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Archive for the ‘Balanced Budget’ Category

Congressman Paul Ryan, the Republican Chairman of the House Budget Committee, has unveiled the GOP’s latest budget plan.

Is this proposal deserving of applause or criticism? The answer is yes and yes, with a bit of emphasis on the former.

Let’s start with some depressing news. The Ryan budget has gotten weaker each year.

Three years ago, he put forth a budget that limited spending so that it grew 2.8 percent per year.

Two years ago, he put forth a budget that limited spending so that it grew 3.1 percent per year.

Last year, he put forth a budget that limited spending so that it grew 3.4 percent per year.

His latest budget continues this slide in the wrong direction. Here are the numbers from the new budget, showing that the burden of government spending will rise by an average of 3.5 percent annually over the next 10 years.

And this is during a time when inflation is projected to be about 2 percent per year!

Ryan FY2015 Budget

Since it would be foolish to ever expect perfection from the political process, let’s now look at the positive features of the Ryan budget.

1. Spending may be growing, but it would grow at a slower rate than the President’s proposed budget.

2. Spending may be growing, but it would grow at a slower rate than nominal economic output, thus satisfying Mitchell’s Golden Rule.

3. Perhaps most important, the budget contains genuine and structural reform of both Medicare and Medicaid, so it at least partially solves the long-run fiscal crisis.

4. The budget also foresees tax reform, including lower tax rates for households, a 25 percent corporate tax rate, and a move toward territorial taxation.

Now let’s close with some hard-to-judge news.

The tax reform would be “revenue neutral,” so it’s difficult to accurately assess the proposal without knowing the “revenue raisers” that would offset the “revenue losers” listed above (particularly since lawmakers would be bound by static scoring).

If lower tax rates are financed by getting rid of distortions such as the healthcare exclusion, the net effect is very positive.

But if lower tax rates are financed with increased double taxation (a major shortcoming of the Cong. Camp tax plan), then it’s unclear whether policy has improved.

One final comment. I’m disappointed that the House Budget Committee’s report approvingly cites Congressional Budget Office analysis to suggest that the Ryan budget would boost economic performance.

I think that’s a tactically and morally dubious approach. It’s tactically misguided because the Ryan budget supposedly hurts growth from 2015-2017 according to CBO’s short-term Keynesianism.

And it’s morally dubious because it’s wrong to use bad arguments to advance good policy. The supposed added growth beginning in 2018 is based on the assumption that interest rates are the significant determinant of economic growth – which is the same thinking displayed in the left-wing debt video I shared yesterday.

Paul Ryan and the House GOP can legitimately claim that the proposed budget is good for growth. But improved economic performance would be the result of a smaller burden of government spending and a potentially less destructive tax system. Those are the policies that free up labor and capital for the productive sector and boost incentives to utilize those resources efficiently.

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The President’s new budget has been unveiled.

There are lots of provisions that deserve detailed attention, but I always look first at the overall trends. Most specifically, I want to see what’s happening with the burden of government spending.

And you probably won’t be surprised to see that Obama isn’t imposing any fiscal restraint. He wants spending to increase more than twice as fast as needed to keep pace with inflation.

Obama 2015 Budget Growth

What makes these numbers so disappointing is that we learned last month that even a modest bit of spending discipline is all that’s needed to balance the budget.

By the way, you probably won’t be surprised to learn that the President also wants a $651 billion tax hike.

That’s in addition to the big fiscal cliff tax hike from early last and the (thankfully smaller) tax increase in the Ryan-Murray budget that was approved late last year.

P.S. Since we’re talking about government spending, I may as well add some more bad news.

I’ve shared some really outrageous examples of government waste, but here’s a new example that has me foaming at the mouth. Government bureaucrats are flying in luxury and sticking taxpayers with big costs. Here are some of the odious details from the Washington Examiner.

What can $4,367 buy? For one NASA employee, it bought a business-class flight from Frankfurt, Germany, to Vienna, Austria. Coach-class fare for the same flight was $39. The federal government spent millions of dollars on thousands of upgraded flights for employees in 2012 and 2013, paying many times more for business and first-class seats than the same flights would have cost in coach or the government-contracted rate. …Agencies report their premium travel expenses to the General Services Administration each year. These reports were obtained by the Washington Examiner through Freedom of Information Act requests. …The most common reasons across agencies for such “premium” flights in 2012 and 2013 were medical necessities and flights with more than 14 hours of travel time.

By the way, “medical necessities” is an easily exploited loophole. All too often, bureaucrats get notes from their doctors saying that they have bad backs (or something similarly dodgy) and that they require extra seating space.

Probably the same doctors who participate in the disability scam.

But I’m digressing. It’s sometimes hard to focus when there are so many examples of foolish government policy.

Let’s look at more examples of taxpayers getting reamed.

One such flight was a trip from Washington, D.C., to Brussels, Belgium, which cost $6,612 instead of $863. Similar mission-required upgrades included several flights to Kuwait for $6,911 instead of $1,471, a flight from D.C. to Tokyo for $7,234 instead of $1,081 and a trip from D.C. to Paris for $6,037 instead of $477. …NASA employees also racked up a long list of flights that cost 26, 72 and even 112 times the cost of coach fares, according to Examiner calculations. Several space agency employees flew from Oslo, Norway, to Tromso, Norway — a trip that should have cost $65. Instead, each flew business class for $4,668. Another NASA employee flew from Frankfurt, Germany, to Cologne, Germany, for $6,851 instead of $133, a flight that cost almost 52 times more than the coach fare. …One flight from D.C. to Hanoi, Vietnam, for an informational meeting cost $15,529 instead of $1,649, according to the agency’s 2012 report.

Frankfurt to Cologne for $6851?!? Did the trip include caviar and a masseuse? A domestic flight in Norway for $4668? Was the plane made of gold?

I do enough international travel to know that these prices are absurd, even if you somehow think bureaucrats should get business class travel (and they shouldn’t).

And as you might suspect, much of the travel was for wasteful boondoggles.

Department of the Interior employees, for example, flew to such exotic locations as Costa Rica, Denmark, Japan and South Africa in 2012. …The Department of Labor sent employees to places like Vietnam and the Philippines for “informational meetings,” conferences and site visits.

The one sliver of good news is that taxpayers didn’t get ripped off to the same extent last year as they did the previous year.

The agencies spent $5.7 million in 2012, almost double the $3 million they paid for premium travel in 2013.

The moral of the story is that lowering overall budgets – as happened in 2013 – is the only effective way of reducing waste.

P.P.S. Want to know why the tax reform plan introduced by Congressman Dave Camp was so uninspiring, as I noted last week?

The answer is that he preemptively acquiesced to the left’s demands that class warfare should guide tax policy. Politico has the details.

Republicans had vowed for more than three years to slash the top individual income tax rate to 25 percent as part of a Tax Code overhaul. …last week Camp abandoned plans for a deep cut in the top marginal tax rate. He settled for 35 percent, which is just 4 percentage points lower than the current one. “It was a distribution issue,” Camp said. Getting all the way down to 25 percent “would have reduced taxes for the top 1 percent” and “I said we would be distributionally neutral.”

In other words, this is the tax code version of the Brezhnev Doctrine. Whenever the left is successful is raising the tax burden on the so-called rich (the top 20 percent already bears two-thirds of the burden), that then supposedly becomes a never-to-be-changed benchmark.

Fortunately, Reagan did not accept the left’s distorted rules and we got the Economic Recovery Tax Act in 1981, which helped trigger the 1980s boom.

And even when Reagan agreed to “distributional neutrality,” as happened as part of the 1986 Tax Reform Act, at least he got something big in exchange.

The Camp plan, by contrast, is thin gruel.

A big rate cut is what powered the last major tax overhaul, in 1986, which delivered tax cuts to every income group while slicing the top rate to 28 percent from a whopping 50 percent. …Lawmakers may look at the proposal and think: “I’m having the world coming down on me” and “all this just to get the rate down 4 points?”

That being said, the Camp plan has plenty of good features, including modest rate reductions and repeal of a few bad loopholes. But it’s accompanied by some really bad provisions, such as increased double taxation and higher taxes on business investment.

P.P.P.S. Long-time readers may remember this amusing Reagan-Obama comparison.

For understandable reasons, that’s what crossed my mind when seeing this example of Obama humor.

I should hasten to add, incidentally, that this is not to suggest I want Obama to do anything about the Ukrainian conflict (other than perhaps encourage decentralized power).

Unless one genuinely thinks that Putin has both the capacity and the desire for global imperialism, it’s hard to see how America’s national security is affected.

But I still appreciate good political humor. I like it when Obama is the target, and I like it even when it’s directed at people like me.

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A just-released report from the bean counters at the Congressional Budget Office is getting lots of attention because the bureaucrats are now admitting that Obamacare will impose much more damage to the economy than they previously predicted.

Of course, many people knew from the start that Obamacare would be a disaster and that it would make the healthcare system even more dysfunctional, so CBO is way behind the curve.

Moreover, CBO’s deeply flawed estimates back in 2009 and 2010 helped grease the skids for passage of the President’s failed law, so I hardly think they deserve any applause for now producing more realistic numbers.

But today’s post isn’t about the Obamacare fiasco. I want to focus instead on some other numbers in the new CBO report.

The bureaucrats have put together their new 10-year “baseline” forecast of how much money the government will collect based on current tax laws and the latest economic predictions.

These numbers show that tax revenue is projected to increase by an average of 5.4 percent per year.

As many readers already know, I don’t fixate on balancing the budget. I care much more about reducing the burden of government spending and restoring the kind of limited government our Founding Fathers envisioned.

But whenever the CBO publishes new numbers, I can’t resist showing how simple it is to get rid of red ink by following my Golden Rule of fiscal restraint.

Here’s a chart showing projected revenue over the next 10 years, along with lines showing what happens if spending (currently $3.54 trillion) follows various growth paths.

Balancing the Budget Is Easy

The two biggest takeaways are that a spending freeze (similar to what we got in 2012 and 2013) would almost balance the budget in 2016 and would definitely produce a budget surplus in 2017.

I also highlight what would happen if politicians merely limited spending so it grew at the rate of inflation, about 2.3 percent per year. Under that scenario, the budget would be balanced in 2019 (actually a $20 billion surplus, but that’s an asterisk by Washington standards).

In other words, there is no need to raise taxes. It’s very simple to balance the budget without extracting more money from taxpayers.

This means the Simpson-Bowles people are wrong. The Domenici-Rivlin folks are wrong. Senator Patty Murray is wrong. Jeb Bush and Lindsey Graham are wrong. And (here’s a surprise) the Obama Administration is wrong.

And we have some additional evidence. It’s a chart taken directly from the CBO report and it shows that revenues over the next 10 years will be above the long-run average. This is because even weak growth slowly but surely produces more revenue for Washington, in part because it gradually pushes people into higher tax brackets.

CBO Above-Average Revenues

And this chart just looks at the next 10 yeas. If you peruse the long-run fiscal projections, you’ll see that the tax burden is projected to increase dramatically over the next several decades.

The moral of the story is that there should be tax cuts (ideally as part of tax reform), not tax increases.

P.S. Just in case you think I was being unfair in my description of the Congressional Budget Office, keep in mind that these are the bureaucrats who advise Congress that economic performance increases when taxes go up.

P.P.S. And even though CBO is finally admitting some of the flaws in Obamacare, the bureaucrats are still unrepentant Keynesians. Check out this excerpt from a story in yesterday’s Washington Post.

Rep. Chris Van Hollen (Md.), the top Democrat on the committee, cited the CBO’s finding that the law will “boost overall demand for goods and services over the next few years,” This is because people benefiting from its expansion of Medicaid and insurance subsidies will likely have extra money to spend, which “will in turn boost demand for labor over the next few years,” the report says.

So CBO would like us to believe that the more money the government redistributes, the more growth we’ll get. I guess this explains why France is such an economic dynamo.

More seriously, this is the same flawed analysis that allowed CBO to claim the so-called stimulus was creating jobs as employment was falling.

You can understand why I’ve written that Keynesian economics is the left’s perpetual motion machine.

P.P.P.S. Here’s a Center for Freedom and Prosperity video that I narrated back in 2010, which explains why it is simple to balance the budget. The numbers in the video obviously need to be replaced with the ones I shared above, but the analysis is still right on the mark.

P.P.P.P.S. And if you want to know how to achieve the modest spending restraint needed to balance the budget, the Swiss “debt brake” would be a good place to start.

It’s really a spending cap, and it’s worth noting that the Swiss budget has increased by only 2 percent per year since voters imposed the law back in 2001.

Or maybe we could somehow hope that politicians would simply be responsible, like lawmakers in Canada and New Zealand in the 1990s. Or we could reincarnate Reagan. Or even bring back Clinton.

P.P.P.P.P.S. Since we started this post by talking about how Obamacare is undermining the economy, let’s close with a great example of Obamacare humor.

Remember Pajama Boy? Well, he’s back for an encore performance thanks to some very clever people at Americans for Prosperity.

There’s no update, by the way, on whether being without a job impacts his chances of getting a date with Julia. They’d make such a good couple.

Pajama Boy Jobless

This is amusing, but it surely isn’t as funny as President Obama’s Chief Economist, who actually argued with a straight face that it was a good sign that Obamacare was leading people to drop out of the labor force because unemployment  “might be a better choice and a better option than what they had before.”

Sort of reminds me of this Chuck Asay cartoon, or this famous set of wagon cartoons.

Dependency for more and more people. Such an inviting concept…until this happens.

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I’m testifying tomorrow to the Joint Economic Committee about “The Economic Costs of Debt-Ceiling Brinkmanship.”

I won’t give away what I’m going to say (though you can probably figure out my views rather easily by reading this, this and this), but I do want to share a chart from my testimony.

It shows that it is remarkably simple to balance the budget with a modest amount of spending restraint.

Based on Congressional Budget Office data, we can balance the budget in just three years if spending grows by “only” 1 percent per year.

Balanced Budget with Spending Restraint

The chart also shows that you can balance the budget in just four years if spending is allowed to grow “just” 2 percent annually.

And if you for some reason think that the burden of government spending should rise faster than inflation, then we can balance the budget in seven years by restraining spending so that it grows 3 percent each year.

Here are a couple of relevant observations.

There’s no need to raise taxes. Indeed, there’s amply room to lower the tax burden and reform the corrupt tax code.

If you use honest budget numbers, there’s no need to impose steep spending cuts, though that actually would be desirable.

Good things happen when you follow my Golden Rule for fiscal policy.

Our main goal should be reducing the burden of government relative to private output, not balancing the budget.

That being said, one of the reasons that it’s so simple to balance the budget is that we’ve actually enjoyed two consecutive years of government spending being lower than it was the year before. Something to keep in mind just in case you thought the Tea Party didn’t make a difference or if you didn’t think sequestration was a big victory.

Here’s the video I keep recycling that explains why it’s important to restrain the growth of spending and also shows that when you address the disease of spending, you easily deal with the symptom of deficits.

If it worked for Bill Clinton, it could also work for Barack Obama.

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I wrote about the Ryan budget two days ago, praising it for complying with Mitchell’s Golden Rule and reforming Medicare and Medicaid.

But I believe in being honest and nonpartisan, so I also groused that it wasn’t as good as the 2011 and 2012 versions.

Now it’s time to give the same neutral and dispassionate treatment to the budget proposed by Patty Murray, the Washington Democrat who chairs the Senate Budget Committee.

But I’m going to focus on a theme rather than numbers.

One part of her budget got me particularly excited. Her Committee’s “Foundation for Growth” blueprint makes a very strong assertion about the fiscal and economic history of the Clinton years.

The work done in the 1990s helped grow the economy, create jobs, balance the budget, and put our government on track to eliminate the national debt.

As elaborated in this passage, the 42nd President delivered very good results.

President Bill Clinton entered office in 1993 at a time when the country was facing serious deficit and debt problems. The year before, the federal government was taking in revenue equal 17.5 percent of GDP, but spending was 22.1 percent of the economy—a deficit of 4.7 percent. …The unemployment rate went from 7 percent at the beginning of 1993 to 3.9 percent at the end of 2000. Between 1993 and 2001, our economy gained more than 22 million jobs and experienced the longest economic expansion in our history.

And the Senate Democrats even identified one of the key reasons why economic and fiscal policy was so successful during the 1990s.

…federal spending dropped from 22.1 percent of GDP to 18.2 percent of GDP.

I fully agree with every word reprinted above. That’s the good news.

So what, then, is the bad news?

Well, Senator Murray may have reached the right conclusion, but she was wildly wrong in her analysis. For all intents and purposes, she claims that the 1993 tax hike produced most of the good results.

President Clinton’s 1993 tax deal…brought in new revenue from the wealthiest Americans and…our country created 22 million new jobs and achieved a balanced budget. President Clinton’s tax policies were not the only driver of economic growth, but our leaders’ ability to agree on a fiscally sustainable and economically sound path provided valuable certainty for American families and businesses.

First, let’s dispense with the myth that the 1993 tax hike balanced the budget. I obtained the fiscal forecasts that were produced by both the Congressional Budget Office and the Office of Management and Budget in early 1995 because I wanted to see whether a balanced budget was predicted.

As you can see in the chart, both of those forecasts showed perpetual deficits of about $200 billion. And these forecasts were made nearly 18 months after the Clinton tax hike was implemented.

So if even the White House’s own forecast from OMB didn’t foresee a balanced budget, what caused the actual fiscal situation to be much better than the estimates?

The simple answer is that spending was restrained. You can give credit to Bill Clinton. You can give credit to the GOP Congress that took power in early 1995. You can give the credit to both.

But regardless of who gets the credit, the period of spending restraint that began at that time was the change that produced a budget surplus, not the tax hike that was imposed 18 months earlier and which was associated with perpetual red ink.

But spending restraint tells only part of the story. With the exception of the 1993 tax hike, the Clinton years were a period of shrinking government and free market reform.

Clinton RecordTake a look at my homemade bar chart to compare the good policies of the 1990s with the bad policies. It’s not even close.

You may be thinking that my comparison is completely unscientific, and you’re right. I probably overlooked some good policies and some bad policies.

And my assumptions about weighting are very simplistic. Everything is equally important, with a big exception in that I made the government spending variable three times as important as everything else.

Why? Well, I think reducing the burden of government spending during the Clinton years was a major achievement.

But maybe we shouldn’t rely on my gut instincts. So let’s set aside my created-at-the-spur-of-the-moment bar chart and look at something that is scientific.

This chart is taken directly from Economic Freedom of the World, which uses dozens of variables to measure the overall burden of government.

As you can see, the United States score improved significantly during the Clinton years, showing that economic freedom was expanding and the size and scope of government was shrinking.

In other words, Patty Murray is correct. She is absolutely right to claim that Bill Clinton’s policies “helped grow the economy, create jobs, balance the budget.”

Now she needs to realize that those policies were small government and free markets.

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New 10-year budget projections have been released by the Congressional Budget Office, so it’s time once again for me to show how easy it is to balance the budget with modest spending restraint (though never forget that our goal should be smaller government, not fiscal balance).

The new numbers show the path is even easier. The budget can be balanced in 5 years if spending grows at the rate of inflation (the green line) and in just 10 years if spending is limited so that it grows 3.4 percent annually (the light blue line).

Budget Balance CBO 2013

Today’s path to balance is even easier because of better 10-year growth numbers, and also because of projections that the recent tax increase will generate more revenue (the dark blue line shows total projected revenue over the decade).

Because of Laffer Curve reasons, I’m skeptical about whether all that additional revenue will materialize, so both the chart and the underlying numbers are a bit speculative.

But what they do show is that the nation’s fiscal problems easily can be addressed with some modest spending restraint. Sort of a practical application of Mitchell’s Golden Rule.

Here’s my video explaining the importance of spending restraint. The numbers are now outdated, but the concept is still completely relevant.

As noted at the beginning of the post, I’m much more concerned about reducing the burden of government spending. Balancing the budget is a secondary concern.

That’s why we should impose genuine budget cuts and not just restrain the growth of spending. That would also make it easier to adopt good tax policy.

Maybe, in a parallel universe where politicians are motivated by liberty, we can even get entitlement reform and a flat tax.

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Now that new numbers have been released by the Congressional Budget Office, it’s time once again for me to show how easy it is to balance the budget with modest spending restraint (though please remember our goal should be smaller government, not fiscal balance).

  • I first did this back in September 2010, and showed that we could balance the budget in 10 years if federal spending was limited so it grew by 2 percent annually.
  • I repeated the exercise in January 2011 after new CBO numbers were released, and re-confirmed that a spending cap of 2 percent would eliminate red ink in just 10 years.
  • In August of that year, following the release of the CBO Update, I showed again that the budget could be balanced by limiting spending so it climbed by 2 percent per year.
  • Most recently, back in January after CBO produced the new Economic and Budget Outlook, I crunched the numbers again and showed how a spending cap of 2 percent would balance the budget.

I’m happy to say that the new numbers finally give me some different results. We can now balance the budget if spending grows 2.5 percent annually.

In other words, spending can grow faster than inflation and the budget can be balanced with no tax hikes.

And here’s the video I narrated almost two years ago on this topic. The numbers have changed a bit, but the analysis is exactly the same.

In other words, ignore the politicians, bureaucrats, lobbyists, and special interests when they say we have to raises taxes because otherwise the budget would have to be cut by trillions of dollars. They’re either stupid or lying (mostly the latter, deliberately using the dishonest version of Washington budget math).

Modest fiscal restraint is all that we need, though it would be preferable to make genuine cuts in the burden of government spending.

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In a debate on CNBC, I point out that America is in fiscal trouble because of the reckless spending of the Bush-Obama years.

Amazingly, my opponent at first claimed that taxes have no impact on the economy, though he then modified his statement to acknowledge some effect.

I think the best part of the interview was when I explained that there are several policies that impact economic performance, but that it’s always better to have lower tax rates rather than higher tax rates.

The worst part of the interview is that I got frozen out of the final part of the discussion.

I would have liked to make two final points. First, that all of our long-run fiscal challenge is the result of built-in growth of government spending, and second, that balancing the budget is easily achievable in just 10 years if policy makers limit the growth of spending to just 2 percent yearly.

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A few months ago, I wrote some very nice things about a budget plan put together by Senator Rand Paul of Kentucky, noting that:

Senator Paul and his colleagues are highlighting the fact that the plan generates a balanced budget in just five years. That’s a good outcome, but it should be a secondary selling point. All the good results in the plan – including the reduction in red ink and the flat tax – are made possible because the overall burden of federal spending is lowered.

Not surprising, one of the columnists at the Washington Post has a different perspective. In his hyperventilating column today, Dana Milbank says that Senator’s Paul’s proposal is “monstrous” and “nasty” for reining in the federal government.

The tea party darling’s plan would, among other things, cut the average Social Security recipient’s benefits by nearly 40 percent, reduce defense spending by nearly $100 billion below a level the Pentagon calls “devastating,” and end the current Medicare program in two years — even for current recipients, according to the Senate Budget Committee staff. It would eliminate the education, energy, housing and commerce departments, decimate homeland security, eviscerate programs for the poor, and give the wealthy a bonanza by reducing tax rates to 17 percent and eliminating taxes on capital gains and dividends. It is, all in all, quite a nasty piece of work.

Setting aside some of the inaccuracies (Social Security benefits would rise, for instance, but not as fast as they would under current law), I have two reactions to Milbank’s screed.

1. Milbank seems to think that Rand Paul’s budget is heartless and mean. Does that mean it would be nice and caring to let America descend into Greek-style fiscal chaos and economic decline? Should the United States be more like Europe, even though living standards are about 30 percent lower?

2. More amusingly, what does he think about the fact that the Senate voted against Obama’s tax-and-spend budget by a stunning margin of 99-0? That’s even worse than the 97-0 vote against the budget Obama proposed last year. The 16 votes for Rand Paul’s budget may not sound like much, but 16 is a lot more than zero.

Setting aside the snarky comments, all that Rand Paul is proposing is to limit the growth of government so that the federal budget grows by an average of about 2 percent annually.

Other nations, such as Canada and New Zealand were much more frugal when they solved their fiscal problems. But for leftists such as Milbank, any fiscal restraint apparently is “nasty” and “monsrous.”

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I’ve complained endlessly that America’s fiscal problem is too much spending, and that deficits and debt are best understood as symptoms of that underlying disease.

So I’m obviously a big fan of this new video from the folks at Learn Liberty.

I like how they use several types of measurements to show that there’s plenty of tax revenue. Indeed, the best line, near the end of the video, is when the narrator points out that higher taxes will simply exacerbate the spending problem (as I have noted).

Two final items. First, the folks from the Institute for Humane Studies have a bunch of great videos as part of the Learn Liberty series. I’ve already highlighted the one on free trade vs. protectionism, and I include eight challenging questions for those who think it is a good idea to give politicians and bureaucrats power to interfere with our freedom of exchange.

Second, the video in this post focuses solely on the math question, for lack of a better term. If you want some economic analysis of the consequences of big government, here’s a link to a post with my videos that analyze that issue.

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Even though I favor radical reductions in the burden of government, I’ve made the point that good fiscal policy merely requires that government spending grow slower than the private sector – what I call Mitchell’s Golden Rule.

And if lawmakers simply cap the growth of spending, so that it grows by about 2 percent annually, the budget deficit disappears in a decade.

It’s even better to impose more restraint, of course, which is why I’ve said favorable things about Senator Rand Paul’s plan.

There’s also a “Penny Plan” that would reduce primary spending (non-interest spending) by 1 percent each year. As James Carter and Jason Fichtner explain, this degree of fiscal restraint would reduce the burden of government spending to about 18 percent of economic output.

Any viable solution must cut spending growth. Sen. Mike Enzi of Wyoming and Rep. Connie Mack of Florida have introduced legislation in their respective chambers to do just that. Their “Penny Plan” – recently updated to reflect the latest budget developments – calls for reducing federal spending (excluding interest payments) 1 percent a year for five years, balancing the budget in the fifth year. To maintain balance once it’s reached, Mr. Enzi and Mr. Mack would cap federal spending at 18 percent of GDP. By no small coincidence, 18 percent of GDP roughly matches the U.S. long-run average level of taxation since World War II. Is it realistic to think Congress could limit federal spending to 18 percent of GDP? Actually, there is precedent. Federal spending fell as a share of GDP for nine consecutive years before bottoming out at 18.2 percent of GDP in fiscal 2000 and 2001. The Penny Plan would return federal spending, expressed as a share of GDP, near the level achieved during the last two years of the Clinton administration.

The various interest groups that infest Washington would complain about this degree of spending discipline, but Carter and Fichtner make a good point when they say that this simply means the same size government – as a share of GDP – that we had when Bill Clinton left office.

I realize I’m getting old and my memory may not be what it used to be, but I don’t recall people starving in the streets and grannies being ejected from hospitals during the Clinton years. Am I missing something?

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A couple of weeks ago, I offered some guarded praise for Paul Ryan’s budget, pointing out that it satisfies the most important requirement of fiscal policy by restraining spending – to an average of 3.1 percent per year over the next 10 years – so that government grows slower than the productive sector of the economy (I call this my Golden Rule).

I was more effusive in my comments about Senator Rand Paul’s budget, which limited the growth of the federal budget over the next 10 years to an average of 2.2 percent each year.

Now the Republican Study Committee from the House of Representatives has put forth a plan that also deserves considerable applause. Like Senator Paul, the RSC plan would impose immediate significant fiscal discipline such that spending in 2017 would be about the same level as it is this year.

Think of this as being similar to the very successful fiscal reforms of New Zealand and Canada in the 1990s.

After the initial period of spending restraint, the budget would be allowed to grow, but only about as fast as the private economy. This chart shows spending levels for the Obama budget, the Paul Ryan budget, the Rand Paul budget, and the RSC budget.

A couple of final points.

1. For all the whining and complaining from the pro-spending lobbies, the RSC budget is hardly draconian. Federal spending, measured as a share of GDP, would only drop to where it was when Bill Clinton left office.

2. One preferable feature of the Rand Paul budget is that the Kentucky Senator eliminates four needless and wasteful federal departments – Commerce, Education, Energy, and Housing and Urban Development. As far as I can tell, no departments are eliminated in the RSC plan. Also, Senator Paul’s plan is bolder on tax reform, scrapping the corrupt internal revenue code and replacing it with a simple and fair flat tax.

3. The RSC comes perilously close to winning a Bob Dole Award. The first chapter of their proposal fixates on symptoms of debt and deficits rather than the real problem of excessive government spending. Indeed, the first six charts all relate to deficits and debt, creating an easy opening for leftists to say they can solve the mis-defined problem with higher taxes.

There are lots of other details worth exploring, but the main lesson is that restraining spending is the key to good fiscal policy.

And that’s what’s happening.  Indeed, the good news is that policymakers have proposed several budget plans that would shrink the burden of spending as a share of GDP. It’s refreshing to debate the features of several good plans (rather than comparing the warts in the competing plans during the big-government Bush years).

The bad news is that Harry Reid and Barack Obama will succeed in blocking any progress this year, so America will move ever closer to becoming another Greece.

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The Chairman of the House Budget Committee has produced a new budget plan which contrasts very favorably with the tax-heavy, big-spending proposal submitted by the President last month.

Perhaps most important, Congressman Ryan’s plan restrains spending growth, allowing the private sector to grow faster than the burden of government, thus satisfying Mitchell’s Golden Rule so that spending falls as a share of GDP.

The most important detail in the proposal is that the federal budget, which currently consumes 24 percent of GDP, would fall to less than 20 percent of GDP beginning in 2016.

That’s the good news. There are three pieces of not-so-good news.

1. Ryan’s plan allows spending to grow by an average of 3.1 percent annually over the next 10 years, with is faster than the 2.8 percent average annual growth in last year’s budget.

2. His proposed Medicare reform, while far better than current law, also is not as good as what was proposed last year.

3. The federal budget would still consume a greater share of the economy’s output than it did when Bill Clinton left office.

I suppose it’s also worth mentioning that Ryan’s proposal isn’t as good as Rand Paul’s budget. Spending only climbs 2.2 percent yearly under the plan put together by the Kentucky Senator, and he also abolishes several useless cabinet-level departments.

But the very good shouldn’t be the enemy of the good. As noted already, Congressman Ryan’s plan meets the most important test, which is restraining spending so that the federal budget grows slower than the private economy. And, as the chart shows, he obviously imposes more fiscal restrain then President Obama.

Regular readers know that I generally show no mercy to jelly-spined Republicans, but I praised GOPers for approving last year’s Ryan budget. The same will be true if they approve this year’s version.

P.S. I am frustrated and nauseated by all the people who are fixating on whether Congressman Ryan’s plan balances the budget in 10 years, 20 years, or whenever. What matters is shrinking the burden of government. I hereby bestow the Bob Dole Award on all the people who are mistakenly focusing on the symptom of red ink rather than the underlying disease of bloated government.

P.P.S. I’m happy to report that there is no value-added tax in the revenue portion of Congressman Ryan’s budget. There is a VAT in his Roadmap plan, and I endlessly worry that this poison pill will re-emerge and ruin other good fiscal plans put forth by the Wisconsin lawmaker.

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Last year, while lounging on the beach in the Caribbean…oops, I mean while doing off-site research, I developed the first iteration of a rule to describe how fiscal policy should operate.

Good fiscal policy exists when the private sector grows faster than the public sector, while fiscal ruin is inevitable if government spending grows faster than the productive part of the economy.

My motivation was to help people understand that America’s fiscal problem is excessive government spending, not red ink. Deficits and debt are undesirable, of course, but they are best understood as symptoms. The underlying disease is a bloated federal budget that diverts resources from the productive sector of the economy and subsidizes dependency.

But after getting feedback, I realized that the rule was too wordy. So, after a bit of tweaking and market testing, I came up with “Mitchell’s Golden Rule.”

The purpose of this rule isn’t to make me famous, like Art Laffer with the Laffer Curve. Instead, I’m hoping that this simple construct will help policymakers focus on the most important variable.

Countries that follow the Golden Rule, such as Hong Kong and Singapore, enjoy long-run prosperity. But the Golden Rule also shows how nations in fiscal trouble can get back on the right track with periods of spending restraint, as shown in this video featuring Canada, Slovakia, New Zealand, and Ireland. And this video shows how the United States made progress during both the Reagan years and the Clinton years.

Governments that take the opposite approach, however, eventually wind up in fiscal chaos. Just look at the data from Greece. Or other crumbling welfare states.

All this discussion about how to measure good fiscal policy may seem esoteric, but it provides the foundation to understand why Senator Rand Paul’s new budget proposal is so admirable. Joined by Senators Jim DeMint and Mike Lee, Senator Paul has a comprehensive proposal to curtail big government.

1. An immediate cut of $500 billion of wasteful spending.

2. A five-year freeze on total government spending.

3. Limiting average annual spending growth to 2.2 percent over the next ten years.

Last but not least, taxpayers get a big reward from Senator Paul’s budget with a simple and fair 17 percent flat tax. This pro-growth policy is desperately needed to boost the economy and improve competitiveness. And while a flat tax theoretically could be enacted without accompanying spending restraint, it’s far more likely to happen if lawmakers show they’re serious about restraining the federal behemoth.

The accompany chart shows the 10-year projections for spending and revenue if Senator Paul’s budget is enacted.

A few additional thoughts. Senator Paul and his colleagues are highlighting the fact that the plan generates a balanced budget in just five years. That’s a good outcome, but it should be a secondary selling point. All the good results in the plan – including the reduction in red ink and the flat tax – are made possible because the overall burden of federal spending is lowered. That should be the main selling point.

This doesn’t mean that Senator Paul is in any danger of winning a Bob Dole Award, but it’s nonetheless unfortunate since a focus on deficits gives an opening for leftists to claim that they can achieve the same outcome with tax increases. This is why sponsors should focus on the importance of spending restraint, and then add explanations of how this eliminates red ink. This is the approach I took in this video showing how limits on the growth of spending would lead to a balanced budget.

Also, I have two minor disagreements with Senator Paul’s budget proposal.

1. He does not modernize Social Security system with personal retirement accounts. He does have reforms to rein in the program’s long-run outlays, thus addressing the system’s fiscal crisis. But this generally means workers will pay more and get less, thus exacerbating the system’s other crisis, which is the anemic ratio of benefits received compared to taxes paid.

2. He retains the home mortgage interest deduction in the flat tax plan. This may sound like nit-picking since I should be happy to get 99 percent of what I want, but I worry that allowing one deduction will pave the way for more deductions. Remember the old advertisement by Lay’s potato chips (at least I think) with the saying that “I bet you can’t eat just one”? Well, that’s how politicians would be with a flat tax. Once they allowed one horse out of the barn (I realize I’m mixing my metaphors here, but you get the point), it would be just a matter of time before the entire herd escaped.

But I’m not here to make the perfect the enemy of the very, very good. I wrote a lot last year about the Ryan budget, which was quite an achievement (particularly since it actually passed the House).

The Paul budget is the Ryan budget, but even better.

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Back in 2010, I crunched the numbers from the Congressional Budget Office and reported that the budget could be balanced in just 10 years if politicians exercised a modicum of fiscal discipline and limited annual spending increases to about 2 percent yearly.

When CBO issued new numbers early last year, I repeated the exercise and again found that the same modest level of budgetary restraint would eliminate red ink in about 10 years.

And when CBO issued their update last summer, I did the same thing and once again confirmed that deficits would disappear in a decade if politicians didn’t let the overall budget rise by faster than 2 percent each year.

Well, the new CBO 10-year forecast was released this morning. I’m going to give you three guesses about what I discovered when I looked at the numbers, and the first two don’t count.

Yes, you guessed it. As the chart illustrates, balancing the budget doesn’t require any tax increases. Not does it require big spending cuts (though that would be a very good idea).

Even if we assume that the 2001 and 2003 tax cuts are made permanent, all that is needed is for politicians to put government on a modest diet so that overall spending grows by about 2 percent each year. In other words, make sure the budget doesn’t grow faster than inflation.

Tens of millions of households and businesses manage to meet this simple test every year. Surely it’s not asking too much to get the same minimum level of fiscal restraint from the crowd in Washington, right?

At this point, you may be asking yourself whether it’s really this simple. After all, you’ve probably heard politicians and journalists say that deficits are so big that we have no choice but to accept big tax increases and “draconian” spending cuts.

But that’s because politicians use dishonest Washington budget math. They begin each fiscal year by assuming that spending automatically will increase based on factors such as inflation, demographics, and previously legislated program changes.

This creates a “baseline” and if they enact a budget that increases spending be less than the baseline, that increase magically becomes a cut. This is what allowed some politicians to say that last year’s Ryan budget cut spending by trillions of dollars even though spending actually would have increased by an average of 2.8 percent each year.

Needless to say, proponents of big government deliberately use dishonest budget math because it tilts the playing field in favor of bigger government and higher taxes.

There are two important caveats about these calculations.

1. We should be dramatically downsizing the federal government, not just restraining its growth. Even if he’s not your preferred presidential candidate, Ron Paul’s proposal for an immediate $1 trillion reduction in the burden of federal spending is a very good idea. Merely limiting the growth of spending is a tiny and timid step in the right direction.

2. We should be focusing on the underlying problem of excessive government, not the symptom of too much red ink. By pointing out the amount of spending restraint that would balance the budget, some people will incorrectly conclude that getting rid of deficits is the goal.

Last but not least, here is the video I narrated in 2010 showing how red ink would quickly disappear if politicians curtailed their profligacy and restrained spending growth.

Other than updating the numbers, the video is just as accurate today as it was back in 2010. And the concluding message – that there is no good argument for tax increases – also is equally relevant today.

P.S. Some people will argue that it’s impossible to restrain spending because of entitlement programs, but this set of videos shows how to reform Social Security, Medicare, and Medicaid.

P.P.S. Some people will say that the CBO baseline is unrealistic because it assumes the sequester will take place. They may be right if they’re predicting politicians are too irresponsible and profligate to accept about $100 billion of annual reductions from a $4,000 billion-plus budget, but that underscores the core message that there needs to be a cap on total spending so that the crowd in Washington isn’t allowed to turn America into Greece.

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Welcome Instapundit readers! Canada’s fiscal restraint (relative to the U.S., at least) is not the only positive development. Canada also has privatized its air traffic control system and fought against European schemes for bank taxes. No wonder Canada now ranks above America in both the Economic Freedom of the World Index and the Index of Economic Freedom.

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Since I’ve written before about Canada’s remarkable period of fiscal restraint during the 1990s, I am very pleased to see that the establishment press is finally giving some attention to what our northern neighbors did to reduce the burden of government spending.

Here are some key passages from a Reuters story.

“Everyone wants to know how we did it,” said political economist Brian Lee Crowley, head of the Ottawa-based think tank Macdonald-Laurier Institute, who has examined the lessons of the 1990s. But to win its budget wars, Canada first had to realize how dire its situation was and then dramatically shrink the size of government rather than just limit the pace of spending growth. It would eventually oversee the biggest reduction in Canadian government spending since demobilization after World War Two. …The turnaround began with Chretien’s arrival as prime minister in November 1993, when his Liberal Party – in some ways Canada’s equivalent of the Democrats in the U.S. – swept to victory with a strong majority. The new government took one look at the dreadful state of the books and decided to act. “I said to myself, I will do it. I might be prime minister for only one term, but I will do it,” said Chretien. …The Liberals thought their first, rushed budget – delivered in February 1994, three months after taking office, was tough. It reformed unemployment insurance entitlements, and cut defense and foreign aid… The upstart Reform Party, then the main national opposition party, had campaigned on “zero-in-three” – balance the budget in three years. “We were always trying to go faster,” said Reform’s leader at the time, Preston Manning. …The Liberals were stung by the criticism and, at first reluctantly but then with gusto, they got out the chain saws. …Cutting government spending programs went against the Liberal grain. Contrary to the Reform Party, the Liberals saw a more important role for government. Paul Martin now has a lasting reputation as the finance minister who slayed Canada’s deficit, but the conversion from spender to cutter was painful. His father, also called Paul, had helped create Medicare, Canada’s publicly funded health care system, and suddenly here was Paul Junior contemplating massive cuts.

This is a remarkable story. My only real quibble is that the fiscal restraint actually started the year before the Liberal Party took power, as the chart (click to enlarge) illustrates.

But the key thing to understand is that Canada enjoyed a five-year period when government spending increased by an average of only 1 percent each year.

There are more good passages in the story. Can anybody imagine Obama doing this?

At one 1994 cabinet meeting, Martin announced a spending freeze. A minister put forward a project that needed funding but Chretien cut him off, reminding him of Martin’s freeze. A second minister raised his hand to ask for funding, and a testy Chretien told the cabinet that the next minister to ask for new money would see his whole budget cut by 20 percent. …The ratio of spending cuts to tax hikes was seven-to-one. Asked why, Chretien said simply: “There was more need on one side than the other.” …Cuts ranged from five percent to 65 percent of departmental budgets.

By the way, while there were a few tax hikes implemented, they were trivial. Tax revenue as a share of GDP rose from 44.2 percent of GDP to 44.5 percent a GDP, an increase that probably was going to happen anyhow as Canada’s economy recovered.

So what were the results of Canada’s spending freeze?

The following passage has some numbers, but the second chart (click to enlarge) shows that the burden of government spending in Canada (right axis) fell from 53 percent of GDP to 44 percent of GDP in just five years. And red ink (left axis) completely disappeared.

The deficit disappeared by 1997 and the debt-to-GDP ratio began a rapid decline – it is now at about 34 percent. …After wrestling the deficit to the ground, Canada enjoyed what Crowley calls the payoff decade, outperforming the rest of the G7 on growth, job creation and inward investment. From 1997 to 2007, it averaged 3.3 percent economic growth. while U.S. growth averaged 2.9 percent.

The most important thing to understand is that Canada’s economy improved because the burden of government spending was reduced. And because the underlying disease was being treated, this meant two of the symptoms of excessive government – deficits and debt – also became less of a problem.

Last but not least, there are rewards for good policy. Just as Reagan enjoyed a landslide in 1984 after sticking to his guns, Canada’s Liberal Party also reaped the benefits of doing the right thing.

The final lesson is that you can impose painful spending cuts and still win elections. Chretien went on to win two more back-to-back to form majority governments, a rare feat. ,,,Drummond, who later moved to the private sector and is now an advisor helping the Ontario provincial government slash its deficit, noted that governments on the right and left in Saskatchewan, Alberta and Ontario won more voter support after their own budget cuts in the 1990s.

Here’s a video I narrated that looks at the Canadian experience, as well as similar good reforms in New Zealand, Ireland, and Slovakia.

Last but not least, let’s put all of this in context. As demonstrated here, the U.S. would enjoy a balanced budget in just eight years if politicians could be convinced to limit spending so that it increased by 1 percent each year.

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The Congressional Budget Office has just released the update to its Economic and Budget Outlook.

There are several things from this new report that probably deserve commentary, including a new estimate that unemployment will “remain above 8 percent until 2014.”

This certainly doesn’t reflect well on the Obama White House, which claimed that flushing $800 billion down the Washington rathole would prevent the joblessness rate from ever climbing above 8 percent.

Not that I have any faith in CBO estimates. After all, those bureaucrats still embrace Keynesian economics.

But this post is not about the backwards economics at CBO. Instead, I want to look at the new budget forecast and see what degree of fiscal discipline is necessary to get rid of red ink.

The first thing I did was to look at CBO’s revenue forecast, which can be found in table 1-2. But CBO assumes the 2001 and 2003 tax cuts will expire at the end of 2012, as well as other automatic tax hikes for 2013. So I went to table 1-8 and got the projections for those tax provisions and backed them out of the baseline forecast.

That gave me a no-tax-hike forecast for the next 10 years, which shows that revenues will grow, on average, slightly faster than 6.6 percent annually. Or, for those who like actual numbers, revenues will climb from a bit over $2.3 trillion this year to almost $4.4 trillion in 2021.

Something else we know from CBO’s budget forecast is that spending this year (fiscal year 2011) is projected to be a bit below $3.6 trillion.

So if we know that tax revenues will be $4.4 trillion in 2021 (and that’s without any tax hike), and we know that spending is about $3.6 trillion today, then even those of us who hate math can probably figure out that we can balance the budget by 2021 so long as government spending does not increase by more than $800 billion during the next 10 years.

Yes, you read that correctly. We can increase spending and still balance the budget. This chart shows how quickly the budget can be balanced with varying degrees of fiscal discipline.

The numbers show that a spending freeze balances the budget by 2017. Red ink disappears by 2019 if spending is allowed to grow 1 percent each years. And the deficit disappears by 2021 if spending is limited to 2 percent annual growth.

Not that these numbers are a surprise. I got similar results after last year’s update, and also earlier this year when the Economic and Budget Outlook was published.

Some of you may be thinking this can’t possibly be right. After all, you hear politicians constantly assert that we need tax hikes because that’s the only way to balance the budget without “draconian” and “savage” budget cuts.

But as I’ve explained before, this demagoguery is based on the dishonest Washington practice of assuming that spending should increase every year, and then claiming that a budget cut takes place anytime spending does not rise as fast as previously planned.

In reality, balancing the budget is very simple. Modest spending restraint is all that’s needed. That doesn’t mean it’s easy, particularly in a corrupt town dominated by interest groups, lobbyists, bureaucrats, and politicians.

But if we takes tax hikes off the table and somehow cap the growth of spending, it can be done. This video explains.

And we know other countries have succeeded with fiscal restraint. As is explained in this video.

Or we can acquiesce to the Washington establishment and raise taxes and impose fake spending cuts. But that hasn’t worked so well for Greece and other European welfare states, so I wouldn’t suggest that approach.

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Do not watch this if you disapprove of the F-word. But you’ll probably laugh if you click the video.

Even though I’m posting this video solely for the humor value, I feel compelled to nag everybody with a reminder that the balance-the-budget message is misguided. We should be striving to shrink the the burden of government.

And if you address the disease of too much spending, you automatically solve the symptom of too much red ink.

But I’m a fair-minded person and I’ll post political humor promoting non-libertarian perspectives. If it’s funny, it makes the cut.

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The President has issued an ultimatum that more tax revenue must be part of budget negotiations. Indeed, he endlessly repeats his desire for a “balanced approach,” implying that as much as 50 percent of the deficit reduction in any agreement should come from higher revenues.

Because I am a thoughtful, middle-of-the-road, pragmatic guy, I’m willing to accept the President’s ultimatum. I do have one tiny request, however, and that is for any such deal to be based on honest math.

What I mean by this is that I don’t want politicians to approve a budget that results in more spending, but then claim that they “cut spending” because the budget didn’t grow even faster. I want a spending cut to mean less spending (gee, what a novel idea).

And when they talk about new revenue, I want to see how much revenue the IRS is collecting this year, and measure revenue increases against that number. After all, the crowd in Washington should be happy to get more money, even if it is the result of benign factors such as more jobs being created, companies earning higher profits, and people getting more pay.

I assume these are reasonable requests. After all, this is how businesses and households operate their budgets, and I’m sure the political insiders wouldn’t want to use dishonest numbers to mislead voters (perish the thought!).

So what would a balanced approach look like, assuming we want to use honest math? The answer isn’t that complicated. I started with the latest estimates from the Congressional Budget Office for spending and revenues for this fiscal year (FY2011). I then assume, in the interest of a “balanced approach,” that spending should be cut by 5 percent each year and that revenues should climb by 5 percent each year.

The results, as illustrated by the graph, are remarkable. If we use a 50-50 deal of higher revenue and lower spending, we balance the budget in just five years. The President is right!

Taxpayers will be happy to know the “balanced approach” gets rid of red ink and also leaves enough room to make the 2001 and 2003 tax cuts permanent. Heck, there would be enough left-over revenue to enact additional tax cuts. After all, since we’re looking for balance, there’s no need to let revenues grow by 7 percent or 8 percent each year.

So, Mr. President, do we have a deal? Should we use your “balanced approach” and eliminate today’s big deficit by cutting spending and raising revenue by equal amounts? You were serious about your request, right? Hello, is anybody there?

As you already realize, I don’t think the President actually means what he says about a “balanced approach.” Or, to be more specific, I think he’s happy to do a 50-50 deal, but only if “spending cuts” and “revenue increases” are defined in ways that enable the growth of government.

Inside the beltway, this is known as “baseline budgeting” or “current services budgeting.” But whatever it’s called, it is a dishonest way of presenting information to the American people, as explained in this video.

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There’s a lot of buzz about a Wall Street Journal interview with Stanley Druckenmiller, in which he argues that a temporary delay in making payments on U.S. government debt (which technically would be a default) would be a small price to pay if it resulted in the long-term spending reforms that are needed to save America from becoming another Greece.

One of the world’s most successful money managers, the lanky, sandy-haired Mr. Druckenmiller is so concerned about the government’s ability to pay for its future obligations that he’s willing to accept a temporary delay in the interest payments he’s owed on his U.S. Treasury bonds—if the result is a Washington deal to restrain runaway entitlement costs. “I think technical default would be horrible,” he says from the 24th floor of his midtown Manhattan office, “but I don’t think it’s going to be the end of the world. It’s not going to be catastrophic. What’s going to be catastrophic is if we don’t solve the real problem,” meaning Washington’s spending addiction. …Mr. Druckenmiller’s view on the debt limit bumps up against virtually the entire Wall Street-Washington financial establishment. A recent note on behalf of giant banks on the Treasury Borrowing Advisory Committee warned of a “severe and long-lasting impact” if the debt limit is not raised immediately. …This week more than 60 trade associations, representing virtually all of American big business, forecast “a massive spike in borrowing costs.” On Thursday Federal Reserve Chairman Ben Bernanke raised the specter of a market crisis similar to the one that followed the 2008 bankruptcy of Lehman Brothers. As usual, the most aggressive predictor of doom in the absence of increased government spending has been Treasury Secretary Timothy Geithner. In a May 2 letter to House Speaker John Boehner, Mr. Geithner warned of “a catastrophic economic impact” and said, “Default would cause a financial crisis potentially more severe than the crisis from which we are only now starting to recover.”

Mr. Druckenmiller is not overly impressed by this hyperbole. The article continues with this key passage.

“Here are your two options: piece of paper number one—let’s just call it a 10-year Treasury. So I own this piece of paper. I get an income stream obviously over 10 years . . . and one of my interest payments is going to be delayed, I don’t know, six days, eight days, 15 days, but I know I’m going to get it. There’s not a doubt in my mind that it’s not going to pay, but it’s going to be delayed. But in exchange for that, let’s suppose I know I’m going to get massive cuts in entitlements and the government is going to get their house in order so my payments seven, eight, nine, 10 years out are much more assured,” he says. Then there’s “piece of paper number two,” he says, under a scenario in which the debt limit is quickly raised to avoid any possible disruption in payments. “I don’t have to wait six, eight, or 10 days for one of my many payments over 10 years. I get it on time. But we’re going to continue to pile up trillions of dollars of debt and I may have a Greek situation on my hands in six or seven years. Now as an owner, which piece of paper do I want to own? To me it’s a no-brainer. It’s piece of paper number one.” …”Russia had a real default and two or three years later they had all-time low interest rates,” says Mr. Druckenmiller. In the future, he says, “People aren’t going to wonder whether 20 years ago we delayed an interest payment for six days. They’re going to wonder whether we got our house in order.”

This is a very compelling argument, but it overlooks one major problem – the complete inability of Republicans to succeed in forcing fiscal reform using this approach.

Here’s a sure-fire prediction, assuming GOPers in the House actually are willing to engage in an eyeball-to-eyeball confrontation with Obama on the debt limit.

o There will be lots of political drama.

o We will get to a point where the federal government exhausts its borrowing authority.

o At that point, either Geithner or Bernanke (or probably both) will make some completely dishonest statements designed to rattle financial markets.

o The establishment media will echo those statements.

o The stock market and/or bond market will have a negative reaction.

o Republican resolve will evaporate like a drop of water in the Mojave Desert.

o The debt limit will be increased without any meaningful fiscal reform.

For all intents and purposes, this is what happened with the TARP vote in 2008. There were basically two choices of how to deal with the financial crisis. The establishment wanted a blank-check bailout, while sensible people wanted the “FDIC-resolution” approach (similar to what was used during the savings & loan bailouts about 20 years ago, which bails out retail customers but wipes out shareholders, bondholders and senior management). Republicans initially held firm and defeated the first TARP vote, but then they folded when the Washington-Wall Street establishment scared markets.

I hope I’m wrong in my analysis, but I don’t see how Republicans could win a debt limit fight. At least not if they demand something like the Ryan budget. The best possible outcome would be budget process reform such as Senator Corker’s CAP Act, which would impose caps on future spending, enforced by automatic spending cuts known as sequestration. Because it postpones the fiscal discipline until after the vote, that legislation has a chance of attracting enough bipartisan support to overcome opposition from Obama and other statists.

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I recently took part in a symposium on “The Budget Deficit and U.S. Competitiveness.” Put together by the Council on Foreign Relations, five of us were asked to concisely explain our thoughts on the issue.

Here’s some of what I wrote:

Excessive government spending can slow growth by diverting labor and capital from more productive uses. Punitive tax rates can hinder prosperity by discouraging work, saving, investment, and entrepreneurship. And large budget deficits can undermine competitiveness by “crowding out” private capital and building negative expectations of future tax increases. In extreme cases, high budget deficits can destabilize entire economies, either because a government resorts to the printing press to finance deficits or because investors lose faith in a government’s ability to service debt, thus leading to a sovereign debt crisis. …The best way to control this red ink while also boosting competitiveness is to cap the growth of government spending. If revenues increase by an average of 7 percent each year (as the president’s budget projects, even without tax increases), then we can reduce deficits by making sure spending grows by less than 7 percent annually.

Not surprisingly, the other participants in the symposium did not share my views.

Maya MacGuineas of the Committee for a Responsible Federal Budget wrote that, “Revenues will have to go up to deal with the deficit” and also wrote that, “Consumption taxes could help promote savings; a carbon tax could help lead to improved energy policies.”

She’s wrong on consumption taxes, by the way. A consumption tax hits both current consumption and future consumption, so the incentive to save is left unaltered. And if you want to get technical, something like a VAT would be anti-savings since it would reduce after-tax income for households, resulting in less consumption and less saving.

Greg Ip of the Economist (I’m always mystified some people think that magazine is for less government) wrote that “…taxes will have to rise” and specifically called for, “a broad-based consumption tax or, more narrowly, by raising the gasoline tax.”

While I disagree with Maya and Greg, I should point out that they are not nearly as misguided as  Obama, Reid, Pelosi. Unlike those politicians, both of them explicitly warn against class-warfare tax increases such as higher marginal tax rates on work, saving, investment, and entrepreneurship. These are the types of tax increases that have the worst impact on economic performance.

On other hand, a consumption tax (i.e., a value-added tax) would be the worst possible result since such a levy would be a giant money machine for big government. So while a VAT does not do as much damage, per dollar raised, as higher income tax rates, it would impose considerable damage by financing much bigger government. So McGuineas and Ip aren’t too bad on economics, but they’re really bad on political economy.

This video explains why a VAT is a terrible idea and the other video looks at the empirical evidence against big government.

Sebastian Mallaby of the Council on Foreign Relations and C. Fred Bergsten of  the Peterson Institute for International Economics also took part in the symposium. But they only wrote that deficits are a threat to competitiveness and did not suggest any solutions.

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There were reports about 10 days ago that the crowd in Washington reached a budget deal, for the remainder of the 2011 fiscal year, with $33 billion of cuts. That number was disappointingly low. I wrote at the time that if this was a kiss-your-sister deal, we didn’t have any siblings that looked like Claudia Schiffer.

I knew it was unrealistic to expect the full $61 billion, but I explained that $45 billion was a realistic target.

We now have a new agreement, which supposedly is final, and the amount of budget cuts has climbed to $38 billion. So our sister is getting prettier, but she still isn’t close to being a supermodel. Here are the highlights (or lowlights) from the New York Times story.

Congressional leaders and President Obama headed off a shutdown of the government with less than two hours to spare Friday night under a tentative budget deal that would cut $38 billion from federal spending this year. …the budget measure would not include provisions sought by Republicans to limit environmental regulations and to restrict financing for Planned Parenthood and other groups that provide abortions.

As with all deals (such as last December’s agreement extending the 2001 and 2003 tax cuts), there are good and bad provisions. The good news is:

o President Obama, before the current fiscal year began last October 1, wanted a $40 billion increase for these “discretionary” programs. Cutting $38 billion may not be a big number, but it is a step in the right direction. And it is the first time fiscal policy has moved in the right direction in at least 10 years.

o There will be no funding for additional IRS agents. This is a nice victory. Implementing Obamacare would require as many as 16,000 new tax bureaucrats to harass the American people, so at least that process will be stalled.

o A school choice program for Washington, DC, has been restored, thus reversing President Obama’s disgusting decision to kill the program and sacrifice poor black children to advance the greedy interests of the teacher unions.

Now let’s look at the less desirable parts of the agreement.

o Total spending jumped by almost $2 trillion during the Bush-Obama spending binge, so a $38 billion cut is almost too small to mention.

o Left-wing organizations such as Planned Parenthood will continue to feed at the public trough, something that should be objectionable to everyone, regardless of your views on abortion.

o Obamacare is not repealed (not that I ever thought that was possible) and there is no restriction on the EPA’s unilateral assertion that is has regulatory power to implement radical Kyoto-style global warming policies.

I will have more comments this week about what happens next. Suffice to say that this was just one battle in a long war.

The 2012 budget resolution, for instance, will be a key test of fiscal responsibility, but in this case the debate will be about $trillions rather than $billions. The debt limit vote will an opportunity for some much-needed reform of the budget process. And it is quite likely that there will be another potential shutdown fight when it is time to put together appropriations bills for the 2012 fiscal year, which starts October 1.

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Just days after the introduction of a very good plan by the Chairman of the House Budget Committee, leaders from the Republican Study Committee in the House of Representatives have introduced an even better plan.

In a previous post, I compared spending levels from the Obama budget and the Ryan budget and showed that the burden of federal spending would rise much faster if the White House plan was adopted.

If the goal is to restrain government, the RSC blueprint is the best of all worlds. As the chart illustrates, government only grows by an average of 1.7 percent annually with that plan, compared to an average of 2.8 percent growth under Ryan’s good budget and 4.7 percent average growth with Obama’s head-in-the-sand proposal.

According to the numbers released by the Republican Study Committee, the burden of federal spending would fall to about 18 percent of GDP after 10 years if the RSC plan is implemented.

While that’s a great improvement compared to today, the federal government would still consume as much of the economy as it did when Bill Clinton left office.

Last but not least, for those who are focused on fiscal balance rather than the size of government, this is the only plan that produces a balanced budget. Indeed, red ink disappears in just eight years.

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Washington is filled with groups that piously express their devotion to balanced budgets and fiscal responsibility, so it is rather revealing that some of these groups have less-than-friendly responses to Congressman Ryan’s budget plan.

The Committee for a Responsible Federal Budget, for instance, portrays itself as a bunch of deficit hawks. So you would think they would be doing cartwheels to celebrate a lawmaker who makes a real proposal that would control red ink. Yet Maya MacGuineas, president of the CRFB, basically rejects Ryan’s plan because it fails to increase the tax burden.

…while the proposal deserves praise for being bold, the national discussion has moved beyond just finding a plan with sufficient savings to finding one that can generate enough support to move forward. All parts of the budget, including defense and revenues, will have to be part of a budget deal… Now that both the White House and House Republicans have made their opening bids, this continues to reinforce our belief that a comprehensive plan to fix the budget like the one the Fiscal Commission recommended has the best hope of moving forward.

I’m mystified by Maya’s reference to an “opening bid” by the White House. What on earth is she talking about? Obama punted in his budget and didn’t even endorse the findings of his own Fiscal Commission. But I digress.

Another example of a group called Third Way, which purports to favor “moderate policy and political ideas” and “private-sector economic growth.” Sounds like they should be cheerleaders for Congressman Ryan’s plan, but they are even more overtly hostile to his proposal to reduce the burden of government.

House Budget Chairman Paul Ryan’s budget is a deep disappointment. There is a serious framework on the table for a bipartisan deal on our long term budget crisis. It’s the Bowles-Simpson blueprint, now being turned into legislation by the Gang of Six. It puts everything on the table – a specific plan to save Social Security, significant defense cuts, large reductions in tax expenditures and reforms to make Medicare and Medicaid more efficient, not eliminate them.

That sounds hard left, not third way. But it’s not unusual. Many of the self-proclaimed deficit hawks on Capitol Hill also have been either silent or critical of Ryan’s plan.

Which leaves me to conclude that what they really want are tax increases, and they simply use rhetoric about debt and deficits to push their real agenda.

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Forget all this talk about giant “spending cuts” of $6.2 trillion in Congressman Ryan’s budget plan. That’s music to my ears, but it’s also based on Washington’s bizarre budget math – i.e., the screwy system where politicians can increase spending but say they’re cutting spending because the budget could have grown even faster.

What really matters is how much money government is spending this year compared to how much money will be spent in subsequent years. Using this common-sense benchmark, let’s look at two competing proposals.

According to the new numbers released today, Congressman Ryan’s budget plan will result in government growing, on average, by almost 2.8 percent annually over the next 10 years.

President Obama’s budget plan, by contrast, would increase the burden of government spending by an average of nearly 4.7 percent each year.

This chart compares the two budget plans. Because Chairman Ryan does not let spending grow as rapidly, cumulative spending over that period will be $6.2 billion less than it would be based on the President’s plan. That’s an impressive amount of money that taxpayers will save if Ryan is successful, but it’s not a spending cut.

Not surprisingly, the big spenders in Washington are claiming that the “spending cuts” in Representative Ryan’s budget are “harsh” and “extreme.” But Ryan’s proposal would allow the budget to grow faster than inflation, which is projected to average less than 2.1 percent annually over the 10-year period.

Good fiscal policy is very simple. Restrain the size and scope of government so that outlays grow slower than the private sector. If that happens, the burden of federal spending will shrink as a share of economic output

That’s exactly what happens with Ryan’s plan. By 2018, the federal budget will drop to less than 20 percent of GDP. That still doesn’t bring us back to where we were at the end of the fiscally responsible Clinton years, when federal spending consumed only 18.2 percent of GDP. But after a 10-year spending binge under Bush and Obama, Congressman Ryan’s plan would move America back toward fiscal responsibility.

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I posted yesterday about the stunning political incompetence of Republican Senators, who reportedly are willing to give Obama an increase in the debt limit in exchange for a vote (yes, just a vote) on a balanced budget amendment.

As I explained, there is no way they can get the necessary two-thirds support to approve an amendment, so why trade a meaningless and symbolic vote on a BBA for meaningful and real approval of more borrowing authority for Obama? My analogy yesterday was that this was like trading a all-star baseball player for a utility infielder in the minor leagues.

I did acknowledge that forcing a vote on a BBA was a worthwhile endeavor, but said that the GOP has that power anyhow, so why trade away something valuable to get something you already can get for free?

Little did I realize that Republicans already did force a vote on the balanced budget amendment. Less than one month ago, on March 2, Senator Lee of Utah got a vote on a “Sense of the Senate” resolution in favor of a balanced budget amendment. Senator Lee’s resolution was approved by a 58-40 margin, which is nice, but an actual amendment would need a two-thirds supermajority, so this test vote demonstrated that there is no way to approve an amendment this year.

I’m glad Senator Lee proposed his resolution. I’m glad Senators were forced to go on the record.

But I’m mystified, flabbergasted, and stunned that Republicans apparently are willing to give Obama a bigger debt limit in exchange for something they already got.

This would be like the Yankees giving Derek Jeter to the Red Sox in exchange for a player they already have, such as Alex Rodriguez. I imagine New York sportswriters would be dumbfounded by such stupidity and would rip the team’s management to shreds. So that gives you an idea of how I feel about what’s happening in Washington.

As I noted in yesterday’s post, I’ll soon write about the fiscal reforms GOPer should demand in exchange for a higher debt limit.

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The old joke in Washington is that Democrats are the evil party and Republicans are the stupid party (which is why you should guard your wallet and freedom whenever you hear talk of “bipartisanship”).

The GOP definitely is doing what it can to prove that at least one side of that joke is true. Republicans are actually talking about letting the debt limit increase in exchange for a vote on a balanced budget amendment.

Yes, you read correctly. They’re not talking about an increase in the debt limit in exchange for a balanced budget, or more borrowing authority in exchange for passage of a balanced budget amendment. Instead, they will roll over for the very low price of simply getting a vote on a proposed amendment.

Here’s a passage from a report in Human Events.

The Senate Republicans are preparing to tell President Obama that they want a Balanced Budget Amendment (BBA) to the Constitution passed in Congress in exchange for raising the statuary debt ceiling above $14.2 trillion. “My hope is that we would force a vote on a Balanced Budget Amendment as a condition to voting on the debt ceiling,” Sen. John Cornyn (R.-Tex.) told HUMAN EVENTS.  “By next week, or shortly thereafter, we will have all 47 Republicans unified behind the effort, and then begin to reach out to our Democratic colleagues.”

To understand the foolishness of this approach, here’s all you need to know.

1. If Republicans really want to force a vote on a balanced budget amendment, they basically have that ability already. The rules of the Senate give individual Senators considerable ability to disrupt ordinary business and force votes on motions that at the very least would be proxies for a BBA. And if all 47 Republicans really want to make a stink, they can grind the Senate to a halt and demand an up-or-down vote on a specific amendment.

In other words, Republicans are about to give the democrats something that they really want – an increase in the debt limit – in exchange for a vote that they could get anyhow.

2. More important, what makes them think it is a good deal to give Obama more borrowing authority in exchange for something that, at best, is symbolic? Everyone knows that there is zero chance of getting the necessary two-thirds vote to approve a balanced budget amendment.

That’s not an argument against having a vote (particularly if the BBA is well-written with real limits on taxes and the size of government), but it definitely is not a smart negotiating strategy. It’s sort of akin to trading a power-hitting all-star for a minor league utility player.

Fiscal conservatives should demand substance, not symbolism, in exchange for a higher debt limit. I’ll put forth a few ideas in next few days.

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In the past 10 years, the burden of federal spending has skyrocketed, more than doubling from$1.86 trillion in 2001 to an estimated $3.82 this year.

President Bush deserves a lot of the blame thanks to the no-bureaucrat-left-behind bill that bloated the Department of Education, the corrupt farm bills, the pork-filled transportation bills, the new prescription drug entitlement, and bailouts for banks and auto companies.

Obama then came to office promising hope and change, but he simply grabbed the baton and continued the spending spree, adding more TARP bailouts, and then giving us the boondoggles of a fake stimulus and government-run healthcare.

Taxpayers finally said enough is enough last November and there’s a new Congress with marching orders to stop Washington’s spending orgy.

But Barack Obama and Harry Reid are saying no. They want us to believe that the House spending cuts are too severe.

What does this mean? Are Republicans trying to reduce spending to $2.98 trillion, which is where it was in 2008? That would be a spending cut of nearly $1 trillion and music to my ears. Or are they being even more aggressive, perhaps trying to cut spending to about $2.5 trillion, about halfway between the 2001 and 2008 totals? That would be a spending cut of almost $1.5 trillion, which would be a fantasy for a libertarian wonk like me.

If these were the options being considered, we could understand President Obama and Senator Reid vigorously resisting  spending cuts of that magnitude.

But that’s not what’s happening. Republicans in the House are not trying to reduce spending by a big amount. They’re not even trying to reduce the budget by $500 billion. Heck, they’re not even trying to lower this year’s spending levels by $100 billion.

Instead, the House GOP has put forward a very modest proposal to trim spending by $61 billion – and that tiny bit of nibbling around the edges of the welfare state has Barack Obama and Harry Reid acting as if the safety net is being ripped to shreds.

This video from my colleagues at the Cato Institute puts $61 billion of cuts in context – and indirectly shows that President Obama and Senator Reid have no credibility on fiscal policy.

I can’t resist making one final observation. The burden of government spending has jumped by about $2 trillion in the past 10 years. Does anybody think our economy is stronger as a result? More stable? More competitive? More vigorous? More entrepreneurial?

The answer to all these questions is a resounding no. So if the 10-year Bush-Obama experiment of bigger government has failed, isn’t it time we try a different approach?

To conclude, here’s one of my videos, looking at just a small fraction of the evidence in favor of smaller government.

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In this discussion on Larry Kudlow’s show, I reiterate the central point from my National Review article and explain that the government shutdown in 1995 led to real fiscal restraint. If that was a loss for the GOP, I hope they lose again this year.

But will this happen? If Republicans don’t surrender, a shutdown is inevitable. The Democrats clearly have adopted a rope-a-dope strategy, hoping GOPers will preemptively compromise. Here’s an excerpt from a story in the Washington Times.

A top Senate Democrat said Sunday that the $6 billion in additional spending cuts that his party offered is the limit Democrats can accept — drawing a line well short of Republicans’ goal with less than two weeks to go before a government shutdown if the two sides can’t agree. Sen. Richard J. Durbin of Illinois, the second-ranking Democrat in the chamber, said the $6 billion proposal, released Friday, has “pushed this to the limit” on domestic spending. …Meanwhile, the Senate’s top Republican said his talks with President Obama and Vice President Joseph R. Biden Jr. show that the White House is not serious about tackling longer-term spending challenges, making it difficult for Congress to work with the president. …“I’ve had plenty of conversations with them. What I don’t see now is any willingness to do anything that’s difficult,” Senate Minority Leader Mitch McConnell, Kentucky Republican, said on CBS‘ “Face the Nation” program. “So far, I don’t see the level of seriousness that we need.”

There’s no reason why Republicans should unilaterally compromise, but I’m worried. One major problem for the GOP is a misguided focus on red ink. Too many people, including Senators, Representatives, pundits, and policy wonks, keep talking about deficits and debt. Government borrowing is not desirable, but red ink is merely a symptom of excessive spending.

This is why all the focus should be about controlling the size and scope of Washington. That’s not only smart economics, it’s also astute politics. If the short-term question is how to save $61 billion from FY2011 spending levels and the long-term question is how to cap federal government spending at 20 percent of GDP, higher taxes obviously are not relevant.

But if Republicans keep talking about deficits and debt, that automatically puts tax increases on the table. And the primary long-run goal of the Democrats is to seduce GOPers into going along with a tax increase.

The next thing to watch for is what happens, presumably later today, when the Senate votes on the House plan and the Democrat’s proposal. The Associated Press is probably correct that these are key test votes.

The Senate appears likely to reject both a slashing GOP budget bill and a less ambitious Democratic alternative. …Neither measure can muster the 60 votes required under Senate procedures to advance; not a single Democrat is likely to vote for the GOP measure, and some may shy away from the Democratic bill as well. That could put pressure on House Speaker John Boehner, R-Ohio, as well as other congressional leaders of both parties to find a compromise. …By the same standard, the vote on the Senate Democratic alternative — it would cut about $5 billion from domestic agencies compared with about $60 billion under the House GOP plan — is unlikely to get unanimous support from Democrats, especially moderates up for re-election in 2012.

What Republicans need to understand is that they hold the trump card. Taxpayers will save much more than $61 billion if Democratic obstinacy results in a government shutdown.

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President Obama unveiled his fiscal year 2012 budget today, and there’s good news and bad news. The good news is that there’s no major initiative such as the so-called stimulus scheme or the government-run healthcare proposal. The bad news, though, is that government is far too big and Obama’s budget does nothing to address this problem.

But perhaps the folks on Capitol Hill will be more responsible and actually try to save America from becoming a big-government, European-style welfare state. The solution may not be easy, but it is simple. Lawmakers merely need to restrain the growth of government spending so that it grows slower than the private economy.

Actual spending cuts would be the best option, of course, but limiting the growth of spending is all that’s needed to slowly shrink the burden of government spending relative to gross domestic product.

Fortunately, we have two role models from recent history that show it is possible to control the federal budget. This video from the Center for Freedom and Prosperity uses data from the Historical Tables of the Budget to demonstrate the fiscal policy achievements of both Ronald Reagan and Bill Clinton.

Some people will want to argue about who gets credit for the good fiscal policy of the 1980s and 1990s.

Bill Clinton’s performance, for instance, may not have been so impressive if he had succeeded in pushing through his version of government-run healthcare or if he didn’t have to deal with a Republican Congress after the 1994 elections. But that’s a debate for partisans. All that matters is that the burden of government spending fell during Bill Clinton’s reign, and that was good for the budget and good for the economy. And there’s no question he did a much better job than George W. Bush.

Indeed, a major theme in this new video is that the past 10 years have been a fiscal disaster. Both Bush and Obama have dramatically boosted the burden of government spending – largely because of rapid increases in domestic spending.

This is one of the reasons why the economy is weak. For further information, this video looks at the theoretical case for small government and this video examines the empirical evidence against big government.

Another problem is that many people in Washington are fixated on deficits and debt, but that’s akin to focusing on symptoms and ignoring the underlying disease. To elaborate, this video explains that America’s fiscal problem is too much spending rather than too much debt.

Last but not least, this video reviews the theory and evidence for the “Rahn Curve,” which is the notion that there is a growth-maximizing level of government outlays. The bad news is that government already is far too big in the United States. This is undermining prosperity and reducing competitiveness.

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