I greatly admire Switzerland’s “debt brake” because it’s really a spending cap.
Politicians are not allowed to increase spending faster than average revenue growth over a multi-year period, which basically means spending can only grow at the rate of inflation plus population.
Theoretically, taxes could be hiked to allow more spending, but that hasn’t happened. The Swiss are very good about voting against tax increases, so the politicians don’t have much ability to boost the revenue trendline.
Since the debt brake first took effect in 2003, the burden of government spending has dropped from 36 percent of GDP to 34 percent of economic output – a rather remarkable achievement since most other European nations have moved in the wrong direction.
As part of my self-serving efforts to promote Mitchell’s Golden Rule, I’ve been advocating for spending caps in the United States, and I’ve favorably cited legislation proposed by Congressman Brady of Texas and Senator Corker of Tennessee.
Now I have some new evidence on my side. David Hogberg of Investor’s Business Daily looks at the current fiscal mess in America and discovers – gee, what a surprise – that spending has grown very rapidly since the late 1990s.
President Obama says he wants a “balanced” approach to the fiscal cliff. But critics argue the real problem is spending, which has far outstripped rising tax revenue as well as economic growth. Federal government revenue rose from $1.7 trillion to $2.4 trillion from fiscal 1998 to 2012, slightly exceeding inflation. Revenue growth averaged 2.9% annually, despite two recessions, bear markets — and tax cuts. But federal spending rose nearly twice as fast — 5.7% per year — surging from $1.6 trillion to $3.5 trillion over that same span. The spending spike also exceeds growth in the population.
What’s the solution to this mess? I make the argument for a spending cap.
Dan Mitchell, senior fellow at the libertarian Cato Institute, says the U.S. government needs a spending cap. “It’s an issue of trendlines and that’s everything in fiscal policy,” Mitchell said. “If you are on a path where government spending grows faster than the private sector of the economy, which is your tax base, then in theory there is no level of taxation that will be enough to stabilize the system. … If we had kept government spending down to just increases for inflation and population growth, we wouldn’t be in the trouble we’re in now.” Limiting spending to increases in inflation and population growth over 1998-2012 (an annual average of about 3.3%) would have given dramatically different results. The U.S. would have spent $2.6 trillion in FY 12, about $900 billion less than what it actually did. The latest deficit would be $157 billion, a fraction of the actual $1.089 trillion.
I’ve crunched the numbers to show that we could balance the budget in just 10 years if we just limited spending so that it grew by “only” 2.5 percent annually.
David did the same thing, but looking backwards instead of forward. Here’s the chart included with his article. As you can see, the budget mess would be very manageable today if the Bush-Obama spending binge hadn’t occurred.
But politicians don’t like spending caps for the same reasons that burglars don’t like armed homeowners. As Veronique de Rugy notes, if we imposed a spending cap, they would be forced to reform entitlements.
While a spending cap would help, some analysts contend that it would need to be coupled with entitlement reform. “If you don’t reform Social Security, Medicare and Medicaid, you’ll have a hard time staying within the cap,” said Veronique de Rugy, senior research fellow at the libertarian Mercatus Center. …”To make it feasible and enforceable you’d have to do a constitutional amendment,” said Mitchell. “But even short of that, at least if you start talking about it and set it as your goal it would get people focusing on the real problem … which is government spending growing faster than the private sector.”
This brings us to the real challenge. How do we get politicians to impose reforms when they benefit from the current system. Barring a miracle, they’re not going to tie their own hands.
But I think our chances of success will be much higher if advocates of good fiscal policy kept reminding the crowd in Washington that the real problem is too much spending and that red ink is just a symptom of the underlying disease.
[…] P.S. There is a simple solution to avoid such crises, and a specific policy to achieve that solution. But don’t hold your breath waiting for politicians to tie their own hands. […]
[…] P.S. There is a simple solution to avoid such crises, and a specific policy to achieve that solution. But don’t hold your breath waiting for politicians to tie their own hands. […]
[…] 10 years ago, I shared some data to show how a Swiss-style spending cap would have prevented some of the excess spending of the Bush […]
[…] P.S. There is a simple solution to avoid such crises, and a specific policy to achieve that solution. But don’t hold your breath waiting for politicians to tie their own hands. […]
[…] P.S. There is a simple solution to avoid such crises, and a specific policy to achieve that solution. But don’t hold your breath waiting for politicians to tie their own hands. […]
[…] P.S. There is a simple solution to avoid such crises, and a specific policy to achieve that solution. But don’t hold your breath waiting for politicians to tie their own hands. […]
[…] It’s also worth noting that the United States would be in a much stronger position today if we had enacted a spending capa couple of decades […]
[…] It’s also worth noting that the United States would be in a much stronger position today if we had enacted a spending cap a couple of decades […]
[…] deficit above $1 trillion, Investor’s Business Daily opined that America’s fiscal mess could have been avoided if politicians had simply adopted a TABOR-style spending cap starting in […]
[…] budget surplus today, and also very little debt, if a spending cap had been in effect (same results would hold for […]
[…] …asking politicians to reduce government is like asking burglars to be in favor of armed homeowners. …we know politicians generally have bad incentives. But it’s not hopeless. While I certainly enjoy mocking politicians, they’re not totally immoral or even amoral people. Many of them do understand there’s a problem. Indeed, I would argue that recent votes for entitlement reform are an example of genuine patriotism – i.e., doing the right thing for the country. So is there a potential solution? Maybe. Let’s use an analogy from Greek mythology. Many politicians generally can’t resist the siren song of a go-along-to-get-along approach. But like Ulysses facing temptation from sirens, they recognize that this is a recipe for a bad outcome. So they realize that some sort of self-imposed constraint is desirable. And that’s why I’m somewhat hopeful that we can get them to impose binding spending caps. We know there are successful reforms by looking at the evidence. And we know there is growing support from fiscal experts. And we even see that normally left-leaning international bureaucracies such as theOECD and IMF acknowledge that spending caps are the only effective fiscal rule. So if Ulysses can bind himself to the mast and resist the sirens, perhaps we can convince politicians to tie their own hands with a Swiss-style spending cap. […]
[…] the private sector over a sustained period (just like Greece, just like Alberta, just like the United States, etc, […]
[…] So if Ulysses can bind himself to the mast and resist the sirens, perhaps we can convince politicians to tie their own hands with a Swiss-style spending cap. […]
[…] to say, there’s also a lesson here for Washington (one that actually was heeded between 2009-2014, but the real key is permanent, structural spending […]
[…] in 2012, I shared some superb analysis from Investor’s Business Daily showing that the United States never would have suffered $1 […]
[…] than the private sector over a sustained period (just like Greece, just like Alberta, just like the United States, etc, […]
[…] I cited similar hypothetical examples when writing about fiscal policy in Canada and also when sharing some good analysis from Investor’s Business […]
[…] column published by Investor’s Business Daily reveals that the United States would have avoided the multi-trillion dollar deficits of the Obama years had a Swiss-style spending cap been in […]
[…] column published by Investor’s Business Daily reveals that the United States would have avoided the multi-trillion dollar deficits of the Obama years had a Swiss-style spending cap been in […]
[…] such a policy in the United States would have prevented the trillion-dollar deficits of Obama’s first […]
[…] in 2012, I shared some superb analysis from Investor’s Business Daily showing that the United States never would have […]
[…] in 2012, I shared some superb analysis from Investor’s Business Daily showing that the United States never would have suffered $1 […]
[…] in 2012, I shared some superb analysis from Investor’s Business Daily showing that the United States never would have suffered $1 […]
[…] in 2012, I shared some superb analysis from Investor’s Business Daily showing that the United States never would have suffered $1 […]
[…] in 2012, I shared some superb analysis from Investor’s Business Daily showing that the United States never would have suffered $1 […]
[…] moral of the story is that when you address the real problem of too much spending, you automatically address the symptom of red […]
[…] P.P.S. Here’s the fiscal policy we should emulate. […]
[…] is that we need to reduce the size of the public sector, even if we do it in a very gradual way by imposing some sort of spending cap that fulfills the Golden Rule requirement of having government grow slower than the productive […]
[…] is that we need to reduce the size of the public sector, even if we do it in a very gradual way by imposing some sort of spending cap that fulfills the Golden Rule requirement of having government grow slower than the productive […]
[…] is that we need to reduce the size of the public sector, even if we do it in a very gradual way by imposing some sort of spending cap that fulfills the Golden Rule requirement of having government grow slower than the productive […]
[…] the way, it’s not just Iceland that would benefit from this type of spending cap. I explained last year that America would never have experienced trillion-dollar deficits if we had something similar to […]
[…] P.S. If the United States had implemented something similar to Switzerland’s successful spending cap, we would be in a far stronger fiscal policy position today. […]
[…] prior posts, I’ve shared research showing that the United States today would be very close to a balanced budget if we had implemented something akin to the Swiss Debt […]
[…] I explained last month, we would be in much stronger fiscal shape if lawmakers had merely restrained spending over the […]
I don’t think it’s very fair to cherry-pick policy based on it’s success in a very different system. For instance, I would think you would have to take into account that Switzerland collects more in taxes (as a percentage of GDP) and spends much less on military expenditures (less than 1/5th as a percentage of GDP–what might we do with a half a trillion dollars?) than we do. And they cap their spending while still providing for things like universal health coverage.
These differences alone indicate that we are comparing apples to oranges.
[…] https://danieljmitchell.wordpress.com/2012/12/20/a-swiss-style-spending-cap-would-have-prevented-the-… […]
Reblogged this on Gds44's Blog.
Reblogged this on Public Secrets and commented:
Many on the liberal left wish we were more like Europe. In one sense, I agree: As Mitchell shows in the linked post, if we had the spending cap Switzerland employs, we wouldn’t be stuck in this fiscal morass.
I had a thought recently. If congress can’t pass a balanced budget in 3 years they aren’t allowed to do anything else until that 4th year comes out in the black. On top of that you could withhold their pay as well.
[…] See on danieljmitchell.wordpress.com […]