I’ve received several requests to comment on the controversy surrounding the famous Rogoff-Reinhart study on government debt and economic performance.
For those who haven’t followed this issue, Kenneth Rogoff and Carmen Reinhart wrote an influential paper in 2010 arguing that government debt above 90 percent of GDP was associated with weaker economic performance.
It turns out that the Rogoff and Reinhart made a mistake in their excel spreadsheet and this error was publicized in a recently unveiled article by three other economists.
This has led to a renewed debate about “austerity,” with R&R cast in the role of fiscal hawks and various critics saying that the mistake in their paper discredits that approach and that it’s time for Keynesian policies.
But if you want to know my opinion, I’m not a fan of either side. Unlike the Keynesians, I don’t think debt is good for growth. But I also think it doesn’t make sense to myopically focus on red ink.
Which explains why I’m very frustrated by the debate in Europe. On one side, you have the Keynesians advocating higher spending and on the other side you have “austerians” advocating higher taxes.*
As I’ve repeated over and over again, the real fiscal problem in most nations is the size of government. Excessive government spending is bad for prosperity, regardless of whether it is financed by taxes or borrowing.
To be sure, governments can accumulate so much debt that investors will get suspicious and demand very high interest rates before lending more money (sometimes referred to as an attack by “bond vigilantes”).
But it’s important to realize that debt is the symptom. The underlying disease is a bloated public sector. That’s true in Greece, Spain, Italy, and other nations that have had trouble borrowing money.
By the way, it’s also true in nations such as France and Belgium. Those countries also have governments that are far too big. They haven’t been hit (at least not yet) by the bond vigilantes, but they’re suffering from economic stagnation as well.
The wise fiscal policy, needless to say, is to follow Mitchell’s Golden Rule. If the burden of government spending grows slower than the private economy, any nation can climb out of a fiscal ditch. Especially if they lower tax rates and avoid class-warfare tax policy.
*In theory, the “austerians” ” also advocate less spending, but you won’t be surprised to learn which option politicians select when given a choice between higher taxes and less spending.
P.S. You also won’t be surprised that Paul Krugman doesn’t do his homework when he writes about “austerity” in Estonia and the United Kingdom.
I’m a bit of a nag on getting people to realize that deficits are not the nation’s main fiscal problem. Government borrowing isn’t desirable, to be sure, but our real concern should be a government that is too big and spending too much.
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.
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 over 10 years.
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).
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.
This would force – automatically and immediately – a balanced budget. More important, it would produce a meaningful reduction in the burden of government spending.
But even though that seems like a fantasy outcome for people like me from the Cato Institute, I actually don’t think libertarians, fiscal conservatives, and other advocates of smaller government should make the debt limit a do-or-die battle.
As I say in this interview on Fox Business News, the “continuing resolution” is a much better vehicle.
And if the Fed Chairman is able to rattle Wall Street and cause a big drop in the stock market, it’s quite likely that Republicans will buckle rather than run the risk of being blamed for causing a financial calamity.
But the Obama Administration has less leverage when the “CR” expires on March 27. Like the debt limit, the continuing resolution is a must-pass piece of legislation. Heck, it’s even important since it’s the only way of funding the non-entitlement portions of the federal government for the rest of the 2013 fiscal year.
This is where advocates of small government should draw a line and demand fiscal restraint. They should pass a CR, but only after eliminating some egregious waste from the federal budget.
Yes, the President can object to fiscal reforms. He can even veto such a bill. But the worst thing that happens under a stalemate is a “government shutdown.”
And not even a real shutdown. Things that actually have some value, like the military and the air traffic control system, continue operating. All that happens is that “non-essential” programs, agencies, and department are shuttered. The Department of Housing and Urban Development is a good example.
Let’s now think about leverage. Who will care more about reopening HUD and other non-essential parts of the government? The answer, quite obviously, is that bureaucrats and interest groups are the only ones who will care, and this means the pressure will be on the left.
This doesn’t mean a CR fight and potential government shutdown is free of political risk. Indeed, Newt Gingrich lost popularity as a result of that fight. But that was probably more a reflection of his political style.
In any event, a CR battle definitely has less downside risk than a debt limit battle. So if folks on Capitol Hill actually want to fight to save the country from becoming Greece, why not pick the battle that’s easier to win?
But it does seem that things have calmed down, so the readers who have submitted questions about whether the fiscal crisis has ended obviously are paying attention.
I have two responses.
My first answer is very mature and thoughtful: HAHAHAHAHAHAHAHAHA, are you ;@($&^#’% kidding me?
My second answer is a bit more guarded and circumspect: No. To be more specific, the immediate crisis may have slightly abated, but I have no confidence that the long-run problem has been solved.
But let me start with some good news. Most of the hard-hit European nations have finally begun the cut spending. And when I say cut spending, I mean they actually spent less in 2011 than they did in 2010 (unlike the fake version of spending cuts that you find in the U.S. and U.K., where spending simply grows at a slower pace).
We don’t have data for 2012, but I wouldn’t be surprised if many of the PIIGS nations also cut spending last year as well.
So while long-overdue reductions in spending meant less money was being diverted from the economy’s productive sector, higher tax rates have discouraged entrepreneurs and investors from creating jobs and wealth.
So what’s the net effect?
From an optimistic perspective, the fiscal situation should stabilize if governments keep spending under control. Some additional spending cuts would be very desirable since government spending consumes 45 percent-50 percent of GDP in these nations, which is at least double the growth-maximizing level.
“I’m going back in my bottle if you don’t cut spending!”
But even if these nations merely abide by Mitchell’s Golden Rule and restrain spending so that it grows slower than the private sector, that would be progress.
The reason I’m not optimistic, though, is that I don’t sense any commitment to smaller government. I fear governments will let the spending genie out of the bottle at the first opportunity. And we’re talking about a scary genie, not Barbara Eden.
And to make matters worse, Europe faces a demographic nightmare. These charts, reproduced from a Bank for International Settlements study, show that even the supposedly responsible nations in Europe face a tsunami of spending and debt over the next 25-plus years.
So you can understand why I don’t express a lot of optimism about European economic policy in this interview with Canadian TV.
The ostensible topic was European-wide financial regulation, but that topic is really a proxy for the fact that some nations want to bail out their financial sectors. But they’re in such lousy fiscal shape that they can’t borrow the money that would be needed to prop up their dodgy banks.
So I pointed out that European-wide regulation wasn’t the right answer. It wouldn’t make banks safer (since it would be based upon the deeply flawed Basel regulations), but could become a vehicle for nations such as Germany to further subsidize countries such as Spain.
But I hope I got across my main point, which is that these nations are burdened with too much government and their problems won’t be solved with more handouts, regulation, or bureaucracy.
In other words, there’s no substitute for genuine spending cuts implemented by the nation states of Europe.
P.S. Just in case you’re under the impression that only cranky libertarians think government is too big in Europe, I invite you to peruse this research from the European Central Bank, World Bank, and National Bank of Finland.
It’s never a good idea to display weakness during negotiations. Your opponent will sense your fear and up his demands.
That’s certainly what we’re seeing in Washington. The cartoon at this link captures the GOP’s wobbly attitude on taxes, and this interview is about the ever-increasing demands of the Obama Administration.
It’s important to define austerity correctly. To provide an analogy, we have to drink liquid to survive, but that doesn’t mean it would be a good idea to guzzle paint thinner. Likewise, we need austerity, but that shouldn’t mean higher taxes. We need to be like Estonia and tighten the belts of the public sector, not the private sector.
It’s not my job to give Republicans political advice, but I also want to expand upon the arguments I made a couple of days ago, when I wrote a post giving five policy reasons and five political reasons why the GOP shouldn’t surrender on tax increases.
A couple of readers correctly pointed out that I forgot to mention that tax increases are political poison because middle-class voters turn against the GOP once “revenue” is on the table. They are completely right, and my oversight is inexplicable since I’ve actually made that point in the past. Here’s some of what I wrote last year.
If Republicans put tax increases on the table, however, the politics get turned upside down. Instead of being united against all tax increases, voters realize somebody is going to get mugged and they have an incentive to make sure they’re not the ones who get victimized. That’s when soak-the-rich taxes become very appealing. Democrats, for all intents and purposes, can appeal to average voters by targeting the so-called rich. And even though voters will be skeptical about what Democrats really want, they don’t want to be the primary target of the political predators in Washington. Think of it this way. You’re a wildebeest running away from a pack of hyenas, but you know one member of your herd will get caught and killed. You despise hyenas, but at that critical moment, you’re main goal is wanting another member of the herd to bite the dust. This is why surrendering to tax increases put Republicans in a no-win situation. They oppose class-warfare taxes because they understand the disproportionately damaging impact of higher top income tax rates and increased double taxation of dividends and capital gains. So when GOPers get bullied into agreeing to raise taxes, they want to target less destructive sources of revenue. But that usually means…taxes that are more likely to hit the middle class. Needless to say, Democrats almost always win if there is a fight on whether to tax the middle class or to tax the rich.
I have to pat myself on the back for that passage, particularly the analogy that equates politicians with hyenas (though in the past I’ve apologized to hyenas for that unfair comparison).
Let’s close with a very good cartoon, which points out the foolishness of the media for wanting to send more money to Washington when even they understand that the town is filled with clowns and buffoons. That’s actually a very serious point, as I note about halfway through the interview included in my five-political-reasons-five-policy-reasons post.
But it’s hard to laugh when you contemplate what’s happening. Obama is bullying the GOP, and the Republicans are in the process of surrendering to his class-warfare demands.
That will lead to bad policy, but it will also result in an emasculated, compliant, and house-broken GOP for at least the next two years, and perhaps even Obama’s entire second term. So even though the fiscal cliff tax hike is bigger than what Obama’s currently demanding, the long-run policy damage of surrender almost surely will be far greater.
Republicans don’t have many options in this fight. But they can show some cojones and tell Obama that the only way he’ll get a tax hike is if he wants to take the nation over the cliff.
P.S. If you like the Henry Payne cartoon in this post, you can enjoy some of his other work here, here, here, here, here, here, here, and here.
But maybe there’s evidence from other parts of the world showing that tax hikes lead to balanced budgets. Perhaps we can learn something from European nations.
Let’s start with this chart I put together after digging through historical data from the United Nations, European Commission, and Organization for Economic Cooperation and Development. It shows tax burden for the 15 nations of the pre-2004-expansion European Union, minus Luxembourg which didn’t collect this kind of data in the 1960s. Basically, we’re looking at the average tax burden in Western Europe for 1965-1969 and for 2006-2010.
Not surprisingly, it shows that the tax burden has jumped significantly. I suspect the adoption of the value-added tax deserves a good bit of the blame, but that’s a separate issue.
For this post, we’re wondering whether this big jump in taxes resulted in more red ink or less red ink.
This second chart looks at the burden of government debt, which averaged 45 percent of GDP for the 1965-1969 period. And we see a stick figure wondering whether the debt for 2006-2010 will be higher or lower. In other words, did politicians use the additional revenue to pay down the debt, did they spend it, or did they spend all the added revenue and then borrowed even more?
Well, knock me over with a feather. The next chart shows that debt is much higher today, averaging about 60 percent of GDP.
In other words, every penny of new tax revenue got spent. Not only that, but Europe’s politicians accumulated even more red ink because they increased spending even faster than they increased revenue.
What’s the moral of this story? Well, President Obama claims his class-warfare tax policy will reduce deficits as part of a “balanced approach.”
But what he’s actually proposing is that the United States should emulate our friends on the other side of the Atlantic. And it seems their idea of a “balanced approach” simply means higher taxes, as you can see from this shocking chart. Gee, what a coincidence.
Based on what we know about the evidence in Europe, and based on what we know about the proclivities of American politicians, anybody want to guess what will happen to U.S. government debt if Obama prevails?
P.S. The pre-2004-expansion European Union nations were Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Netherlands, Portugal, Spain, Sweden, and the United Kingdom.
P.P.S. The figures in this post are for central government taxes and debt.
P.P.P.S. There are some good lessons to be learned from other nations, as shown in this video. And if you pay attention to the details in that video, you’ll notice that the key to good fiscal policy is…drumroll please…following Mitchell’s Golden Rule.
The politicians claim that they are negotiating about how best to reduce the deficit. That irks me because our fiscal problem is excessive government spending. Red ink is merely a symptom of that underlying problem.
But that’s a rhetorical gripe. My bigger concern is that politicians are prevaricating. They’re really talking about higher taxes in order to enable a bigger burden of government spending, not less red ink. I make this point in an interview on Fox Business Network.
This is the point where I often elaborate on issues raised in the interview, but let’s instead build on the discussion to look at policy and political reasons why the GOP should not surrender to Obama’s tax demands as part of fight over the fiscal cliff.
Here are the policy arguments against higher taxes.
1. There is no need for higher taxes since the budget can be balanced merely by restraining spending so that it grows 2.5 percent each year.
According to the most recent Congressional Budget Office fiscal estimate, the 2001 and 2003 tax cuts can be made permanent and red ink can be wiped out in just 10 years so long as politicians simply control the growth of federal spending so that outlays don’t grow faster than 2.5 percent each year. Other nations have shown that this type of spending restraint is very successful, while no nation has ever taxed its way to fiscal success.
2. Since the tax increases stick and the supposed spending cuts quickly evaporate, budget deals that raise taxes have a long history of failure.
Last year, in an article that was designed to browbeat Republicans for being unreasonable about tax hikes, a New York Times columnist inadvertently revealed that the only budget deal that actually led to a fiscal surplus was the 1997 agreement that lowered taxes instead of increasing them. None of the tax-hike budget deals ever resulted in a balanced budget.
3. America’s short-run fiscal problem is the result of too much government spending, not inadequate tax revenue.
Because of large spending increases during the Bush-Obama years, the burden of federal spending has doubled in just 11 years. This is why today’s fiscal numbers look so grim. Some argue that tax revenues are below their long-run average of 18 percent of GDP, but CBO estimates show that tax collections will be above the long-run average by the end of the decade even if all the 2001 and 2003 tax cuts are made permanent. And the White House recently admitted this was true as well.
4. America’s long-run fiscal problem is the result of too much government spending, not inadequate tax revenue.
In the absence of entitlement reform, the burden of federal spending will double, measured as a share of GDP, and the overall burden of government will exceed the levels that currently exist in every single European welfare state. Tax revenues also will climb as a share of GDP thanks to “real-bracket creep,” so there is no plausible argument that the long-run problem is inadequate revenue.
5. The European evidence shows that genuine spending cuts are the only effective way of solving a fiscal crisis.
Nations such as Italy, Greece, France, Spain, Ireland, Portugal, and the United Kingdom have imposed massive tax increases, yet their fiscal problems remain. Indeed, in some cases, these nations are in worse shape because the tax hikes contributed to anemic economic performances. Some of these countries have belatedly begun to trim their spending burdens, but generally by relying on transitory savings rather than permanent reductions in the obligations of the welfare state. The only relative success stories on the continent are Switzerland, which never got into trouble in the first place thanks to a spending cap, and the Baltic nations, which imposed genuine spending cuts when the crisis first began and now are reaping the rewards of that fiscal discipline.
And here are the political arguments against higher taxes.
1. With Republicans easily retaining control of the House of Representatives, the election was not a mandate to raise taxes.
Nobody argued that there was a mandate to raise taxes before the election, when Republicans controlled the House and Democrats controlled the White House and Senate, so how can there be a mandate to raise taxes today since the election didn’t change anything? Some assert that Obama has a mandate since he campaigned in favor of his soak-the-rich tax plan. That’s true, but House Republicans prevailed after campaigning against class-warfare taxes, so that’s a wash.
2. The GOP prevailed in the exact same tax battle back in 2010, before they controlled the House and when they had fewer seats in the Senate.
This is not the first fiscal cliff battle. The same fight took place at the end of 2010. At the time, Democrats has an overwhelming majority in the House and even stronger control of the Senate than they do today. But by holding firm and staying united, Republicans prevailed. If they lose today, when they have far more political power, it will be a damning indictment of their incompetence.
3. Acquiescing to tax hikes would set a tone of weakness for 2013 and 2014, much as the 2011 “shutdown fight” needlessly gave Obama the upper hand on fiscal battles in 2011 and 2012.
5. Integrity matters, so politicians who promised the people that they wouldn’t raise taxes should honor those commitments.
I realize that it is silly to make an argument about honor and integrity when we’re discussing the actions of politicians, but I’m old fashioned. A promise should mean something. And even if promises don’t mean anything to these guys, they should remember that voters don’t like dishonesty.
I’m not terribly hopeful that any of my advice will be followed, so let’s close this post with some gallows humor.
…it’s a fight that has important implications, particularly since some of the tax increases will have a significantly harmful impact on incentives to work, save, invest and create jobs. In a competitive global economy, for instance, it is bizarrely self-destructive to increase the double taxation of dividends and capital gains. …This is all bad news, but it is not a crisis. If we go over the cliff, it simply means the economy will grow a bit slower and politicians will spend a bit more money. And the sequester actually would be (modest) good news, since it means the burden of government spending would be “only” $2 trillion higher 10 years from now, rather than $2.1 trillion higher. And even if Obama prevails in the fight, that simply means that we get a different mix of tax hikes and spending rises at a faster rate. Sure, that’s bad for the economy, but it’s not the end of the world. The real crisis is the ticking time bomb of entitlement programs and the welfare state. This bomb won’t explode this year or next year. It may not even explode for another 20 years. But at some point America will experience a Greek-style fiscal collapse if these programs are not reformed.
Just how bad is this future problem? Gee, I’m glad you ask.
A lot of people get upset about the national debt, which is somewhere between $11 trillion and $16 trillion, depending on whether you include money the government owes itself. Those are big numbers — but if you add up the amount of money that the government is promising to spend for entitlement programs in the future and compare that figure to the amount of revenue that the government projects it will collect for those programs, the cumulative shortfall is more than $100 trillion. And that’s after adjusting for inflation. Some politicians claim this huge, baked-into-the-cake expansion of government isn’t a problem, because we can raise taxes. But that’s exactly what Europe’s welfare states tried — and it didn’t work. Simply stated, even huge tax hikes won’t stem the flow of red ink in the long run if government keeps growing faster than the private economy. This is the fiscal problem that demands attention. Absent real entitlement reform, such as block-granting Medicaid to the states, the burden of government spending will consume ever-larger shares of our economic output with each passing year.
P.S. If my only choice is surrendering to Obama or going over the fiscal cliff, I’ll take the plunge without a second’s hesitation. At least we get the sequester if we go off the cliff, so there’s a tiny bit of spending restraint. Moreover, if the GOP capitulates to Obama on this fight, it will set the stage for additional bad policy over the next two years (much as the acquiescence to Obama during the March 2011 “government shutdown” fight was a sign of things to come for the last years, but at least we resuscitated two good cartoons and got some good jokes out of that debacle).
P.P.S. In addition to the Ramirez cartoon above, you can enjoy this bunch of amusing fiscal cliff cartoons. Or I should say they’re amusing so long as you don’t think about the implications.
We can add another one to the list. The Heritage Foundation shows us what Obama has in mind when he talks about a “balanced” plan.
This chart, while horrifying and visually powerful, actually understates the case against Obama.
The President is not proposing to cut spending by $400 billion. He’s only proposing to reduce future spending growth by that amount. In other words, his “spending cut” is only a cut if you play the dishonest DC game of measuring “cuts” against a baseline of ever-expanding government.
To give you an idea of what this really means, here’s my chart showing the CBO projection of what will happen to spending if the budget is left on autopilot. That’s the blue line.
The red line, by contrast, shows the impact of Obama’s supposed $400 billion cut. Feel free to pull out a magnifying glass to examine the difference between the two lines.
All you need to know is that the burden of government spending will climb by about $2 trillion over the next 10 years without Obama’s budget plan.
But if we enact Obama’s plan, the burden of spending will climb by…drum roll please…about $2 trillion over the next 10 years. In other words, it’s not much more than a rounding error.
P.S. Don’t forget that revenues also are projected to rise dramatically over the next 10 years, even if the 2001 and 2003 tax cuts are made permanent. All that’s actually needed to balance the budget is modest spending restraint, restraining outlays so they grow by an average of 2.5 percent. In other words, good things happen if policy makers comply with Mitchell’s Golden Rule.
I’ve commented before how the fiscal fight in Europe is a no-win contest between advocates of Keynesian deficit spending (the so-called “growth” camp, if you can believe that) and proponents of higher taxes (the “austerity” camp, which almost never seems to mean spending restraint).
That’s a left-vs-left battle, which makes me think it would be a good idea if they fought each other to the point of exhaustion, thus enabling forward movement on a pro-growth agenda of tax reform and reductions in the burden of government spending.
That’s a nice thought, but it probably won’t happen in Europe since almost all politicians in places such as Germany and France are statists. And it might never happen in the United States if lawmakers pay attention to the ideologically biased work of the Congressional Budget Office (CBO).
For all intents and purposes, the CBO has a slavish devotion to Keynesian theory in the short run, which means more spending supposedly is good for growth. But CBO also believes that higher taxes improve growth in the long run by ostensibly leading to lower deficits. Here’s what it says will happen if automatic budget cuts are cancelled.
Eliminating the automatic enforcement procedures established by the Budget Control Act of 2011 that are scheduled to reduce both discretionary and mandatory spending starting in January and maintaining Medicare’s payment rates for physicians’ services at the current level would boost real GDP by about three-quarters of a percent by the end of 2013.
…the agency has estimated the effect on output that would occur in 2022 under the alternative fiscal scenario, which incorporates the assumption that several of the policies are maintained indefinitely. CBO estimates that in 2022, on net, the policies included in the alternative fiscal scenario would reduce real GDP by 0.4 percent and real gross national product (GNP) by 1.7 percent. …the larger budget deficits and rapidly growing federal debt would hamper national saving and investment and thus reduce output and income.
In other words, CBO reflexively makes two bold assumption. First, it assumes higher tax rates generate more money. Second, the bureaucrats assume that politicians will use any new money for deficit reduction. Yeah, good luck with that.
To be fair, the CBO report does have occasional bits of accurate analysis. The authors acknowledge that both taxes and spending can create adverse incentives for productive behavior.
…increases in marginal tax rates on labor would tend to reduce the amount of labor supplied to the economy, whereas increases in revenues of a similar magnitude from broadening the tax base would probably have a smaller negative impact or even a positive impact on the supply of labor. Similarly, cutting government benefit payments would generally strengthen people’s incentive to work and save.
But these small concessions do not offset the deeply flawed analysis that dominates the report.
While I’m irritated about CBO’s bias (and the fact that it’s being financed with my tax dollars), that’s not what has me worked up. The reason for this post is to grouse and gripe about the fact that some people are citing this deeply flawed analysis to oppose Obama’s pursuit of class warfare tax policy.
Why would some Republican politicians and conservative commentators cite a publication that promotes higher spending in the short run and higher taxes in the long run? Well, because it also asserts – based on Keynesian analysis – that higher taxes will hurt the economy in the short run.
…extending the tax reductions originally enacted in 2001, 2003, and 2009 and extending all other expiring provisions, including those that expired at the end of 2011, except for the payroll tax cut—and indexing the alternative minimum tax (AMT) for inflation beginning in 2012 would boost real GDP by a little less than 1½ percent by the end of 2013.
At the risk of sounding like a doctrinaire purist, it is unethical to cite inaccurate analysis in support of a good policy.
Consider this example. If some academic published a study in favor of the flat tax and it later turned out that the data was deliberately or accidentally wrong, would it be right to cite that research when arguing for tax reform? I hope everyone would agree that the answer is no.
Yet that’s precisely what is happening when people cite CBO’s shoddy work to argue against tax increases.
You have to give President Obama credit for chutzpah. He pushed through a faux stimulus in his first year and Obamacare in his second year, both of which significantly increased the burden of government spending.
In the past two years, he’s basically punted, proposing budgets that are so laughably unserious that they received zero votes in both the House and Senate. Including zero votes from Democrats.
But now he wants us to believe he favors a moderate-sounding deal that supposedly would reduce spending by $2.50 for every $1 of tax hikes.
This is utter fantasy and even leftists admit the President is engaging in gimmickry far beyond the smoke-and-mirrors chicanery that you normally find in Washington. Here’s some of what Reason’s Peter Suderman wrote about the topic.
President Obama described what he thought were the prospects for a big budget deal in the early part of a potential second term. “It will probably be messy,” he said. “It won’t be pleasant. But I am absolutely confident that we can get what is the equivalent of the grand bargain that essentially I’ve been offering to the Republicans for a very long time, which is $2.50 worth of cuts for every dollar in spending, and work to reduce the costs of our health care programs.” The president went on to suggest that such a deal could help the federal government start digging its way out of the deep debt hole it’s currently in. “And we can easily meet — ‘easily’ is the wrong word — we can credibly meet the target that the Bowles-Simpson Commission established of $4 trillion in deficit reduction…” Here’s the thing. That $4 trillion debt plan he’s offered so far? It doesn’t actually reduce deficits by $4 trillion. That’s because it’s packed with budget savings gimmicks. The Committee for a Responsible Federal Budget (CRFB) explains: “To reach his $4.3 trillion in savings through 2021, the President’s budget counts $1.6 trillion (excluding interest) of already-enacted savings…” This isn’t a lonely opinion either. As The Washington Post‘s Fact Checker Glenn Kessler wrote in September, “virtually no serious budget analyst” accepts the president’s $4 trillion deficit reduction figure. …What about the $2 trillion in deficit reduction the plan can claim to put on the scoreboard? It comes almost entirely tax increases. As James Pethokoukis of the American Enterprise Institute shows, the plan would result in about $1.735 trillion in tax hikes — and just $230 billion in spending cuts, the vast majority of which are cuts to health care provider reimbursements of dubious long-term value. That’s Obama’s idea of a grand bargain. Not $4 trillion in deficit reduction weighted toward spending cuts, but $2 trillion worth deficit reduction produced almost entirely by tax hikes.
The last part is the key. A $2 trillion package that is almost 87 percent tax hikes.
But I think Peter is being too kind, because even the changes in reimbursement rates for health care providers (which, as Peter notes, almost surely will evaporate in a very short period of time) are simply reductions in increases. In other words, spending will still grow, just not as fast as previously planned. In other words, the spending cuts are only cuts if you accept dishonest Washington terminology.
Something else that’s worth noting is that Obama pretends to embrace the Bowles-Simpson proposal, but we need to do some Clintonian parsing of what he actually said. The President carefully states that he wants to meet the “target that the Bowles-Simpson Commission established.” But that simply means a $4 trillion number, not the specifics of the Bowles-Simpson plan.
Well, Obama clearly is signally that he wants to move this bad plan even further to the left, most notably with class-warfare increases in top tax rates, which is contrary to one of the few good features in the Bowles-Simpson plan.
If Obama is re-elected, GOPers should not get seduced into a phony budget summit that invariably would produce a bad plan. It’s not simply that I’m against higher taxes. It’s that I don’t want to give the clowns and crooks in Washington even more of our money when we won’t get any reforms that might justify that sacrifice.
It’s better to do nothing than it is to make a bad situation even worse.
President Obama supports higher taxes, but he usually claims he only wants higher tax rates on evil rich people as part of his class-warfare agenda. Heck, he promised back in 2008 that, “no family making less than $250,000 a year will see any form of tax increase. Not your income tax, not your payroll tax, not your capital gains taxes, not any of your taxes.”
I guess we’re supposed to forget the higher tax burdens that were imposed on the middle class by Obamacare in 2010 and the SCHIP legislation in 2009.
Obama’s other rhetorical trick is to claim he wants a “balanced approach.” Translated from Washington-speak to English, that means he wants more of our money. But it’s a soothing way to demand more money. After all, who’s against “balance”?
This is why the budget deals put together by politicians almost always are awful. In order to protect the goodies they hand out to various special interests, the politicians use fake numbers to pretend they’re restraining spending, but when the dust settles, it turns out that the only real result is that taxpayers are forking over more of their hard-earned cash to the clowns in Washington.
Actually, that statement is incomplete. We need to remember that taxpayers in other nations also get screwed by the political elite. Take a look at this stunning chart that was shown at yesterday’s Cato Institute conference on “Europe’s Crisis and the Welfare State.” Put together by Veronique de Rugy of the Mercatus Center, it shows that politicians across the Atlantic have imposed nine euro of higher taxes for every one euro of spending cuts.
And keep in mind, as Veronique noted in her comments, that many of these so-called spending cuts were merely reductions in planned increases!
This matters because I’m getting increasingly worried that gullible Republicans will get seduced into some sort of budget summit designed to trick them into supporting the Simpson-Bowles tax-hike package.
P.S. It’s rather ironic that the New York Times inadvertently revealed that the only budget deal that worked was the one in 1997 that cut taxes rather than raising taxes.
But if you want to enjoy some laughs as the politicians spend us into fiscal crisis, you should watch this video. But only watch it if you’re okay with PG-13 titillation.
If you want to graduate to R-rated debt humor with several mentions of the F word, you can click here for another video.
And if you like the F word and don’t like the IRS, you’ll enjoy this video even more.
Many people want to believe in Unicorns, the Loch Ness Monster, and Bigfoot. I think those people are rational and reasonable compared to the folks in Washington that spend their days dreaming of “bipartisan” and “balanced” plans to fix the budget mess.
Here are the two things you should understand. First, you need to grab your Washingtonese-to-English dictionary so you can learn that “bipartisan” and “balanced” are almost always code words for “higher taxes.” Second, budget deals with higher taxes (as the New York Times accidentally admitted) don’t “fix” anything.
The Simpson-Bowles budget plan is a good example of why taxpayers should be quite skeptical. Put together by a former Republican Senator from Wyoming and Bill Clinton’s former Chief of Staff as part of President Obama’s Fiscal Commission, the Simpson-Bowles proposal is viewed by the inside-the-beltway crowd as fiscal Nirvana.
The Simpson-Bowles commission offered a reasonable, responsible, comprehensive and bipartisan solution that won the support of a majority of Democrats and Republicans on the commission. Most importantly, it would reduce the deficit by $4 trillion over the next decade — enough to put the debt on a clear downward path relative to the economy.
Gee, sounds nice, but let’s look at the details, all of which can be seen by downloading their report.
A main problem is that Simpson and Bowles misdiagnose the problem. I think it’s fair to say that their focus, as they explicitly state in their report, is to “…stabilize and then reduce the national debt.” But as I explain in this video, the real problem is a federal government that is too big and spending too much. Red ink is just a symptom of that problem.
Moreover, the report even includes Keynesian policy, stating that “…budget cuts should start gradually so they don’t interfere with the ongoing economic recovery.”
But let’s set aside rhetorical sins and grade the plan.
Restraining Spending: C+
The plan does impose some restraint on the budget, but the plan – even after being in place for 10 years – assumes that the federal government should grow by about $1.5 trillion and consume nearly 22 percent of economic output. This is far above the 18.2 percent of GDP when Clinton left office, which should be the minimum target for policymakers.
But the components of the plan make me think they won’t even achieve the plan’s anemic targets.
Eliminating Departments and Programs: D
The Simpson-Bowles plan does not call for shutting down a single program, agency, or department. Not even cesspools of waste and inefficiency such as the Department of Education or Department of Housing and Urban Development.
Reforming Entitlements: C-
There are real change in the plan, but they’re the wrong kind of changes. Instead of the structural reforms to Medicare and Medicaid contained in the Ryan budget, the Simpson-Bowles report basically calls for price fixing and means testing – policies that have a track record of ineffectiveness.
Reducing Bureaucratic Bloat: B
In terms of controlling spending, this is the part of the report that is most admirable. It calls for a three-year freeze on excessive compensation and urges reductions in bureaucratic bloat – albeit only through attrition.
Controlling the Tax Burden and Reforming the Tax Code: C-
The best policy, needless to say, is getting rid of the corrupt tax system and replacing it with a simple and fair flat tax. That obviously wasn’t what Simpson and Bowles decided to propose, but the flat tax is a benchmark that allows us to judge the components of their plan.
They basically get two policies right and two policies wrong. If they were major league baseball players, a .500 average would make them superstars. In Dan Mitchell’s policy world, they’re below average.
Lowering Tax Rates: A-
This is the best feature of all the revenue provisions. The Simpson-Bowles report proposes a top tax rate of between 23 percent-28 percent, significantly below the current top rate of 35 percent (and well below the 39.6 percent top rate that is part of President Obama’s class-warfare proposal). The corporate tax rate also would be reduced.
Reducing Double Taxation: D
The plan would increase the double taxation of dividends and capital gains. The U.S. already has a very anti-competitive system and this would be a step in the wrong direction (though ameliorated by a lower corporate tax rate).
Limiting the Tax Burden: D-
The plan assumes that laws should be changed to increase the federal tax burden to 21 percent of GDP from the long-run average of 18 percent of economic output. That’s unfortunate, but it’s even worse than it seems since the tax burden already is scheduled to rise to record levels because of what’s called “real bracket creep.” The Simpson-Bowles tax hikes would be an additional burden on taxpayers.
Eliminating Corrupt Loopholes: B
The good news is that some deductions are curtailed and a few are eliminated. The best components are the repeal of the deduction for state and local income and property taxes. So no more indirect preferences that reward profligate states such as California and Illinois. The healthcare exclusion also is capped, which would be a nice step on the long – but important – task of dealing with the third-party payer crisis in the healthcare sector.
I’m not a fan of the Simpson-Bowles plan, but I do give them credit. They decided to focus on the wrong variable and they have some bad policies, but at least it’s a real proposal.
It’s not anywhere close to the Ryan budget, but it’s a heck of a lot better than what the Senate Democrats have produced (nothing) and what the President has proposed (kicking the can down the road).
Other nations, such as New Zealand and Canada, got great results when imposing multi-year periods of fiscal restraint. Certainly it’s not asking too much to expect American lawmakers to exercise similar levels of prudence?
Well, yesterday’s announcement that the ECB would buy the dodgy debt of nations such as Spain didn’t make me feel any better.
Central banks should not be bullied into creating too much money simply because politicians are too corrupt, venal, and short-sighted to control spending.
There is nothing markets love more than a good dose of monetary activism, especially when they detect a hidden bailout, so it is no wonder that traders and investors reacted so positively to Mario Draghi’s bond buying plan. …Yet generally speaking these days, the more the markets like a central bank intervention, the more I worry. This is because all too often investors are trying to get central banks – and ultimately, the taxpayer – to monetise debt to protect themselves, or because they believe that there are monetary solutions to real, structural problems. I disagree on both counts: excessive debt needs to be written off, with the cost born by the creditors, not redistributed to the taxpayers of more prudent countries or inflated away. It is right that investors should be able to make a fortune if they make a correct bet – but it is equally right that they should lose their shirt when their investment goes sour. This habit of quietly enjoying the former but loudly refusing the latter is one of the main reasons why the City’s reputation is at such a low ebb.
He then explains that the ECB shouldn’t try to mask reality.
…there is a perfectly good reason why the yields of peripheral Eurozone nations have shot up over the past year. It is because the markets have finally started to price risk properly. Higher yields on Spanish or Greek debt reflect the reality of deeply troubled, structurally uncompetitive nations… The market is sending a clear and precise signal, and warning the world that there is a major problem that needs resolution; buying vast amounts of bonds to try and distort or even entirely eliminate that signal and pretend that nothing is wrong with Europe’s weaker economies would be an absurd act of delusion.
I’m not as optimistic as Allister is in this next section, largely because the supposed conditionality will lead to the kind of fiscal gimmicks and moving goal posts that we see in Greece.
…while there are many problems with Draghi’s plans, he is actually being relatively sensible. He will not help Portugal, Ireland and Greece until they are able to access bond markets; even more importantly, Spain and Italy will need to ask for European bailout fund support, and accept the ensuing conditionality, before ECB bond-buying starts. It will theoretically be unlimited in scale but Draghi only wants to “do whatever it takes” as long as politicians toe the line. Given that they won’t, and that many countries will soon be borrowing even more, the crisis will soon flare up again. The simple reality is that the Eurozone in its current form is doomed. Draghi’s plan will buy some time, and his next one even more, as will the one after that. But eventually the size of the fiscal and competitiveness crisis, combined with voter anger in both Northern and Southern countries, will overwhelm all of his attempts at papering over the cracks. It’s just a matter of time.
But I obviously agree with his conclusion. Unless European politicians decide to reduce the burden of government spending, the continent is in deep trouble.
Last but not least, the problem in Europe is not the euro. It is the welfare state. I’m not a huge fan of the single currency, but it is way down on my list of reasons that nations such as Spain, Italy, and Greece are in trouble.
P.S. America will be in the same boat at some point in the future if we don’t reform entitlements.
P.P.S. Allister is the author of this great article explaining why tax competition and tax havens are so important and valuable in the global economy.
Everyone has a cross to bear in life, some sort of burden or obligation, often self-imposed.
For some inexplicable reason, I’ve decided that one of my responsibilities is to educate a backwards and primitive people who seem impervious to common sense, simple logic, and strong principles.
As you’ve probably guessed already, I’m talking about Republicans.
I’ve specifically warned that they are economically (and politically) misguided when they focus on deficits and debt as America’s main fiscal problem.
I even created a “Bob Dole Award” in hopes of getting this point across. Simply stated, fixating on debt opens the door for higher taxes.
And does anyone think our economy would be stronger, or our fiscal position would be better, if we replaced some debt-financed spending with some spending financed by class-warfare taxes?
Notwithstanding all my educational efforts, Republicans couldn’t resist jumping up and down and making loud noises earlier this week when the national debt hit the $16 trillion mark earlier this week (a google search for “$16 trillion debt” returned more than 24 million hits).
So let’s walk through (again) why this is misguided.
First, let’s clear up some numbers that cause confusion. Republicans are complaining about something called the “gross federal debt.” This number is largely meaningless (see table 7.1 of the OMB Historical Tables if you want to look at the details).
It is the combination of a somewhat meaningful number of more than $11 trillion known as “debt held by the public,” which is a measure of how much the federal government has borrowed over time from the private sector, and a totally irrelevant number of about $4.5 trillion known as “debt held by federal government accounts.”
The latter number is simply a total of the IOUs that the government issues to itself, most notably the ones at the Social Security Trust Fund. But the “assets” in the Trust Fund at the Social Security Administration are offset by the “liabilities” at the Treasury Department. This is an empty bookkeeping gimmick, just as if you took a dollar out of your right pocket, put it in your left pocket, and left an IOU in exchange.
That being said, it is important to recognize that politicians have imposed poorly designed entitlement programs, and future spending on these programs will skyrocket far beyond current revenues. That growing gap, which is explained in this short video, is sometimes known as “unfunded liabilities.”
This number depends on a whole range of assumptions and can be measured in current dollars, constant dollars, and present value. I prefer the middle approach, which adjusts for inflation, and it’s worth noting that “unfunded liabilities” for Social Security and Medicare are more than $100 trillion.
That’s a number we should worry about, not the make-believe $4.5 trillion of IOUs that comprise part of the “gross national debt.”
Now let’s get to the most important issue. The reason we should worry about that $100 trillion number is that it is an estimate of how much the burden of spending will climb in the future. That additional spending will weaken the economy whether it is financed by borrowing or taxes.
Sort of helps to explain why entitlement reform is completely necessary if we want to keep America from a Greek-style fiscal collapse at some point in the future.
Here’s my video on the topic. In an ideal world, Republicans would not be allowed to talk about fiscal policy until they were first strapped in chairs, given a bunch of ADD medicine, and forced to watch this on automatic replay about 50 times.
Now for the all-important caveats. Yes, a nation can reach a point where debt becomes a problem. All you have to do is look at the mess in Europe to understand that point.
What I want people to realize, though, is that governments only get into that kind of mess because there’s too much spending.
Government spending is the disease. The various ways of financing that spending – taxes, borrowing, and printing money – are symptoms of the underlying disease.
And I emphasized that the fiscal problem in Europe is the size of government, not the fact that nations are having a hard time borrowing money. As explained in this video, spending is the disease and deficits are one of the symptoms.
This is also an issue in the United States, and Steve Moore of the Wall Street Journal is worried that the GOP ticket is debt-obsessed and doesn’t have sufficient enthusiasm for lower tax rates and tax reform.
Stylistically, Paul Ryan’s Republican convention speech last night was a grand slam. …But was it the growth message that supply-siders wanted to hear, or debt-clock obsession? There were clearly apocalyptic claims. “Before the math and the momentum overwhelm us all, we are going to solve this nation’s economic problems,” said Mr. Ryan in reference to the federal rea ink. “I’m going to level with you; we don’t have that much time.” …In fact, he talked about turning around the economy with “tax fairness.” Ugh, that’s an Obama term. …Larry Kudlow of CNBC and a former Reagan economist tells me, “Paul’s speech just didn’t have the growth, tax-cutting message. We didn’t even get the words tax reform. I don’t know what happened, but it worries me.” It’s a question of priorities. Are Mitt Romney and Paul Ryan signaling that they will put spending cuts ahead of pro-growth tax-rate cuts?
As a general rule, it is always good to do spending cuts (however defined). And it is always good to lower tax rates. And if you can do both at the same time, even better.
But since I have low expectations, I’ll be delighted if we “merely” manage to get entitlement reform during a Romney-Ryan Administration. That would mean some progress on the spending side and presumably reduce the risk of bad things (like a VAT!) on the revenue side.
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.
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.
Back in 2010, I posted a fascinating map from the Economist website, showing debt burdens (as a share of GDP) for nations around the world. This data showed lots of red ink, with Western Europe generally being more indebted than the United States.
In other words, our politicians to date haven’t over-spent as much as their counterparts in Europe, but it appears that – if government is left on auto-pilot – America will suffer more from excessive government than European nations in the future.
If this data is correct, the United States isn’t just in danger of becoming Greece. It’s actually in worse shape than Greece. Not just Greece, but every other European welfare state as well. That doesn’t bode well.
This doesn’t mean the long-run estimates are wrong. But if the focus is on the real problem of government spending, then it is much more apparent that the only feasible solution is to restrain the growth of government spending.
If the burden of government spending grows slower than the economy’s productive sector (i.e., Mitchell’s Golden Rule), then deficits and debt fall. To be blunt, if you cure the disease, the symptoms automatically disappear.
Which helps explain why I’m a fan of the Ryan budget, particularly his reforms to Medicare and Medicaid.
P.S. Regular readers know I’m not a fan of the OECD (for many reasons), but the economists at the Paris-based bureaucracy generally are competent at putting together good data. It goes without saying, of course, that this doesn’t justify raping taxpayers to subsidize economists.
But then Romney will do something odious and I’ll sound the warning sign with a we-don’t-need-another-big-spender-like-Bush post.
Today, it’s Obama’s turn on the chopping block. I went on Neil Cavuto’s Fox Business News program and commented on the fact that the President doesn’t have a fiscal plan.
We started by discussing the President’s failure to embrace the findings of his own Fiscal Commission and then shifted to the big-picture issue of whether the American people have become ensnared by the dependency mindset and are willing to vote for Greek-style fiscal policy.
My own personal guess is that he would impose a value-added tax if he thought it was politically feasible. Not that I’m showing any great insight. After all, Obama already has made the ridiculous statement that a VAT is “something that has worked for other countries.”
But because he’s running for reelection, he’d rather just demagogue the Ryan plan rather than show his own cards.
P.S. Even the cartoonist for the Washington Post doesn’t think the VAT is something that is working for other countries. This cartoon is a classic and definitely worth sharing. And you can enjoy other VAT cartoons here and here.
For nearly three decades Social Security produced big surpluses, collecting more in taxes from workers than it paid in benefits to retirees, disabled workers, spouses and children. The surpluses also helped mask the size of the budget deficit being generated by the rest of the federal government. Those days are over. Since 2010, Social Security has been paying out more in benefits than it collects in taxes… The projected shortfall in 2033 is $623 billion, according to the trustees’ latest report. It reaches $1 trillion in 2045 and nearly $7 trillion in 2086, the end of a 75-year period used by Social Security’s number crunchers because it covers the retirement years of just about everyone working today. Add up 75 years’ worth of shortfalls and you get an astonishing figure: $134 trillion. Adjusted for inflation, that’s $30.5 trillion in 2012 dollars, or eight times the size of this year’s entire federal budget.
My only complaint is that the story does include some analysis of the Social Security Trust Fund, even though that supposed Fund is nothing but a pile of IOUs – money that one part of the government promises to give to another part of the government.
But let’s set that aside. Another interesting tidbit from the story is this quote from one of the kleptocrats at the American Association of Retired Persons. Note that he implicitly rules out any changes other than those that enable the government to “pay the benefits we promised.” But that shouldn’t be a surprise. AARP is part of the left-wing coalition.
“I’m not suggesting we need to wait 20 years but we do have time to make changes to Social Security so that we can pay the benefits we promised,” said David Certner, AARP’s legislative policy director. “Let’s face it. Relative to a lot of other things right now, Social Security is in pretty good shape.”
But I will say that Mr. Certner is sort of correct about Social Security being in better shape than Medicare and Medicaid. But that’s like saying the guy with lung cancer who is 75 lbs overweight is in better shape than the two guys with brain tumors who are both 150 lbs overweight.
If you have to engage in fiscal triage, it would be smart to first address Medicare and Medicaid, but Social Security also needs reform. And not the kind of statist reform the folks at AARP would like to see.
By the way, you probably won’t be surprised to learn that President Obama’s approach is similar to the left-wingers at AARP. Here’s a video I narrated about his preferred policy.
It seems that the question doesn’t matter with this administration. The answer is always to impose more class-warfare tax policy.
But I have a hard time cheering their actions, since they routinely vote for corrupt politicians and also seek to mooch off the government that they don’t want to pay for.
…one region in particular has been in the spotlight: Sicily, which some fear has become “the Greece of Italy” and is at risk of defaulting on its high public debts. …an official in the Sicily branch of Italy’s leading industrialists association called for the island to be put into receivership by the central government to clean up its finances. …Sicily highlights the challenges that Mr. Monti is facing in trying to use pressure from European leaders and international markets to push Italy’s politicians to cut costs. Those expenses have ballooned after decades of a patronage system in which the state has been the primary means of employment in Sicily.
We know there’s a mess. And, to give credit where it’s due, the New York Times does discuss the bloated bureaucracy in Sicily.
…critics say Italy — and Sicily in particular — has been driven into dire financial straits not by austerity but by the rampant public spending of the past, the product of an entrenched jobs-for-votes system that helped keep Italian governments in power and Sicilians employed. Today, Sicily’s regional government has 1,800 employees — more than the British Cabinet Office — and the island employs 26,000 auxiliary forest rangers; in the vast forest lands of British Columbia, there are fewer than 1,500. Out of a population of five million people in Sicily, the state directly or indirectly employs more than 100,000 of them and pays pensions to many more. It changed its pension system eight years after the rest of Italy. (One retired politician recently won a case to keep an annual pension of 480,000 euros, about $584,000.)
Not surprisingly, the political class doesn’t want to fire any of the deadwood, which means an enormous burden on taxpayers and lots of suffering for young people.
“Of course that’s too many,” Mr. Lombardo said of the forest rangers. But he said it was difficult to cut back because state workers have job protection. “We have to wait for them to retire.” That system has come at a cost. Last month, Italy’s audit court issued a scathing report saying that Sicily had 7 billion euros, about $8.5 billion, of liabilities at the end of 2011 and showed “signs of unstoppable decline.” Sicily’s unemployment rate is 19.5 percent, twice the national average, and 38.8 percent of young people do not have jobs.
Lombardo must have spent time in Chicago
By the way, the head of the Sicilian government is a very accomplished politician. It’s not uncommon for lawmakers to go to prison after a stint in government, but it takes a special politician to then go back into “public service.”
Mr. Lombardo, who belongs to the Movement for Autonomy — which believes that Sicily should secede from the Italian state, as unlikely as that is to happen — said he would step down as agreed. (He is under investigation for Mafia ties. He denies the accusations and has not been formally charged. He was jailed on corruption charges in the early 1990s, though he was later acquitted.)
At least some residents have figured out how the political system works.
Many Sicilians, for their part, take a world-weary view of the political class. “If I steal a little, I go to jail; if I steal a lot, I advance my career,” Gioacchino De Giorgi, 34, said as he worked in a tobacco shop in downtown Palermo.
Needless to say, this story is yet another example of why bailouts are a bad idea. As I’ve explained before, governments will only make the right reforms as a final option. Bailouts, by contrast, simply give politicians more time to delay, while also making the debt bubble even bigger as reforms are postponed.
This is true, regardless of whether bailouts come from national governments, the European Commission, or international bureaucracies such as the International Monetary Fund.
And it’s true whether we’re talking about an Italian province, or an American state that also is governed by short-sighted and corrupt politicians. Like California.
Some folks say they want “austerity,” but that’s largely a code word for higher taxes. They’re fighting against the people who say they want “growth,” but that’s generally a code word for more Keynesian spending.
And then, to get me even more irritated, lots of people support bailouts because they supposedly are needed to save the euro currency.
When I ask these people why a default in, say, Greece threatens the euro, they look at me as if it’s the year 1491 and I’ve declared the earth isn’t flat.
So I’m delighted that the Wall Street Journal has published some wise observations by a leading French economist (an intellectual heir to Bastiat!), who shares my disdain for the current discussion. Here are some excerpts from Prof. Salin’s column, starting with his common-sense hypothesis.
…there is no “euro crisis.” The single currency doesn’t have to be “saved” or else explode. The present crisis is not a European monetary problem at all, but rather a debt problem in some countries—Greece, Spain and some others—that happen to be members of the euro zone. Specifically, these are public-debt problems, stemming from bad budget management by their governments. But there is no logical link between these countries’ fiscal situations and the functioning of the euro system.
Salin then looks at how the artificial link was created between the euro currency and the fiscal crisis, and he makes a very good analogy (and I think it’s good because I’ve made the same point) to a potential state-level bankruptcy in America.
The public-debt problem becomes a euro problem only insofar as governments arbitrarily decide that there must be some “European solidarity” inside the euro zone. But how does mutual participation in the same currency logically imply that spendthrift governments should get help from the others? When a state in the U.S. has a debt problem, one never hears that there is a “dollar crisis.” There is simply a problem of budget management in that state.
Because European politicians have decided to create an artificial link between national budget problems and the functioning of the euro system, they have now effectively created a “euro crisis.” To help out badly managed governments, the European Central Bank is now buying public bonds issued by these governments or supplying liquidity to support their failing banks. In so doing, the ECB is violating its own principles and introducing harmful distortions.
Last but not least, Salin warns that politicians are using the crisis as an excuse for more bad policy – sort of the European version of Mitchell’s Law, with one bad policy (excessive spending) being the precursor of additional bad policy (centralization).
Politicians now argue that “saving the euro” will require not only propping up Europe’s irresponsible governments, but also centralizing decision-making. This is now the dominant opinion of politicians in Europe, France in particular. There are a few reasons why politicians in Paris might take that view. They might see themselves being in a similar situation as Greece in the near future, so all the schemes to “save the euro” could also be helpful to them shortly. They might also be looking to shift public attention away from France’s internal problems and toward the rest of Europe instead. It’s easier to complain about what one’s neighbors are doing than to tackle problems at home. France needs drastic tax cuts and far-reaching deregulation and labor-market liberalization. Much simpler to get the media worked up about the next “euro crisis” meeting with Angela Merkel.
For all intents and purposes, Cyprus is now bankrupt, and the only question that remains to be answered is whether it will get handouts from the IMF-ECB-EC troika, handouts from Russia, or both. Here’s some of what has been reported by AP.
Cyprus’ president on Thursday defended his government’s decision to seek financial aid from the island nation’s eurozone partners while at the same time asking for a loan from Russia, insisting that the two are perfectly compatible. …Cyprus, with a population of 862,000 people, last week became the fifth country that uses the euro currency to seek a European bailout… The country is currently in talks with the so-called ‘troika’ — the body made up of officials from the European Commission, the European Central Bank and the International Monetary Fund — on how much bailout money it will need and the conditions that will come attached. Locked out of international markets because of its junk credit rating status, Cyprus is paying its bills thanks to a €2.5 billion ($3.14 billion) Russian loan that it clinched last year. But that money is expected to run out by the end of the year.
So what caused this mess? Is Cyprus merely the helpless and innocent victim of economic turmoil in nearby Greece?
That’s certainly the spin from Cypriot politicians, but the budget data shows that Cyprus is in trouble because of excessive spending. This chart, based on data from the International Monetary Fund, shows that the burden of government spending has jumped by an average of 8.3 percent annually since the mid-1990s.
My Golden Rule of fiscal policy is that government spending should grow slower than economic output. Nations that follow that rule generally enjoy good results, while nations that violate that rule inevitably get in trouble.
Interestingly, if Cypriot politicians had engaged in a very modest amount of spending restraint and limited annual budgetary increases to 3 percent, there would be a giant budget surplus today and the burden of government spending would be down to 21.4 percent of GDP, very close to the levels in the hyper-prosperous jurisdictions of Hong Kong and Singapore.
Actually, that’s not true. If the burden of government spending had grown as 3 percent instead of 8.3 percent, economic growth would have been much stronger, so GDP would have been much larger and the public sector would be an ever smaller share of economic output.
Speaking of GDP, the burden of government spending in Cyprus, measured as a share of GDP, has climbed dramatically since 1995.
A simple way to look at this data is that Cyprus used to have a Swiss-sized government and now it has a Greek-sized government. Government spending is just one of many policies that impact economic performance, but is anyone surprised that this huge increase in the size of the public sector has had a big negative impact on Cyprus?
Interestingly, if government spending had remained at 33.9 percent of GDP in Cyprus, the nation would have a big budget surplus today. Would that have required huge and savage budget cuts? Perhaps in the fantasy world of Paul Krugman, but politicians could have achieved that modest goal if they had simply limited annual spending increases to 6 percent.
But that was too “draconian” for Cypriot politicians, so they increased spending by an average of more than 8 percent each year.
What’s the moral of the story? Simply stated, the fiscal policy variable that matters most is the growth of government. Cyprus got in trouble because the burden of government grew faster than the productive sector of the economy.
Europe’s political elite doubtlessly will push for higher taxes, but that approach – at best – simply masks the symptoms in the short run and usually exacerbates the disease in the long run.
I even outlined several specific scenarios where that might occur, including giving the politicians more money in exchange for a flat tax or giving them additional revenue in exchange for real entitlement reform.
But I then pointed out that all of those options are unrealistic. And I’ve expanded on that thesis in a new article. Here’s some of what I wrote for The Blaze.
The no-tax pledge of Americans for Tax Reform generates a lot of controversy. With record levels of red ink, the political elite incessantly proclaims that all options must be “on the table.” This sounds reasonable. And when some Republicans say no tax hikes under any circumstances, there’s a lot of criticism about dogmatism. Theoretically, I agree with the elitists.
So does that make me a squish, the fiscal equivalent of Chief Justice John Roberts?
Nope, because I’m tethered to the real world. I know that there is zero chance of getting a good agreement. Once you put taxes “on the table,” any impetus for spending restraint evaporates.
But even though I’m theoretically open to a tax hike, I am a de facto opponent of tax increases for the simple reason that we will never get a good deal. We won’t get sustainable spending cuts. Not even in our dreams. We won’t get real entitlement reforms. Even if we hold our breath ‘til we turn blue. And we won’t get the “Simpson-Bowles” tax reform swap, where taxpayers give up $2 of deductions in exchange for $1 of lower tax rates. Let’s not kid ourselves. In other words, reality trumps theory. Yes, there are tax-hike deals that would be good, but they’re about as realistic as me speculating on whether I’d be willing to play for the New York Yankees, but only if they guarantee me $5 million per year.
I then point out that a budget deal inevitably would lead to bad policy – just as we saw in 1982 and 1990.
Here’s the bottom line: There is no practical way to get a good deal from either the Democrats in the Senate or the Obama Administration. Notwithstanding the good intentions of some people, any grand bargain would be a failure that leads to higher spending and more red ink, just as we saw after the 1982 and 1990 budget deals. The tax increases would not be relatively benign loophole closers. Instead, the economy would be hit by higher marginal tax rates on work, savings, investment, and entrepreneurship. And the entitlement reform would be unsustainable gimmicks rather than structural changes to fix the underlying programs. Ironically, when a columnist for the New York Times complained that Republicans were being unreasonable for opposing tax hikes, she inadvertently revealed that the only successful budget deal was the one in 1997 – the one that had no tax hikes!
The last sentence is worth some additional commentary. As I explained in a previous post, the only bipartisan budget agreement that generated a balanced budget was the 1997 pact – and that deal lowered taxes rather than increasing them.
Not because my leftist opponent grabbed more air time (mostly because the host started challenging him, which also happens periodically when I’m on Kudlow’s show), but because he gave me a giant opening to completely destroy his arguments and I failed to seize the opportunity.
I think the points I made to wrap up the debate were fine, but I would be much happier with my performance if I had pointed out this huge hole in his position.
Which explains why I’m very frustrated by the debate in Europe. On one side, you have the Keynesians advocating higher spending and on the other side you have “austerians” advocating higher taxes.*
*In theory, the “austerians” ” also advocate less spending, but you won’t be surprised to learn which option politicians select when given a choice between higher taxes and less spending.
I’m not terribly hopeful that any of my advice will be followed, so let’s close this post with some gallows humor.
But the cliff is not our biggest fiscal problem.
