate demand” and that deficit reduction (whether from tax increases or spending restraint) can help by slowing the economy.

Yet this is the theory that also told us that it was impossible to have rising prices and rising unemployment, like we saw in the 1970s. And Keynesians also said we couldn’t have falling unemployment and falling inflation, like we enjoyed in the 1980s.

Second, even if one believes in the fairy tale of Keynesian economics, all of the alleged deficit reduction occurs in future years.

And even that is nonsense since every sentient adult knows that the massive expansion of the IRS’s budget is not going to generate a windfall of new tax revenue. And every honest person also knows that lawmakers plan on extending the new Obamacare handouts in the bill.

These tweets summarize why even Keynesians should realize the legislation is fraudulent.

And what happens to the 10-year "deficit reduction" when the new Obamacare subsidies are extended after 2 years? Bizarre that NR editorial doesn't hit this point https://t.co/3TUDkEUCyL https://t.co/R86P2rUEbG

— Mickey Kaus (@kausmickey) August 4, 2022

P.S. It is very disappointing (but perhaps not entirely surprising) that former Indiana Governor Mitch Daniels signed the CRFB letter. And it also is disappointing that a couple of people from the American Enterprise Institute added their names as well. They all deserve the Charlie Brown Award.

P.P.S. As I noted in the video, deficit spending can lead to inflation if a central bank buys government bonds in order to help finance additional government spending (the crazy Modern Monetary Theory agenda). Perhaps I am being too charitable, but I don’t think that’s the reason for the Federal Reserve’s big mistake (though I fear it may be happening with the European Central Bank).

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The Simple Solution to America’s Horrific Long-Run Fiscal Crisis

Yesterday’s column analyzed some depressing data in the new long-run fiscal forecast from the Congressional Budget Office.

Simply stated, if we leave fiscal policy on auto-pilot, government spending is going to consume an ever-larger share of America’s economy. Which means some combination of more taxes, more debt, and more reckless monetary policy.

Today, let’s show how that problem can be solved.

My final chart yesterday showed that the fundamental problem is that government spending is projected to grow faster than the private economy, thus violating the “golden rule” of fiscal policy.

Here’s a revised version of that chart. I have added a bar showing how fast tax revenues are expected to grow over the next 30 years, as well as a bar showing the projection for population plus inflation.

As already stated, it’s a big problem that government spending is growing faster (an average of 4.63 percent per year) than the growth of the private economy (an average of 3.75 percent per years.

But the goal of fiscal policy should not be to maintain the bloated budget that currently exists. That would lock in all the reckless spending we got under Bush, Obama, and Trump. Not to mention the additional waste approved under Biden.

Ideally, fiscal policy should seek to reduce the burden of federal spending.

Which is why this next chart is key. It shows what would happen if the federal government adopted a TABOR-style spending cap, modeled after the very successful fiscal rule in Colorado.

If government spending can only grow as fast as inflation plus population, we avoid giant future deficits. Indeed, we eventually get budget surpluses.

But I’m not overly concerned with fiscal balance. The proper goal should be to reduce the burden of spending, regardless of how it is financed.

And a spending cap linked to population plus inflation over the next 30 years would yield impressive results. Instead of the federal government consuming more than 30 percent of the economy’s output, only 17.8 percent of GDP would be diverted by federal spending in 2052.

P.S. A spending cap also could be modeled on Switzerland’s very successful “debt brake.”

P.P.S. Some of my left-leaning friends doubtlessly will think a federal budget that consumes “only” 17.8 percent of GDP is grossly inadequate. Yet that was the size of the federal government, relative to economic output, at the end of Bill Clinton’s presidency.

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