Looming Republican Surrender on Spending Caps?

What’s worse, Democrats who deliberately seek to make government bigger because of their ideological belief in statism, or Republicans who sort of realize that big government is bad yet make government bigger because of incompetence?

I’m not sure, though this is a perfect example of why I often joke that Washington is divided between the Evil Party and the Stupid Party.

And the fight over spending caps is a perfect example.

President Obama and the Democrats despise this small bit of fiscal discipline, which was created as part of the 2011 Budget Control Act (BCA). They’re aggressively seeking to eviscerate the law, particularly the sequester enforcement mechanism. And since they believe in bigger government, their actions make sense.

Republicans, by contrast, claim to believe in smaller government and fiscal responsibility. So they should be in the driver’s seat on this fight. After all, the BCA is the law of the land and the spending caps – assuming they are not changed – will automatically limit overspending in Washington. In other words, the BCA fight is like the fight over reauthorizing the corrupt Export-Import Bank. Republicans can win simply by doing nothing.

Seems like a slam dunk win for taxpayers, right?

Not exactly. With apologies for mixing my sports metaphors, the Republicans are poised to fumble the ball at the one-yard line.

Which would be a very depressing development. In this interview, I explain that preserving the spending caps should be the most important goal for advocates of limited government.

And you’ll see that I also explained that fighting for good policy today is necessary if we want to avoid huge fiscal problems in the future.

But that doesn’t seem to matter very much for a lot of Republicans.

Let’s look at what other fiscal policy experts are saying about this issue.

Writing for Reason, Veronique de Rugy of the Mercatus Center explains that the key to good fiscal policy (including tax cuts) is to have effective and enforceable long-run spending restraint.

If lawmakers want big tax cuts, there will need to be commensurately greater levels of spending restraint. The difficulty, of course, is to persuade politicians to implement such spending constraints and actually stick to them in the long run.

Amen.

That’s basically the same message I shared yesterday.

President Obama, however, has threatened to veto the budget and shut down the government if Congress doesn’t agree to bust the current spending caps.

And plenty of Republicans, either because they also want to buy votes with other people’s money or because they’re scared of a shutdown fight, are willing to throw in the towel.

The battle isn’t lost, at least not yet, but it’s very discouraging that this fight even exists. Controlling discretionary spending should be the easy part.

After all, if politicians balk at the modest requirements of the BCA, what hope is there that they’ll properly address entitlements? As Veronique notes, those are the programs that are driving America’s long-run fiscal crisis.

…the only realistic way to limit spending growth to 2 or 3 percent per year is to reform the fastest-growing programs in our budget, or the so-called entitlements.

What makes this issue especially frustrating is that we know sustained spending restraint is possible.

Nations such have Switzerland have shown how spending caps produce very positive results.

But that requires some commitment for good policy by at least some people in Washington.

And that may be lacking. In a column for the Wall Street Journal, Steve Moore takes a closer look at how GOPers are poised to throw away their biggest fiscal victory of the Obama years.

Let’s start with an excerpt illustrating how the BCA and sequestration have worked.

…the Budget Control Act helped slam the brakes on Mr. Obama’s first-term spending spree. …In 2009 the federal government accounted for nearly a quarter of the American economy, 24.4%. That fell by 2014 to 20.3% of GDP.

He’s right. I’ve shared similar numbers showing how Obama’s spending binge was halted.

And that’s led to the biggest five-year reduction in the burden of government spending since the end of World War II.

But fiscal sobriety needs to be sustained. Deciding to have “just one drink” at the big spender’s bar is not a good way to stay on the wagon.

And Steve shares some bad news on this issue.

Congress and the White House are quietly negotiating a deal for the new fiscal year that would bust the spending caps that have brought down the deficit. Breaking the caps yet again—this would be the third violation in four years—is lousy policy. …the GOP is reportedly forging a compromise with Mr. Obama that would raise the caps by $70 billion to $100 billion. …What’s worse, the deal would likely raise the spending caps permanently, meaning…nearly $1 trillion…over the next decade.

By the way, there’s a reason why this sounds like déjà vu all over again. Republicans already agreed to bust the spending caps at the end of 2013.

That was an unambiguous victory for Obama.

And now it may happen again. Steven discusses the implications of this looming GOP surrender.

The mystery is why Republicans are so ready to throw away their best fiscal weapon… Liberals hate the sequester because it squeezes their favorite programs, from transit grants to Head Start. But it is the law of the land. President Obama can do nothing to circumvent the sequester—unless Republicans in Congress cave in. …Busting the spending caps will only reverse progress toward a balanced budget, fatten liberal social programs, and confirm what many tea-party voters have been shouting for years: that Republicans break their promises once elected.

For all intents and purposes, the battle over BCA spending caps is a huge test of GOP sincerity. Do they really believe in limited government, or is that just empty rhetoric they reserve for campaign speeches.

P.S. Some Republicans argue that they favor smaller government, but that the sequester is “unfair” and the spending caps are too “harsh” because the defense budget is disproportionately affected.

It’s true that the defense budget is being capped while most domestic spending (specifically entitlement programs) is left unconstrained. But that doesn’t mean the nation’s security is threatened.

Defense spending still grows under these laws and our military budget is still far bigger than the combined budgets of all possible adversaries.

For further information, read George Will’s sober analysis and also peruse some writings by Mark Steyn and Steve Chapman.

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Notwithstanding Media Coverage of Black Friday, Consumer Spending Does Not Drive Economy

By fighting for freedom in Washington, I’ve condemned myself to a life of frustration and aggravation. One of my many pet peeves is that so many people in DC believe that economic growth depends on consumer spending.

Back in the early days of this blog, I wrote the following.

Many people assume that consumer spending drives growth because it is roughly two thirds of the economy. But this puts the cart before the horse. Higher levels of consumer spending do not cause prosperity. Instead, more consumer spending is best understood as a symptom of prosperity.

So you can imagine how irritating it is for me to see news reports about how Black Friday spending will goose the economy.

This video debunks this notion, while also explaining that Keynesian economics is flawed because it misinterprets the role of consumer spending.

If you like this video, also check out this video on IRS complexity.

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Basic Economics for Financial Journalists and Other Dummies

While driving home last night, I had the miserable experience of listening to a financial journalist being interviewed about the anemic growth numbers that were just released.

I wasn’t unhappy because the interview was biased to the left. From what I could tell, both the host and the guest were straight shooters. Indeed, they spent some time speculating that the economy’s weak performance was bad news for Obama.

What irked me was the implicit Keynesian thinking in the interview. Both of them kept talking about how the economy would have been weaker in the absence of government spending, and they fretted that “austerity” in Washington could further slow the economy in the future.

This was especially frustrating for me since I’ve spent years trying to get people to understand that money doesn’t disappear if it’s not spent by government. I repeatedly explain that less government means more money left in the private sector, where it is more likely to create jobs and generate wealth.

In recent years, though, I’ve begun to realize that many people are accidentally sympathetic to the Keynesian government-spending-is-stimulus approach. They mistakenly think the theory makes sense because they look at GDP, which measures how national income is spent. They’d be much less prone to shoddy analysis if they instead focused on how national income is earned.

This should be at least somewhat intuitive, because we all understand that economic growth occurs when there is an increase in things that make up national income, such as wages, small business income, and corporate profits.

But as I listened to the interview, I began to wonder whether more people would understand if I used the example of a household.

Let’s illustrate by imagining a middle-class household with $50,000 of expenses and $50,000 of income. I’m just making up numbers, so I’m not pretending this is an “average” household, but that doesn’t matter for this analysis anyway.

Expenses                                                        Income                                  

Mortgage           $15,000                        Wages                $40,000

Utilities               $10,000                        Bank Interest       $1,000

Food                     $5,000                        Rental Income      $8,000

Taxes                  $10,000                        Dividends             $1,000

Clothing               $2,000

Health Care         $3,000

Other                   $5,000

The analogy isn’t perfect, of course, but think of this household as being the economy. In this simplified example, the household’s expenses are akin to the way the government measures GDP. It shows how income is allocated. But instead of measuring how much national income goes to categories such as consumption, investment, and government spending, we’re showing how much household income goes to things like housing, food, and utilities.

The income side of the household, as you might expect, is like the government’s national income calculations. But instead of looking at broad measures of things such wages, small business income, and corporate profits, we’re narrowing our focus to one household’s income.

Now let’s modify this example to understand why Keynesian economics doesn’t make sense. Assume that expenses suddenly jumped for our household by $5,000.

Maybe the family has moved to a bigger house. Maybe they’ve decided to eat steak every night. But since I’m a cranky libertarian, let’s assume Obama has imposed a European-style 20 percent VAT and the tax burden has increased.

Faced with this higher expense, the household – especially in the long run – will have to reduce other spending. Let’s assume that the income side has stayed the same but that household expenses now look like this.

Expenses                                                       

Mortgage           $15,000

Utilities                 $9,000        (down by $1,000)

Food                     $4,000        (down by $1,000)

Taxes                  $15,000        (up by $5,000)

Clothing               $2,000

Health Care         $3,000

Other                   $2,000        (down by $3,000)

Now let’s return to where we started and imagine how a financial journalist, applying the same approach used for GDP analysis,  would cover a news report about this household’s budget.

This journalist would tell us that the household’s total spending stayed steady thanks to a big increase in tax payments, which compensated for falling demand for utilities, food, and other spending.

From a household perspective, we instinctively recoil from this kind of sloppy analysis. Indeed, we probably are thinking, “WTF, spending for other categories – things that actually make my life better – are down because the tax burden increased!!!”

But this is exactly how we should be reacting when financial journalists (and other dummies) tell us that government outlays are helping to prop up total spending in the economy.

The moral of the story is that government is capable of redistributing how national income is spent, but it isn’t a vehicle for increasing national income. Indeed, the academic evidence clearly shows the opposite to be true.

Let’s conclude by briefly explaining how journalists and others should be looking at economic numbers. And the household analogy, once again, will be quite helpful.

It’s presumably obvious that higher income is the best thing for our hypothetical family. A new job, a raise, better investments, an increase in rental income. Any or all of these developments would be welcome because they mean higher living standards and a better life. In other words, more household spending is a natural consequence of more income.

Similarly, the best thing for the economy is more national income. More wages, higher profits, increased small business income. Any or all of these developments would be welcome because we would have more money to spend as we see fit to enjoy a better life. This higher spending would then show up in the data as higher GDP, but the key things to understand is that the increase in GDP is a natural result of more national income.

Simply stated, national income is the horse and GDP is the cart. This video elaborates on this topic, and watching it may be more enjoyable that reading my analysis.

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