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Posts Tagged ‘Debt’

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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Libertarians tend to like – or at least have a grudging respect for – the underground economy.

For instance, even if we’re personally very straight-laced, we don’t like government prohibitions against gambling, drugs, and prostitution. This is why we’re not upset when these things happen in spite of the laws enacted by the political class.

But this isn’t just about victimless crimes. We also dislike high taxes, so you won’t find libertarians shedding many tears when we read about tax avoidance and tax evasion in nations (such as France and Greece) with punitive tax systems.

Politicians tend to have a different perspective. They generally get very upset if we’re not following their societal diktats and acquiescing to their fiscal demands.

But now we’re suddenly seeing that some politicians have a new-found appreciation for the underground economy.

The New York Times reports that European nations want to add these activities to their estimates of GDP.

As of September, all European Union countries will be required to take fuller accounting of trade in sex, drugs and other underground businesses as part of an overhaul of economic measurements by Eurostat, the European statistics agency. The point of counting everything, including the wages of sin, is to get a more accurate reading of each country’s gross domestic product.

Sounds reasonable, right? Who objects, after all, to more accurate numbers?

But it’s always good to be suspicious of governments.

And why is suspicion warranted in this case? Well, it appears that this effort to re-measure GDP may give politicians more ability to spend.

With European Union governments obliged to reduce debt as a percentage of their economies, the changes are also expected to make growth rates from Spain to Sweden look better, possibly also making debt ratios seem rosier. …In Italy, Ireland, Portugal and Spain, …G.D.P. could increase by as much as 2 percent, Eurostat estimates, while Germany and France could see expansions of as much as 3 percent. Britain might show a gain of 3 to 4 percent, Eurostat said.

To elaborate, there are “Maastricht rules” in the European Union that (at least in theory) obligate governments to keep deficits from rising about 3 percent of GDP and to keep debt from climbing above 60 percent of GDP.

So if politicians and bureaucrats can figure out ways to make GDP appear bigger, that means they can have more red ink. Which means, of course, that they can spend more money.

So now it should be abundantly clear why governments have an incentive to add the underground economy to their GDP estimates.

But there’s one little problem with this approach. The whole purpose of the Maastricht rules was to keep nations from spending themselves into a fiscal crisis. The rules obviously didn’t work very well (perhaps because they focused on the symptom of red ink rather than the underlying disease of too much government spending), but there presumably would have been even more profligacy if they didn’t exist.

So what’s the point of adding the underground economy to GDP when that simply gives politicians more leeway to spend?

Indeed, the NYT article notes that some of the bean-counting bureaucracies in Europe are concerned that this new approach won’t work because there won’t be any new tax revenue to accompany the new spending.

Statistics agencies, though, say that whatever the improved ratios, debt will not be easier to service, because governments cannot collect taxes from illegal underground activity.

And just in case you don’t trust the New York Times, here’s a blurb from Money News making the same point.

No country is supposed to let their annual deficits exceed 3 percent of GDP or accumulated debt exceed 60 percent of GDP. Countries that don’t comply with the debt limits are to be penalized — 0.2 percent of GDP, plus a “variable component” that can range up to 0.5 percent of GDP annually as long as the breach continues. Boosting GDP helps lower the debt ratio.

The bottom line is that these changes will enable Europe’s politicians to postpone much-needed fiscal discipline.

In other words, they’ll have the ability to spend themselves deeper into a hole.

And as you can see from these sobering IMF, OECD, and BIS estimates, the hole is already enormous.

Not that America is any different. Our economy may be doing better (or less worse) today, but our future fiscal outlook is worse than many other nations thanks to a combination of poorly designed entitlement programs and changing demographics.

And just as is the case for Europe, counting our underground economy would not be a substitute for the reforms needed to save the nation.

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What happens when you mix something good with something bad?

To be more specific, what happens when you have a big success story, like the spending cap in Switzerland that has dramatically slowed the growth of government, and then expect intelligent and coherent coverage by a government-run media outfit that presumably wants a bigger public sector?

Well, the answer is that you get a very muddled story.

Here’s some of what Swiss Info, which is part of the Swiss Broadcasting Corporation, wrote about that nation’s “debt brake.”

The mind-boggling…debt racked up by governments…has turned some heads towards Switzerland’s successful track record… Swiss voters approved a so-called ‘debt brake’ on federal public finances in 2001, which was put into operation in 2003. A decade later, the mountain of government debt – that soared to dangerous levels during the 1990s and early 2000s – has been reduced by CHF20 billion ($23 billion) from its 2005 peak. The ratio of debt to annual economic output (gross domestic product or GDP)…fell from 53% to 37% between 2005 and the end of 2012.

There’s nothing wrong with that passage. Indeed, you could almost say that Swiss Info was engaging in boosterism.

Moreover, the story points out that other nations have been going in the wrong direction while Switzerland was enjoying success.

…as Switzerland was chipping away at its mountain of debt, other countries were building theirs up. …Since the middle of 2007 public sector debt alone has soared 80% to $43 trillion, according to the Bank for International Settlements.

And the story even notes that other nations are beginning to copy Switzerland.

The Swiss debt brake is the perfect model for other countries to embrace… Germany applied its own version of the Swiss debt brake in 2009, followed by Spain and other European countries.  …“Switzerland came up with the blueprint for what I am sure will be the standard fiscal model of the future,” said Müller-Jentsch.

So why, then, do I think the story has a muddled message?

The answer is that there is no explanation of how the debt brake works and therefore no explanation of why it is a success.

A reader will have no idea, for instance, that the debt brake is actually a spending cap. Readers also will have no way of knowing that red ink has been controlled because the law properly focuses on limiting the growth of spending.

By the way, it wouldn’t have required much research for Swiss Info to include that relevant data. If you do a Google search for “Swiss debt brake,” the first item that appears is the column I wrote in 2012 for the Wall Street Journal.

In that piece, I explained that “Switzerland’s debt brake limits spending growth to average revenue increases over a multiyear period” and I added that “Before the law went into effect in 2003, government spending was expanding by an average of 4.3% per year. Since then it’s increased by only 2.6% annually.”

So why didn’t Swiss Info mention any of this very relevant information? Is it because it tilts to the left like other government-owned media outfits, and the journalists didn’t want to acknowledge that spending restraint is a successful fiscal policy?

I have no idea whether that’s the case, but there is a definite pattern. When I appear on PBS, the deck is usually stacked in favor of statism. Moreover, you won’t be surprised to learn that I’ve had similar experiences with government-run TV in France. And it goes without saying that the BBC in the United Kingdom also leans left (though at least they seem to believe in fair fights).

This video from Swiss Info is similarly vague. It’s a favorable portrayal, but people who watch the video won’t know how the debt brake works or why it has been successful.

P.S.  I don’t know the details about the German version of the debt brake, but it’s probably having some positive impact. The burden of government spending has not increased in that nation since 2009, at least when measured as a share of GDP. Though the Germans also weren’t as profligate as other nations (including the United States) in the years before they adopted a debt brake, so I’ll have to do more research to ascertain whether the German approach is as good as the Swiss approach.

P.P.S. In any event, the moral of the story is that good fiscal policy should be based on the Golden Rule of having government grow slower than the productive sector of the economy.

P.P.S. The Princess of the Levant and I continued our tour of the French Riviera. This photo is from Les Jardins Exotiques at Chateau d’Eze.

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As part of my travels, I’ve learned that the unluckiest people in the world are from Menton and Roquebrune in France. That’s because they were part of Monaco until 1860.

So now, instead of enjoying an income tax of zero under Monegasque rule, they are part of France’s wretched fiscal system.

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My tireless (and probably annoying) campaign to promote my Golden Rule of spending restraint is bearing fruit.

The good folks at the editorial page of the Wall Street Journal allowed me to explain the fiscal and economic benefits that accrue when nations limit the growth of government.

Here are some excerpts from my column, starting with a proper definition of the problem.

What matters, as Milton Friedman taught us, is the size of government. That’s the measure of how much national income is being redistributed and reallocated by Washington. Spending often is wasteful and counterproductive whether it’s financed by taxes or borrowing.

So how do we deal with this problem?

I’m sure you’ll be totally shocked to discover that I think the answer is spending restraint.

More specifically, governments should be bound by my Golden Rule.

Ensure that government spending, over time, grows more slowly than the private economy. …Even if the federal budget grew 2% each year, about the rate of projected inflation, that would reduce the relative size of government and enable better economic performance by allowing more resources to be allocated by markets rather than government officials.

I list several reasons why Mitchell’s Golden Rule is the only sensible approach to fiscal policy.

A golden rule has several advantages over fiscal proposals based on balanced budgets, deficits or debt control. First, it correctly focuses on the underlying problem of excessive government rather than the symptom of red ink. Second, lawmakers have the power to control the growth of government spending. Deficit targets and balanced-budget requirements put lawmakers at the mercy of economic fluctuations that can cause large and unpredictable swings in tax revenue. Third, spending can still grow by 2% even during a downturn, making the proposal more politically sustainable.

The last point, by the way, is important because it may appeal to reasonable Keynesians. And, in any event, it means the Rule is more politically sustainable.

I then provide lots of examples of nations that enjoyed great success by restraining spending. But rather than regurgitate several paragraphs from the column, here’s a table I prepared that wasn’t included in the column because of space constraints.

It shows the countries that restrained spending and the years that they followed the Golden Rule. Then I include three columns of data. First, I show how fast spending grew during the period, followed by numbers showing what happened to the overall burden of government spending and the change to annual government borrowing.

Golden Rule Examples

Last but not least, I deal with the one weakness of Mitchell’s Golden Rule. How do you convince politicians to maintain fiscal discipline over time?

I suggest that Switzerland’s “debt brake” may be a good model.

Can any government maintain the spending restraint required by a fiscal golden rule? Perhaps the best model is Switzerland, where spending has climbed by less than 2% per year ever since a voter-imposed spending cap went into effect early last decade. And because economic output has increased at a faster pace, the Swiss have satisfied the golden rule and enjoyed reductions in the burden of government and consistent budget surpluses.

In other words, don’t bother with balanced budget requirements that might backfire by giving politicians an excuse to raise taxes.

If the problem is properly defined as being too much government, then the only logical answer is to shrink the burden of government spending.

Last but not least, I point out that Congressman Kevin Brady of Texas has legislation, the MAP Act, that is somewhat similar to the Swiss Debt Brake.

We know what works and we know how to get there. The real challenge is convincing politicians to bind their own hands.

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Based on what’s happened in Greece and other European nations, we know from real-world evidence that even nations from the developed world can spend themselves into debt trouble.

This has led to research that seeks to pinpoint when debt reaches a dangerous level.

Where’s the point where investors stop buying the debt? Where’s the point when interest on the debt becomes too much of a burden?

Most famously, a couple of economists crunched numbers and warned that nations may reach a tipping point when debt is about 90 percent of GDP.

I was not persuaded by this research for two reasons.

First, I think it’s far more important to focus on the underlying disease of too much government, and not get fixated on the symptom of too much borrowing. If I go see a doctor because of headaches and he discovers I have a brain tumor, I want him to address that problem and not get distracted by the fact that head pain is one of the symptoms.

Second, there are big differences between nations, and those differences have a big effect on whether investors are willing to buy government bonds. The burden of debt is about 240 percent of GDP in Japan and the nation’s economy is moribund, for instance, yet there’s no indication that the “bond vigilantes” are about to pounce. On the other hand, investors are understandably leery about buying Argentinian government debt, even though accumulated red ink is less than 40 percent of economic output.

So what about America, where government borrowing from the private sector now accounts for 82 percent of GDP? Have we reached a danger point for government debt?

According to Matthew Yglesias (who says I’m insane and irrational), the answer is no.

I have several comments on this video.

1. Some people have complained that the video is deceptive because it focuses on debt held by the public rather than the gross federal debt. The video could have been more explicit and explained why that choice was made, but I have no objection to the focus on publicly-held debt. After all, that’s the measure of what government has borrowed from the private sector. The gross federal debt, by contrast, also includes money the government owes itself (such as the IOUs in the Social Security Trust Fund), but that type of debt is merely a bookkeeping entry.

2. The video asserts that inflation is low and therefore we don’t have to worry that government might have to “print money” at some point to finance additional debt. I don’t think there’s any immediate danger that the Fed will be put in a position of financing the federal government, but I nonetheless don’t like this logic. It’s sort of like saying it wouldn’t be a problem to start eating ten pizzas per day because you currently aren’t heavy. The simple truth is that low inflation now doesn’t mean low inflation in the future.

3. I also reject the assumption in the video that interest rates drive the economy. Indeed, it’s probably more accurate to say that the economy drives interest rates, not the other way around. Suffice to say that the video is based on the same thinking that led the Congressional Budget Office to imply that you maximize growth by putting tax rates at 100 percent.

4. The video also warns that politicians shouldn’t raise taxes or reduce government benefits since either policy would “take money out of people’s pockets.” This is Keynesian economic theory, which I’ve explained many times doesn’t make sense. No need to regurgitate those arguments here.

5. Which brings us to the main problem of the video. It ignores the problem of unfunded liabilities. More specifically, it doesn’t address the fact that politicians have made commitments to spend far too much money in the future, largely because of poorly designed entitlement programs. And it is these built-in promises to spend money that give America a very grim fiscal future, as show by this BIS, OECD, and IMF data.

Here’s the video, produced by the Center for Prosperity, that accurately puts all this information together (the data is now several years out of date, but the analysis is still spot on).

Remember, the problem – both today and in the future – is the burden of government spending.

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Back in 2010, I shared a video that predicted a catastrophic end to the welfare state.

I said it was an example of “Libertarian Porn” because:

…it is designed for the dark enjoyment of people who think the government is destroying the nation. If you don’t like bloated government and statist intervention and you think that the policies being imposed by Washington are going to lead to hyperinflation and societal collapse, then you will get a certain level of grim satisfaction by watching the video.

While I also stated in that post that I thought the video was far too dour and pessimistic, I don’t automatically reject the hypothesis that the welfare state will lead to societal chaos.

UK RiotsIndeed, I’ve specifically warned that America might experience European-type disarray because of big government and I even wrote about which nations that might be good escape options if the welfare state causes our country to unravel.

Moreover, I’ve speculated about the possible loss of democracy in Europe and specifically said that people should have the right to be well armed just in case society goes you-know-where in a handbasket.

So I’m definitely not a Pollyanna.

I’ve given this background because here’s another video for those of you who revel in the glass being nine-tenths empty. It’s about the United Kingdom, but these numbers from the BIS, OECD, and IMF show that the long-term spending problem is equally severe in the United States.

Be warned, though, that it’s depressing as well as long. And I gather it’s also designed to sell a magazine, so you can ignore that (particularly if you’re not British).

Now that I’ve shared the video, I’ll add a couple of my own observations.

First and foremost, no country is past the point of no return, at least based on the numbers. It doesn’t matter whether we’re talking about the United Kingdom, the United States, Greece, or France. Politicians always have the option of reforming entitlements and restraining the burden of government spending. So long as they follow Mitchell’s Golden Rule over an extended period of time, they can dig out of the mess.

That’s why I’m a big fan of Switzerland’s spending cap, That policy, technically known as the debt brake, imposes a rolling cap on budgetary growth and has been very effective. Colorado also has a spending cap that has been somewhat effective in restraining the cost of the public sector.

My second observation, however, is that some nations may be past the psychological point of return. This is not easy to measure, but it basically means that there’s good reason to be pessimistic when the majority of citizens in a country think it’s morally acceptable to have their snouts in the public trough and to live off the labor of others. When you have too many people riding in the wagon (or riding in the party ship), then it’s difficult to envision how good policy is implemented.

Indeed, the video includes some discussion of how a growing number of people in the United Kingdom now live off the state. And if you add together the votes of people like NatailijaTraceyAnjem, Gina, and Danny, perhaps the United Kingdom has reached a grim tipping point. Especially since welfare spending has dramatically increased in recent years!

A third and final point about the video. I think it focuses too much on deficits and debt. Red ink is a serious issue, to be sure, but it’s very important to understand that too much borrowing is merely a symptom of too much spending.

P.S. On a totally separate matter, everyone should read the USA Today column by Glenn Reynolds. He explains how government is perverting our criminal justice system.

Here are some of the most important passages, but you should read the whole thing.

Here’s how things all-too-often work today: Law enforcement decides that a person is suspicious (or, possibly, just a political enemy). Upon investigation into every aspect of his/her life, they find possible violations of the law, often involving obscure, technical statutes that no one really knows. They then file a “kitchen-sink” indictment involving dozens, or even hundreds of charges, which the grand jury rubber stamps. The accused then must choose between a plea bargain, or the risk of a trial in which a jury might convict on one or two felony counts simply on a “where there’s smoke there must be fire” theory even if the evidence seems less than compelling.

This is why, Glenn explains, there are very few trials. Almost everything gets settled as part of plea bargains.

But that’s not a good thing, particularly when there are no checks and balances to restrain bad behavior by the state.

…although there’s lots of due process at trial — right to cross-examine, right to counsel, rules of evidence, and, of course, the jury itself, which the Framers of our Constitution thought the most important protection in criminal cases — there’s basically no due process at the stage when prosecutors decide to bring charges. Prosecutors who are out to “get” people have a free hand; prosecutors who want to give favored groups or individuals a pass have a free hand, too.When juries decide not to convict because doing so would be unjust, it’s called “jury nullification,” and although everyone admits that it’s a power juries have, many disapprove of it. But when prosecutors decide not to bring charges, it’s called “prosecutorial discretion,” and it’s subject to far less criticism, if it’s even noticed.

Here’s the bottom line.

…with today’s broad and vague criminal statutes at both the state and federal level, everyone is guilty of some sort of crime, a point that Harvey Silverglate underscores with the title of his recent book, Three Felonies A Day: How The Feds Target The Innocent, that being the number of felonies that the average American, usually unknowingly, commits. …The combination of vague and pervasive criminal laws — the federal government literally doesn’t know how many federal criminal laws there are — and prosecutorial discretion, plus easy overcharging and coercive plea-bargaining, means that where criminal law is concerned we don’t really have a judicial system as most people imagine it. Instead, we have a criminal justice bureaucracy that assesses guilt and imposes penalties with only modest supervision from the judiciary, and with very little actual accountability.

Glenn offers some possible answers.

…prosecutors should have “skin in the game” — if someone’s charged with 100 crimes but convicted of only one, the state should have to pay 99% of his legal fees. This would discourage overcharging. (So would judicial oversight, but we’ve seen little enough of that.) Second, plea-bargain offers should be disclosed at trial, so that judges and juries can understand just how serious the state really thinks the offense is. …And finally, I think that prosecutors should be stripped of their absolute immunity to suit — an immunity created by judicial activism, not by statute — and should be subject to civil damages for misconduct such as withholding evidence. If our criminal justice system is to be a true justice system, then due process must attach at all stages. Right now, prosecutors run riot. That needs to change.

Amen to all that. And you can read more on this topic by clicking here.

The Obama years have taught us that dishonest people can twist and abuse the law for ideological purposes.

Obamacare rule of law cartoonWhether we’re talking about the corruption of the IRS, the deliberate disregard of the law for Obamacare, or the NSA spying scandal, the White House has shown that it’s naive to assume that folks in government have ethical standards.

And that’s also true for the law enforcement bureaucracy, as Glenn explained. Simply stated, people in government abuse power. And jury nullification, while a helpful check on misbehavior, only works when there is a trial.

Indeed, I’m now much more skeptical about the death penalty for many of the reasons Glenn discusses in his column. To be blunt, I don’t trust that politically ambitious prosecutors will behave honorably.

That’s why, regardless of the issue, you rarely will go wrong if you’re advocating fewer laws and less government power.

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When I give speeches around the country, I often get asked whether it’s time to give up.

More specifically, has America reached a tipping point, with too many people riding in the wagon of government dependency and too few people creating wealth and pulling the wagon in the right direction?

These questions don’t surprise me, particularly since my speeches frequently include very grim BIS, OECD, and IMF data showing that the long-run fiscal problem in the United States is larger than it is in some nations that already are facing fiscal crisis.

But that doesn’t mean I have a good answer. I think there is a tipping point, to be sure, but I’m not sure whether there’s a single variable that tells us when we’ve reached the point of no return.

Is it when government spending consumes 50 percent of economic output? That would be a very bad development if the burden of government spending reached that level, but it’s not necessarily fatal. Back in the early 1990s, the public sector was that big in Canada, yet policy makers in that country were able to restrain budgetary growth and put the country on a positive path. Sweden is another nation that has turned the corner. Government spending peaked at 67 percent of GDP in the early 1990s, but is now down to 47 percent of GDP after years of free-market reforms.

Is it when a majority of households are getting government handouts? That’s also a worrisome development, especially if those folks see the state as a means of living off their fellow citizens. But taking a check from Uncle Sam doesn’t automatically mean a statist mindset. As one of my favorite people opined, “some government beneficiaries – such as Social Security recipients – spent their lives in the private sector and are taking benefits simply because they had no choice but to participate in the system.”

Is it when a majority of people no longer pay income taxes, leaving a shrinking minority to bear all the burden of financing government? It’s not healthy for society when most people think government is “free,” particularly if they perceive an incentive to impose even higher burdens on those who do pay. And there’s no question that the overwhelming majority of the tax burden is borne by the top 10 percent. There’s little evidence, though, that the rest of the population thinks there’s no cost to government – perhaps because many of them pay heavy payroll taxes.

I explore these issues in this interview with Charles Payne.

The main takeaway from the interview is that the tipping point is not a number, but a state of mind. It’s the health of the nation’s “social capital.”

So for what it’s worth, the country will be in deep trouble if and when the spirit of self-reliance becomes a minority viewpoint. And the bad news is that we’re heading in that direction.

The good news is that we’re not close to the point of no return. There is some polling data, for instance, showing that Americans still have a much stronger belief in liberty than their European counterparts.

And we’ve even made a small bit of progress against big government in the past few years.

I speculated in the interview that we probably have a couple of decades to save the country, but it will become increasingly difficult to make the necessary changes – such as entitlement reform and welfare decentralization – as we get closer to 2020 and 2030.

Welfare State Wagon CartoonsAnd if those changes don’t occur…?

That’s a very grim subject. I fully understand why some Americans are thinking about the steps they should take to protect their families if reforms don’t occur and a crisis occurs.

Indeed, this to me is one of the most compelling arguments against gun control. If America begins to suffer the chaos and disarray that we’ve seen in nations such as Greece, it’s better to be well-armed.

Though maybe there will be some nations that remain stable as the world’s welfare states collapse. And if emigration is your preferred option, I’d bet on Australia.

But wouldn’t it be better to fix what’s wrong and stay in America?

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Self awareness is supposed to be a good thing, so I’m going to openly acknowledge that I have an unusual fixation on the size of government.

I don’t lose a wink of sleep thinking about deficits, but I toss and turn all night fretting about the overall burden of government spending.

My peculiar focus on the size and scope of government can be seen in this video, which explains that spending is the disease and deficits are just a symptom.

Moreover, my Golden Rule explicitly targets the spending side of the budget. And I also came up with a “Bob Dole Award” to mock those who mistakenly dwell on deficits.

With all this as background, you’ll understand why I got excited when I started reading Robert Samuelson’s column in today’s Washington Post.

Well, there’s a presidential whopper. Obama is right that the role of the federal government deserves an important debate, but he is wrong when he says that we’ve had that debate. Just the opposite: The White House and Congress have spent the past five years evading the debate. They’ve argued over federal budget deficits without addressing the underlying issues of what the government should do, what programs are unneeded, whether some beneficiaries are undeserving… The avoidance is entirely bipartisan. Congressional Republicans have been just as allergic to genuine debate as the White House and its Democratic congressional allies.

By the way, I have mixed feelings about the final sentence in that excerpt. Yes, Republicans oftentimes have displayed grotesque levels of fiscal irresponsibility. Heck, just look at the new farm bill. Or the vote on the Export-Import Bank. Or the vote on housing subsidies. Or…well, you get the point.

On the other hand, GOPers have voted for three consecutive years in favor of a budget that restrains the growth of federal spending, in large part because it includes much-needed reforms to major entitlement programs such as Medicare and Medicaid.

But Republican inconsistency isn’t our focus today.

I want to address other parts of Samuelson’s column that left a bad taste in my mouth.

He argues that you can’t balance the budget merely by cutting discretionary programs. That’s technically untrue, but it’s an accurate assessment of political reality.

I’m much more worried about his assertion that you can’t balance the budget even if entitlement spending also is being addressed.

Let’s look at what he wrote and then I’ll explain why he’s wrong.

Eliminating many programs that are arguably marginal — Amtrak, subsidies for public broadcasting and the like — would not produce enough savings to balance the budget. The reason: Spending on Social Security, Medicare and other health programs… But even plausible benefit trims for affluent retirees would still leave deficits. There would still be a need for tax increases.

This is wrong. Not just wrong, but demonstrably inaccurate.

The Ryan budget, for instance, balanced the budget in 2023. Without a single penny of tax hikes.

Senator Rand Paul and the Republican Study Committee also have produced balanced budget plans. Even as scored by the statists at the Congressional Budget Office.

By the way, you don’t even need to cut spending to balance the budget. Spending cuts would be desirable, of course, but the key to eliminating red ink is simply making sure that government spending climbs at a slower rate than revenues.

And since revenues are expected to grow by about 6 percent per year, it shouldn’t take advanced knowledge of mathematics to realize that the deficit will fall if spending grows by less than 6 percent annually.

Indeed, we could balance the budget as early as 2018 if spending merely was restrained so that the budget grew at the rate of inflation.

But never forget that the goal of fiscal policy should be shrinking the size and scope of the federal government, not fiscal balance.

Ask yourself the following questions. If $1 trillion floated down from Heaven and into the hands of the IRS, would that alter in any way the argument for getting rid of wasteful and corrupt parts of the federal leviathan, such as the Department of Housing and Urban Development?

If the politicians had all that extra money and the budget was balanced, would that mean we could – or should – forget about entitlement reform?

If there was no red ink, would that negate the moral and economic imperative of ending the welfare state?

In other words, the first part of Samuelson’s column is right. We need a debate about “the underlying issues of what the government should do, what programs are unneeded, whether some beneficiaries are undeserving.”

But we’re not going to come up with a good answer if we don’t understand basic fiscal facts.

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At the beginning of the year, I was asked whether Europe’s fiscal crisis was over. Showing deep thought and characteristic maturity, my response was “HAHAHAHAHAHAHAHAHA, are you ;@($&^#’% kidding me?”

But I then shared specific reasons for pessimism, including the fact that many European nations had the wrong response to the fiscal crisis. With a few exceptions (such as the Baltic nations), European governments used the crisis to impose big tax hikes, including higher income tax rates and harsher VAT rates.

Combined with the fact that Europe’s demographic outlook is rather grim, you can understand why I’m not brimming with hope for the continent. And I’ve shared specific dismal data for nations such as Portugal, France, Greece, Italy, Poland, Spain, Ireland, and the United Kingdom.

But one thing I’ve largely overlooked is the degree to which the European Central Bank may be creating an unsustainable bubble in Europe’s financial markets. I warned about using bad monetary policy to subsidize bad fiscal policy, but only once in 2011 and once in 2012.

Check out this entertaining – but worrisome – video from David McWilliams and you’ll understand why this issue demands more attention.

I’ve openly argued that the euro is not the reason that many European nations got in trouble, but it appears that Europe’s political elite may be using the euro to make a bad situation even worse.

And to add insult to injury, the narrator is probably right that we’ll get the wrong outcome when this house of cards comes tumbling down. Instead of decentralization and smaller government, we’ll get an expanded layer of government at the European level.

Or, as I call it, Germany’s dark vision for Europe.

That’s Mitchell’s Law on steroids.

P.S. Here’s a video on the five lessons America should learn from the European crisis.

P.P.S. On a lighter note, the mess in Europe has generated some amusing videos (here, here, and here), as well as a very funny set of maps.

P.P.P.S. If all this sounds familiar, that may be because the Federal Reserve in the United States could be making the same mistakes as the European Central Bank. I don’t pretend to know when and how the Fed’s easy-money policy will turn out, but I’m not overly optimistic about the final outcome. As Thomas Sowell has sagely observed, “We all make mistakes. But we don’t all have the enormous and growing power of the Federal Reserve System… In the hundred years before there was a Federal Reserve System, inflation was less than half of what it became in the hundred years after the Fed was founded.”

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Okay, I’ll admit the title of this post is an exaggeration. How to fix the mess at the IRS is a fiscal policy question, and that requires tax reform rather than spending restraint.

But allow me a bit of literary license. We just had a big debt limit battle in Washington and, after a lot of political drama, politicians kicked the can down the road.

So we need to ask ourselves whether that fight accomplished anything?

It did focus attention on the flaws of Obamacare, and I suppose there’s some value in that.

But the debt limit was not a vehicle – as has been the case in the past – for changes in fiscal policy. We didn’t get something good, like the sequester which resulted from the 2011 debt limit legislation. And we didn’t get something bad, like the tax hike in the 1985 debt limit legislation

Some are asking whether we should even have a debt limit. A number of critics have suggested we should get rid of the borrowing cap because it creates the risk of default. I think those concerns are very overblown.

I’m more persuaded by those who argue that the debt limit diverts attention from better options to improve fiscal policy.

Professors Gary Becker and Edward Lazear write in the Wall Street Journal that the debt ceiling is not a very good tool for restraining the growth of government. They look at evidence from the states to warn that fiscal rules that seek to limit borrowing are ineffective.

Many states are required to have “balanced” budgets, but the growth in spending and the size of state governments continues apace. During good times, when tax revenues are high, states “balance” their budgets by spending at the high levels consistent with large revenues. When times get tough, it is difficult if not impossible to eliminate programs that had been initiated during the fat years. Instead, the states resort to budgetary gimmicks, like delaying shortfalls until next year’s “balanced” budget.

Gimmicks are bad, of course, but politicians also respond to fiscal squeezes by raising taxes.

And that can be even worse as the prospect of more revenue leads to a ratchet effect, with periodic tax hikes used to maintain or expand the gravy train of spending. The fiscal mess in Europe is an obvious case study, but if you want a painful example from America, just look at data from Connecticut. The state did quite well without an income tax from the 1600s until 1991.

But then an income tax was imposed, in part to deal with the fiscal shortfall caused by an economic downturn. And, as critics warned, that new tax has produced dismal results. The top rate has jumped from 4.5 percent to 6.5 percent and inflation-adjusted per-capita state government spending has doubled. And there have been zero net private-sector jobs created since the income tax was implemented.

So what’s the answer? Becker and Lazear explain that lawmakers should target the underlying problem of spending rather than the symptom of red ink.

Better than a debt-ceiling rule would be one that controls spending directly, not the debt that results from it. The specifics are less important than the general principle, which is that spending growth should be limited in a way that brings government outlays back down to historic ratios relative to GDP. This would place the attention where it belongs, on spending rather than on the difference between outlays and receipts. Increased spending, coupled with even larger increases in taxes, might bring the deficit down, but it would damage economic growth and well-being.

Well stated. Reducing the overall burden of government spending – measured as a share of economic output – should be the goal of fiscal policy. That’s simply another way of stating my Golden Rule. And there’s a growing body of academic evidence showing that reducing the size of government is a good way of improving economic performance.

I’ve been highlighting the example of Switzerland, which has successfully strengthened its economy and fiscal policy with a spending cap (which, ironically, is called a “debt brake” even though the real effect of the law is to limit how fast spending can increase over time).

Other countries that have limited spending also have achieved some very impressive results. The video at this link looks at evidence from nations such as New Zealand and Canada in the 1990s, and there’s a more recent data about the positive effects of spending restraint in the Baltic nations.

There has been some interest in spending caps on Capitol Hill. Congressman Brady of Texas has proposed a MAP Act that is somewhat similar to Switzerland’s debt brake and Senator Corker of Tennessee has introduced a CAP Act that also would restrain annual spending increases.

Perhaps if some of their colleagues read today’s Becker-Lazear column, they’ll also understand why it’s better to focus on the underlying problem of government spending rather than getting distracted by the symptom of red ink.

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If this blog was an episode of Jeopardy, the response to the title of this post would be “Name three things that Dan Mitchell doesn’t like.”

But this blog isn’t a game show. It’s a serious forum* for discussing how we protect freedom and prosperity from ever-expanding government.

That’s why, in this interview with John Stossel, I reiterate my mantra that government spending is the problem and that deficits and debt are symptoms of the problem.

I usually use the analogy that government spending is a brain tumor and red ink is the headache caused by the tumor when seeking to help people understand that it’s important to focus on the disease and not the symptom. But to show that I’m not just a single-analogy kind of guy, this time I said that government spending was like lung cancer and that deficits are akin to the resulting cough.

I also concocted an analogy about government goodies being akin to heroin. If you’re an addict, it may feel good to put more junk in your veins, but you’ll be much better off if you endure the short-run discomfort of going clean. Just as it may cause angst among interest groups if we stop the federal gravy train, but they’ll be better off in the long run if we reduce the burden of government spending and restore robust growth.

And nobody will be surprised to see that I made my usual points that there was no risk of default and that it’s actually surprisingly simple to balance the budget with modest spending restraint.

Speaking of analogies, I also modified Senator Durbin’s analogy so that he and his colleagues are a bunch of drug dealers trying to buy votes by addicting people to big government.

*Okay, given all the political humor I share, perhaps it’s a semi-serious forum, but my analysis of fiscal policy is not a joking matter.

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It appears that the government shutdown, which technically is a battle over annual appropriations legislation for so-called discretionary spending, is going to drag on for a while.

The Obama Administration has shown zero willingness to negotiate, even though Republicans have made a series of offers to resolve the conflict.

And the longer this fight lasts, the more likely that the shutdown battle will get wrapped up in a bigger fight over the debt limit.

The White House apparently thinks this is a good development because of the assumption that GOPers can be stampeded into a bad deal to keep the government from supposedly defaulting.

Indeed, the Administration already is fanning the flames of economic anxiety. Here’s some of what the Treasury Department recently wrote as part of this world-is-ending hysteria.

A default would be unprecedented and has the potential to be catastrophic: credit markets could freeze, the value of the dollar could plummet, U.S. interest rates could skyrocket, the negative spillovers could reverberate around the world, and there might be a financial crisis and recession that could echo the events of 2008 or worse.

I’m surprised they didn’t warn about the four horsemen of the apocalypse and also say that default would mean cancer, tooth decay, and the heartbreak of psoriasis.

On a more serious note, there are three things about the Treasury report that are worth noting.

1. The Obama Administration is deliberately trying to blur the difference between defaulting on the debt, which would have real consequences, and “defaulting on obligations,” which is a catch-all phrase that includes mundane and uneventful matters such as postponing a Medicare payment to a hospital or delaying a grant disbursement to a state government.

2. The Treasury report repeatedly says bad things “could” happen and “might” happen, but never that they “will” happen. Well, I “could” be the clean-up batter next year for the New York Yankees, and I “might” date a couple of supermodels from Victoria’s Secret. But I wouldn’t want to bet my life on either of those things happening. Likewise, don’t hold your breath waiting for the sky to fall if the debt limit isn’t immediately increased.

3. The White House wants people to believe genuine default is likely even though tax receipts this fiscal year are expected to be more than $3 trillion and interest on the debt is projected to be only $237 billion. In other words, the Treasury will collect more than 12 times as much revenue as needed to pay interest on the debt. Even someone like me, with my well-known views on the incompetence of the federal government, thinks that the Treasury Department will have no problem figuring out how to avoid default.

To be sure, there would be some real problems if the debt limit wasn’t raised. The Treasury Department would have to override its own system to stop payments from automatically occurring. The bureaucrats would have to figure out how to prioritize payments.

Interest unquestionably would be paid on the debt, so there’s no real possibility of default. One also assumes the Administration would figure out how to make politically sensitive payments such as Social Security checks. But this would be uncharted territory, so things probably would be messy.

All that being said, I want to reiterate that a default only would happen if the White House wanted it to happen. And while the Obama Administration has shown a willingness to inflict pain on innocent third parties – as illustrated by the attempts to inconvenience Americans when the sequester imposed a tiny bit of fiscal restraint, it is inconceivable that the White House would decide to engineer an actual default.

By the way, it’s not just partisan political operatives in the Obama Administration who are making hysterical assertions.

Here are some blurbs from a Wall Street Journal report showing that the CEO of Goldman Sachs seems to be on the same page as the White House.

“There’s precedent for a government shutdown. There’s no precedent for default,”Goldman Sachs Group Inc. CEO Lloyd Blankfein said after emerging from an hour-long meeting between Mr. Obama and top financial executives. The executives, in town for a series of meetings arranged by the Financial Services Forum trade group, told Mr. Obama that even the possibility of the U.S. defaulting on its debt, should policy makers fail to raise the ceiling on the nation’s borrowing, would derail the nascent recovery and cause economic harm. Mr. Blankfein said they told Mr. Obama “exactly how bad it would be.”

And here are parts of a story from the UK-based Guardian about the views of the IMF’s head bureaucrat.

Christine Lagarde, the IMF’s managing director, urged America’s politicians to settle their differences before the dispute harmed the entire global economy. Speaking ahead of the fund’s annual meeting in Washington next week, Lagarde said it was “mission critical” that Democrats and Republicans raise the US debt ceiling before the 17 October deadline. Lagarde said the dispute was a fresh setback for a global economy… “In the midst of this fiscal challenge, the ongoing political uncertainty over the budget and the debt ceiling does not help. The government shutdown is bad enough, but failure to raise the debt ceiling would be far worse, and could very seriously damage not only the US economy, but the entire global economy.”

So what’s going on? Why are they making these hyperbolic statements?

Beats me, but here are my three theories.

1. They don’t know what they’re talking about, either because of stupidity or laziness. Since neither Blankfein nor Lagarde are stupid, perhaps they are simply too lazy to learn how the federal government operates and they don’t understand that the Treasury Department will have far more money than is needed to pay interest on the debt.

2. They understand the issues, but they’re willing to make dishonest and misleading statements because they want to please the White House. This could be because they sympathize with the President’s agenda. Or perhaps this is a typical case of DC-style horsetrading, with Blankfein supporting the White House in exchange for some sort of regulatory favor and Lagarde providing help to Obama in exchange for more subsidies from American taxpayers for the IMF.

3. They understand the issues, but are genuinely afraid that the President is so petty and ideological that he might deliberately force a default, so they are warning about the risks of that approach. Seems totally improbable, but keep in minds that the White House is so petty and spiteful that it has been spending money in a shutdown to keep elderly WWII vets from visiting an open-air memorial!

I’m guessing the second option is most accurate, but there’s no way to know for sure.

In closing, let’s take a step back and look at the big picture. What’s America’s biggest long-run economic challenge? Almost surely, the answer is that poorly designed entitlement programs will lead to a much more onerous burden of government spending.

The President made this problem worse with Obamacare (just as Bush made it worse with the prescription drug entitlement).

Advocates of fiscal responsibility want to address this problem now, before we get close to the point of a Greek-style fiscal collapse.

I’m not sure they can win, given the structure of America’s political system, but I’m damn sure glad that at least some people are trying to do what’s best for the country.

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I haven’t written much about the budget fights over a government shutdown, Obamacare, the continuing resolution, and the debt limit for the simple reason that the battles are mostly about politics and strategy rather than policy.

At the risk of oversimplifying, here’s what’s happening.

On one side are those who want to use the debt limit (legislation allowing additional borrowing) and the continuing resolution (a spending bill for the fiscal year that starts October 1) as leverage to weaken Obamacare and restrain spending.

On the other side are those who say big confrontations are too politically risky, particularly since good changes are impossible with Harry Reid controlling the Senate and Obama in the White House.

In this “insurgents” vs “establishment” fight, I think it’s possible for good people to have opposing positions, but my sympathies are with the former over the latter. Here are a couple of observations to illustrate why I think the insurgents are correct.

1. The biggest fiscal policy victory of the 21st Century – sequestration – was only possible because of hard-ball tactics on the debt limit in 2011.

2. It’s always better to be on offense. If folks like Senator Ted Cruz weren’t making the President’s unpopular healthcare law the focus of attention, the crowd in Washington might be busy right now trying to do something destructive such as class-warfare tax hikes. Or repealing sequestration.

3. It’s common sense in any negotiation to ask for more than you think you’ll get and to appear as inflexible as possible. While I think many of the “establishment” types are willing to do the right thing (as evidenced by near-unanimous votes for the Ryan budgets), they sometimes lead with their fallback position, which means the final result will be even further to the left.

4. The “political risks” of a shutdown fight or a debt limit fight are greatly overblown. As I explained in an article for National Review back in 2011, Republicans achieved a policy victory and – at worst – a political draw in the big shutdown fights of 1995-1996. And my recent testimony to the Joint Economic Committee explained why there’s no risk of default if there’s a fight on the debt limit.

All this being said, the insurgent strategy can backfire. The media serves as an echo chamber for proponents of bigger government, so expect story after story about how a government shutdown threatens the economy (even though we’ve had plenty of shutdowns in recent decades with no negative impact).

And expect stories about how a debt limit fight could mean default, even though that’s preposterously inaccurate.

But that echo chamber can be effective, particularly when statist GOPers such as Karl Rove mimic those left-wing talking points.

So the real issue is whether we can get some incremental progress – such as a one-year delay of Obamacare’s individual mandate – when a deal finally is reached.

The main thing to understand, though, is that no progress would be possible if the insurgents weren’t forcing the issue.

P.S. If you want to end on a lighter note, there are some good one-liners about the debt limit at the bottom of this post, and you can enjoy some good debt limit cartoons by clicking here and here.

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As we get closer to the debt limit, the big spenders in Washington are becoming increasingly hysterical about the supposed possibility of default if politicians lose the ability to borrow more money.

I testified yesterday to the Joint Economic Committee on “The Economic Costs of Debt-Ceiling Brinkmanship” and I explained (reiterating points I made back in 2011) that there is zero chance of default.

Why? Because, as I outline beginning about the 3:10 mark of the video, annual interest payments are about $230 billion and annual tax collections are approaching $3 trillion.

I actually made five points in my testimony. The first three should be quite familiar to regular readers.

First, America’s main fiscal problem is that government is too big. That’s the disease  Deficits and debt are symptoms of that underlying problem.

Second, you achieve good fiscal policy by following “Mitchell’s Golden Rule” so that government grows slower than private sector economic output.

Third, we’ve made some progress in the last two years thanks to genuine fiscal restraint, and we can balance the budget in a very short period of time if lawmakers impose a very modest bit of spending discipline in the future.

The fourth point, which I already discussed above, is that there’s no risk of default – unless the Obama Administration deliberately wants that to happen. But that’s simply not a realistic possibility.

My fifth and final point deserves a bit of extra discussion. I explained that Greece is now suffering through a very deep recession, with record unemployment and harsh economic conditions. I asked the Committee a rhetorical question: Wouldn’t it have been preferable if there was some sort of mechanism, say, 15 years ago that would have enabled some lawmakers to throw sand in the gears so that the government couldn’t issue any more debt?

Debt limit jokesYes, there would have been some budgetary turmoil at the time, but it would have been trivial compared to the misery the Greek people currently are enduring.

I closed by drawing an analogy to the situation in Washington. We know we’re on an unsustainable path. Do we want to wait until we hit a crisis before we address the over-spending crisis? Or do we want to take prudent and modest steps today – such as genuine entitlement reform and spending caps – to ensure prosperity and long-run growth.

Seems like the answer should be simple…at least if you’re not trying to get reelected by bribing voters with their own money.

P.S. My argument for short-term fighting today to avoid fiscal crisis in the future was advanced in greater detail by a Wall Street expert back in 2011.

P.P.S. You can enjoy some good debt limit cartoons by clicking here and here.

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About two weeks ago, while making an important point about the Laffer Curve, here’s what I wrote about the fiscal disaster in Detroit.

Detroit’s problems are the completely predictable result of excessive government. Just as statism explains the problems of Greece. And the problems of California. And the problems of Cyprus. And the problems of Illinois. …Simply stated, as the size and scope of the public sector increased, that created very destructive economic and political dynamics. More and more people got lured into the wagon of government dependency, which puts an ever-increasing burden on a shrinking pool of producers. Meanwhile, organized interest groups such as government bureaucrats used their political muscle to extract absurdly excessive compensation packages, putting an even larger burden of the dwindling supply of taxpayers.

And in this Fox News interview, I elaborate on these arguments and warned that federal government profligacy – if unchecked – will lead to similarly dismal results for the entire United States.

I want to augment on a couple of my points.

First, I explained that Detroit’s bankruptcy won’t have any major and long-lasting ripple effects – assuming politicians on the state or national level don’t encourage more bad policy with bailouts. If you’re a creditor, it’s not good news that the city owes you money, and it’s also not a cheerful time if you’re a retired bureaucrat hoping for years and years of pension payments and healthcare subsidies, but there’s no reason to expect that Detroit’s problems will impose significant damage on Michigan – particularly compared to the harm that would be caused if Detroit was allowed to continue with business as usual.

Similarly, the United States wouldn’t suffer major consequences if (probably when) California no longer can pay its bills. On the other hand, the European Union and the euro currency are being weakened by the mess in Greece, though that’s because they’ve been subsidizing bad fiscal policy with bailouts.

Second, I made the argument for entitlement reform, specifically the “pre-funding” version of Social Security reform that’s been adopted in nations as diverse as Australia and Chile.

Incidentally, this approach is even bolder than the Medicaid and Medicare reforms in the GOP budgets.

Third, I expressed some optimism that the United States has a chance to implement these much-needed reforms, in part because countries such as France and Japan will blow up before America.

And each time another nation, state, or city gets into trouble, it will strengthen our arguments to put the federal government on a long-overdue diet.

Big problems for America if politicians leave government on auto-pilot

Having a strong argument, though, is not the same as having an argument that will prevail. So even though America still has some breathing room, and even though the economic and moral case for spending restraint is very powerful, we’re in the unfortunate situation of having to rely on politicians in Washington.

So keep places such as Australia in mind just in case you need to escape when America’s fiscal chickens come home to roost.

In conclusion, I can’t resist drawing your attention to something I wrote back in 2011, when I showed the eerie similarity of Detroit’s collapse with the “blighted areas” in Ayn Rand’s classic novel, Atlas Shrugged.

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I’m thinking of inventing a game, sort of a fiscal version of Pin the Tail on the Donkey.

Only the way it will work is that there will be a map of the world and the winner will be the blindfolded person who puts their pin closest to a nation such as Australia or Switzerland that has a relatively low risk of long-run fiscal collapse.

That won’t be an easy game to win since we have data from the BIS, OECD, and IMF showing that government is growing far too fast in the vast majority of nations.

We also know that many states and cities suffer from the same problems.

A handful of local governments already have hit the fiscal brick wall, with many of them (gee, what a surprise) from California.

The most spectacular mess, though, is about to happen in Michigan.

The Washington Post reports that Detroit is on the verge of fiscal collapse.

After decades of sad and spectacular decline, it has come to this for Detroit: The city is $19 billion in debt and on the edge of becoming the nation’s largest municipal bankruptcy. An emergency manager says the city can make good on only a sliver of what it owes — in many cases just pennies on the dollar.

This is a dog-bites-man story. Detroit’s problems are the completely predictable result of excessive government. Just as statism explains the problems of Greece. And the problems of California. And the problems of Cyprus. And the problems of Illinois.

I could continue with a long list of profligate governments, but you get the idea. Some of these governments are collapsing at a quicker pace and some at a slower pace. But all of them are in deep trouble because they don’t follow my Golden Rule about restraining the burden of government spending so that it grows slower than the private sector.

Detroit obviously is an example of a government that is collapsing sooner rather than later.

Why? Simply stated, as the size and scope of the public sector increased, that created very destructive economic and political dynamics.

More and more people got lured into the wagon of government dependency, which puts an ever-increasing burden on a shrinking pool of producers.

Meanwhile, organized interest groups such as government bureaucrats used their political muscle to extract absurdly excessive compensation packages, putting an even larger burden of the dwindling supply of taxpayers.

But that’s not the main focus of this post. Instead, I want to highlight a particular excerpt from the article and make a point about how too many people are blindly – perhaps willfully – ignorant of the Laffer Curve.

Check out this sentence.

Property tax collections are down 20 percent and income tax collections are down by more than a third in just the past five years — despite some of the highest tax rates in the state.

This is a classic “Fox Butterfield mistake,” which occurs when someone fails to recognize a cause-effect relationship. In this case, the reporter should have recognized that tax collections are down because Detroit has very high tax rates.

The city has a lot more problems than just high tax rates, of course, but can there be any doubt that productive people have very little incentive to earn and report taxable income in Detroit?

And that’s the essential insight of the Laffer Curve. Politicians can’t – or at least shouldn’t – assume that a 20 percent increase in tax rates will lead to a 20 percent increase in tax revenue. They also have to consider the degree to which a higher tax rate will cause a change in taxable income.

In some cases, higher tax rates will discourage people from earning more taxable income.

In some cases, higher tax rates will discourage people from reporting all the income they earn.

In some cases, higher tax rates will encourage people to utilize tax loopholes to shrink their taxable income.

In some cases, higher tax rates will encourage migration, thus causing taxable income to disappear.

Here’s my three-part video series on the Laffer Curve. Much of this is common sense, though it needs to be mandatory viewing for elected officials (as well as the bureaucrats at the Joint Committee on Taxation).

P.S. Just in case it’s not clear from the videos, we don’t want to be at the revenue-maximizing point on the Laffer Curve.

P.P.S. Amazingly, even the bureaucrats at the IMF recognize that there’s a point when taxes are so onerous that further increases don’t generate revenue.

P.P.P.S. At least CPAs understand the Laffer Curve, probably because they help their clients reduce their tax exposure to greedy governments.

P.P.P.P.S. I offered a Laffer Curve lesson to President Obama, but I doubt it had any impact.

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According to the Bank for International Settlements, the United States has a terrible long-run fiscal outlook. Assuming we don’t implement genuine entitlement reform, the only countries in worse shape are the United Kingdom and Japan.

The Organization for Economic Cooperation and Development, meanwhile, also has a grim fiscal outlook for America. According to their numbers, the only nations in worse shape are New Zealand and Japan.

But I’ve never been happy with these BIS and OECD numbers because they focus on deficits, debt, and fiscal balance. Those are important indicators, of course, but they’re best viewed as symptoms.

The underlying problem is that the burden of government spending is too high. And what the BIS and OECD numbers are really showing is that the public sector is going to get even bigger in coming decades, largely because of aging populations. Unfortunately, you have to read between the lines to understand what’s really happening.

But now I’ve stumbled across some IMF data that presents the long-run fiscal outlook in a more logical fashion. As you can see from this graph (taken from this publication), they show the expected rise in age-related spending on the vertical axis and the amount of needed fiscal adjustment on the horizontal axis.

In other words, you don’t want your nation to be in the upper-right quadrant, but that’s exactly where you can find the United States.

IMF Future Spending-Adjustment Needs

Yes, Japan needs more fiscal adjustment. Yes, the burden of government spending will expand by a larger amount in Belgium. But America combines the worst of both worlds in a depressingly impressive fashion.

So thanks to FDR, LBJ, Nixon, Bush, Obama and others for helping to create and expand the welfare state. They’ve managed to put the United States in a worse long-run position than Greece, Italy, Spain, Portugal, France, and other failing welfare states.

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In my never-ending crusade to push for the right kind of austerity, I appeared on RT to pontificate on the merits of limited government.

We got to cover a lot of material, so here’s some augmenting material.

1. The right kind of “austerity” is less government spending, which is why I’m very frustrated that the fight in Europe is largely between Keynesians who support more spending and IMF types who advocate higher taxes.

2. I explain why Keynesian economics is misguided, in part because government can’t spend money without taking resources from the productive sector of the economy and in part because politicians never follow through on Keynesian prescriptions for fiscal restraint when the economy is strong..

3. In an example of how to damn with faint praise, I give the International Monetary Fund credit for understanding that 2+2=4, though I also criticize the IMF for shifting from one bad approach (higher taxes) to another bad approach (Keynesian spending).

4. We discuss how many European nations got in trouble and then looked at how various governments responded to the crisis. Not surprisingly, I praise Switzerland for never getting in trouble and I commend the Baltic nations for rectifying their mistakes with genuine spending cuts.

5. I even give the “PIIGS” credit for slowing the growth of spending, albeit only after they had exhausted every possible bad policy option.

6. Not all government spending is created equal and I explain that Europe’s problem is that far too much money is spent on the welfare state.

7. I close with some analysis of the data fight between Senator Sheldon Whitehouse and the Heritage Foundation. As I’ve already explained, the Senator was the one relying on speculative data.

Showing that I have a tiny bit of non-economic knowledge, I even quoted Saint Augustine, though I’m sure he would be horribly offended that I indirectly equated him with politicians.

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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.

If you’re interested in the broader debate, here’s what Rogoff and Reinhart wrote in the New York Times to defend themselves, and here’s Paul Krugman’s criticism.

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.*

No wonder I want both sides to lose!

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.

In other words, deficits are bad, but the real problem is spending. I elaborate in this Center for Freedom and Prosperity video.

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.

P.P.S. Please do not confuse “austerian” economics with “Austrian economics.” The former is a political rationale for tax hikes. The latter is a sensible school of economic thought.

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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 even created a Bob Dole Award to chastise people who mistakenly focus on red ink when they should be worried about the overall burden of government spending.

But I may have to give myself the award because I very much enjoyed these two cartoons.

Here’s one from Jerry Holbert, showing Obama blithely unconcerned about the looming debt catastrophe.

Cartoon Debt Zombie

Except it’s really an entitlement problem, which is why I would have given the zombies names like Medicare, Medicaid, and Social Security.

And this Ken Catalino cartoon sort of makes the same point, but focusing specifically on the fiscal boondoggle known as Obamacare.

Cartoon Obamacare Debt

For those who don’t get the “mint” reference, it comes from a disgustingly amusing scene in a Monty Python movie.

And since I’ve already linked to scenes in another Monty Python movie, that gives you an idea of the type of humor I appreciate.

But the serious point to this post is that we will face a fiscal crisis at some point if government isn’t put on a diet.

Waiting for the crises to actually occur is a recipe for wretched consequences, as we can see from Greece, Italy, Spain, etc.

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As part of the silly budget debate in Washington, President Obama is claiming that an increase in the debt limit wouldn’t authorize higher spending.

That’s technically true, but it sure would enable higher spending.

This Chuck Asay cartoon offers an amusing perspective on the battle.

Asay Debt Limit Bills Cartoon

In the interest of accuracy, however, it should show President Bush having already gone through the checkout line with an equally big cart full of handouts.

After all, government spending imposes a heavy cost on the economy regardless of whether Republicans or Democrats are the ones in charge of policy.

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In an ideal world, Congress would not raise the debt limit.

This would force – automatically and immediately – a balanced budget. More important, it would produce a meaningful reduction in the burden of government spending.

Debt Limit FWAnd contrary to hyperbole from defenders of the status quo, it doesn’t mean default since the federal government collects about ten times as much revenue as needed to pay interest on the debt.

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.

To elaborate, my concern is that the White House will be able to whip up too much hysteria on the debt limit, particularly since the media will serve as an echo chamber and Bernanke will act as a lackey for the White House.

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.

Indeed, this is exactly what happened in 1995 when Newt Gingrich and Bill Clinton had their famous shutdown battle. The Democrats were anxious to cut a deal to get the gravy train rolling again, and Republicans used that leverage to achieve a significant policy victory.

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?

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I’ve frequently commented on Europe’s fiscal mess and argued that excessive government spending is responsible for both the sovereign debt crisis and the economic stagnation that plagues the continent.

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.

Now for some bad news. Unlike the Baltic nations, the PIIGS dragged their feet and didn’t reduce the burden of government spending until they had no choice.

Moreover, they all imposed crippling tax hikes. Indeed, the tax increases in Greece were so severe that even the International Monetary Fund warned that the country might be past the Laffer Curve revenue-maximizing point.

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.

P.P.S. To close with some European-themed humor, we have three videos: 1) A romantic comedy involving Mr. Greece and Ms. Germany, 2) Hitler learning about the European downgrade, and 3) A Greek perspective on Germany.

P.P.P.S. Heck, I can’t resisting sharing this cartoon, this Dave Barry mockery, and the non-PC map of Europe as well.

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Our number one fiscal problem is an excessive burden of government spending. A big part of the solution is entitlement reform.

Good for lobbyists, bad for America

Our number two fiscal problem is a punitive and corrupt tax code (as captured by images here, here, and here). A big part of the solution is a simple and fair flat tax.

So what do you think happened when the clowns in Washington were forced to address these issues because of the fiscal cliff? To nobody’s surprise, they were missing-in-action on the first problem and they made the second problem worse. Obama got a class-warfare tax hike and nothing was done to control government spending.

This was a defeat, but it’s not the end of the world. Indeed, it could be the trigger for a renewed campaign for fiscal responsibility.

Here’s some of what I wrote for the Daily Caller, beginning with my assessment that Obama had all the advantages going into the fight over the fiscal cliff.

President Obama entered the battle in a very strong position. A big tax increase automatically was going to happen even if he did nothing, so he was holding all the cards. He could — and did — tell Republicans that they had an unpleasant choice of either accepting that big automatic tax increase or acquiescing to his class-warfare plan. No wonder Republicans have been acting so discombobulated. They had no winning strategy.

And because of this unpalatable situation, I wrote that “I’m not overly upset with Republicans.” There was no way of denying Obama some sort of tax hike.

But they do deserve some blame, at least if they were in office last decade.

I am upset with many of them, however, because they were in office during the Bush years and they voted for much of the wasteful spending that helped create the current fiscal mess. Many GOPers beat their chests about being against tax hikes, but that’s not a very credible or sustainable position when they’re also voting for the no-bureaucrat-left-behind education bill, the corrupt farm bills, the pork-filled transportation bills, the prescription drug entitlement, the TARP bailout, and the 2008 faux stimulus.

As I explained last month, we would be in much stronger fiscal shape if lawmakers had merely restrained spending over the past 10-plus years so that it “only” grew to keep pace with inflation and population growth.

“I’m trying as hard as I can, but it’s difficult to spend as much of other people’s money as you did”

But we can’t undo the past. The real issue is whether we can make progress in the future. Are there strategies that might restrain Leviathan?

Fortunately, the answer is yes.

In the article, I point out that Republicans “have several opportunities in the next few months to show whether they’re on the side of taxpayers.” The key is to pick battles that are winnable. Here are three fights that they can win for the simple reason that nothing can happen without approval of the House of Representatives.

1. In my dream world, I argue that they should “block any disaster funding for New York, New Jersey, and other states affected by Hurricane Sandy.” But I realize that’s an impossible demand because so many people now mistakenly assume the federal government should be in charge of this state and local responsibility. So, instead, they should draw a line in the sand and say the measure won’t be approved unless lawmakers “cut out the billions of extraneous pork that’s been added to the bill.”

This is not a trivial issue. Check out these reports from Townhall and the Weekly Standard to see how politicians have larded the legislation with handouts that have nothing to do with hurricane-related damage. Fiscally responsible lawmakers can make appropriate economic arguments against this pork, but they also can grab the moral high ground and denounce the way special interests and their Capitol Hill lackeys are trying to exploit a tragedy.

2. Another good opportunity is the debt limit. Proponents of smaller government should “insist on some long-overdue process reform as part of an increase” in the federal government’s borrowing authority. In the article, I specifically suggest they look at Congressman Brady’s MAP Act, which “imposes a spending cap modeled after the very successful Swiss Debt Brake.”

But even though I’m a huge fan of Switzerland’s spending cap, it’s important to recognize that the debt limit is a two-edged sword. Geithner, Bernanke, and other defenders of the status quo doubtlessly will engage in a lot of reckless demagoguery, falsely asserting that fiscal conservatives could provoke a default if they don’t give Obama a blank check.

3. This is why I think the ideal place to take a stand is the looming fight over the “continuing resolution.” Ignoring budgetary jargon, all you need to know is that Washington’s spending authority expires at the end of March. This means “that the government no longer will have authority to spend money for the non-entitlement portions of the federal government.”

In the article, I argue that “…lawmakers should insist on genuine spending cuts. And if Obama balks, let him be the one to shut down useless and counterproductive bureaucracies such as the Department of Education and the Department of Housing and Urban Development.” The potential risk of this strategy is that voters will blame fiscal conservatives if there’s a government shutdown, but I explained in an article for National Review that this was a very successful strategy in the mid-1990s.

The only problem with these three ideas is that they can only succeed if Republicans genuinely want to fight for smaller government. And as we saw from votes on housing handouts, pork-barrel spending, and corporate welfare, the GOP oftentimes is part of the problem.

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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 rather galling, by the way, to be lectured on taxes by a tax cheat like Tim Geithner.

But my key point is that the GOP’s preemptive surrender emboldened the White House, and helped move the debate even further to the left.

Let me elaborate on two points from the interview.

  1. We don’t need a tax increase. We can balance the budget simply by limiting spending so that it grows by “only” 2.5 percent annually. As I say to Cavuto, the White House is pushing higher taxes in order to enable a bigger burden of government spending.
  2. 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.

Cartoon Beat the Press Tax Hikes

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, herehereherehere, and here.

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I’ve been arguing against higher taxes because of my concerns that more revenue will simply lead to a bigger burden of government spending.

Yes, I realize it is theoretically possible that a tax hike could be part of a political deal that produces a good outcome, such as entitlement reform.

But that doesn’t seem to happen in the real world. Indeed, I pointed out almost exactly one year ago that the only budget deal that gave us a surplus was the 1997 pact that cut taxes instead of raising them.

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.

Euro tax debt 1

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?

Euro tax debt 2

Well, knock me over with a feather. The next chart shows that debt is much higher today, averaging about 60 percent of GDP.

Euro tax debt 3

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.

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I’m very concerned about both the fiscal cliff and its possible replacements. It will be bad news if we get an automatic tax hike on January 1, and it will be bad news if that tax increase is replaced by an even more odious plan concocted by the White House.

Fiscal Cliff Cartoon RamirezBut the cliff is not our biggest fiscal problem.

Here’s some of what I wrote for today’s New York Post about the fiscal cliff, along with a warning that we have a much bigger problem down the road.

…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.

In other words, the solution is to follow Mitchell’s Golden Rule. That’s the only way to make sure that the burden of government spending shrinks relative to economic output.

Fortunately, that simply requires some modest spending restraint to address the short run problem and some intelligently designed entitlement reform to solve the long run challenge.

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.

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If done well, an image can say a thousand words. Here are some of my favorites.

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.

Heritage Fiscal Cliff

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.

Obama Fake $400 Billion Cut

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.

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It’s not easy to find some humor in the European fiscal crisis, though this Hitler parody video surely is a classic.

We now have a new video to enjoy.

There are some naughty words, so be forewarned.

And speaking of Greek-related humor, this cartoon is quite  good, but this this one is my favorite. And the final cartoon in this post also has a Greek theme.

P.S. If you like Greek-related humor, I have two more posts that have been very popular. The first one features a video about…well, I’m not sure, but we’ll call it a European romantic comedy and the second one has some very un-PC maps of how various peoples – including the Greeks – view different European nations.

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I shared a cartoon last Halloween that made fun of those who support class-warfare tax policy.

Now we have a related cartoon, featuring a stop at the White House.

Republicans will like the ghost’s comments, of course.

The next two cartoons are almost identical. We’ll start with this one from Michael Ramirez.

Ramirez is one of my favorite cartoonists, incidentally, and you can see more of his work here, here, here, here, here, here, here, here, here, here, herehereherehereherehere, and here.

Here’s a Gary Varvel cartoon with the exact same message.

Instead of great minds thinking alike, this is a case of great cartoonists thinking alike. Though they probably have great minds as well.

But I don’t want to make too many fawning comments since I would modify both of these cartoons so that the kids were looking at papers that said “Medicare” and “Social Security” instead of “debt.”

It’s always important to focus first and foremost on the disease of spending, after all, and not the symptom of red ink.

Last but not least, I can’t resist linking to this comedian’s video, which includes some very good economic insights about work incentives.

Sort of like this Wizard of Id parody featuring Obama.

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