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Posts Tagged ‘Keynesian Economics’

Regular readers know that good fiscal policy takes place when government spending grows slower than the private economy.

Nations that maintain this Golden Rule for extended periods of time shrink the relative burden of government spending, thus enabling more growth by freeing up resources for the productive sector of the economy and creating leeway for lower tax rates.

And when countries deal with the underlying disease of too much spending, they automatically solve the symptom of red ink, so it’s a win-win situation whether you’re a spending hawk or a so-called deficit hawk.

With this in mind, let’s look at some interesting new research from the Heritage Foundation. They’ve produced a report entitled Europe’s Fiscal Crisis Revealed: An In-Depth Analysis of Spending, Austerity, and Growth.

It focuses on fiscal policy over the past few years and is an important contribution in two big ways. First, it shows that the Keynesian free-lunch approach is counterproductive. Second, it shows that the right kind of fiscal consolidation (i.e., spending restraint) generates superior results.

Here are some excerpts from the chapter by Professor Alberto Alesina of Harvard of Veronique de Rugy of the Mercatus Center. They look at some of the academic evidence.

The debate over the merits of austerity (the implementation of debt-reduction packages) is frustrating. Most people focus only on deficit reduction, but that can be achieved in many different ways. Some ways, such as raising taxes, deeply hurt growth… The data show that austerity has been implemented in Europe. However, with some rare exceptions, the forms of austerity were heavy on tax increases and far from involving savage spending cuts. …spending-based adjustments are more likely to reduce the debt-to-GDP ratio, regardless of whether fiscal adjustments are defined in terms of improvements in the cyclically adjusted primary budget deficit or in terms of premeditated policy changes designed to improve a country’s fiscal outlook. …Other research has found that fiscal adjustments based mostly on the spending side are less likely to be reversed and, as a result, have led to more long-lasting reductions in debt-to-GDP ratios. …successful fiscal adjustments are often rooted in reform of social programs and reductions in the size and pay of the government workforce rather than in other types of spending cuts. …tax increases failed to reduce the debt and were associated with large recessions. …growing evidence suggests that private investment tends to react more positively to spending-based adjustments. For instance, data from Alesina and Ardagna and from Alesina, Favero, and Giavazzi show that private-sector capital accumulation increases after governments cut spending.

The basic message of the Alesina-de Rugy chapter is that bad outcomes are largely unavoidable when nations spend themselves into fiscal trouble, but the damage can be minimized if policy makers impose spending restraint.

The Heritage Foundation’s Salim Furth is the editor of the report, and here’s some of what he wrote in Chapter 3, which looks at what’s happened in recent years as countries dealt with fiscal crisis.

Tax austerity is very harmful to growth, while spending cuts are partially replaced by private-sector activity, making them less harmful. …Estimating growth effects on private GDP, the difference between tax and spending multipliers grows predictably. A two-dollar decline in private GDP is associated with every dollar of tax increases, but spending cuts are associated with no change in private GDP.  …fiscal consolidation that relied 60 percentage points more on spending cuts was associated with 3.1 percentage points more GDP growth from 2009 to 2012, when average growth was just 3.3 percent over the entire period. In other words, a country that had a fiscal consolidation composed of 80 percent of spending cuts and 20 percent of tax increases would grow much more rapidly than a country in which only 20 percent of the consolidation was spending cuts and 80 percent was tax increases. The association is slightly stronger for private GDP.

Salim then cites a couple of powerful examples.

…the difference between Germany’s 8 percent growth from 2009 to 2012 and the 1 percent growth in the Netherlands is largely accounted for by Germany’s cut-spending, cut-taxes approach and the Netherlands’ raise-spending, raise-taxes approach. The U.K. and Italy enacted similarly-sized austerity packages, but Italy’s was half tax increases while the U.K. favored spending cuts. Neither country excelled, but over half of the gap between the U.K.’s 3 percent growth and Italy’s negative growth is explained by Italy’s tax increases.

By the way, it’s not as if Germany and the United Kingdom are stellar examples of fiscal restraint. It’s just that they’re doing better than nations that traveled down the path of even bigger government.

Regarding supposed Keynesian stimulus, Salim makes a very important point that more government spending seems positive in the short run, sort of like the fiscal version of a sugar high.

But that sugar high produces a bad hangover. Nations that try Keynesianism quickly fall behind countries with more prudent policy.

Government spending boosts GDP instantly and then crowds out private spending slowly. The incentive effects of taxation may take effect over several years, but they are permanent and especially pronounced in investment. If anything, this recent crisis shows how brief the short run is: Countries whose spending-focused stimulus put them one step ahead in 2010 were already two steps behind in 2012.

There’s a lot more in the report, so I encourage readers to give it a look.

I particularly like that it emphasizes the importance of properly defining “austerity” and “fiscal consolidation.” These are issues that I highlighted in my discussion with John Stossel.

Another great thing about the report is that it has all sorts of useful data.

Though much of it is depressing. Here’s Chart 2-9 from the report and it shows all the countries that have increased top marginal tax rates between 2007 and 2013.

Portugal wins the booby prize for the biggest tax hike, though many nations went down this class-warfare path. Including the United States thanks to Obama’s fiscal cliff tax increase.

The United Kingdom is an interesting case. It raised its top rate by 10 percentage points, but then cut the rate by 5 percentage points after it became apparent that the higher rate wasn’t collecting any additional revenue.

We should give credit to the handful of nations that have lowered tax rates, several of which replaced discriminatory systems with simple and fair flat taxes.

Though it’s also important to keep in mind where each nation started. Switzerland lowered it’s top rate by only 0.4 percentage points, which seems small compared to Denmark, which dropped its top rate by 6.7 percentage points.

But Switzerland started with a much lower rate, whereas Denmark has one of the world’s most punitive tax regimes (though, paradoxically, it is very laissez-faire in areas other than fiscal policy).

Let’s look at the same data, but from a different perspective. Chart 2-10 shows how many nations (from a list of 37) raised top rates or lowered top rates each year.

The good news is that tax cutters out-numbered tax-hikers in 2008 and 2009.

The bad news is that tax increases have dominated ever since 2010.

Many of these post-2009 tax hikes were enabled by a weakening of tax competition, which underscores why it is so important to preserve the right of jurisdictions to maintain competitive tax systems.

And don’t forget that tax policy will probably get even worse in the future because of aging populations and poorly designed entitlement programs.

Let’s close with some more numbers.

Here’s Table 2-5 from the report. It shows changes in the value-added tax (VAT) beginning in December 2008.

The key thing to notice is that there’s no column for decreases in the VAT. That’s because no nation lowered that levy. Practically speaking, this hidden form of a national sales tax is a money machine for bigger government.

But you don’t have to believe me. The International Monetary Fund unintentionally provided the data showing that VATs are the most effective tax for financing bigger government.

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Keynesian economics is a failure.

It didn’t work for Hoover and Roosevelt in the 1930s. It didn’t work for Japan in the 1990s. And it didn’t work for Bush or Obama in recent years.

No matter where’s it’s been tried, it’s been a flop.

So why, whenever there’s a downturn, do politicians resuscitate the idea that bigger government will “stimulate” the economy?

I’ve tried to answer that question.

Keynesian economics is the perpetual motion machine of the left. You build a model that assumes government spending is good for the economy and you assume that there are zero costs when the government diverts money from the private sector. …politicians love Keynesian theory because it tells them that their vice is a virtue. They’re not buying votes with other people’s money, they’re “stimulating” the economy!

I think there’s a lot of truth in that excerpt, but Sheldon Richman, writing for Reason, offers a more complete analysis. He starts by identifying the quandary.

You can’t watch a news program without hearing pundits analyze economic conditions in orthodox Keynesian terms, even if they don’t realize that’s what they’re doing. …What accounts for this staying power?

He then gives his answer, which is the same as mine.

I’d have said it’s because Keynesianism gives intellectual cover for what politicians would want to do anyway: borrow, spend, and create money. They did these things before Lord Keynes published his The General Theory of Employment, Interest, and Money in 1936, and they wanted to continue doing those things even when trouble came of it.

Makes sense, right?

But then Sheldon digs deeper, citing the work of Professor Larry White of George Mason University, and suggests that Keynesianism is popular because it provides hope for an easy answer.

Lawrence H. White of George Mason University, offers a different reason for this staying power in his instructive 2012 book The Clash of Economic Ideas: The Great Policy Debates and Experiments of the Last Hundred Years: namely, that Keynes’s alleged solution to the Great Depression offered hope, apparently unlike its alternatives. …White also notes that “Milton Friedman, looking back in a 1996 interview, essentially agreed [that the alternatives to Keynesianism promised only a better distant future]. Academic economists had flocked to Keynes because he offered a faster way out of the depression, as contrasted to the ‘gloomy’ prescription of [F.A.] Hayek and [Lionel] Robbins that we must wait for the economy to self-correct.” …Note that the concern was not with what would put the economy on a long-term sustainable path, but rather with what would give the short-term appearance of improvement.

In other words, Keynesian economics is like a magical weight-loss pill. Some people simply want to believe it works.

Which is understandably more attractive than the gloomy notion the economy has to go through a painful adjustment process.

But perhaps the best insight in Sheldon’s article is that painful adjustment processes wouldn’t be necessary if politicians didn’t make mistakes in the first place!

A related aspect of the Keynesian response to the Great Depression—this also carries on to the current day—is the stunning lack of interest in what causes hard times. Modern Keynesians such as Paul Krugman praise Keynes for not concerning himself with why the economy fell into depression in the first place. All that mattered was ending it. …White quotes Krugman, who faulted economists who “believed that the crucial thing was to explain the economy’s dynamics, to explain why booms are followed by busts.” …why would you want to get bogged down trying to understand what actually caused the mass unemployment? It’s not as though the cause could be expected to shed light on the remedy.

This is why it’s important to avoid unsustainable booms, such as the government-caused housing bubble and easy-money policy from last decade.

Hayek, Robbins, and Mises, in contrast to Keynes, could explain the initial downturn in terms of the malinvestment induced by the central bank’s creation of money and its low-interest-rate policies during the 1920s. …you’d want to see the mistaken investments liquidated so that ever-scarce resources could be realigned according to consumer demand… And you’d want the harmful government policies that set the boom-bust cycle in motion to end.

Gee, what a radical notion. Instead of putting your hope in a gimmicky weight-loss pill, simply avoid getting too heavy in the first place.

For further information, here’s my video on Keynesian economics.

P.S. Here’s some clever humor about Keynesian economics.

P.P.S. If you like humor, but also want some substance, here’s the famous video showing the Keynes v. Hayek rap contest, followed by the equally entertaining sequel, which features a boxing match between Keynes and Hayek. And even though it’s not the right time of year, this satirical commercial for Keynesian Christmas carols is right on the mark.

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The headline of this post might not be completely honest. Indeed, if you asked me to grade the accuracy of my title, I’ll admit right away that it falls into the “if you like your plan, you can keep your plan” category of mendacity.

Krugman WeatherBut I’m only prevaricating to set the stage for some satire about Keynesian economics.

But this satire is based on a very bizarre reality. Advocates of Keynesian economics such as Paul Krugman have claimed that war is stimulus for the economy and that it would be good if we were threatened by an alien invasion. As such, it doesn’t take too much imagination to think that conversations like this may have taken place inside the Obama White House.

Particularly since Keynes himself thought it would be good for growth if the government buried money in the ground.

So enjoy this satire from The Onion.

By the way, Krugman also said the 9-11 terrorist attacks would “do some economic good.”

So the folks at The Onion need to step it up if they want to keep pace.

Now let’s share a serious video.

I’ve written before about how the Food and Drug Administration’s risk-averse policies lead to needless deaths.

Econstories builds upon that hypothesis, using the Dallas Buyers Club to make excellent points about why markets are better than command-and-control regulation.

Very similar to what Steve Chapman wrote about bureaucracy, competency, and incentives.

By the way, the bureaucrats at the FDA also have engaged in pointless harassment of genetic testing companies, even though nobody claims there is even the tiniest shred of risk to health and safety.

And nobody will be surprised about the bureaucracy’s anti-smoking jihad.

But nothing exemplifies brainless bureaucracy more than the raid by the FDA’s milk police. Though the FDA’s strange condom regulations might be even more bizarre.

It’s hard to decide when bureaucracies do so many foolish things.

P.S. The prize for the craziest bit of red tape still belongs to Japan, where the government actually regulates providers of coffee enemas, though the Department of Agriculture’s rules for magic rabbits is a close competitor.

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It’s sometimes difficult to make fun of Keynesian economics. But this isn’t because Keynesian theory is airtight.

It’s easy, after all, to mock a school of thought that is predicated on the notion that you can make yourself richer by taking money from your right pocket and putting it in your left pocket.

The problem is that it’s hard to utilize satire when proponents of Keynesian theory say things that are more absurd than anything critics could possibly make up.

Paul Krugman, for example, stated a couple of years ago that it would be good for growth if everyone thought the world was going to be attacked by aliens because that would trigger massive military outlays.

He also asserted recently that a war would be very beneficial to the economy.

Equally bizarre, he really said that the terrorist attacks on the World Trade Center would “do some economic good” because of the subsequent money spent on rebuilding.

And let’s not forget that John Maynard Keynes actually did write that it would be good policy to bury money in the ground so that people would get paid to dig it out.

As you can see, it’s difficult to mock such a strange theory since proponents of Keynesianism already have given us such good material.

But let’s try.

Here’s an amusing satirical image of Ludwig von Mises describing Keynesian economics.

Here’s Paul Krugman doing a Keynesian weather report.

This is the one that got the biggest laugh from me, though I’m chagrined at the misspelling.

Keynesian Fire

Last but not least, here’s an image of a neighborhood that has been the recipient of lots of stimulus. I bet the people are very happy.

Sort of reminds me of this satirical Obama campaign poster.

Let’s close with a few serious observations.

I recently added my two cents to the debate in an article debunking the White House’s attempt to justify the failed 2009 stimulus.

And there’s lots of additional material here, here, and here. My favorite cartoon on Keynesian economics also is worth sharing.

But you’ll probably learn just as much and be more entertained by this video from the Atlas Economic Research Foundation. It looks at the left’s fascination with disaster economics.

And here’s my video debunking Keynesian theory.

I’ll end with a gloomy comment. It’s easy to mock Keynesian economics, but it’s very hard to put a stake through its heart.

How can you kill an idea that tells politicians that their vice – buying votes with other people’s money – is actually a virtue?

P.S. Here’s the famous video showing the Keynes v. Hayek rap contest, followed by the equally entertaining sequel, which features a boxing match between Keynes and Hayek. And even though it’s not the right time of year, here’s the satirical commercial for Keynesian Christmas carols.

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There’s an ongoing debate about Keynesian economics, stimulus spending, and various versions of fiscal austerity, and regular readers know I do everything possible to explain that you can promote added prosperity by reducing the burden of government spending.

Simply stated, we get more jobs, output, and growth when resources are allocated by competitive markets. But when resources are allocated by political forces, cronyism and pork cause inefficiency and waste.

That’s why statist nations languish and market-oriented countries flourish.

Paul Krugman has a different perspective on these issues, which is hardly a revelation. But I am surprised that he oftentimes doesn’t get the numbers quite right when he delves into specific case studies.

He claimed that spending cuts caused an Estonian economic downturn in 2008, but the government’s budget actually skyrocketed by 18 percent that year.

He complained about a “government pullback” in the United Kingdom even though the data show that government spending was climbing faster than inflation.

He even claimed that Hollande’s election in France was a revolt against austerity, notwithstanding the fact that the burden of government spending rose during the Sarkozy years.

My colleague Alan Reynolds pointed out that Krugman mischaracterized the supposed austerity in the PIIGS nations such as Portugal, Ireland, Italy, Greece, and Spain.

We have another example to add to the list.

He now wants us to believe that Germany has been a good Keynesian nation.

Here’s some of what Professor Krugman wrote for the New York Times.

I hear people trying to dismiss the overwhelming evidence for large economic damage from fiscal austerity by pointing to Germany: “You say that austerity hurts growth, but the Germans have done a lot of austerity and they’re booming.” Public service announcement: Never, ever make claims about a country’s economic policies (or actually anything about economics) on the basis of what you think you’ve heard people say. Yes, you often hear people talking about austerity, and the Germans are big on praising and demanding austerity. But have they actually imposed a lot of it on themselves? Not so much.

In some sense, I agree with Krugman. I don’t think the Germans have imposed much austerity.

But here’s the problem with his article. We know from the examples above that he’s complained about supposed austerity in places such as the United Kingdom and France, so one would think that the German government must have been more profligate with the public purse.

After all, Krugman wrote they haven’t “imposed a lot of [austerity] on themselves.”

So I followed the advice in Krugman’s “public service announcement.” I didn’t just repeat what people have said. I dug into the data to see what happened to government spending in various nations.

And I know you’ll be shocked to see that Krugman was wrong. The Germans have been more frugal (at least in the sense of increasing spending at the slowest rate) than nations that supposedly are guilty of “spending cuts.”

German Austerity Krugman

To ensure that I’m not guilty of cherry-picking the data, I look at three different base years. But it doesn’t matter whether we start before, during, or after the recession. Germany increased spending at the slowest rate.

Moreover, if you look at the IMF data, you’ll see that the Germans also were more frugal than the Swedes, the Belgium, the Dutch, and the Austrians.

So I’m not sure what Krugman is trying to tell us with his chart.

By the way, spending in Switzerland grew at roughly the same rate as it did in Germany. So if Professor Krugman is highlighting Germany as a role model, maybe we can take that as an indirect endorsement of Switzerland’s very good spending cap?

But I won’t hold my breath waiting for that endorsement to become official. After all, Switzerland has reduced the burden of government spending thanks to the spending cap.

Not exactly in line with Krugman’s ideological agenda.

P.S. This isn’t the first time I’ve had to deal with folks who mischaracterize German fiscal policy. When Professor Epstein and I debated a couple of Keynesians in NYC as part of the Intelligence Squared debate, one of our opponents asserted that Germany was a case study for Keynesian stimulus. But when I looked at the data, it turned out that he was prevaricating.

P.P.S. This post, I hasten to add, is not an endorsement of German fiscal policy. As I explained while correcting a mistake in the Washington Post, the burden of government is far too large in Germany. The only good thing I can say is that it hasn’t grown that rapidly in recent years.

P.P.P.S. Let’s close with a look at another example of Krugman’s misleading work. He recently implied that an economist from the Heritage Foundation was being dishonest in some austerity testimony, but I dug into the numbers and discovered that, “critics of Heritage are relying largely on speculative data about what politicians might (or might not) do in the future to imply that the Heritage economist was wrong in his presentation of what’s actually happened over the past six years”

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Did you sing Happy Birthday?

The nation just “celebrated” the fifth anniversary of the signing of the so-called American Recovery and Reinvestment Act, Political Cartoons by Nate Beelermore commonly referred to as the “stimulus.”

This experiment in Keynesian economics was controversial when it was enacted and it’s still controversial today.

The Obama Administration is telling us that the law was a big success, but I have a far more dour assessment of the President’s spending binge.

Here’s some of what I wrote about the topic for The Federalist.

The White House wants us to think the legislation was a success, publishing a report that claims the stimulus “saved or created about 6 million job-years” and “raised the level of GDP by between 2 and 3 percent from late 2009 through mid-2011.”

Sounds impressive, right?

Unfortunately, these numbers for jobs and growth are based on blackboard models that automatically assume rosy outcomes.

Here’s how I explain it in the article.

…how, pray tell, did the White House know what jobs and growth would have been in a hypothetical world with no stimulus? The simple answer is that they pulled numbers out of thin air based on economic models using Keynesian theory. …Keynesian economics is the perpetual motion machine of the left. They build models that assume government spending is good for the economy and they assume that there are zero costs when the government takes money from the private sector. That type of model then automatically generates predictions that bigger government will “stimulate’ growth and create jobs. The Keynesians are so confident in their approach that they’ll sometimes even admit that they don’t look at real world numbers. And that’s what the White House did in its estimate. The jobs number (or, to be more technical, the job-years number) is built into the model. It’s not a count of actual jobs.

In the real world, however, you can count jobs.

As part of my article, I looked at the Minneapolis Federal Reserve Bank’s interactive website and compared the current recovery to all business cycle expansions in the post-World War II era.

And I did that comparison for jobs and growth. Here are the numbers for the labor market. The current recovery is in red, and you can see that the nation is “stumbling through the second-worst recovery for job creation in the post-WWII era.”

Minn Fed Recovery Jobs Data

And here are the Minneapolis Fed’s numbers for growth.

It doesn’t seem possible, but GOP performance has been even worse than job performance. We are mired in stagnation. As I noted, “the current recovery (red line) is the weakest expansion since World War II.”

Minn Fed Recovery GDP Data

In other words, it’s very difficult to argue – looking at the numbers – that the President’s main economic initiative was a success.

So why did it flop?

I pontificate in the article, pointing out three specific problems with Keynesian economics. I start with the elementary observation that the theory is based on the notion that you can become richer by taking money out of one pocket and putting it in another pocket.

…there is an “opportunity cost” when government borrows money and spends it. Resources are diverted from the productive sector of the economy. This might not be a problem if government spent money wisely, but stimulus schemes tend to reward interest groups with the most political clout. So instead of outlays for physical and human capital, which at least theoretically might improve the economy’s productive capacity, the White House directed the bulk of the stimulus to redistribution programs and handouts to state governments.

I then make a critical observation about how you shouldn’t try to solve one set of bad government policies with another layer of bad policy.

…the Keynesians don’t seem to appreciate that recessions generally are the result of bad government policies – such as inflation, housing subsidies, etc – that lead to fundamental and unsustainable economic imbalances. Unfortunately, more government spending often is designed to prop up these imbalances, which can create a longer and more painful period of adjustment.

Political Cartoons by Eric AllieBut the clincher, at least for most people, is the simple fact that Keynesianism doesn’t work.

But the biggest problem with Keynesianism is that the real-world evidence is so unfriendly. Consider, for instance, that the White House claimed that the unemployment would never climb above 8 percent if the stimulus was adopted. The following chart shows the actual unemployment projection put together by the Obama Administration, but modified to show the actual monthly unemployment rates the country experienced. …And that’s just the tip of the stimulus iceberg. Keynesian economics has a long track record of failure. It didn’t work for Hoover and Roosevelt in the 1930s. It didn’t work for Nixon, Ford, and Carter in the 1970s. It didn’t work for Japan in the 1990s. And it hasn’t worked this century for either Bush or Obama.

And guess what? I’m going to make a very sad prediction that we’ll get more Keynesian economics in the future, but it’s easy to predict right now that these future spending binges will fail just like previous stimulus schemes have flopped.

P.S. Here’s my video on Keynesian economics and here’s my video on Obama’s failed stimulus.

P.P.S. If you’d rather laugh than hear my voice, my favorite cartoons on Keynsianism can be viewed here and here.

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A just-released report from the bean counters at the Congressional Budget Office is getting lots of attention because the bureaucrats are now admitting that Obamacare will impose much more damage to the economy than they previously predicted.

Of course, many people knew from the start that Obamacare would be a disaster and that it would make the healthcare system even more dysfunctional, so CBO is way behind the curve.

Moreover, CBO’s deeply flawed estimates back in 2009 and 2010 helped grease the skids for passage of the President’s failed law, so I hardly think they deserve any applause for now producing more realistic numbers.

But today’s post isn’t about the Obamacare fiasco. I want to focus instead on some other numbers in the new CBO report.

The bureaucrats have put together their new 10-year “baseline” forecast of how much money the government will collect based on current tax laws and the latest economic predictions.

These numbers show that tax revenue is projected to increase by an average of 5.4 percent per year.

As many readers already know, I don’t fixate on balancing the budget. I care much more about reducing the burden of government spending and restoring the kind of limited government our Founding Fathers envisioned.

But whenever the CBO publishes new numbers, I can’t resist showing how simple it is to get rid of red ink by following my Golden Rule of fiscal restraint.

Here’s a chart showing projected revenue over the next 10 years, along with lines showing what happens if spending (currently $3.54 trillion) follows various growth paths.

Balancing the Budget Is Easy

The two biggest takeaways are that a spending freeze (similar to what we got in 2012 and 2013) would almost balance the budget in 2016 and would definitely produce a budget surplus in 2017.

I also highlight what would happen if politicians merely limited spending so it grew at the rate of inflation, about 2.3 percent per year. Under that scenario, the budget would be balanced in 2019 (actually a $20 billion surplus, but that’s an asterisk by Washington standards).

In other words, there is no need to raise taxes. It’s very simple to balance the budget without extracting more money from taxpayers.

This means the Simpson-Bowles people are wrong. The Domenici-Rivlin folks are wrong. Senator Patty Murray is wrong. Jeb Bush and Lindsey Graham are wrong. And (here’s a surprise) the Obama Administration is wrong.

And we have some additional evidence. It’s a chart taken directly from the CBO report and it shows that revenues over the next 10 years will be above the long-run average. This is because even weak growth slowly but surely produces more revenue for Washington, in part because it gradually pushes people into higher tax brackets.

CBO Above-Average Revenues

And this chart just looks at the next 10 yeas. If you peruse the long-run fiscal projections, you’ll see that the tax burden is projected to increase dramatically over the next several decades.

The moral of the story is that there should be tax cuts (ideally as part of tax reform), not tax increases.

P.S. Just in case you think I was being unfair in my description of the Congressional Budget Office, keep in mind that these are the bureaucrats who advise Congress that economic performance increases when taxes go up.

P.P.S. And even though CBO is finally admitting some of the flaws in Obamacare, the bureaucrats are still unrepentant Keynesians. Check out this excerpt from a story in yesterday’s Washington Post.

Rep. Chris Van Hollen (Md.), the top Democrat on the committee, cited the CBO’s finding that the law will “boost overall demand for goods and services over the next few years,” This is because people benefiting from its expansion of Medicaid and insurance subsidies will likely have extra money to spend, which “will in turn boost demand for labor over the next few years,” the report says.

So CBO would like us to believe that the more money the government redistributes, the more growth we’ll get. I guess this explains why France is such an economic dynamo.

More seriously, this is the same flawed analysis that allowed CBO to claim the so-called stimulus was creating jobs as employment was falling.

You can understand why I’ve written that Keynesian economics is the left’s perpetual motion machine.

P.P.P.S. Here’s a Center for Freedom and Prosperity video that I narrated back in 2010, which explains why it is simple to balance the budget. The numbers in the video obviously need to be replaced with the ones I shared above, but the analysis is still right on the mark.

P.P.P.P.S. And if you want to know how to achieve the modest spending restraint needed to balance the budget, the Swiss “debt brake” would be a good place to start.

It’s really a spending cap, and it’s worth noting that the Swiss budget has increased by only 2 percent per year since voters imposed the law back in 2001.

Or maybe we could somehow hope that politicians would simply be responsible, like lawmakers in Canada and New Zealand in the 1990s. Or we could reincarnate Reagan. Or even bring back Clinton.

P.P.P.P.P.S. Since we started this post by talking about how Obamacare is undermining the economy, let’s close with a great example of Obamacare humor.

Remember Pajama Boy? Well, he’s back for an encore performance thanks to some very clever people at Americans for Prosperity.

There’s no update, by the way, on whether being without a job impacts his chances of getting a date with Julia. They’d make such a good couple.

Pajama Boy Jobless

This is amusing, but it surely isn’t as funny as President Obama’s Chief Economist, who actually argued with a straight face that it was a good sign that Obamacare was leading people to drop out of the labor force because unemployment  “might be a better choice and a better option than what they had before.”

Sort of reminds me of this Chuck Asay cartoon, or this famous set of wagon cartoons.

Dependency for more and more people. Such an inviting concept…until this happens.

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