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Archive for the ‘Government Spending’ Category

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 want to challenge supporters of intervention and big government. Here are two simple questions. I’ll be happy if I can get a semi-reasonable answer to either of them.

1. Can you name a nation that became rich with statist policies?

Before you say Sweden, or even France, note that I asked you to name a nation that became rich during a period when it followed policies of interventionism and big government. Countries in Western Europe became rich during the 1800s and early 1900s when government was very small. Indeed, government spending consumed only about 10 percent of economic output in Western Europe prior to World War I and there was almost no redistribution. That’s more libertarian than what you find today in places such as Hong Kong and Singapore.

Speaking of which, what I’m really asking my leftist friends is that they give me the left-wing versions of Hong Kong and Singapore. These jurisdictions were relatively impoverished at the end of World War II, but they are now both very rich by global standards. And libertarians and other advocates of small government and free markets can make a very strong case that good policy played a role in their amazing rise to prosperity.

So where’s the role model for statists? What nation can they put forth as a successful example?

I won’t hold my breath waiting for an accurate answer.

Now for the other part of the challenge.

2. Can you name a nation that with interventionism and big government that is out-performing a similar nation with free markets and small government?

Before you embarrass yourself by asserting that, say, Denmark is richer than Paraguay because of statism, you need to look at the data. Denmark has a bigger welfare state than Paraguay, but it’s much more pro-market in other respects. Indeed, it is ranked #14 in the Economic Freedom of the World, compared to #89 for Paraguay. You’d be more clever to ask why, for example, #42 Belgium is richer than #6 Mauritius.

But this is why I asked for a comparison of similar nations. In other words, find two countries that are, or were, roughly equal in terms of demographics, economic development, resource endowments, and other factors. And then I want an example of a nation with statist policy that has out-performed a nation that instead chose small government and free markets. Or the jurisdictions don’t even need to be that similar. Just show me a statist nation that grows faster, over a meaningful period of time, than a pro-market jurisdiction.

From a libertarian perspective, I can cite lots of examples, such as Chile vs. Argentina vs. Venezuela. Or North Korea vs. South Korea. Or Ukraine vs. Poland. Or Hong Kong vs. Argentina. Or Singapore vs. Jamaica. Or the United States vs. Hong Kong and Singapore. Or even Sweden vs. Greece. I could continue, but I think you get the point.

I will patiently wait for my left-wing friends to provide examples that support their perspective, but cobwebs will form before they fulfill my challenge.

In the meantime, here’s a video that explains the simple recipe that countries should follow if they want to enjoy growth and prosperity.

You’ll notice that the video heavily borrows from Economic Freedom of the World.

That’s no surprise. There’s no better source for making apples-to-apples comparisons to see whether countries are following good policy.

The bad news is that the United States has taken a dive in the wrong direction in these rankings.

When Bill Clinton left office, the United States had the world’s 3rd-freest economy. Today, thanks to years of statism under both Bush and Obama, we’ve dropped to #17.

This Lisa Benson cartoon is a very painful illustration of what’s happening.

America is copying the nations that are in deep trouble because of excessive government.

Which is the same message you find in this Glenn Foden cartoon and this Michael Ramirez cartoon.

But maybe some leftist can answer one or both of the questions above and we can stop worrying about the ever-expanding welfare state.

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It’s difficult to promote good economic policy when some policy makers have a deeply flawed grasp of history.

This is why I’ve tried to educate people, for instance, that government intervention bears the blame for the 2008 financial crisis, not capitalism or deregulation.

Going back in time, I’ve also explained the truth about “sweatshops” and “robber barons.”

But one of the biggest challenges is correcting the mythology that capitalism caused the Great Depression and that government pulled the economy out of its tailspin.

To help correct the record, I’ve shared a superb video from the Center for Freedom and Prosperity that discusses the failed statist policies of both Hoover and Roosevelt.

Now, to augment that analysis, we have a video from Learn Liberty. Narrated by Professor Stephen Davies, it punctures several of the myths about government policy in the 1930s.

Professors Davies is right on the mark in every case.

And I’m happy to pile on with additional data and evidence.

Myth #1: Herbert Hoover was a laissez-faire President – Hoover was a protectionist. He was an interventionist. He raised tax rates dramatically. And, as I had to explain when correcting Andrew Sullivan, he was a big spender. Heck, FDR’s people privately admitted that their interventionist policies were simply more of the same since Hoover already got the ball rolling in the wrong direction. Indeed, here’s another video on the Great Depression and it specifically explains how Hoover was a big-government interventionist.

Myth #2: The New Deal ended the depression – This is a remarkable bit of mythology since the economy never recovered lost output during the 1930s and unemployment remained at double-digit levels. Simply stated, FDR kept hammering the economy with interventionist policies and more fiscal burdens, thwarting the natural efficiency of markets.

Myth #3: World War II ended the depression – I have a slightly different perspective than Professor Davies. He’s right that wars destroy wealth and that private output suffers as government vacuums up resources for the military. But most people define economic downturns by what happens to overall output and employment. By that standard, it’s reasonable to think that WWII ended the depression. That’s why I think the key lesson is that private growth rebounded after World War II ended and government shrank, when all the Keynesians were predicting doom.

By the way, Reagan understood this important bit of knowledge about post-WWII economic history. And if you want more evidence about how you can rejuvenate an economy by reducing the fiscal burden of government, check out what happened in the early 1920s.

P.S. If you want to see an economically illiterate President in action, watch this video and you’ll understand why I think Obama will never be as bad as FDR.

P.P.S. Since we’re looking at the economic history of the 1930s, I strongly urge you to watch the Hayek v Keynes rap videos, both Part I and Part II. This satirical commercial for Keynesian Christmas carols also is very well done.

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I’m very worried about the burden of government spending.

Moreover, I’m quite concerned that poorly designed entitlement programs will lead to fiscal disaster.

And I’m especially irked that Obama made the problem worse by ramming through yet another misguided and costly health care entitlement.

Given this background, you can imagine that I was very interested (and depressed) to see that Veronique de Rugy of the Mercatus Center put together some very important charts and analysis based on new fiscal policy projections.

After crunching the new numbers from CBO, here’s her bottom line conclusion.

…data from the Congressional Budget Office’s (CBO) recently released update to its Budget and Economic Outlook to show the trends and components of projected revenue and outlay increases. …growing entitlement obligations and net interest payments are projected to push outlays (spending) to grow faster than revenues over much of the next decade.

She also produced a chart showing the ever-rising burden of both taxes and spending. Pay close attention to how the numbers get worse at a rapid rate over the next 10 years.

There are two important takeaways from this data.

First, it should be abundantly clear that Washington is not suffering from inadequate tax revenue. Receipts are projected to rise in nominal dollars, in inflation-adjusted dollars, and as a share of GDP.

In other words, America’s long-run fiscal problems are solely a result of a rising burden of government spending.

Second, on the topic of government spending, it’s important to understand that the problem is overwhelmingly caused by entitlement programs. Social Security is part of the problem, but the real issue is government-run healthcare.

The President claimed Obamacare would “bend the cost curve.” But he wasn’t truthful since the White House implied the legislation would bend the curve down rather than up.

Here’s a second chart showing the breakdown of various spending categories.

As you can see, the problem is entitlements. And the healthcare entitlements deserve the lion’s share of the blame.

If this chart isn’t sufficiently depressing, then keep in mind that the numbers get even worse after 2024.

Simply states, the United States is doomed to become another Greece in the absence of genuine entitlement reform.

But let’s focus just on the next 10 years. Ms. de Rugy adds some detail.

…CBO projects three large budget categories—major health care programs (consisting of Medicare, Medicaid, the Children’s Health Insurance Program, and subsidies for health insurance), Social Security, and net interest payments on the debt—will account for 85 percent of the total increase in outlays from 2014 to 2024. Total outlays are projected to increase from roughly $3.5 trillion in 2014 to $5.8 trillion in 2024, for a total increase of $2.3 trillion. Major health care programs are projected to grow by $816 billion, which accounts for 32 percent of the total. Social Security spending will grow by $654.9 billion over the next decade, which constitutes 28 percent of the total increase in outlays.

Let’s close, though, with some good news.

The numbers in the previous charts are all based on what happens if government policy is left on autopilot.

But what happens if politicians impose a modest bit of spending restraint?

According to the latest CBO forecast, inflation is supposed to average almost 2 percent over the next 10 years. So if some sort of spending cap is imposed and outlays “only” grow by a commensurate amount, it turns out that there’s a remarkably quick change in America’s fiscal profile.

As seen in this chart, there’s a budget surplus by 2019. And more important, government spending by 2024 is about $1.5 trillion lower than it would be with the budget left on autopilot.

Here’s a video from a few years ago. The numbers are out of date, but the underlying analysis is still completely appropriate. Simply stated, it’s very easy to balance the budget if politicians simply follow the Golden Rule of spending restraint.

P.S. Since this was a somewhat depressing topic, let’s close with some humor.

A few years ago, I shared a satirical application form for bailout money from Uncle Sam. Well, the New Yorker has an application quiz for Syrian rebels seeking American dollars.

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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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Michael Strain of the American Enterprise Institute looks at the topic of infrastructure spending and I’m left with mixed feelings.

Some of what he writes is very good.

Yes, the claims of an “infrastructure crisis” by President Obama, many liberals…are exaggerated. …yes, existing laws and regulations turn infrastructure projects into boondoggles that take an order of magnitude longer to complete than necessary and cost more than they should.

Amen, particularly with regard to the absurd notion that America is suffering some sort of crisis. The International Institute for Management Development in Switzerland, publisher of the World Competitiveness Yearbook, puts the United States in first place when ranking nations on the quality of infrastructure.

Moreover, the just-released Global Competitiveness Report from the World Economic Forum puts the United States in 12th place for infrastructure, which also is a rather high score (if you want to know where the United States does lag, we’re in 73rd place for wastefulness of government spending, 82nd place for burden of government regulation, and 102nd place for the total tax rate on profits).

And I also agree with his second point about infrastructure programs being very vulnerable to waste (see here and here for jaw-dropping examples).

But I’m nervous that he nonetheless wants to a new program of infrastructure investment.

…conservatives should put that skepticism aside and proceed — as always, with apprehension and great prudence — with a program of infrastructure investment.

Though maybe this isn’t a bad idea. After all, he specifically says that the new government spending would be based on what generates a good rate of return.

We shouldn’t follow the left’s approach to infrastructure stimulus, calculating the number of jobs we’d like to create. …a conservative approach to infrastructure would begin with a question: What are some projects that we actually need to fund? We all know by now that “shovel ready” projects are rare. So we should take some time to actually figure out which projects offer the highest value to society.

Sounds like he’s wised up since he wrote in favor of Keynesian “stimulus” earlier this year.

Unfortunately, later in his most recent article, he does use failed Keynesian theory to justify his call for more infrastructure spending.

A multi-year program will help growth and employment over the next few years, when the economy will probably still need a boost.

But let’s set that aside. If there are sound economic reasons to build a road, I’m not going to be opposed simply because Keynesians support the spending for the wrong reason.

Indeed, I don’t even necessarily object that he entitled his article, “How the government can spend billions of dollars on a new policy and still win conservative support.”

My one real problem with Strain’s column is that he wants Washington to be involved. He specifically refers to:

…the federal government’s share of the money to pay for these infrastructure projects.

Sigh.

We should be eliminating the Department of Transportation, not giving it more money to waste. That’s the answer I give when some people want a higher federal gas tax to fund more transportation spending. And it’s the answer I give when others whine about a supposed deficit in the federal highway trust fund.

The answer is federalism, not more centralization.

Want some very timely evidence in support of my position? Here are some excerpts from a new Wall Street Journal report on how infrastructure programs are ridiculously wasteful.

The most expensive train station in the U.S. is taking shape at the site of the former World Trade Center…the terminal connecting New Jersey with downtown Manhattan has turned into a public-works embarrassment. …How could such a high-profile project fall eight years behind schedule and at least $2 billion over budget? An analysis of federal oversight reports viewed by The Wall Street Journal and interviews with current and former officials show a project sunk in a morass of politics and government. …When completed in 2015, the station is on track to cost between $3.7 and $4 billion, more than double its original budget of $1.7 billion to $2 billion. …“the station is a national symbol for government waste…,” Mr. LaVorgna said.

So why am I citing a boondoggle project in New York City when I want to disagree with Strain’s call for more federal spending?

Because thanks to existing federal handouts, I’m paying for a big chunk of it!

…the Federal Transit Administration…is funding $2.87 billion of the train station project.

And when Uncle Sam is paying part of the tab, state and local politicians are more than happy to squander money in hopes of memorializing themselves.

The terminal’s delays and cost overruns were “certainly unfortunate,” said Mr. Pataki, a driving force in the early years of the World Trade Center redevelopment. “But I think 50 years from now, people are going to say, ‘Wow, they did it the right way.'”

But let’s ignore headline-seeking and glory-hunting politicians. What we should care about it getting good value when the government spends our money.

My point is that we’re more likely to get acceptable results (not great results since I realize that waste isn’t limited to Washington) when state and local governments are raising and spending their own money.

When other people pick up the tab, by contrast, you get absurd examples of waste.

P.S. I also heartily recommend this National Review column on getting the federal government out of the infrastructure business.

P.P.S. And don’t forget that the private sector should play a bigger role in building and operating roads.

P.P.P.S. I’m in Mexico City, having just spoken to the Society of Trust and Estate Professionals on the latest developments in the campaign by high-tax nations to cripple tax competition.

They had a nice gala dinner last night, which was the favorite part of the trip for the Princess of the Levant.

photo1

Since I’m a policy dork, I was much more enthusiastic about rallying opposition to bad policies such as FATCA and a global network of tax police.

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In April of 2013, I introduced a Moocher Hall of Fame to “celebrate” some very odious examples of welfare dependency.

Since that time, I keep thinking that it’s time to do something similar for government bureaucrats. This compilation from last December would be a good place to start, though I’d have to figure out whether to have group memberships so that we could include the bureaucrats at the Patent and Trademark Office who get paid to watch TV, as well as the paper pushers at the Department of Veterans Affairs who got big bonuses after creating secret waiting lists that led to the death of former soldiers.

But if we’re creating a Bureaucrat Hall of Fame, I won’t want to discriminate against foreigners.

The U.K.-based Telegraph reports, for instance, that an unnamed doctor from Italy is a very worthy candidate for this award.

The notorious inefficiencies of Italy’s state sector were laid bare on Thursday as news emerged of a Sicilian doctor who has done just 15 days’ work in the past nine years.

How has he “achieved” this degree of non-work?

…the doctor disappeared off on a university training course, reportedly paid for by taxpayers’ money, when he started work in 2005. Returning to work on October 31, 2008, the doctor immediately asked for, and obtained, paid family leave until May the following year. Then he worked 15 days at the hospital before calling off sick until July 2009. Recovered from illness, the doctor obtained a place on another university training course, once again reportedly swapping his wage for payment from the state university, which lasted until June this year, said wire agency ANSA. The doctor is now allegedly planning more time off to obtain a doctorate which will finish in December 2016.

By the way, our lazy doctor has lots of company. Indeed, Sicily sounds like the California of Italy.

The problem is pronounced in Sicily, where an army of around 144,000 regional staff – both permanent and temporary – includes 26,000 forestry workers, more than in British Columbia in Canada. Around 7,000 Sicilians have been given government jobs teaching work skills to Sicilians without jobs.

With that amount of waste and featherbedding, no wonder Italian taxpayers are beginning to revolt.

Here’s a specific example that boggles the mind.

Red tape on the island has also created surreal working weeks for those employed by the local government. In March, a vet in Trapani complained that the work he was contracted to carry out for the local authority had been spread over a such a long period he was required to do just one minute’s work every week. “Once a week I go to the office and stamp my pass,” said Manuel Bongiorno. “I walk in, wait for a minute to go by, then stamp the pass again. It’s been going on for months,” he added.

I don’t know if “vet” means he’s an animal doctor or a former soldier, but he doesn’t qualify for membership in the Bureaucrat Hall of Fame because he apparently wants to do some work.

That’s preposterous, but what would you expect in a nation where government is so incompetent that the wrong people are appointed to high-level jobs that shouldn’t even exist.

So you can see why I don’t really care which party rules Italy. The names may change at the top, but government always comes out ahead.

Though a New York Times columnist actually wrote that America should become more like Italy. And he wasn’t being satirical. At least not on purpose.

P.S. The U.K. government has raised its terror threat level from “substantial” to “severe.” I realize this is a serious issue, but I couldn’t help but think about the humorous version of European threat levels.

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