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Posts Tagged ‘Federal Budget’

The President’s new budget has been unveiled.

There are lots of provisions that deserve detailed attention, but I always look first at the overall trends. Most specifically, I want to see what’s happening with the burden of government spending.

And you probably won’t be surprised to see that Obama isn’t imposing any fiscal restraint. He wants spending to increase more than twice as fast as needed to keep pace with inflation.

Obama 2015 Budget Growth

What makes these numbers so disappointing is that we learned last month that even a modest bit of spending discipline is all that’s needed to balance the budget.

By the way, you probably won’t be surprised to learn that the President also wants a $651 billion tax hike.

That’s in addition to the big fiscal cliff tax hike from early last and the (thankfully smaller) tax increase in the Ryan-Murray budget that was approved late last year.

P.S. Since we’re talking about government spending, I may as well add some more bad news.

I’ve shared some really outrageous examples of government waste, but here’s a new example that has me foaming at the mouth. Government bureaucrats are flying in luxury and sticking taxpayers with big costs. Here are some of the odious details from the Washington Examiner.

What can $4,367 buy? For one NASA employee, it bought a business-class flight from Frankfurt, Germany, to Vienna, Austria. Coach-class fare for the same flight was $39. The federal government spent millions of dollars on thousands of upgraded flights for employees in 2012 and 2013, paying many times more for business and first-class seats than the same flights would have cost in coach or the government-contracted rate. …Agencies report their premium travel expenses to the General Services Administration each year. These reports were obtained by the Washington Examiner through Freedom of Information Act requests. …The most common reasons across agencies for such “premium” flights in 2012 and 2013 were medical necessities and flights with more than 14 hours of travel time.

By the way, “medical necessities” is an easily exploited loophole. All too often, bureaucrats get notes from their doctors saying that they have bad backs (or something similarly dodgy) and that they require extra seating space.

Probably the same doctors who participate in the disability scam.

But I’m digressing. It’s sometimes hard to focus when there are so many examples of foolish government policy.

Let’s look at more examples of taxpayers getting reamed.

One such flight was a trip from Washington, D.C., to Brussels, Belgium, which cost $6,612 instead of $863. Similar mission-required upgrades included several flights to Kuwait for $6,911 instead of $1,471, a flight from D.C. to Tokyo for $7,234 instead of $1,081 and a trip from D.C. to Paris for $6,037 instead of $477. …NASA employees also racked up a long list of flights that cost 26, 72 and even 112 times the cost of coach fares, according to Examiner calculations. Several space agency employees flew from Oslo, Norway, to Tromso, Norway — a trip that should have cost $65. Instead, each flew business class for $4,668. Another NASA employee flew from Frankfurt, Germany, to Cologne, Germany, for $6,851 instead of $133, a flight that cost almost 52 times more than the coach fare. …One flight from D.C. to Hanoi, Vietnam, for an informational meeting cost $15,529 instead of $1,649, according to the agency’s 2012 report.

Frankfurt to Cologne for $6851?!? Did the trip include caviar and a masseuse? A domestic flight in Norway for $4668? Was the plane made of gold?

I do enough international travel to know that these prices are absurd, even if you somehow think bureaucrats should get business class travel (and they shouldn’t).

And as you might suspect, much of the travel was for wasteful boondoggles.

Department of the Interior employees, for example, flew to such exotic locations as Costa Rica, Denmark, Japan and South Africa in 2012. …The Department of Labor sent employees to places like Vietnam and the Philippines for “informational meetings,” conferences and site visits.

The one sliver of good news is that taxpayers didn’t get ripped off to the same extent last year as they did the previous year.

The agencies spent $5.7 million in 2012, almost double the $3 million they paid for premium travel in 2013.

The moral of the story is that lowering overall budgets – as happened in 2013 – is the only effective way of reducing waste.

P.P.S. Want to know why the tax reform plan introduced by Congressman Dave Camp was so uninspiring, as I noted last week?

The answer is that he preemptively acquiesced to the left’s demands that class warfare should guide tax policy. Politico has the details.

Republicans had vowed for more than three years to slash the top individual income tax rate to 25 percent as part of a Tax Code overhaul. …last week Camp abandoned plans for a deep cut in the top marginal tax rate. He settled for 35 percent, which is just 4 percentage points lower than the current one. “It was a distribution issue,” Camp said. Getting all the way down to 25 percent “would have reduced taxes for the top 1 percent” and “I said we would be distributionally neutral.”

In other words, this is the tax code version of the Brezhnev Doctrine. Whenever the left is successful is raising the tax burden on the so-called rich (the top 20 percent already bears two-thirds of the burden), that then supposedly becomes a never-to-be-changed benchmark.

Fortunately, Reagan did not accept the left’s distorted rules and we got the Economic Recovery Tax Act in 1981, which helped trigger the 1980s boom.

And even when Reagan agreed to “distributional neutrality,” as happened as part of the 1986 Tax Reform Act, at least he got something big in exchange.

The Camp plan, by contrast, is thin gruel.

A big rate cut is what powered the last major tax overhaul, in 1986, which delivered tax cuts to every income group while slicing the top rate to 28 percent from a whopping 50 percent. …Lawmakers may look at the proposal and think: “I’m having the world coming down on me” and “all this just to get the rate down 4 points?”

That being said, the Camp plan has plenty of good features, including modest rate reductions and repeal of a few bad loopholes. But it’s accompanied by some really bad provisions, such as increased double taxation and higher taxes on business investment.

P.P.P.S. Long-time readers may remember this amusing Reagan-Obama comparison.

For understandable reasons, that’s what crossed my mind when seeing this example of Obama humor.

I should hasten to add, incidentally, that this is not to suggest I want Obama to do anything about the Ukrainian conflict (other than perhaps encourage decentralized power).

Unless one genuinely thinks that Putin has both the capacity and the desire for global imperialism, it’s hard to see how America’s national security is affected.

But I still appreciate good political humor. I like it when Obama is the target, and I like it even when it’s directed at people like me.

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The President is supposed to release his FY2014 budget tomorrow, more than two months later than required by law.

Based on what it’s rumored to contain, I’ve already explained that nobody should be tricked into thinking that Obama is moving to the center. Though he may not be as far to the left as Senate Democrats.

Not that it would be easy to get to the left of that plan, as cartoonists have ably illustrated.

Anyhow, much of Washington is buzzing about what might be in the President’s proposal.

Well, time to sate your curiosity. I have a leaked copy of the budget for your enjoyment.

Leaked Obama Budget Cartoon

We won’t see actual numbers until tomorrow, but I’m guessing that I’ll be sharing something very similar to the analysis I provided last year and the year before.

P.S. If you enjoy political humor, the Glenn McCoy cartoon in this post is a pretty good summary of what Obama will say in his budget message.

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I wrote about the Ryan budget two days ago, praising it for complying with Mitchell’s Golden Rule and reforming Medicare and Medicaid.

But I believe in being honest and nonpartisan, so I also groused that it wasn’t as good as the 2011 and 2012 versions.

Now it’s time to give the same neutral and dispassionate treatment to the budget proposed by Patty Murray, the Washington Democrat who chairs the Senate Budget Committee.

But I’m going to focus on a theme rather than numbers.

One part of her budget got me particularly excited. Her Committee’s “Foundation for Growth” blueprint makes a very strong assertion about the fiscal and economic history of the Clinton years.

The work done in the 1990s helped grow the economy, create jobs, balance the budget, and put our government on track to eliminate the national debt.

As elaborated in this passage, the 42nd President delivered very good results.

President Bill Clinton entered office in 1993 at a time when the country was facing serious deficit and debt problems. The year before, the federal government was taking in revenue equal 17.5 percent of GDP, but spending was 22.1 percent of the economy—a deficit of 4.7 percent. …The unemployment rate went from 7 percent at the beginning of 1993 to 3.9 percent at the end of 2000. Between 1993 and 2001, our economy gained more than 22 million jobs and experienced the longest economic expansion in our history.

And the Senate Democrats even identified one of the key reasons why economic and fiscal policy was so successful during the 1990s.

…federal spending dropped from 22.1 percent of GDP to 18.2 percent of GDP.

I fully agree with every word reprinted above. That’s the good news.

So what, then, is the bad news?

Well, Senator Murray may have reached the right conclusion, but she was wildly wrong in her analysis. For all intents and purposes, she claims that the 1993 tax hike produced most of the good results.

President Clinton’s 1993 tax deal…brought in new revenue from the wealthiest Americans and…our country created 22 million new jobs and achieved a balanced budget. President Clinton’s tax policies were not the only driver of economic growth, but our leaders’ ability to agree on a fiscally sustainable and economically sound path provided valuable certainty for American families and businesses.

First, let’s dispense with the myth that the 1993 tax hike balanced the budget. I obtained the fiscal forecasts that were produced by both the Congressional Budget Office and the Office of Management and Budget in early 1995 because I wanted to see whether a balanced budget was predicted.

As you can see in the chart, both of those forecasts showed perpetual deficits of about $200 billion. And these forecasts were made nearly 18 months after the Clinton tax hike was implemented.

So if even the White House’s own forecast from OMB didn’t foresee a balanced budget, what caused the actual fiscal situation to be much better than the estimates?

The simple answer is that spending was restrained. You can give credit to Bill Clinton. You can give credit to the GOP Congress that took power in early 1995. You can give the credit to both.

But regardless of who gets the credit, the period of spending restraint that began at that time was the change that produced a budget surplus, not the tax hike that was imposed 18 months earlier and which was associated with perpetual red ink.

But spending restraint tells only part of the story. With the exception of the 1993 tax hike, the Clinton years were a period of shrinking government and free market reform.

Clinton RecordTake a look at my homemade bar chart to compare the good policies of the 1990s with the bad policies. It’s not even close.

You may be thinking that my comparison is completely unscientific, and you’re right. I probably overlooked some good policies and some bad policies.

And my assumptions about weighting are very simplistic. Everything is equally important, with a big exception in that I made the government spending variable three times as important as everything else.

Why? Well, I think reducing the burden of government spending during the Clinton years was a major achievement.

But maybe we shouldn’t rely on my gut instincts. So let’s set aside my created-at-the-spur-of-the-moment bar chart and look at something that is scientific.

This chart is taken directly from Economic Freedom of the World, which uses dozens of variables to measure the overall burden of government.

As you can see, the United States score improved significantly during the Clinton years, showing that economic freedom was expanding and the size and scope of government was shrinking.

In other words, Patty Murray is correct. She is absolutely right to claim that Bill Clinton’s policies “helped grow the economy, create jobs, balance the budget.”

Now she needs to realize that those policies were small government and free markets.

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One of the big stories from Washington is that there may be another fight over the debt limit, which could mean…gasp, hide the women and children…gridlock, downgrades, government shutdown, default, and tooth decay.

Okay, perhaps not tooth decay, but the DC establishment nonetheless is aghast.

Last year, there were actually two big confrontations between House Republicans and President Obama.

The first fight occurred early in the year and revolved around spending levels for the remainder of the 2011 fiscal year. I explained in February of that year how advocates of smaller government could prevail in a government shutdown fight, especially since the “essential” parts of the government wouldn’t be affected.

But I wasn’t surprised when GOPers buckled under pressure and accepted a deal that – at best – could be categorized as a kiss-your-sister compromise (and, as I noted elsewhere, our sister wasn’t Claudia Schiffer).

Then we had the big debt limit fight later in the year, which led to absurd claims that failure to increase the debt limit would lead to default – even though the federal government was collecting ten times as much revenue as was needed to pay interest on the debt.

Once again, Republicans were unable to withstand the demagoguery and they basically gave Obama what he wanted after agreeing to a “supercommittee” that was designed to seduce them into a tax increase.

Now the game is about to start over. It’s deja vu all over again, as Yogi Berra might say.

Here’s some of what the L.A. Times reported.

Republicans in Congress are heading into summer much the way they did last year — instigating a showdown with the White House by demanding massive federal budget cuts in exchange for what used to be the routine task of raising the nation’s debt limit to pay the government’s bills. House Speaker John A. Boehner (R-Ohio) is doubling down on the strategy that ended in mixed results last year after the country came to the brink of a federal default before a deal was struck with President Obama. In that go-round, both sides saw their approval ratings with voters plummet and the nation’s credit was downgraded. …The risk for Republicans is not only in presenting another high-stakes showdown at a time when voters have grown weary of the gridlock in Washington.

The reporter’s assertion that the debt limit fight led to the downgrade is a bit silly, as I explain here, but that’s now part of the official narrative.

On a separate matter, I can’t help but shake my head with frustration that GOPers still haven’t learned that America’s fiscal problem is too much spending, and that deficits and debt are symptoms of that problem. Here’s another passage from the L.A. Times story.

“The issue is the debt,” Boehner said Sunday on ABC’s “This Week With George Stephanopoulos.” “Dealing with our deficit and our debt would help create more economic growth in the United States and it would lift this cloud of uncertainty that’s causing employers to wonder what’s next.”

No, Mr. Speaker. The problem is spending, spending, spending.

Returning to the main issue, the debt limit isn’t the only big fiscal fight that may happen this year. There will also be the spending bills for the 2013 fiscal year, which starts on October 1 of this year. That will mean another fight, particularly since the left has no intention of abiding by the spending limit that was part of last year’s debt limit deal.

And if Republicans hold firm, that means another “government shutdown.” Though it really should be called a “government slowdown” since it’s only the non-essential bureaucrats who get sent home.

In any event, since I’m glum about the likelihood of anything good happening, let’s at least enjoy some good cartoons from Jeff MacNelly. He passed away a number of years ago, but these cartoons from the mid-1990s are just as applicable today as they were then.

These are amusing cartoons, so long as you don’t actually think about the fact that government is bloated in part because Washington is littered with programs, departments, and agencies that are filled with non-essential bureaucrats. And don’t forget that these bureaucrats are overpaid, getting, on average, twice the compensation of workers in the productive sector of the economy.

But I don’t want to end this post on a sour note, so here are some good jokes from the late-night comics about government shutdowns.

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A few months ago, I wrote some very nice things about a budget plan put together by Senator Rand Paul of Kentucky, noting that:

Senator Paul and his colleagues are highlighting the fact that the plan generates a balanced budget in just five years. That’s a good outcome, but it should be a secondary selling point. All the good results in the plan – including the reduction in red ink and the flat tax – are made possible because the overall burden of federal spending is lowered.

Not surprising, one of the columnists at the Washington Post has a different perspective. In his hyperventilating column today, Dana Milbank says that Senator’s Paul’s proposal is “monstrous” and “nasty” for reining in the federal government.

The tea party darling’s plan would, among other things, cut the average Social Security recipient’s benefits by nearly 40 percent, reduce defense spending by nearly $100 billion below a level the Pentagon calls “devastating,” and end the current Medicare program in two years — even for current recipients, according to the Senate Budget Committee staff. It would eliminate the education, energy, housing and commerce departments, decimate homeland security, eviscerate programs for the poor, and give the wealthy a bonanza by reducing tax rates to 17 percent and eliminating taxes on capital gains and dividends. It is, all in all, quite a nasty piece of work.

Setting aside some of the inaccuracies (Social Security benefits would rise, for instance, but not as fast as they would under current law), I have two reactions to Milbank’s screed.

1. Milbank seems to think that Rand Paul’s budget is heartless and mean. Does that mean it would be nice and caring to let America descend into Greek-style fiscal chaos and economic decline? Should the United States be more like Europe, even though living standards are about 30 percent lower?

2. More amusingly, what does he think about the fact that the Senate voted against Obama’s tax-and-spend budget by a stunning margin of 99-0? That’s even worse than the 97-0 vote against the budget Obama proposed last year. The 16 votes for Rand Paul’s budget may not sound like much, but 16 is a lot more than zero.

Setting aside the snarky comments, all that Rand Paul is proposing is to limit the growth of government so that the federal budget grows by an average of about 2 percent annually.

Other nations, such as Canada and New Zealand were much more frugal when they solved their fiscal problems. But for leftists such as Milbank, any fiscal restraint apparently is “nasty” and “monsrous.”

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Many people think that my opposition to tax increases is ideological, but they’re wrong.

  • If someone told me that I magically had the power to flick a switch and give the country a flat tax, but that simple and fair tax system would only be possible if the rate was set high enough to give the government an extra $100 billion of revenue each year, I would take the deal in a heartbeat.
  • If I was given the opportunity to abolish the Departments of Energy, Education, Transportation, Agriculture, and Housing and Urban Development, but I had to give the politicians an extra $100 billion of revenue per year in exchange, I’d say yes right away.
  • And if I had the chance to adopt Medicare reform, Medicaid reform, and Social Security reform, and all I had to give up was $100 billion of added annual tax revenue, I wouldn’t hesitate to give my approval.

In other words, I’m willing to go along with a tax hike so long as I get an acceptable offer. And my definition of acceptable offer isn’t even that onerous. I’m willing to acquiesce to a tax hike if the net long-run effect is more freedom, liberty, and prosperity.

Heck, I’ve even said on national TV that I would go back to Bill Clinton’s tax policy if I could undo all the reckless spending and regulation of the Bush-Obama years.

So if my views on this topic are so open-minded, reasonable, and pragmatic, why am I always writing posts that are critical of tax hikes?

But before answering that question, let’s present the views of some other people. At the end of last month, I was at the Economics Bloggers Forum put on by the good folks at the Kauffman Foundation in Kansas City. Lots of interesting people from all parts of the spectrum.

My favorite panel was entitled “After the Election, How Do We Fix the Budget?” and it featured John Goodman of the National Center for Policy Analysis, Ezra Klein of the Washington Post, and Donald Marron of the Tax Policy Center.

All of the presentations were interesting, but I want to focus on Donald’s remarks. He made the case that a big budget deal with higher taxes might be desirable because that kind of  “grand bargain” would include pro-growth tax reform and much-need entitlement reform.

You can watch his presentation by clicking on the “Panel 2″ video and going to the 17:15 mark. Donald’s argument is that tax preferences are inefficient and distorting, so it would be a win-win scenario to get rid of them as part of a deal that also deals with entitlement programs. The government does collect more revenue, but he’s describing a worthwhile package. At least in theory.

Donald’s not the only person to make this argument. Here’s some of what Morgen Richmond recently wrote at the conservative Hotair.com website.

I am mystified why the GOP has adopted such a hard line when it comes to tax policy, particularly within the framework of a budget deal which would include a major re-structuring of federal entitlement programs. …given what may be a once-in-a-lifetime opportunity to finally deal with entitlements, personally, as a member of the near-1%, I would at least grudgingly accept a moderate tax increase knowing that we’ve set the nation on a sustainable path. Further, I would gladly – enthusiastically! – support the possibility of a moderate tax increase as part of the 2012 GOP budget platform, as long as it’s clear that this would only be on the table as part of a comprehensive deal which included entitlement reform, along the lines proposed by Ryan. …I’m…suggesting we…consider adding a little revenue from higher wage earners, or least a placeholder to do so. Just something to allow our nominee to credibly argue that when it comes to restoring the fiscal prosperity of our nation, everything is on the table. Because frankly, it should be.

Morgen’s premise is to the left of Donald’s because he is willing to trade class-warfare tax hikes for entitlement reform. But this also might be an acceptable swap.

And remember the GOP presidential debate, where all the Republican candidates rejected a hypothetical deal featuring $10 of spending cuts for every $1 of tax hikes? Well, here’s what Kevin Williamson of National Review said in response.

Every candidate said he would oppose a…plan that contained a 10:1 ratio of cuts to taxes. Chalk one up to the crazies. If Congress wanted to get rid of tax exemptions and exclusions amounting to $100 billion in new taxes in exchange for $1 trillion in cuts, and Republicans turned the deal down, I would personally drive down to Washington and pelt them with rotten vegetables, and possibly with rocks. $100 billion in new taxes plus $1 trillion in cuts balances the budget in 2012.

I wouldn’t mind throwing rocks at politicians, so sign me up. And I’d also take the 10-1 deal Kevin is describing.

But here’s where theory gets crushed by reality. Marron, Richmond, and Williamson are describing deals that will never happen. Sort of like me speculating on whether I’d be willing to play for the New York Yankees, but only if they guarantee me $5 million per year.

As a practical matter, I’m opposed to tax increases because the odds of getting a deal that moves policy in a constructive direction are somewhere between…well, I was going to write “slim and none,” but it’s more accurate to say that the odds range from are-you-smoking-crack to you-must-be-f-ing-kidding.

Here are three reasons why.

1. The supposed spending cuts in a “grand bargain” would be based on dishonest Washington math. If I’m supposed to take some sort of deal, whether it’s $10-$1, $3-$1, or $1-$1, I want the spending cuts to be genuine, not the usual game of having a program grow by 6 percent instead of 8 percent and pretending there’s been a 2 percent cut. Sadly, what I want doesn’t matter. Budget policy in Washington is governed by a fundamentally dishonest process that says that reductions in increases are actually cuts.

2. Proponents of the grand bargain always say that any new tax revenues will be generated by closing loopholes, deductions, exclusions, and other preferences. Since I’ve railed against corrupt tax-code distortions, that should be music to my ears. Unfortunately, as I explained last year, the people at the Joint Committee on Taxation use a very biased benchmark when measuring so-called tax expenditures. As a result, a “grand bargain” would be more likely to result in an increase in the (already onerous) double taxation of income that is saved and invested rather than the elimination of genuine loopholes such as the exclusion for employer-provided health insurance. And if Obama prevailed, we’d also have higher income tax rates as well.

3. Not all entitlement reform is created equal. The right kind of reform changes the structure of programs to promote market forces, federalism, and fiscal sustainability. The wrong kind of reform, by contrast, keeps the existing structure in place and tries to address the fiscal train wreck with some combination of means-testing and price controls. Now, take a wild guess at which approach was adopted by the Gang of Six and the Simpson-Bowles fiscal commission, plans that often are cited as providing a framework for a grand bargain? You won’t be surprised to learn that neither plan included the real entitlement reforms from the Ryan budget.

Simply stated, there is no practical way to get a good deal from either the Democrats in the Senate or the Obama Administration. Notwithstanding the good intentions of Marron, Richmond, and Williamson, any grand bargain would be a failure that leads to higher spending and more red ink, just as we saw after the 1982 and 1990 budget deals. The tax increases would not be relatively benign loophole closers. Instead, the economy would be hit by higher marginal tax rates on work, savings, investment, and entrepreneurship. And the entitlement reform would be unsustainable gimmicks rather than structural changes to fix the underlying programs.

This is a prediction, not a statement of fact, so I could be wrong. Indeed, I hope my prediction is wrong. But history is on my side, so I think supporters of the so-called grand bargain have an obligation to tell us why a budget deal today would produce a good result notwithstanding the  real-world concerns outlined above.

And speaking of history, the left sometimes claims that the 1993 tax hike generated budget surpluses later in the decade, but numbers from Bill Clinton’s Office of Management and Budget puncture this myth.

The bottom line is that more than 100 percent of America’s fiscal problem is because of too much spending. As such, even though higher taxes theoretically could be part of a grand bargain to address the nation’s spending crisis, I’m reminded of Samuel Johnson’s famous quote about second marriages being a triumph of hope over experience.

But some second marriages are successful, so proponents of the grand bargain are more akin to people going on safaris in search of Bigfoot, the abominable snowman, unicorns, and the Loch Ness monster. But I’ll bestow upon them a Charlie Brown Award, so at least they’ll have something to hang on the wall.

P.S. Since I don’t want to tear down the ideas of others without offering a solution of my own, here’s the simple approach that’s needed to balance the budget.

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I posted yesterday about Obama’s demagoguery against the Ryan budget and criticized the President for sloppy budget math, tedious class warfare, and a deeply flawed grasp of America’s founding principles.

This was followed by an opportunity yesterday evening to debate Jared Bernstein on the PBS NewsHour.

Here’s the interview, though I warn you that excerpts of Obama’s  speech take up the first 3:17 of the video, and you won’t get to the debate until about 4:20.

A few observations about the interview (other than that I need a haircut).

By the way, Jared Bernstein is a co-author of the infamous White House report that claimed unemployment would never rise above 8 percent if we squandered $800 billion on a faux stimulus package based on Keynesian economics. But I’m a nice guy, so I chose not to raise that issue.

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A couple of weeks ago, I offered some guarded praise for Paul Ryan’s budget, pointing out that it satisfies the most important requirement of fiscal policy by restraining spending – to an average of 3.1 percent per year over the next 10 years – so that government grows slower than the productive sector of the economy (I call this my Golden Rule).

I was more effusive in my comments about Senator Rand Paul’s budget, which limited the growth of the federal budget over the next 10 years to an average of 2.2 percent each year.

Now the Republican Study Committee from the House of Representatives has put forth a plan that also deserves considerable applause. Like Senator Paul, the RSC plan would impose immediate significant fiscal discipline such that spending in 2017 would be about the same level as it is this year.

Think of this as being similar to the very successful fiscal reforms of New Zealand and Canada in the 1990s.

After the initial period of spending restraint, the budget would be allowed to grow, but only about as fast as the private economy. This chart shows spending levels for the Obama budget, the Paul Ryan budget, the Rand Paul budget, and the RSC budget.

A couple of final points.

1. For all the whining and complaining from the pro-spending lobbies, the RSC budget is hardly draconian. Federal spending, measured as a share of GDP, would only drop to where it was when Bill Clinton left office.

2. One preferable feature of the Rand Paul budget is that the Kentucky Senator eliminates four needless and wasteful federal departments – Commerce, Education, Energy, and Housing and Urban Development. As far as I can tell, no departments are eliminated in the RSC plan. Also, Senator Paul’s plan is bolder on tax reform, scrapping the corrupt internal revenue code and replacing it with a simple and fair flat tax.

3. The RSC comes perilously close to winning a Bob Dole Award. The first chapter of their proposal fixates on symptoms of debt and deficits rather than the real problem of excessive government spending. Indeed, the first six charts all relate to deficits and debt, creating an easy opening for leftists to say they can solve the mis-defined problem with higher taxes.

There are lots of other details worth exploring, but the main lesson is that restraining spending is the key to good fiscal policy.

And that’s what’s happening.  Indeed, the good news is that policymakers have proposed several budget plans that would shrink the burden of spending as a share of GDP. It’s refreshing to debate the features of several good plans (rather than comparing the warts in the competing plans during the big-government Bush years).

The bad news is that Harry Reid and Barack Obama will succeed in blocking any progress this year, so America will move ever closer to becoming another Greece.

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The Chairman of the House Budget Committee has produced a new budget plan which contrasts very favorably with the tax-heavy, big-spending proposal submitted by the President last month.

Perhaps most important, Congressman Ryan’s plan restrains spending growth, allowing the private sector to grow faster than the burden of government, thus satisfying Mitchell’s Golden Rule so that spending falls as a share of GDP.

The most important detail in the proposal is that the federal budget, which currently consumes 24 percent of GDP, would fall to less than 20 percent of GDP beginning in 2016.

That’s the good news. There are three pieces of not-so-good news.

1. Ryan’s plan allows spending to grow by an average of 3.1 percent annually over the next 10 years, with is faster than the 2.8 percent average annual growth in last year’s budget.

2. His proposed Medicare reform, while far better than current law, also is not as good as what was proposed last year.

3. The federal budget would still consume a greater share of the economy’s output than it did when Bill Clinton left office.

I suppose it’s also worth mentioning that Ryan’s proposal isn’t as good as Rand Paul’s budget. Spending only climbs 2.2 percent yearly under the plan put together by the Kentucky Senator, and he also abolishes several useless cabinet-level departments.

But the very good shouldn’t be the enemy of the good. As noted already, Congressman Ryan’s plan meets the most important test, which is restraining spending so that the federal budget grows slower than the private economy. And, as the chart shows, he obviously imposes more fiscal restrain then President Obama.

Regular readers know that I generally show no mercy to jelly-spined Republicans, but I praised GOPers for approving last year’s Ryan budget. The same will be true if they approve this year’s version.

P.S. I am frustrated and nauseated by all the people who are fixating on whether Congressman Ryan’s plan balances the budget in 10 years, 20 years, or whenever. What matters is shrinking the burden of government. I hereby bestow the Bob Dole Award on all the people who are mistakenly focusing on the symptom of red ink rather than the underlying disease of bloated government.

P.P.S. I’m happy to report that there is no value-added tax in the revenue portion of Congressman Ryan’s budget. There is a VAT in his Roadmap plan, and I endlessly worry that this poison pill will re-emerge and ruin other good fiscal plans put forth by the Wisconsin lawmaker.

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As discussed yesterday, the most important number in Obama’s budget is that the burden of government spending will be at least $2 trillion higher in 10 years if the President’s plan is enacted.

But there are also some very unsightly warts in the revenue portion of the President’s budget. Americans for Tax Reform has a good summary of the various tax hikes, most of which are based on punitive, class-warfare ideology.

In this post, I want to focus on the President’s proposals to increase both the capital gains tax rate and the tax rate on dividends.

Most of the discussion is focusing on the big increase in tax rates for 2013, particularly when you include the 3.8 tax on investment income that was part of Obamacare. If the President is successful, the tax on capital gains will climb from 15 percent this year to 23.8 percent next year, and the tax on dividends will skyrocket from 15 percent to 43.4 percent.

But these numbers understate the true burden because they don’t include the impact of double taxation, which exists when the government cycles some income through the tax code more than one time. As this chart illustrates, this means a much higher tax burden on income that is saved and invested.

The accounting firm of Ernst and Young just produced a report looking at actual tax rates on capital gains and dividends, once other layers of tax are included. The results are very sobering. The United States already has one of the most punitive tax regimes for saving and investment.

Looking at this first chart, it seems quite certain that we would have the worst system for dividends if Obama’s budget is enacted.

The good news, so to speak, is that we probably wouldn’t have the worst capital gains tax system if the President’s plan is enacted. I’m just guessing, but it looks like Italy (gee, what a role model) would still be higher.

Let’s now contemplate the potential impact of the President’s tax plan. I am dumbfounded that anybody could look at these charts and decide that America will be in better shape with higher tax rates on dividends and capital gains.

This isn’t just some abstract issue about competitiveness. As I explain in this video, every single economic theory – even Marxism and socialism – agrees that saving and investment are key for long-run growth and higher living standards.

So why is he doing this? I periodically run into people who are convinced that the President is deliberately trying to ruin the nation. I tell them this is nonsense and that there’s no reason to believe elaborate conspiracies.

President Obama is simply doing the same thing that President Bush did: Making bad decisions because of perceived short-run political advantage.

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President Obama’s budget proposal was unveiled today, generating all sorts of conflicting statements from both parties.

Some of the assertions wrongly focus on red ink rather than the size of government. Others rely on dishonest Washington budget math, which means spending increases magically become budget cuts simply because outlays are growing at a slower rate than previously planned.

When you strip away all the misleading and inaccurate rhetoric, here’s the one set of numbers that really matters. If we believe the President’s forecasts (which may be a best-case scenario), the burden of federal spending will grow by $2 trillion between this year and 2022.

In all likelihood, the actual numbers will be worse than this forecast.

The President’s budget, for instance, projects that the burden of federal spending will expand by less than 1 percent next year. That sounds like good news since it would satisfy Mitchell’s Golden Rule.

But don’t believe it. If we look at the budget Obama proposed last year, federal spending was supposed to fall this year. Yet the Obama Administration now projects that outlays in 2012 will be more than 5 percent higher than they were in 2011.

The most honest assessment of the budget came from the President’s Chief of Staff, who openly stated that, “the time for austerity is not today.”

With $2 trillion of additional spending (and probably more), that’s the understatement of the century.

What makes this such a debacle is that other nations have managed to impose real restraints on government budgets. The Baltic nations have made actual cuts to spending. And governments in Canada, New Zealand, Slovakia, and Ireland generated big improvements by either freezing budgets or letting them grow very slowly.

I’ve already pointed out that the budget could be balanced in about 10 years if the Congress and the President displayed a modest bit of fiscal discipline and allowed spending to grow by no more than 2 percent annually.

But the goal shouldn’t be to balance the budget. We want faster growth, more freedom, and constitutional government. All of these goals (as well as balancing the budget) are made possible by reducing the burden of federal spending.

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I gave this post a tongue-in-cheek title because Congressman Paul has produced a very good budget plan.

Which is to be expected since he is the candidate closest to my views according to the Reason political quiz (though I do criticize him  when appropriate).

You can read it on Congressman Paul’s campaign site and here’s how the New York Times described the highlights.

Representative Ron Paul on Monday unveiled an aggressive budget plan that would greatly shrink the federal government that he is seeking to run, eliminating the agency that oversees airport security, the departments of energy and education — and three others — while cutting all war financing. Providing a stark vision of what a libertarian takeover of the White House would look like, the plan would slash the federal budget by $1 trillion in a single year and, Mr. Paul said, bring the budget into balance within three. The federal workforce would be cut by 10 percent across the board. Aid to foreign nations would stop flowing altogether.

There’s obviously a lot to applaud about this proposal, and he gets rid of five useless cabinet-level departments (Energy, HUD, Commerce, Interior, and Education).

But why not get rid of the Department of Agriculture, which is a rat’s nest of destructive subsidies?

And why not get rid of the Department of Labor, which promotes unemployment and props up Big Labor?

Is there any reason not to get rid of the Department of Transportation, which does things that should be handled by the private sector, or state and local government?

But let’s not make the perfect the enemy of the very good. If we ever got half of what Congressman Paul is proposing, I might actually be briefly happy.

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Sounds like the beginning of a joke, sort of like, “A priest, a rabbi, and a minister walk into a bar…”

Setting for my weekend research

But I have a serious point to make. I’m currently in Anguilla (yes, this is just one of the sacrifices I make in the fight for liberty), where I just gave a speech to a local business group.

One of the topics I addressed was Anguilla’s fiscal policy.

Like many jurisdictions around the world, Anguilla has a red-ink problem. And like all the other places we could mention, the deficits and debt exist because government spending rose much faster than inflation over the past 10 years.

So I decided to create a new “Golden Rule of Fiscal Policy” based on all these observations (I would have called it Mitchell’s Law, but I’ve already used that title for another purpose).

Good fiscal policy exists when the private sector grows faster than the public sector, while fiscal ruin is inevitable if government spending grows faster than the productive part of the economy.

This is the underlying message of my video showing how to balance the federal budget. Moreover, all of the countries in this video enjoyed significant fiscal progress by following the rule. And it explains why I’m very impressed with Senator Corker’s proposal to cap the growth of federal spending.

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I’ve pointed out on several occasions that the burden of federal spending fell significantly during the Clinton years. Indeed, if we did nothing other than bring federal spending back down to 18.2 percent of GDP (where it was when Clinton left office), we’d have a budget surplus before the end of the decade (even with all the tax cuts made permanent).

Here’s a debate from a couple of months ago, but the issues haven’t changed. I debate Pat Choate (the 1996 running-mate of Ross Perot) about fiscal policy. I explain that spending is the problem and we could solve that problem by unwinding all the counterproductive spending of the Bush-Obama years.

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Here’s another news appearance from my new youtube channel. I chat about the importance (or lack thereof) of a possible ratings downgrade for the United States government.

You’ll see that I’m not overly impressed by Moody’s and the rest of the rating agencies.

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All the talk of spending cuts in Washington is fictitious. Even the House Republican Study Committee budget allows spending to increase, on average, by 1.7 percent each year for the next decade. The Ryan budget, which critics deride for its “savage” cuts, allows spending to rise by an average of 2.8 percent each year. And Obama’s budget allows spending to climb, on average, by 4.7 percent each year – which is more than twice the projected rate of inflation.

Too bad American policymakers can’t copy the Baltic nations of Estonia, Latvia, and Lithuania. Like the United States, these nations got in fiscal trouble, thanks to the combination of excessive spending and an economic downturn triggered by falling real estate prices.

But unlike the United States, these nations didn’t follow the Keynesian policy of more deficit spending. Lawmakers in the Baltic nations recognized, to borrow the words of Dan Hannan, that “you cannot spend your way out of recession or borrow your way out of debt.”

So they reduced spending. Not in the Washington sense, where politicians get to increase spending and call it a cut because outlays didn’t rise even faster. The Baltic nations imposed real cuts. And not just for one year, but in both 2009 and 2010. Here’s the data from the European Union for the Baltic nations.

Interestingly, it appears that fiscal restraint has been very successful for the Baltic nations. After suffering a steep downturn, economic growth has returned. Amazingly, Estonia is even back to having a budget surplus.

It’s also worth noting that other nations have enjoyed great success with fiscal restraint. This video shows how Canada, Ireland, Slovakia, and New Zealand dramatically reduced the burden of government spending by freezing or capping outlays. Not quite as impressive as what’s happened in the Baltics, but definitely very good compared to what’s been happening in the United States.

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I recently took part in a symposium on “The Budget Deficit and U.S. Competitiveness.” Put together by the Council on Foreign Relations, five of us were asked to concisely explain our thoughts on the issue.

Here’s some of what I wrote:

Excessive government spending can slow growth by diverting labor and capital from more productive uses. Punitive tax rates can hinder prosperity by discouraging work, saving, investment, and entrepreneurship. And large budget deficits can undermine competitiveness by “crowding out” private capital and building negative expectations of future tax increases. In extreme cases, high budget deficits can destabilize entire economies, either because a government resorts to the printing press to finance deficits or because investors lose faith in a government’s ability to service debt, thus leading to a sovereign debt crisis. …The best way to control this red ink while also boosting competitiveness is to cap the growth of government spending. If revenues increase by an average of 7 percent each year (as the president’s budget projects, even without tax increases), then we can reduce deficits by making sure spending grows by less than 7 percent annually.

Not surprisingly, the other participants in the symposium did not share my views.

Maya MacGuineas of the Committee for a Responsible Federal Budget wrote that, “Revenues will have to go up to deal with the deficit” and also wrote that, “Consumption taxes could help promote savings; a carbon tax could help lead to improved energy policies.”

She’s wrong on consumption taxes, by the way. A consumption tax hits both current consumption and future consumption, so the incentive to save is left unaltered. And if you want to get technical, something like a VAT would be anti-savings since it would reduce after-tax income for households, resulting in less consumption and less saving.

Greg Ip of the Economist (I’m always mystified some people think that magazine is for less government) wrote that “…taxes will have to rise” and specifically called for, “a broad-based consumption tax or, more narrowly, by raising the gasoline tax.”

While I disagree with Maya and Greg, I should point out that they are not nearly as misguided as  Obama, Reid, Pelosi. Unlike those politicians, both of them explicitly warn against class-warfare tax increases such as higher marginal tax rates on work, saving, investment, and entrepreneurship. These are the types of tax increases that have the worst impact on economic performance.

On other hand, a consumption tax (i.e., a value-added tax) would be the worst possible result since such a levy would be a giant money machine for big government. So while a VAT does not do as much damage, per dollar raised, as higher income tax rates, it would impose considerable damage by financing much bigger government. So McGuineas and Ip aren’t too bad on economics, but they’re really bad on political economy.

This video explains why a VAT is a terrible idea and the other video looks at the empirical evidence against big government.

Sebastian Mallaby of the Council on Foreign Relations and C. Fred Bergsten of  the Peterson Institute for International Economics also took part in the symposium. But they only wrote that deficits are a threat to competitiveness and did not suggest any solutions.

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The recent agreement between Obama and Boehner supposedly cuts spending by $38 billion. I’ve already explained that this number is disappointingly small and noted that the effect on spending for the current fiscal year is almost too small to measure.

But my analysis was entirely too kind. My Cato Institute colleagues have put together a clever one-minute video mocking both Obama and Boehner for using the dishonest Washington definition of a spending cut – meaning they claim spending cuts merely because they increase the budget by less than previously planned.

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There were reports about 10 days ago that the crowd in Washington reached a budget deal, for the remainder of the 2011 fiscal year, with $33 billion of cuts. That number was disappointingly low. I wrote at the time that if this was a kiss-your-sister deal, we didn’t have any siblings that looked like Claudia Schiffer.

I knew it was unrealistic to expect the full $61 billion, but I explained that $45 billion was a realistic target.

We now have a new agreement, which supposedly is final, and the amount of budget cuts has climbed to $38 billion. So our sister is getting prettier, but she still isn’t close to being a supermodel. Here are the highlights (or lowlights) from the New York Times story.

Congressional leaders and President Obama headed off a shutdown of the government with less than two hours to spare Friday night under a tentative budget deal that would cut $38 billion from federal spending this year. …the budget measure would not include provisions sought by Republicans to limit environmental regulations and to restrict financing for Planned Parenthood and other groups that provide abortions.

As with all deals (such as last December’s agreement extending the 2001 and 2003 tax cuts), there are good and bad provisions. The good news is:

o President Obama, before the current fiscal year began last October 1, wanted a $40 billion increase for these “discretionary” programs. Cutting $38 billion may not be a big number, but it is a step in the right direction. And it is the first time fiscal policy has moved in the right direction in at least 10 years.

o There will be no funding for additional IRS agents. This is a nice victory. Implementing Obamacare would require as many as 16,000 new tax bureaucrats to harass the American people, so at least that process will be stalled.

o A school choice program for Washington, DC, has been restored, thus reversing President Obama’s disgusting decision to kill the program and sacrifice poor black children to advance the greedy interests of the teacher unions.

Now let’s look at the less desirable parts of the agreement.

o Total spending jumped by almost $2 trillion during the Bush-Obama spending binge, so a $38 billion cut is almost too small to mention.

o Left-wing organizations such as Planned Parenthood will continue to feed at the public trough, something that should be objectionable to everyone, regardless of your views on abortion.

o Obamacare is not repealed (not that I ever thought that was possible) and there is no restriction on the EPA’s unilateral assertion that is has regulatory power to implement radical Kyoto-style global warming policies.

I will have more comments this week about what happens next. Suffice to say that this was just one battle in a long war.

The 2012 budget resolution, for instance, will be a key test of fiscal responsibility, but in this case the debate will be about $trillions rather than $billions. The debt limit vote will an opportunity for some much-needed reform of the budget process. And it is quite likely that there will be another potential shutdown fight when it is time to put together appropriations bills for the 2012 fiscal year, which starts October 1.

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Just days after the introduction of a very good plan by the Chairman of the House Budget Committee, leaders from the Republican Study Committee in the House of Representatives have introduced an even better plan.

In a previous post, I compared spending levels from the Obama budget and the Ryan budget and showed that the burden of federal spending would rise much faster if the White House plan was adopted.

If the goal is to restrain government, the RSC blueprint is the best of all worlds. As the chart illustrates, government only grows by an average of 1.7 percent annually with that plan, compared to an average of 2.8 percent growth under Ryan’s good budget and 4.7 percent average growth with Obama’s head-in-the-sand proposal.

According to the numbers released by the Republican Study Committee, the burden of federal spending would fall to about 18 percent of GDP after 10 years if the RSC plan is implemented.

While that’s a great improvement compared to today, the federal government would still consume as much of the economy as it did when Bill Clinton left office.

Last but not least, for those who are focused on fiscal balance rather than the size of government, this is the only plan that produces a balanced budget. Indeed, red ink disappears in just eight years.

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Washington is filled with groups that piously express their devotion to balanced budgets and fiscal responsibility, so it is rather revealing that some of these groups have less-than-friendly responses to Congressman Ryan’s budget plan.

The Committee for a Responsible Federal Budget, for instance, portrays itself as a bunch of deficit hawks. So you would think they would be doing cartwheels to celebrate a lawmaker who makes a real proposal that would control red ink. Yet Maya MacGuineas, president of the CRFB, basically rejects Ryan’s plan because it fails to increase the tax burden.

…while the proposal deserves praise for being bold, the national discussion has moved beyond just finding a plan with sufficient savings to finding one that can generate enough support to move forward. All parts of the budget, including defense and revenues, will have to be part of a budget deal… Now that both the White House and House Republicans have made their opening bids, this continues to reinforce our belief that a comprehensive plan to fix the budget like the one the Fiscal Commission recommended has the best hope of moving forward.

I’m mystified by Maya’s reference to an “opening bid” by the White House. What on earth is she talking about? Obama punted in his budget and didn’t even endorse the findings of his own Fiscal Commission. But I digress.

Another example of a group called Third Way, which purports to favor “moderate policy and political ideas” and “private-sector economic growth.” Sounds like they should be cheerleaders for Congressman Ryan’s plan, but they are even more overtly hostile to his proposal to reduce the burden of government.

House Budget Chairman Paul Ryan’s budget is a deep disappointment. There is a serious framework on the table for a bipartisan deal on our long term budget crisis. It’s the Bowles-Simpson blueprint, now being turned into legislation by the Gang of Six. It puts everything on the table – a specific plan to save Social Security, significant defense cuts, large reductions in tax expenditures and reforms to make Medicare and Medicaid more efficient, not eliminate them.

That sounds hard left, not third way. But it’s not unusual. Many of the self-proclaimed deficit hawks on Capitol Hill also have been either silent or critical of Ryan’s plan.

Which leaves me to conclude that what they really want are tax increases, and they simply use rhetoric about debt and deficits to push their real agenda.

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Forget all this talk about giant “spending cuts” of $6.2 trillion in Congressman Ryan’s budget plan. That’s music to my ears, but it’s also based on Washington’s bizarre budget math – i.e., the screwy system where politicians can increase spending but say they’re cutting spending because the budget could have grown even faster.

What really matters is how much money government is spending this year compared to how much money will be spent in subsequent years. Using this common-sense benchmark, let’s look at two competing proposals.

According to the new numbers released today, Congressman Ryan’s budget plan will result in government growing, on average, by almost 2.8 percent annually over the next 10 years.

President Obama’s budget plan, by contrast, would increase the burden of government spending by an average of nearly 4.7 percent each year.

This chart compares the two budget plans. Because Chairman Ryan does not let spending grow as rapidly, cumulative spending over that period will be $6.2 billion less than it would be based on the President’s plan. That’s an impressive amount of money that taxpayers will save if Ryan is successful, but it’s not a spending cut.

Not surprisingly, the big spenders in Washington are claiming that the “spending cuts” in Representative Ryan’s budget are “harsh” and “extreme.” But Ryan’s proposal would allow the budget to grow faster than inflation, which is projected to average less than 2.1 percent annually over the 10-year period.

Good fiscal policy is very simple. Restrain the size and scope of government so that outlays grow slower than the private sector. If that happens, the burden of federal spending will shrink as a share of economic output

That’s exactly what happens with Ryan’s plan. By 2018, the federal budget will drop to less than 20 percent of GDP. That still doesn’t bring us back to where we were at the end of the fiscally responsible Clinton years, when federal spending consumed only 18.2 percent of GDP. But after a 10-year spending binge under Bush and Obama, Congressman Ryan’s plan would move America back toward fiscal responsibility.

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The Chairman of the House Budget Committee, Congressman Paul Ryan of Wisconsin, will be unveiling his FY2012 budget tomorrow. Not all the details are public information, but what we do know is very encouraging.

Ryan’s plan is a broad reform package, including limits on so-called discretionary spending, limits on excessive pay for federal bureaucrats, and steep reductions in corporate welfare.

But the two most exciting parts are entitlement reform and tax reform. Ryan’s proposals would simultaneously address the long-run threat of bloated government and put in place tax policies that will boost growth and improve competitiveness.

1. The long-run fiscal threat to America is entitlement spending. Ryan’s plan will address this crisis by block-granting Medicaid to the states (repeating the success of the welfare reform legislation of the 1990s) and transforming Medicare for future retirees into a “premium-support” plan (similar to what was proposed as part of the bipartisan Domenici-Rivlin Debt Reduction Task Force).

2. America’s tax system is a complicated disgrace that manages to both undermine growth and promote corruption. The answer is a simple and fair flat tax, and Ryan’s plan will take an important step in that direction with lower tax rates, less double taxation of saving and investment, and fewer distorting loopholes.

One potential criticism is that the plan reportedly will not balance the budget within 10 years, at least based on the antiquated and inaccurate scoring systems used by the Congressional Budget Office and Joint Committee on Taxation. While I would prefer more spending reductions, I’m not overly fixated on getting to balance with 10 years.

What matters most is “bending the cost curve” of government. Obama’s budget leaves government on auto-pilot and leaves America on a path to becoming a decrepit European-style welfare state. Ryan’s budget, by contrast, would shrink the burden of federal spending relative to the productive sector of the economy.

Along with other Cato colleagues, I’ll have more analysis of the plan when it is officially released.

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My post earlier today nailed Obama for imposing new regulations that will require us to spend more for new cars while exempting himself from abiding by the same rules.

Sticking with that general theme, there’s a great cartoon from The Corner at NRO.

Switching to the budget fight, I’ve written about the overwrought rhetoric from politicians and their big-government allies, who want us to believe that tiny spending cuts would ravage the federal budget (we should be so lucky). This second cartoon from NRO is a good description of the faux-panic being spread by special interest groups trying to protect their spots at the federal trough.

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Press reports indicate that there is a tentative agreement between Republicans and Democrats to trim $33 billion of spending for the remainder of the current fiscal year. Here are a few blurbs from a story in The Hill.

A source familiar with the talks said members of the Senate and House Appropriations panels are working toward a target of $33 billion in spending cuts. …The $33 billion would be close to the cuts first proposed by House GOP leaders, who moved to $61 billion in proposed cuts under pressure from freshmen in their conference. Policy language defunding the new healthcare law and Planned Parenthood, which conservatives have insisted should be in a final deal, remains a sticking point.

If the final result is anywhere close to $33 billion, this has to be considered a disappointment. I was never under any illusion that GOPers would get $61 billion of cuts. But I was hoping the final number would be somewhere in the range of $45 billion.

To put this in context, the budget for the current fiscal year is $3,800 billion. And that’s almost $2,000 billion higher than it was when Bill Clinton left office. Yet politicians, after a 10-year binge of higher spending, can only find $33 billion of cuts?!?

One Capitol Hill staffer told me that this is a “kiss-your-sister” deal, implying that neither side won or lost. But if that’s the case, then I’m definitely not related to Claudia Schiffer. In this case, my sister is…well, never mind…I don’t want to be snarky.

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Yesterday, I analyzed how the GOP should fight the budget battle, but I may have made a big mistake. I assumed the Republican leadership actually wanted to do the right thing. I thought they learned the right lessons from the disastrous Bush years, and that the GOP no longer would be handmaidens for big government. And I naively assumed that the Republican leadership would not betray the base and stab the Tea Party in the back.

Unfortunately, if this Washington Post story is accurate, that may be what is happening.

Having difficulty finding consensus within their own ranks, House Republican leaders have begun courting moderate Democrats on several key fiscal issues, including a deal to avoid a government shutdown at the end of next week. The basic outline would involve more than $30 billion in cuts for the 2011 spending package, well short of the $61 billion initially demanded by freshman Republicans and other conservatives, according to senior aides in both parties. Such a deal probably would be acceptable to Senate leaders and President Obama as long as the House didn’t impose funding restrictions on certain social and regulatory programs supported by Democrats, Senate and administration aides said.

Having been in Washington for 25 years, I’m not blind to reality. I knew it was never going to be possible to get all $61 billion of cuts. At some point, there would be a compromise. And I also was aware that the GOP “riders” – such as blocking Obamacare, curtailing the EPA’s power grab, and defunding the leeches at Planned Parenthood – were an uphill battle.

But I thought the GOP leadership would fight and get a decent deal rather than unilaterally surrender. If the Washington Post report is true and Republicans act like the French army, it will discourage the base and cause a rift with the Tea Party. So it’s dumb politics and dumb policy.

Let’s keep our fingers crossed, though, and hope this is just a trial balloon that quickly will be shot down.

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Welcome Instapundit readers (and everyone else, of course). I have a very depressing update to this post, which you can read here.

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According to news reports, Democrats and Republicans are unlikely to reach any sort of budget agreement before April 8, when a short-term spending bill for the current fiscal year expires.

Barring some new development, this could mean a shutdown of the non-essential parts of the government.

This makes both sides very nervous. Democrats don’t want the spending spigot turned off and are worried that voters might conclude that there’s no reason to ever re-open departments such as Housing and Urban Development. Republicans, meanwhile, mostly worry that they might look unreasonable and get blamed if certain parts of the government are mothballed and voters can’t get passports or visit national parks.

Given this state of play, what’s the best strategy for fiscal conservatives, libertarians, and other advocates of smaller government?

Fred Barnes of the Weekly Standard thinks Republicans should continue with short-term spending bills.

…the incremental strategy is working. Republicans have passed two short-term measures to keep the government in operation since early March while slashing $10 billion in spending. At this rate, they would achieve the target of GOP congressional leaders of lopping off $61 billion from President Obama’s proposed budget in the final seven months of the 2011 fiscal year. There’s every reason to believe the incremental strategy would continue to succeed.

He’s worried that a more confrontational approach, where the GOP passes a take-it-or-leave-it spending bill, might backfire – even though any shutdown would exist solely because Senator Reid and/or President Obama refused to act.

Would a shutdown give Republicans more muscle in negotiating for cuts? …Maybe it would. But it might not. …So long as they control the Senate and White House, Democrats will reject massive cuts. Republicans also want to bar spending for Planned Parenthood, the Corporation for Public Broadcasting, and Mr. Obama’s health-care program. Attach any of these prohibitions to a spending measure and Democratic opposition is certain. Should Republicans insist, we’ll get a government shutdown. This is a big gamble. …Indeed it might discredit Republicans and boost Mr. Obama in the same way the shutdown in 1995 hurt Republicans and lifted President Bill Clinton out of the doldrums. It could alienate independent voters so critical to the Republican triumph in 2010. True enough, the political atmosphere is more favorable to serious spending reductions than it was 16 years ago. …But why take a chance?

I think Barnes is a bit off in his portrayal of what happened in 1995, as I’ve previously explained, but these are all fair points. A “shutdown” fight could be considered uncharted territory.

Keith Hennessey, a former Hill staffer and Bush Administration official, also is skeptical of a confrontational approach. Instead, he suggests that the GOP increase the pressure on Democrats by slowly increasing the amount of weekly spending cuts.

While negotiating with the President’s team and Senate Democrats, in this variant House Republicans continue to pass short-term Continuing Resolutions as long as there is not an acceptable full-year deal. In these repeated future CRs, they ratchet up the spending cuts by the paltry figure of only $100 million each week. …Under this new variant, as April 8th approaches House Republicans would pass another three week CR, one which cuts $2.1 B in its first week, $2.2 B in its second week, and $2.3 B in its third week. …Such a tiny weekly increment would be nearly impossible for Democrats to reject. And yet if continued through the end of this fiscal year, $4.5 B of discretionary spending would be cut in the final week, that of September 23rd. This strategy…poses zero additional risk for Congressional Republicans. They would maintain the high ground on spending cuts and remain on the offensive for the next six months.

There’s a lot to like about Keith’s approach. If successful, he explains, GOPers could wind up with $82 billion of cuts rather than just $61 billion.

But here’s my concern about an incremental strategy. What makes anyone think that the left will go along with short-term spending bills, regardless of whether they cut $2 billion per week, or even more?

Democrats already have agreed to $10 billion of cuts, and even though that’s very trivial when compared to total spending (akin to a couple of french fries out of a Big Mac meal), the pro-spending lobbies and their allies on Capitol Hill are balking at the thought of additional cuts. So while it might be possible to push through a couple of additional short-term spending bills, there will come a point when Democrats refuse to play ball. And when that happens, we’re back to a partial shutdown.

Here’s how constitutional lawyer James Bopp, Jr., explained the issue in a piece for the Washington Times.

A government shutdown is inevitable because President Obama will insist on it. Nothing the Republicans do, short of total capitulation, will prevent this from happening. …With a three-week extension of government funding (which included $6 billion in cuts) expiring April 8, now is the time to escalate one’s bid. Demand $12 billion in cuts the next time. And when the shutdown occurs because of an Obama veto or a vote in the Democrat-controlled Senate, the House should keep passing bills to reopen the government, coupling it with more spending cuts. …There is a fundamental contradiction in the Democrats’ shutting down the government. The Democrats are the party of government. It is like a bank robber, caught in the act, who threatens to pull the trigger on himself if arrested; what would the cop say but, “Go ahead”? The government shutdown threat defeats the Democrats own objective and is thus ultimately self-defeating, while the Republicans protect the bank depositors – the taxpayers – from the bank robber.

I think this is largely correct, particularly in that there almost certainly will be a shutdown fight. The only question is when it will happen. And if a shutdown battle is inevitable, advocates of smaller government should decide whether it’s better to have that fight sooner rather than later.

My instinct is that it would be better to fight now. GOP resolve presumably will decrease over time, particularly since the “easy” spending cuts get used up first. Moreover, it is quite likely that a strategy of short-term spending bills will complicate GOP efforts to get budget process reform in a couple of months in exchange for an increase in the debt limit.

Democrats surely don’t want the GOP to have another opportunity to restrain the size of government, so they would insist on an increase in the federal government’s borrowing authority as the price for approving whatever short-term spending bill is being considered around that time. Republicans presumably will balk at that demand. But that brings us back, once again, to a shutdown fight. Only this time, it will be complicated by demagogic assertions of a default.

So long as the final result is a smaller burden of government, there is no right or wrong answer about the process. It’s simply a question of which approach is more likely to achieve the desired outcome. I think fighting now is better than fighting later, but if the GOP chooses a strategy of short-term spending bills, I hope I’m wrong.

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I posted yesterday about the stunning political incompetence of Republican Senators, who reportedly are willing to give Obama an increase in the debt limit in exchange for a vote (yes, just a vote) on a balanced budget amendment.

As I explained, there is no way they can get the necessary two-thirds support to approve an amendment, so why trade a meaningless and symbolic vote on a BBA for meaningful and real approval of more borrowing authority for Obama? My analogy yesterday was that this was like trading a all-star baseball player for a utility infielder in the minor leagues.

I did acknowledge that forcing a vote on a BBA was a worthwhile endeavor, but said that the GOP has that power anyhow, so why trade away something valuable to get something you already can get for free?

Little did I realize that Republicans already did force a vote on the balanced budget amendment. Less than one month ago, on March 2, Senator Lee of Utah got a vote on a “Sense of the Senate” resolution in favor of a balanced budget amendment. Senator Lee’s resolution was approved by a 58-40 margin, which is nice, but an actual amendment would need a two-thirds supermajority, so this test vote demonstrated that there is no way to approve an amendment this year.

I’m glad Senator Lee proposed his resolution. I’m glad Senators were forced to go on the record.

But I’m mystified, flabbergasted, and stunned that Republicans apparently are willing to give Obama a bigger debt limit in exchange for something they already got.

This would be like the Yankees giving Derek Jeter to the Red Sox in exchange for a player they already have, such as Alex Rodriguez. I imagine New York sportswriters would be dumbfounded by such stupidity and would rip the team’s management to shreds. So that gives you an idea of how I feel about what’s happening in Washington.

As I noted in yesterday’s post, I’ll soon write about the fiscal reforms GOPer should demand in exchange for a higher debt limit.

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The old joke in Washington is that Democrats are the evil party and Republicans are the stupid party (which is why you should guard your wallet and freedom whenever you hear talk of “bipartisanship”).

The GOP definitely is doing what it can to prove that at least one side of that joke is true. Republicans are actually talking about letting the debt limit increase in exchange for a vote on a balanced budget amendment.

Yes, you read correctly. They’re not talking about an increase in the debt limit in exchange for a balanced budget, or more borrowing authority in exchange for passage of a balanced budget amendment. Instead, they will roll over for the very low price of simply getting a vote on a proposed amendment.

Here’s a passage from a report in Human Events.

The Senate Republicans are preparing to tell President Obama that they want a Balanced Budget Amendment (BBA) to the Constitution passed in Congress in exchange for raising the statuary debt ceiling above $14.2 trillion. “My hope is that we would force a vote on a Balanced Budget Amendment as a condition to voting on the debt ceiling,” Sen. John Cornyn (R.-Tex.) told HUMAN EVENTS.  “By next week, or shortly thereafter, we will have all 47 Republicans unified behind the effort, and then begin to reach out to our Democratic colleagues.”

To understand the foolishness of this approach, here’s all you need to know.

1. If Republicans really want to force a vote on a balanced budget amendment, they basically have that ability already. The rules of the Senate give individual Senators considerable ability to disrupt ordinary business and force votes on motions that at the very least would be proxies for a BBA. And if all 47 Republicans really want to make a stink, they can grind the Senate to a halt and demand an up-or-down vote on a specific amendment.

In other words, Republicans are about to give the democrats something that they really want – an increase in the debt limit – in exchange for a vote that they could get anyhow.

2. More important, what makes them think it is a good deal to give Obama more borrowing authority in exchange for something that, at best, is symbolic? Everyone knows that there is zero chance of getting the necessary two-thirds vote to approve a balanced budget amendment.

That’s not an argument against having a vote (particularly if the BBA is well-written with real limits on taxes and the size of government), but it definitely is not a smart negotiating strategy. It’s sort of akin to trading a power-hitting all-star for a minor league utility player.

Fiscal conservatives should demand substance, not symbolism, in exchange for a higher debt limit. I’ll put forth a few ideas in next few days.

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There’s a significant debate now taking place in Washington – largely behind closed doors, but sometimes covered by the media – on whether fiscal conservatives should maintain a rigid no-tax-increase position. One side of the debate features Grover Norquist of Americans for Tax Reform, which is the organization that maintains the no-tax increase pledge. The other side features Senator Coburn of Oklahoma, who is part of a small group of GOP Senators who might be willing to increase the tax burden as part of a deal that supposedly reduces deficits.

I’m a huge fan of Senator Coburn, who was in favor of cutting wasteful spending before it became fashionable. His office, for instance, releases a “Pork Report” every couple of days. But you shouldn’t read it if you have high blood pressure, because it will confirm (and reconfirm, and reconfirm, ad nauseum) your worst fears about tax dollars getting wasted.

Nonetheless, I’m on Grover’s side on this tax debate for two reasons.

First, we have a spending problem, not a revenue problem or a deficit/debt problem. Red ink is undesirable, to be sure, but it is a symptom of the underlying problem of a government that is too big and spending too much.

But don’t believe me. Here is a chart from the House Budget Committee showing long-run projections for spending and revenues over the next 70 years. As you can see, the long-run fiscal shortfall is completely caused by higher spending. In other words, 100 percent of red ink is due to government spending. So why put taxes on the table?

But this chart actually understates the case against tax increases. It uses revenue numbers from the Congressional Budget Office’s “alternative” forecast, which shows taxes steady at 19.3 percent of GDP. That’s more than the historical average of about 18 percent of GDP, which surely indicates that revenues are not the problem.

However, that 19.3 percent estimate is completely artificial. As CBO states in its long-run forecast, “the alternative fiscal scenario also incorporates unspecified changes in tax law that would keep revenues constant as a share of GDP after 2020.”

I’ll actually be delighted if we can permanently keep federal revenues below 20 percent of GDP, but I’m not overly optimistic because the tax burden is projected to automatically increase over time. And I’m not talking about the expiration of the Bush tax cuts or the alternative minimum tax. Yes, those factors would push up tax revenues (at least based on static revenue estimates), but the tax burden also is expected to climb because even modest economic growth slowly but surely pushes more and more people into higher tax brackets.

This second chart shows CBO’s estimate of personal income tax revenue based on current policy (as opposed to estimates based on current law, which includes already legislated tax hikes). To be more specific, it shows how much revenue the government will collect from the individual income tax even if the 2001 and 2003 tax cuts are made permanent and the AMT is indexed.

As you can see, the aggregate individual income tax burden will increase by roughly 5 percentage points of GDP when compared to the long-run average of about 8 percent of GDP (the CBO estimate only goes to 2035, so I extrapolated to show the same time period as the first chart). And remember, this is the forecast of what will happen to income tax revenues even if politicians don’t impose any new laws to coercively extract more revenue.

This might not be too bad if other taxes were falling, but that’s not what CBO is projecting. As such, this big increase in revenue from the individual income tax means that the overall tax burden will climb by approximately the same amount.

In other words, revenue likely will rise close to 25 percent of GDP as we approach the next century. So if we use this more realistic baseline, we can say that more than 100 percent of the long-run deficit problem is because spending is out of control.

The second reason for a firm no-tax increase position is that higher taxes are a very ineffective way of reducing budget deficits. Indeed, tax increases generally backfire and lead to more red ink. To understand why, it’s important to put away the calculator and instead consider the real world of politics and public policy. For instance:

o  Tax increases rarely raise as much revenue as predicted by government forecasters. This is because of “Laffer Curve” effects, as taxpayers change their behavior to earn less income and/or report less income. Simply stated, people respond to incentives, and this means taxable income falls as tax rates increase.

o  Tax increases erode pressure to control spending. Why would politicians want to make tough decisions and upset special interest groups, after all, when there is going to be more revenue (or at least the expectation of more revenue)? Using more colloquial language, trying to control spending with higher taxes is like trying to cure alcoholics by giving them keys to a liquor store.

o  Milton Friedman was right when he said that, “In the long run government will spend whatever the tax system will raise, plus as much more as it can get away with.” In other words, if politicians think they can get away with deficits averaging, say, 5 percent of GDP in the long run, then the the only impact of higher taxes is an equal amount of additional spending – while still retaining deficits of 5 percent of GDP.

The real-world evidence certainly points in this direction. We’ve seen “bipartisan budget summits” several times in Washington, and the result is more spending rather than lower deficits. Americans for Tax Reform has a good analysis of what happened after the two big budget summits in 1982 and 1990, but I think the problem is best captured by my adaptation of a famous Peanuts cartoon strip.

Every year, if my aging memory is correct, Lucy would ask Charlie Brown if he wanted to kick the football. At first, Charlie was skeptical. But Lucy always managed to trick him into giving it a try. And the inevitable result was Charlie Brown lying on his back wondering why he had been so foolish.

In the Washington version of this cartoon, Democrats hypnotize gullible Republicans with ostensibly sincere promises of future spending restraint. Republicans eventually acquiesce, naively assuming that Democrats will be their new best-friends-forever in the fight against big government.

Needless to say, that’s not the way the story ends.

Ronald Reagan is reported to have said that the 1982 tax increase was the “biggest mistake” of his presidency. And since Congress never followed through on commitments to reduce spending by $3 for every $1 of higher taxes, he wryly remarked that, “I’m still waiting on those three dollars of spending cuts I was promised from Congress.”

Like Ronald Reagan, Tom Coburn wants to do the right thing. But good intentions are not the same as good policy. America’s fiscal challenge is too much spending. Government is too big and it is wasting too much money. Taking more money from the American people is not the way to solve that problem.

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