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Posts Tagged ‘Federal Spending’

New 10-year budget projections have been released by the Congressional Budget Office, so it’s time once again for me to show how easy it is to balance the budget with modest spending restraint (though never forget that our goal should be smaller government, not fiscal balance).

The new numbers show the path is even easier. The budget can be balanced in 5 years if spending grows at the rate of inflation (the green line) and in just 10 years if spending is limited so that it grows 3.4 percent annually (the light blue line).

Budget Balance CBO 2013

Today’s path to balance is even easier because of better 10-year growth numbers, and also because of projections that the recent tax increase will generate more revenue (the dark blue line shows total projected revenue over the decade).

Because of Laffer Curve reasons, I’m skeptical about whether all that additional revenue will materialize, so both the chart and the underlying numbers are a bit speculative.

But what they do show is that the nation’s fiscal problems easily can be addressed with some modest spending restraint. Sort of a practical application of Mitchell’s Golden Rule.

Here’s my video explaining the importance of spending restraint. The numbers are now outdated, but the concept is still completely relevant.

As noted at the beginning of the post, I’m much more concerned about reducing the burden of government spending. Balancing the budget is a secondary concern.

That’s why we should impose genuine budget cuts and not just restrain the growth of spending. That would also make it easier to adopt good tax policy.

Maybe, in a parallel universe where politicians are motivated by liberty, we can even get entitlement reform and a flat tax.

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President Obama supports higher taxes, but he usually claims he only wants higher tax rates on evil rich people as part of his class-warfare agenda. Heck, he promised back in 2008 that, “no family making less than $250,000 a year will see any form of tax increase.  Not your income tax, not your payroll tax, not your capital gains taxes, not any of your taxes.”

I guess we’re supposed to forget the higher tax burdens that were imposed on the middle class by Obamacare in 2010 and the SCHIP legislation in 2009.

Obama’s other rhetorical trick is to claim he wants a “balanced approach.” Translated from Washington-speak to English, that means he wants more of our money. But it’s a soothing way to demand more money. After all, who’s against “balance”?

I actually agree with Obama – but only if one uses honest math. Needless to say, Obama wants to use Washington math, where spending increases get redefined as spending cuts if the burden of government spending doesn’t rise as fast as was projected in some artificial baseline.

This is why the budget deals put together by politicians almost always are awful. In order to protect the goodies they hand out to various special interests, the politicians use fake numbers to pretend they’re restraining spending, but when the dust settles, it turns out that the only real result is that taxpayers are forking over more of their hard-earned cash to the clowns in Washington.

Actually, that statement is incomplete. We need to remember that taxpayers in other nations also get screwed by the political elite. Take a look at this stunning chart that was shown at yesterday’s Cato Institute conference on “Europe’s Crisis and the Welfare State.” Put together by Veronique de Rugy of the Mercatus Center, it shows that politicians across the Atlantic have imposed nine euro of higher taxes for every one euro of spending cuts.

And keep in mind, as Veronique noted in her comments, that many of these so-called spending cuts were merely reductions in planned increases!

This matters because I’m getting increasingly worried that gullible Republicans will get seduced into some sort of budget summit designed to trick them into supporting the Simpson-Bowles tax-hike package.

As I’ve previously explained, this would be a terrible idea. It means a big tax hike with, particularly an increase in the double taxation of income that is saved and invested. It also relies on gimmicks rather than real entitlement reform.

I don’t like higher taxes, but I wouldn’t be completely upset if at least we got some permanent reforms to control the growth of government. But that’s definitely not the case with Simpson-Bowles. And, as Veronique showed, it’s not the case in Europe either.

P.S. It’s rather ironic that the New York Times inadvertently revealed that the only budget deal that worked was the one in 1997 that cut taxes rather than raising taxes.

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Now that new numbers have been released by the Congressional Budget Office, it’s time once again for me to show how easy it is to balance the budget with modest spending restraint (though please remember our goal should be smaller government, not fiscal balance).

  • I first did this back in September 2010, and showed that we could balance the budget in 10 years if federal spending was limited so it grew by 2 percent annually.
  • I repeated the exercise in January 2011 after new CBO numbers were released, and re-confirmed that a spending cap of 2 percent would eliminate red ink in just 10 years.
  • In August of that year, following the release of the CBO Update, I showed again that the budget could be balanced by limiting spending so it climbed by 2 percent per year.
  • Most recently, back in January after CBO produced the new Economic and Budget Outlook, I crunched the numbers again and showed how a spending cap of 2 percent would balance the budget.

I’m happy to say that the new numbers finally give me some different results. We can now balance the budget if spending grows 2.5 percent annually.

In other words, spending can grow faster than inflation and the budget can be balanced with no tax hikes.

And here’s the video I narrated almost two years ago on this topic. The numbers have changed a bit, but the analysis is exactly the same.

In other words, ignore the politicians, bureaucrats, lobbyists, and special interests when they say we have to raises taxes because otherwise the budget would have to be cut by trillions of dollars. They’re either stupid or lying (mostly the latter, deliberately using the dishonest version of Washington budget math).

Modest fiscal restraint is all that we need, though it would be preferable to make genuine cuts in the burden of government spending.

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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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Back in 2010, I crunched the numbers from the Congressional Budget Office and reported that the budget could be balanced in just 10 years if politicians exercised a modicum of fiscal discipline and limited annual spending increases to about 2 percent yearly.

When CBO issued new numbers early last year, I repeated the exercise and again found that the same modest level of budgetary restraint would eliminate red ink in about 10 years.

And when CBO issued their update last summer, I did the same thing and once again confirmed that deficits would disappear in a decade if politicians didn’t let the overall budget rise by faster than 2 percent each year.

Well, the new CBO 10-year forecast was released this morning. I’m going to give you three guesses about what I discovered when I looked at the numbers, and the first two don’t count.

Yes, you guessed it. As the chart illustrates, balancing the budget doesn’t require any tax increases. Not does it require big spending cuts (though that would be a very good idea).

Even if we assume that the 2001 and 2003 tax cuts are made permanent, all that is needed is for politicians to put government on a modest diet so that overall spending grows by about 2 percent each year. In other words, make sure the budget doesn’t grow faster than inflation.

Tens of millions of households and businesses manage to meet this simple test every year. Surely it’s not asking too much to get the same minimum level of fiscal restraint from the crowd in Washington, right?

At this point, you may be asking yourself whether it’s really this simple. After all, you’ve probably heard politicians and journalists say that deficits are so big that we have no choice but to accept big tax increases and “draconian” spending cuts.

But that’s because politicians use dishonest Washington budget math. They begin each fiscal year by assuming that spending automatically will increase based on factors such as inflation, demographics, and previously legislated program changes.

This creates a “baseline” and if they enact a budget that increases spending be less than the baseline, that increase magically becomes a cut. This is what allowed some politicians to say that last year’s Ryan budget cut spending by trillions of dollars even though spending actually would have increased by an average of 2.8 percent each year.

Needless to say, proponents of big government deliberately use dishonest budget math because it tilts the playing field in favor of bigger government and higher taxes.

There are two important caveats about these calculations.

1. We should be dramatically downsizing the federal government, not just restraining its growth. Even if he’s not your preferred presidential candidate, Ron Paul’s proposal for an immediate $1 trillion reduction in the burden of federal spending is a very good idea. Merely limiting the growth of spending is a tiny and timid step in the right direction.

2. We should be focusing on the underlying problem of excessive government, not the symptom of too much red ink. By pointing out the amount of spending restraint that would balance the budget, some people will incorrectly conclude that getting rid of deficits is the goal.

Last but not least, here is the video I narrated in 2010 showing how red ink would quickly disappear if politicians curtailed their profligacy and restrained spending growth.

Other than updating the numbers, the video is just as accurate today as it was back in 2010. And the concluding message – that there is no good argument for tax increases – also is equally relevant today.

P.S. Some people will argue that it’s impossible to restrain spending because of entitlement programs, but this set of videos shows how to reform Social Security, Medicare, and Medicaid.

P.P.S. Some people will say that the CBO baseline is unrealistic because it assumes the sequester will take place. They may be right if they’re predicting politicians are too irresponsible and profligate to accept about $100 billion of annual reductions from a $4,000 billion-plus budget, but that underscores the core message that there needs to be a cap on total spending so that the crowd in Washington isn’t allowed to turn America into Greece.

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There’s been a lot of discussion about Mitt Romney’s appeal – or lack thereof – among supporters of limited government.

To put it mildly, many libertarians and conservatives are underwhelmed by his less-than-stellar record on healthcare, his weakness on Social Security reform, his anemic list of proposed budget savings, and his reprehensible support for ethanol subsidies.

Notwithstanding this dismal track record, some advocates of free markets argue that anybody would be better than Obama.

But that’s not necessarily the case. Economic history shows that the burden of government often expands the most under Republicans, with Nixon and Bush (either one) being obvious examples.

On the other hand, even a skeptic like me has admitted that Romney’s record in Massachusetts is difficult to assess because he was governor of a very left-wing state and he had to deal with a state legislature with heavy Democratic majorities.

That being said, there’s a new development that suggests Romney may be an unacceptable alternative to Obama. In an interview with the Wall Street Journal, he basically said he is willing to consider a value-added tax for the United States. Here’s the relevant passage.

He says he doesn’t “like the idea” of layering a VAT onto the current income tax system. But he adds that, philosophically speaking, a VAT might work as a replacement for some part of the tax code, “particularly at the corporate level,” as Paul Ryan proposed several years ago. What he doesn’t do is rule a VAT out.

For those who are not familiar with a VAT, it is a version of a national sales tax, but imposed at every stage in the production process and embedded in the price of goods and services. Perhaps more important, it is despised by everyone who wants to limit the size of government. This video explains how it works and why it is a money machine for big government.

Simply stated, this is an awful tax. If it ever gets implemented in the United States, the battle will be over. America will descend to European-style stagnation, eventually leading to fiscal crisis.

Any politician that supports a VAT (or even hints at supporting a VAT) should not be allowed anywhere near the White House. That applies to Mitt Romney. And it should be the rule for Paul Ryan as well.

But what about Barack Obama, you may be asking. Hasn’t he said nice things about a VAT?

Not surprisingly, he has been sympathetic, appointing VAT sympathizers to high office and remarking that a VAT is “something that has worked for other countries.”

But there’s no way a VAT will happen if Obama gets reelected. Republicans will be overwhelmingly opposed, even if only for shallow reasons of partisanship.

But if Romney wins and decides to push a VAT, many Republicans will say yes because of loyalty (much as many GOPers went along with Bush’s statist agenda) and many Democrats will say yes in order to get a new source of revenue to expand government.

The consequences, as explained here, would be disastrous.

P.S. For a humorous – but accurate – perspective on the VAT, take a look at these clever cartoons (here, here, and here).

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I’m not a big fan of Senator Schumer of New York. As I’ve noted before, he’s a doctrinaire statist who wants the government to have control over just about every aspect of our lives.

But that describes a lot of people in Washington. I guess what also bothers me is his willingness to say anything, regardless of how divorced it is from reality, to advance his short-run political agenda (sort of a Democrat version of Karl Rove).

For example, here’s part of what the clownish Empire State  Senator recently had to say about fiscal policy, as reported by a Washington Post columnist.

Schumer said, “…Republicans came in and said, `We can solve your problem by shrinking government’…We tried their theory…The American people resent government paralysis, but most of them would say that government is doing too little to help them, not too much.”

What’s remarkable about this statement is that it’s so inaccurate that we can’t even decipher what he means. I’ve come up with three possible interpretations of what he might have been trying to say, and they’re all wrong.

1. He’s referring to GOP actions this year. This interpretation might make partial sense because the House Republicans have made a few semi-serious efforts to shrink government, but how can Schumer say “we tried their theory” when every Republican initiative was blocked by the Senate and Obama?

The Ryan budget died of malign neglect since the Senate didn’t even bother to produce a budget, and Republican efforts on the 2011 spending levels and the debt limit also were stymied, resulting at best in kiss-your-sister deals.

2. He’s referring to GOP actions during the Bush Administration. This interpretation might make some sense because the GOP did control the House, the Senate, and the Presidency, but does Schumer understand that “shrinking government” was not part of the Republican agenda during those years?

But don’t believe me. The numbers from the Historical Tables of the Budget unambiguously show that the federal budget almost doubled during the Bush years because of huge increases in domestic spending.

3. He’s referring to GOP actions during the 1990s. This interpretation actually does make sense because the burden of the public sector did shrink as a share of GDP during the Clinton years when Republicans controlled Congress, so it would be accurate to say “we tried their theory.”

But what was so bad about the era of spending restraint during the 1990s? The economy expanded and people were better off, in large part because, to quote Schumer, government was “doing too little to help them.”

Heck, the Clinton-GOP Congress years were so good that I even offered, during a debate on national TV, to go back to Clinton’s higher tax rates if it meant we also could undo all the reckless spending of the Bush-Obama years.

This doesn’t mean I’ve stopped caring about low marginal tax rates. It just means that I understand that the ultimate tax is the burden of the public sector. This video explains more, in case you’re wondering why I’d like to go back to the 1990s.

It goes without saying (but I’ll say it anyhow) that it would be even better to combine Clinton’s spending levels with Reagan’s tax rates.

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