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Posts Tagged ‘Red Ink’

Almost exactly one year ago, I did a post entitled “A Laffer Curve Tutorial” because I wanted readers to have all the arguments and data in one place (and also because it meant I wouldn’t have to track down all the videos when someone asked me for the full set).

Riders from the fiscal policy short bus

Today, I’m doing the same thing on the issue of government spending. If you watch these four videos, you will know more about the economics of government spending than 99.9 percent of the people in Washington. That’s not a big achievement, to be sure, since you’re being compared to a remedial class, but it’s nonetheless good to have a solid understanding of an issue.

The first video defines the problem, explaining that deficits and debt are bad, but then explaining that red ink is best understood as a symptom of the real problem of too much government spending.

The second video reviews the theoretical reasons why a large public sector undermines prosperity.

The next video examines the empirical evidence, citing both cross-country data and academic research.

Last but not least, the final video looks at the research about the growth-maximizing size of government.

You may have noticed, by the way, that this post does not include any of the videos about Keynesian economics or Obama’s stimulus. That’s an entirely different issue, perhaps best described as being a debate over whether it’s good or bad in the short run to increase the burden of government spending. The videos in this post are about the appropriate size and scope of government in the long run.

This post also does not include the video about fiscal restraint during the Reagan and Clinton years, or the video looking at how nations such as New Zealand and Canada were able to restrain spending. Those are case studies, not economics.

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I’m getting very frustrated. I  spend too much time reminding my supposed allies that America’s fiscal problem is too much government. Deficits and debt, I constantly explain, are best understood as symptoms, whereas a bloated public sector is the underlying disease.

Even people who are very solid on fiscal policy make the mistake of sometimes focusing too much on red ink rather than the size of government, including Senator Jim DeMint, Mark Steyn of National Review, Representative Paul Ryan, and my old friends at the Heritage Foundation.

So I’ve decided to create a new award. But unlike my other awards, which are exercises in narcissism (Mitchell’s Law, Mitchell’s Golden Rule), I’m naming this award after former Senator Bob Dole.

The message is very simple. Whenever people complain about red ink, even if they are genuine advocates of small government, they give leftists an opportunity to say that higher taxes are a solution.

That’s bad politics and bad policy. And since Bob Dole excelled in both those ways, you can understand why his name is linked to the award.

Naming the award after Bob Dole also is appropriate since he was never a sincere advocate of limited government. The Kansas lawmaker was a career politician who said in his farewell speech that his three greatest achievements were a) creating the food stamp program, b) increasing payroll taxes, and c) imposing the Americans with Disabilities Act (no wonder I wanted Clinton to win in 1996).

For all of these reasons, and more, no real conservative should want to win an award linked to Bob Dole.

So I’m putting the policy world on notice. If you say the wrong thing – even if your heart is in the right place, you may win this booby prize.

This video has further information on why the real fiscal problem is excessive government spending. Deficits also are bad, the video explains, but they are best understood as a bad consequence of big government (with high taxes being the other bad consequence).

One last point, for those who are still fixated on red ink, is that nations that do the right thing on spending also tend to be the ones who reduce deficits and debt.

Not that this should come as a surprise. The best way to get rid of symptoms is to cure the disease that causes them.

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Many of the politicians in Washington, including President Obama during his State-of-the-Union address, piously tell us that there is no way to balance the budget without tax increases. Trying to get rid of red ink without higher taxes, they tell us, would require “savage” and “draconian” budget cuts.

I would like to slash the budget and free up resources for private-sector growth, so that sounds good to me. But what’s the truth?

The Congressional Budget Office has just released its 10-year projections for the budget, so I crunched the numbers to determine what it would take to balance the budget without tax hikes. Much to nobody’s surprise, the politicians are not telling the truth.

The chart below shows that revenues are expected to grow (because of factors such as inflation, more population, and economic expansion) by more than 7 percent each year. Balancing the budget is simple so long as politicians increase spending at a slower rate. If they freeze the budget, we almost balance the budget by 2017. If federal spending is capped so it grows 1 percent each year, the budget is balanced in 2019. And if the crowd in Washington can limit spending growth to about 2 percent each year, red ink almost disappears in just 10 years.

These numbers, incidentally, assume that the 2001 and 2003 tax cuts are made permanent (they are now scheduled to expire in two years). They also assume that the AMT is adjusted for inflation, so the chart shows that we can balance the budget without any increase in the tax burden.

I did these calculations last year, and found the same results. And I also examined how we balanced the budget in the 1990s and found that spending restraint was the key. The combination of a GOP Congress and Bill Clinton in the White House led to a four-year period of government spending growing by an average of just 2.9 percent each year.

We also have international evidence showing that spending restraint – not higher taxes – is the key to balancing the budget. New Zealand got rid of a big budget deficit in the 1990s with a five-year spending freeze. Canada also got rid of red ink that decade with a five-year period where spending grew by an average of only 1 percent per year. And Ireland slashed its deficit in the late 1980s by 10 percentage points of GDP with a four-year spending freeze.

No wonder international bureaucracies such as the International Monetary fund and European Central Bank are producing research showing that spending discipline is the right approach.

This video provides all the details.

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Tyler Cowen’s recent New York Times column explains how nations as diverse as Ireland, Sweden, and Canada have successfully solved fiscal problems by limiting the growth of government spending:

America’s long-run fiscal outlook is bleak, mostly because of an aging population and rising health care costs. To close the gap between expenditures and revenue, …we’ll need to focus especially on reducing spending, largely because that taxes on the wealthy can be raised only so high. …Higher income tax rates would discourage hard work and encourage tax avoidance, thereby defeating the purpose of the tax increases. …Higher levels of government spending and taxation would also soak up resources that might otherwise foster innovation and new businesses. And sentiment would most likely turn ever stronger against those immigrants who consume public services and make the deficit higher in the short run. …The macroeconomic evidence also suggests the wisdom of emphasizing spending cuts. In a recent paper, Alberto Alesina and Silvia Ardagna, economics professors at Harvard, found that in developed countries, spending cuts were the key to successful fiscal adjustments — and were generally better for the economy than tax increases. …The received wisdom in the United States is that deep spending cuts are politically impossible. But a number of economically advanced countries, including Sweden, Finland, Canada and, most recently, Ireland, have cut their government budgets when needed. Most relevant, perhaps, is Canada, which cut federal government spending by about 20 percent from 1992 to 1997.

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