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Archive for the ‘Fiscal Crisis’ Category

Europe is in deep trouble.

That’s an oversimplification, of course, since there are a handful of nations that seem to be moving in the right direction (or at least not moving rapidly in the wrong direction).

But notwithstanding those exceptions, Europe in general is suffering from economic stagnation caused by a bloated public sector. Barring dramatic change, another fiscal crisis is a virtual certainty.

A key problem is that Europe’s politicians suffer from fiscal incontinency. They can’t resist spending other people’s money, regardless of all the evidence that excessive government spending is suffocating the productive sector of the economy.

Yet some of them cling to the discredited Keynesian notion that government spending “stimulates” economic performance. Writing for the Wall Street Journal, Brian Wesbury explains why European politicians are wrong.

We need less government, not more, and yet governments are engaged in deficit spending like they did in the 1970s. It didn’t work then to boost growth, and it isn’t working now. Euro area government spending was 49.8% of GDP in 2013 versus 46.7% in 2006. In other words, euro area governments have co-opted an additional 3.1% of GDP (roughly €300 billion) compared with before the crisis—about the size of the Austrian economy. France spent 57.1% of GDP in 2013 versus 56.7% in 2009, at the peak of the crisis. This is the opposite of austerity—but the French economy hasn’t grown in more than six months. It is no wonder S&P downgraded its debt rating. Italy, at 50.6% of GDP, is spending more than the euro area average but is contracting faster.

Brian isn’t the first person to make this observation.

Constantin Gurdgiev, Fredrik Erixon, and Leonid Bershidsky also have pointed out the ever-increasing burden of government in Europe.

And I can’t count how many times I’ve also explained that Europe’s problem is too much government.

The problem with all this government spending, as Brian points out, is that politicians don’t allocate resources very intelligently. So the net result is that labor and capital are misallocated and we get less economic output.

Every economy can be divided into two parts: private and public sectors. The larger the slice taken by the government, the smaller the slice left over for the private sector, which means fewer jobs and a lower standard of living. If government were more productive than private business this wouldn’t be true, but government is not.

Let’s be thankful, by the way, that the United States isn’t as far down the wrong road as Europe.

And this is why America’s economy is doing better.

The U.S. is growing faster than Europe not because…our government is relatively smaller. Federal, state and local expenditures in the U.S. were 36.5% of GDP in 2013. This is too high, but because it is less than Europe, the U.S. has a larger and more vibrant private sector.

Ironically, even President Obama agrees that the U.S. economy is superior, though he (predictably) is incapable of putting 2 and 2 together and reaching the right conclusion.

My Cato colleague Steve Hanke (using the correct definition of austerity) also has weighed in on the topic of European fiscal policy.

Here’s some of what he wrote for the Huffington Post.

The leading political lights in Europe — Messrs. Hollande, Valls and Macron in France and Mr. Renzi in Italy – are raising a big stink about fiscal austerity. They don’t like it. And now Greece has jumped on the anti-austerity bandwagon. …But, with Greece’s public expenditures at 58.5 percent of GDP, and Italy’s and France’s at 50.6 percent and 57.1 percent of GDP, respectively — one can only wonder where all the austerity is (see the accompanying table). Government expenditures cut to the bone? You must be kidding.

Here’s Professor Hanke’s table. As you can see, the burden of government spending is far above growth-maximizing levels.

That’s a very depressing table, particularly when you realize that government used to be very small in Europe. Indeed, the welfare state basically didn’t exist prior to World War II.

P.S. Shifting to another issue, it’s not exactly a secret that I have little respect for politicians.

But some of our “leaders” are worse than others. Maryland’s outgoing governor is largely known for making his state inhospitable for investors, entrepreneurs, and small business owners.

Notwithstanding his miserable record, he thinks of himself as a potential presidential candidate. And one of his ideas is that wireless access to the Internet is a human right.

I’m not joking. Here’s what Charles Cooke wrote for National Review.

Maryland’s governor Martin O’Malley — a man so lacking in redeeming qualities that a majority in his own state hopes he doesn’t run for president – is attempting to carve out a new constituency: young people with no understanding of political philosophy. …“WiFi is a human right”? Hey, why not? Sure, Anglo-American societies have traditionally regarded “rights” as checks on the power of the state. But if we’re going to invert the most successful philosophy in American history to appease a few terminally stupid millennials in Starbucks, let’s think big

This definitely belongs in my great-moments-in-human-rights collection.

Here are previous winners of that booby prize.

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I’m a big believer that real-world examples can teach us about the benefits of good fiscal policy (think Hong Kong, Estonia, Canada, and the U.S. under Reagan and Clinton) and the costs of bad fiscal policy (France, Cyprus, Greece, and the U.S. under Bush and Obama).

Today, let’s look at another example of bad fiscal policy. And we’re going to pick on Slovenia since I’m on my way back from the annual Liberty Seminar at Lake Bohinj.

I’m motivated because one of the other lecturers at the Seminar was that country’s former Finance Minister, Janez Šušteršič.

His basic argument is that Slovenia is at risk of falling behind because of a failure to reduce the size and scope of government.

Here are some of his slides, starting with a look at how Slovenia started out richer than many other post-Soviet Bloc jurisdictions, but you can see that other nations (with better track records on reform) are catching up.

I especially like that he shows the rapid growth of the Baltic nations (hmmm….I guess Paul Krugman was wrong after all).

The message from these two slides is one that I often make, which is that faster economic growth makes a big difference over time.

You can click here to get links to a bunch of similar examples of how countries with pro-market policies out-pace other countries that chose statism.

The one disappointment in Dr. Šušteršič‘s presentation is that he looked at deficits and debt when he discussed fiscal policy.

Here’s his slide showing a big increase in red ink.

You won’t be surprised to learn that I think he should have focused on the underlying disease of too much spending rather than the symptom of red ink.

So I went to the IMF data and put together this chart.

As you can see, the reason that Slovenia has more red ink is that the burden of government spending increased so rapidly in recent years.

In the past few years, you can see that spending no longer is growing so rapidly.

I’d like to think this is a sign of new-found fiscal rectitude, but I suspect it’s simply a sign that Slovenian politicians realize they may be at the precipice of a fiscal crisis.

What Slovenia needs (what just about every nation needs) is some sort of spending cap to enforce long-run and sustainable spending restraint.

The Swiss “debt brake” is a good model to emulate.

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I’m a pessimist about public policy for two simple reasons:

1) Seeking power and votes, elected officials generally can’t resist making short-sighted and politically motivated choices that expand the burden of government.

2) Voters are susceptible to bribery, particularly over time as social capital (the work ethic, spirit of self reliance, etc) erodes and the entitlement mentality takes hold.

Actually, let me add a third reason.

The first two reasons explain why countries get into trouble. Our last reason explains why it’s oftentimes so hard to then fix the mess created by statism.

3) Once a nation adopts big government, reform is difficult because too many voters are riding in the wagon of dependency and they reflexively oppose good policy.

Or they’re riding in the party boat, but you get the idea.

Now that I’ve explained why I’m a Cassandra, let me try to be a Pollyanna.

And I’m going to be Super Pollyanna, because my task is to explain how Greece can be saved.

I’ll start by pointing out that government spending has actually been cut in recent years. And we’re talking about genuine spending cuts, not the make-believe cuts you find in Washington, which occur when spending doesn’t grow as fast as previously planned.

This chart, based on IMF data, shows that the budget increased dramatically in Greece from 1980-2009. But once the fiscal crisis started and Greek politicians no longer had the ability to finance spending with borrowed money, they had no choice but to reduce the burden of government spending.

This seems like great news, but there’s one minor problem and one major problem.

The minor problem is that there hasn’t been nearly enough structural reform of the welfare state in Greece. For long-run fiscal recovery, it’s very important to save money by reducing handouts that create dependency, while also shrinking the country’s bloated bureaucracy. By comparison, it’s less important (or perhaps even harmful) to save money by letting physical infrastructure deteriorate.

The major problem is that controlling government spending is just one piece of the puzzle. There are five major factors that determine economic performance, with experts assigning equal importance to fiscal policy, trade policy, regulatory policy, monetary policy, and rule of law.

Moreover, not only is fiscal policy just 20 percent of the puzzle, it’s also important to understand that spending is just part of that 20 percent. You also have to consider the tax burden.

And the progress Greece has made on the spending side of the budget has been offset by a bunch of destructive tax increases.

But there is a glimmer of hope because Greek politicians apparently realize that this is a problem.

Here are some excerpts from the Wall Street Journal’s coverage.

Greek Prime Minister Antonis Samaras promised tax-relief measures to help jump-start the country’s economy and boost the government’s popularity as it faces a series of political challenges in the months ahead. “The overtaxation has to end,” Mr. Samaras said Saturday during a speech.

It’s easy to see why there’s a desire to boost economic performance.

Since entering recession in 2008, Greece’s economy has shrunk by more than a quarter… This year, however, the country is expected to emerge from recession and post growth of 0.6%. But the recovery has yet to trickle down to ordinary Greeks who continue to face a jobless rate of more than 27% and higher taxes imposed during the past few years.

However, don’t get too excited. The Premier isn’t talking about sweeping reforms.

Instead, it appears that the proposed changes will be very minor.

In his remarks, the Greek premier announced a number of tax changes, including a 30% reduction in the levy on home heating oil and amendments to a new unified property tax that has been so far marred by errors and miscalculations in implementation.

Geesh, talk about rearranging the deck chairs on the Titanic.

Indeed, at least one of the tax cuts may be designed to bring in more money for the government. The New York Times, for instance, reports that the energy tax didn’t generate any extra tax revenue.

That levy, which was introduced in 2012, raised the tax on heating oil 450 percent. But it has failed to bring in additional revenue and has led to environmental damage as Greeks turned to burning wood for heat.

I guess it’s progress that both the Greek government and the New York Times are acknowledging the Laffer Curve, but this is a perfect example of why it’s important to be on the growth-maximizing point of the curve rather than the revenue-maximizing point.

So why am I expressing a tiny sliver of optimism when the Greek government’s tax agenda is so timid?

Well, there’s at least some hope of bigger and more pro-growth reforms.

He also announced a reduction to a so-called solidarity tax on income, the size of which is to be determined when the state budget for 2015 is drafted in October. The changes would be part of a “road map” for lowering taxation with cuts to the property tax, income tax and corporate tax to come later, he said. “Overtaxation may have been necessary, but now it must stop,” he said.

And the Greek press is reporting further details indicating that the government wants to reduce marginal tax rates

Samaras said that it his ultimate aim to reduce the top income tax rate to 32 percent and for business to pay no more than 15 percent.

If these policies actually took place, then I suspect Greece’s economy would enjoy robust growth.

Particularly if policy makers also dealt with the major problem of excessive regulation (see here and here to get a flavor of the awful nature of red tape in Greece).

In other words, any nation can prosper if good policy is adopted.

Including Greece, though I must admit in closing that I suspect that there’s a less-than-15-percent chance that my optimistic scenario will materialize. And if you read this Mark Steyn column, you’ll understand why the pessimistic scenario is much more likely.

P.S. Click here and here for two very funny (or sad) cartoons about Obama and Greece. And here’s another cartoon about Greece that’s worth sharing.

P.P.S. Click here and here for some amusing Greek policy humor.

P.P.P.S. The IMF also has admitted that Greece is on the wrong side of the Laffer Curve.

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Remember when Paul Krugman warned that there was a plot against France? He asserted that critics wanted to undermine the great success of France’s social model.

I agreed with Krugman, at least in the limited sense that there is a plot against France. But I explained that the conspiracy to hurt the nation was being led by French politicians.

Simply stated, my view has been that the French political elite have been taxing the nation into stagnation and decline and there is every reason to think that the nation is heading toward a severe self-inflicted fiscal crisis.

But it turns out I may have been too optimistic. Let’s look at some updates from Krugmantopia.

We’ll start with a report from the Financial Times, which captures the nation’s sense of despair.

…if the country’s embattled socialist president was hoping for some respite from what has been a testing year, he can probably think again. … the French economy barely expanded during the second quarter of this year after stagnating in the first. …the result will make it all but impossible to achieve the government’s growth forecast for 2014 of 1 per cent… Bruno Cavalier, chief economist at Oddo & Cie, the Paris-based bank, says one reason is the huge constraint on disposable income posed by France’s tax burden, which has risen from 41 per cent of GDP in 2009 to 45.7 per cent last year – one of the highest in the eurozone.

The government has responded by rearranging the deck chairs on the political Titanic.

French President Francois Hollande dissolved the government on Monday after open feuding among his Cabinet over the country’s stagnant economy. …France has had effectively no economic growth this year, unemployment is hovering around 10 percent and Hollande’s approval ratings are sunk in the teens. …Hollande’s promises to cut taxes and make it easier for businesses to open and operate have stalled, in large part because of the divisions among his Socialist party.

For what it’s worth, Hollande’s commitment to tax cuts and deregulation is about as sincere and genuine as my support for the Florida Gators.

After all, he’s the guy who imposed a new top tax rate of 75 percent (which he said was “patriotic”)

And that’s just the personal income tax. When you add other taxes to the mix, you get a system that is so onerous that more than 8,000 households paid more than 100 percent of their income to the French government!

No wonder successful people are escaping to other nations.

By the way, if you’re wondering why Hollande is appointing new people to his government, it’s because some of his ministers were complaining that so-called austerity was inhibiting Keynesian spending policies that would make government even bigger!

Austerity measures being pursued by France and elsewhere in the euro zone are quashing growth, FrenchEconomy Minister Arnaud Montebourg was quoted saying on Saturday… The outspoken minister, a fierce critic of budget austerity, is known for frequent attacks on big business and the European Commission, which he accuses of strangling economic recovery with its prioritization of deficit reduction. …While not as strident as the comments by Montebourg, French Finance Minister Michel Sapin similarly argued for moderated deficit reduction in an interview published in Italian newspaper La Repubblica. “The euro zone is at risk of getting stuck in a spiral of weak or negative growth. We absolutely must slow down the rate of deficit reduction,” Sapin was quoted as saying.

In other words, the French policy debate is between the far left and the crazy left.

Which is why this dour assessment from across the English Channel probably understates the depth of the problem.

Since Francois Hollande was elected President in 2012, French GDP per capita has fallen. Its economy is expected to grow by just 0.7 per cent this year. …the country now looks set for stagnation – with its unemployment rate entrenched above 10 per cent (and youth unemployment double that). …the problems are obvious. The French government accounts for a massive 57.1 per cent of the economy in state spending and transfers. The tax burden is so high at 57 per cent for French employees (the sum of income, payroll taxes, VAT, and social security contributions as a proportion of the gross employment cost)… The World Economic Forum says that France is near the worst performer on a host of measures: positioned 130 out of 148 countries for its regulatory burden, 134 for the tax rates on profits, 135 on cooperation in labour-employer relations, and 144 on hiring and firing practices. …No wonder investors have voted with their wallets. FDI into France is estimated to have fallen by 95 per cent in the last decade.

Wow. No wonder the French people are so glum about the economy, as reported by the EU Observer.

…in France, the eurozone’s second biggest economy, eight percent felt the country’s economy was good. …Only 34 percent feel the jobs crisis has peaked compared with 60 percent who are bracing themselves for a darker economic future.

Which raises a good question. If the French people are so pessimistic about the future, why do they keep electing socialists?!?

Particularly when they tell pollsters they support smaller government!

Last but not least, we have a story from the New York Times about the mind-boggling regulation and protectionism that , mostly because it illustrates the pervasive statism that is strangling France.

Alexandre Chartier and Benjamin Gaignault work off Apple computers and have no intention of ever using the DVD player tucked in the corner of their airy office. But French regulations demand that all driving schools have one, so they got one. Mr. Chartier, 28, and his partner, Mr. Gaignault, 25, are trying to break into the driving school business here… But they are not having an easy time. The other driving schools have sued them, saying their innovations break the rules. …their struggle highlights how the myriad rules governing driving schools — and 36 other highly regulated professions — stifle competition and inflate prices in France.

And what are these rules and regulations, other than the bizarre requirement to own a DVD player?

“The system is absurd,” said Mr. Koenig, who was a speechwriter for Christine Lagarde when she was the French finance minister. …he has been campaigning for changes, including calling for an overhaul of the written test, which he says goes far beyond making sure that a person knows the rules of the road. Instead, he said, it seems intended to trip students up with ridiculous questions, such as: If you run headlong into a wall, would you be safer if you were in a tank or in a car? (The answer: a car, because it has air bags.) …Some studies have concluded that the French are probably paying 20 percent more than they should for the services they get from regulated professions, which include notaries, lawyers, bailiffs, ambulance drivers, court clerks, driving instructors and more. …Francis Kramarz, an economist who has studied the French licensing system, says that barriers to getting a license are so high that about one million French people, who should have licenses, have never been able to get them. …Mr. Kramarz said that it often costs 3,000 euros, or about $3,900, to get a license. But others said the average was closer to 1,500 to 2,000 euros.

Gee, isn’t big government wonderful!

The statists say it helps the less fortunate, but it seems the poor are the ones most hurt by regulations that push the cost of getting a license to $2,000 or above.

P.S. In an uncharacteristic expression of mercy, President Hollande has announced that he wants to limit the fiscal burden so that no taxpayer has to surrender more than 80 percent  of their income to the government.

P.P.S. No wonder Obama will never make America as bad as France, regardless of how hard he tries.

P.P.P.S. Here’s the best-ever cartoon about French economic policy, though this cartoon deserves honorable mention.

P.P.P.P.S. Even the establishment, as indicated by stories in Newsweek and the New York Times (as well as The Economist and the BBC), is noticing that the French economy is dismal.

P.P.P.P.P.S. No matter how much I mock France, there are places in Europe with even worse economic policy.

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It’s remarkable to read that European politicians are agitating to spend more money, supposedly to make up for “spending cuts” and austerity.

To put it mildly, their Keynesian-based arguments reflect a reality-optional understanding of recent fiscal policy on the other side of the Atlantic.

Here’s some of what Leonid Bershidsky wrote for Bloomberg.

Just as France’s and Italy’s poor economic results prompt the leaders of the euro area’s second and third biggest economies to step up their fight against fiscal austerity, it might be appropriate to ask whether they even know what that is.

An excellent question. As I’ve already explained, austerity is a catch-all phrase that includes bad policy (higher taxes) and good policy (spending restraint).

But with a few notable exceptions, European nations have been choosing the wrong kind of austerity (even though Paul Krugman doesn’t seem to know the difference).

As a result, the real problem of bloated government keeps getting worse.

Government spending in the European Union, and in the euro zone in particular, is now significantly higher than before the 2008 financial crisis. …Among the 28 EU members, public spending reached 49 percent of gross domestic product in 2013, 3.5 percentage points more than in 2007.

Here’s a chart showing how the burden of government spending has become more onerous since 2007.

As you can see, all the big nations of Western Europe have moved in the wrong direction.

Only a small handful of countries in Eastern Europe that have trimmed the size of the public sector.

Bershidsky does explain that the numbers today are slightly better than they were at the peak of the economic downturn, though not because of genuine fiscal restraint.

The spending-to-GDP-ratio first ballooned by 2009, exceeding 50 percent for the EU as a whole, and then shrank a little… That, however, was not the result of government’s austerity efforts: Rather, the spending didn’t go down as much as the economies collapsed, and then didn’t grow in line with the modest rebound.

Here are some examples he shared.

I suppose France deserves a special shout out for managing to expand the size of government between 2009 and 2013. That’s what you call real commitment to statism!

The article also cites an example that is both amusing and tragic, at least in the sense that there’s no genuine seriousness about reforming hte public sector.

Even when spending cuts are made…, the whole public spending system’s glaring inadequacy is not affected. …The ushers at the Italian Parliament, whose job is to carry messages in their imposing gold-braided uniforms, made $181,590 a year by the time they retired, but will only make as much as $140,000 after Renzi’s courageous cut. If you wonder what on earth could be wrong with getting rid of them altogether and just using e-mail, you just don’t get European public expenditure.

I particularly embrace Bershidsky’s conclusion.

There is no rational justification for European governments to insist on higher spending levels than in 2007. The post-crisis years have shown that in Italy, and in the EU was a whole, increased reliance on government spending drives up sovereign debt but doesn’t result in commensurate growth. The idea of a fiscal multiplier of more than one — every euro spent by the government coming back as a euro plus change in growth — obviously has not worked. In fact, increased government interference in the economy, in the form of higher borrowing and spending as well as increased regulation, have led to the shrinking of private credit.  …Unreformed government spending is a hindrance, not a catalyst for growth.

Amen.

Politicians will never want to hear this message, but government spending undermines economic performance by diverting resources from the the economy’s productive sector.

Here’s my video on the theoretical evidence against government spending.

And here’s the video looking at the empirical evidence against excessive spending.

P.S. Other Europeans who have correctly analyzed Europe’s spending problem include Constantin Gurdgiev and Fredrik Erixon.

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With all the controversy over the failed and costly Obamacare program, it’s understandable that other entitlements aren’t getting much attention.

But that doesn’t mean there aren’t serious problems with Medicaid, Medicare, and Social Security.

Indeed, the annual Social Security Trustees Report was released a few days ago and the updated numbers for the government-run retirement program are rather sobering.

Thanks in part to sloppy journalism, many people only vaguely realize that Social Security is actuarially unsound.

In reality, the level of projected red ink is shocking. If you look at the report’s annual projections and then adjust them for inflation (so we get an idea of the size of the problem based on the value of today’s dollars), we can put together a very depressing chart.

How depressing is this chart? Well, cumulative deficits over the next 75 years will total an astounding $40 trillion. And keep in mind these are inflation-adjusted numbers. In nominal dollars, total red ink will be far more than $150 trillion.

That’s a lot of money even by Washington standards.

Just as worrisome, the trend is in the wrong direction. Last year, the cumulative inflation-adjusted shortfall was $36 trillion. The year before, the total amount of red ink was $30 trillion. And so on.

But regular readers know I’m not fixated on deficits and debt. I’m much more worried about the underlying problem of too much spending. So let’s look at the annual data showing how much payroll tax will be generated by Social Security and how much money will be paid out to beneficiaries.

As you can see, the problem is not inadequate tax revenue. Indeed, revenues will climb to record levels. The problem is that spending is projected to increase at an even faster rate.

Once again, don’t forget that these are inflation-adjusted numbers. In nominal dollars, the numbers are far bigger!

Why is the program becoming an ever-larger fiscal burden? The answer boils down to demographics. Simply stated, we will have more and more old people and fewer and fewer younger workers.

So if we do nothing, we’ll be Greece in 20 or 30 years.

That’s not a happy thought, so let’s close on a humorous note. Here’s a joke about how Social Security works, and you can enjoy some Social Security-themed cartoons here, here, and here.

P.S. I’m confident that few people will be surprised to learn that Obama’s supposed solution to this mess involves a huge tax increase.

P.P.S. The real solution is personal retirement accounts. I think Australia is the best role model, but Chile also is a big success.

P.P.S. The good news is that the American people are quite sympathetic to personal retirement accounts.

P.P.P.S. Statists try to scare people by claiming private investments are too risky, but one of my Cato colleagues showed that workers would be better off even if they retired after a stock market crash.

P.P.P.P.S. By the way, Social Security is a really bad deal for blacks and other minorities with lower-than-average life expectancies.

P.P.P.P.P.S. In the interests of fairness, I’ll admit the biggest weakness in the argument for personal accounts is that we might not be able to stop politicians from confiscating the money at some point in the future.

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I had a very bad lunch today.

But not because of what I ate. My lunch was unpleasant because I moderated a noontime panel on Capitol Hill featuring Senator Ron Johnson of Wisconsin and my Cato colleague Chris Edwards.

And I should hasten to add that they were splendid company. The unpleasant part of the lunch was the information they shared.

The Senator, in particular, looked at budgetary projections over the next 30 years and basically confirmed for the audience that an ever-expanding burden of federal spending is going to lead to a fiscal crisis.

To be blunt, he showed numbers that basically matched up with this Henry Payne cartoon.

Here’s a chart from his presentation. It shows the average burden of spending in past years, compared to various projections of how much bigger government will be – on average – over the next three decades.

The Senator warned that the most unfavorable projection (i.e., “CBO ALT FISC”) was also the most realistic one. In other words, federal spending will consume a much larger share of economic output over the next three decades than it has over the past two decades.

But our fiscal outlook is actually even worse than what you see in his slide.

The Senator’s numbers are based on average spending levels over the 2015-2044 period. That’s very useful – and sobering – data, but if you look at the annual numbers, you’ll see that the trendline gives us additional reasons to worry.

More specifically, spending for the major entitlement programs (Social Security and Medicare, as well as Medicaid) is closely tied to the aging population. So as more and more baby boomers retire over the next couple of decades, spending on these programs will become more burdensome.

In other words, our fiscal problem will be much larger in 2040 than it will be in 2020.

Here are the long-run numbers from the Congressional Budget Office. The blue line is federal spending on various programs and the pink line is total spending (i.e., programmatic spending plus interest payments). And keep in mind that these numbers don’t include state and local government spending, which presumably will chew up another 15 percent of our economic output!

In other words, America will become Greece.

And don’t delude yourself into thinking that CBO must be wrong. I’m not a big fan of the Congressional Budget Office (particularly CBO’s economic analysis), but these numbers are driven by demographics.

Moreover, CBO’s grim outlook is matched by similarly dismal numbers from the IMF, BIS, and OECD.

By the way, CBO doesn’t do projections once federal government debt exceeds 250 percent of GDP, so the gray-colored trendline beginning about 2048 is not an official projections. It’s merely an estimate of the total spending burden assuming that the federal budget is left on autopilot.

Of course, we’ll never reach that level. We will suffer a fiscal crisis before that point. But when it happens to us, the IMF won’t be there to bail us out for the simple reason that the IMF’s credibility is based on the backing of American taxpayers.

And we’ll already have been bled dry!

So unless we find some very rich Martians (who are also stupid enough to bail out profligate governments), it won’t be a pretty situation. I’m not sure we’ll have riots, such as the ones that have taken place in Europe, but there will be plenty of suffering.

Fortunately, there is a solution. All we need is a modest bit of fiscal restraint so that government grows slower than the private sector. That would completely reverse Senator Johnson’s dismal long-run numbers.

And some countries have shown that multi-year periods of fiscal restraint are possible.

The real question, though, is whether politicians in America would be willing to adopt the entitlement reforms that are needed to control the long-run growth of spending.

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