Okay, I’ll admit the title of this post is an exaggeration. How to fix the mess at the IRS is a fiscal policy question, and that requires tax reform rather than spending restraint.
But allow me a bit of literary license. We just had a big debt limit battle in Washington and, after a lot of political drama, politicians kicked the can down the road.
So we need to ask ourselves whether that fight accomplished anything?
It did focus attention on the flaws of Obamacare, and I suppose there’s some value in that.
But the debt limit was not a vehicle – as has been the case in the past – for changes in fiscal policy. We didn’t get something good, like the sequester which resulted from the 2011 debt limit legislation. And we didn’t get something bad, like the tax hike in the 1985 debt limit legislation
Some are asking whether we should even have a debt limit. A number of critics have suggested we should get rid of the borrowing cap because it creates the risk of default. I think those concerns are very overblown.
I’m more persuaded by those who argue that the debt limit diverts attention from better options to improve fiscal policy.
Professors Gary Becker and Edward Lazear write in the Wall Street Journal that the debt ceiling is not a very good tool for restraining the growth of government. They look at evidence from the states to warn that fiscal rules that seek to limit borrowing are ineffective.
Many states are required to have “balanced” budgets, but the growth in spending and the size of state governments continues apace. During good times, when tax revenues are high, states “balance” their budgets by spending at the high levels consistent with large revenues. When times get tough, it is difficult if not impossible to eliminate programs that had been initiated during the fat years. Instead, the states resort to budgetary gimmicks, like delaying shortfalls until next year’s “balanced” budget.
Gimmicks are bad, of course, but politicians also respond to fiscal squeezes by raising taxes.
And that can be even worse as the prospect of more revenue leads to a ratchet effect, with periodic tax hikes used to maintain or expand the gravy train of spending. The fiscal mess in Europe is an obvious case study, but if you want a painful example from America, just look at data from Connecticut. The state did quite well without an income tax from the 1600s until 1991.
But then an income tax was imposed, in part to deal with the fiscal shortfall caused by an economic downturn. And, as critics warned, that new tax has produced dismal results. The top rate has jumped from 4.5 percent to 6.5 percent and inflation-adjusted per-capita state government spending has doubled. And there have been zero net private-sector jobs created since the income tax was implemented.
So what’s the answer? Becker and Lazear explain that lawmakers should target the underlying problem of spending rather than the symptom of red ink.
Better than a debt-ceiling rule would be one that controls spending directly, not the debt that results from it. The specifics are less important than the general principle, which is that spending growth should be limited in a way that brings government outlays back down to historic ratios relative to GDP. This would place the attention where it belongs, on spending rather than on the difference between outlays and receipts. Increased spending, coupled with even larger increases in taxes, might bring the deficit down, but it would damage economic growth and well-being.
Well stated. Reducing the overall burden of government spending – measured as a share of economic output – should be the goal of fiscal policy. That’s simply another way of stating my Golden Rule. And there’s a growing body of academic evidence showing that reducing the size of government is a good way of improving economic performance.
I’ve been highlighting the example of Switzerland, which has successfully strengthened its economy and fiscal policy with a spending cap (which, ironically, is called a “debt brake” even though the real effect of the law is to limit how fast spending can increase over time).
Other countries that have limited spending also have achieved some very impressive results. The video at this link looks at evidence from nations such as New Zealand and Canada in the 1990s, and there’s a more recent data about the positive effects of spending restraint in the Baltic nations.
There has been some interest in spending caps on Capitol Hill. Congressman Brady of Texas has proposed a MAP Act that is somewhat similar to Switzerland’s debt brake and Senator Corker of Tennessee has introduced a CAP Act that also would restrain annual spending increases.
Perhaps if some of their colleagues read today’s Becker-Lazear column, they’ll also understand why it’s better to focus on the underlying problem of government spending rather than getting distracted by the symptom of red ink.
[…] Monaco, and the Cayman Islands that are worth highlighting because of strong rule of law and good fiscal policy. There are also a few medium-sized nations that are – by modern standards – very […]
[…] half-joked in the past that spending restraint is the answer to every fiscal […]
[…] already written favorably about the Swiss Debt Brake and specifically noted that the MAP Act is the closest thing to that approach in the Untied States, it’s obvious that I like spending […]
Less spending means less goodies allocated through the political process and voting. What incentive do politicians have in accepting such principle?
Will voters refrain from the delusional prosperity panacea of redistributing and suppressing production incentives at the polls?
When pandering to politicians the odds are stacked against you, against the country’s perpetually compounding growth rate (or lack thereof), and thus against your continued long term prosperity.
The public’s vigilance required to neutralize such inherent politician motivation is just no longer there in America. The vigilance required to avoid the nearly ubiquitous European trajectory is just no longer there.
So enjoy the short socialist smorgasbord years, while they last, and secure an escape boat, because things will get worse. Motivation to produce is decreasing across the board, effort-reward curves are flattening, and the dream that someone else will do the exceptional work required to keep your top of the world standard of living will end badly, dear American. So have Hope but keep the Change, because you’re going to need it. Tough times, times of European malaise, lay ahead. Don’t hope that a Tea Party with twenty percent voter support (at best) can stop the decline. They are simply the predictable scream of a prosperity going down the tubes. Virtually every march towards coercive collectivism has had its minority opponents. They were defeated, forgotten, and the path to decline taken in great public hope and celebration. The flags change color, the details of the manifesto’s change, but the central delusional hope remains the same: that One day competent people will start leaving their families every morning to go work for distant others, under adulterated and flattened effort/reward incentives, and, ultimately, under the mandate if some public savior, some commissar, some public organizer, some expert committee, or the public majority itself. AND work with enough residual enthusiasm to outcompete most if the world and sustain your top ten percent worldwide standard of living. Sure, it will happen. Just vote for it and it will happen. What choice do they have? Others seem to have not been able to figure out this redistribution trick, so your reign as most prosperous citizen of the planet rests secure dear American. Divine forces guarantee the production that keeps America prosperous. Follow Europe to a better distribution of this taken for granted windfall.
From this height (top ten percent in worldwide prosperity) it will be a long-long way down.
Act accordingly. Teach your children cross border mobility.
The American middle class, with the twenty five hundred square foot house and the three car garage ( top ten percent worldwide) does not need $30 in redistribution money to vaccinate its children. Buying a two inch smaller TV, skipping a few roaming charges etc., will easily cover the cost. The American middle class’ prosperity depends on a long history of unadulterated incentives, whereby it has been responsible for bearing the cost of its own vaccinations.
You may get your $30 vaccination and another 5-10k in redistribution goodies if you simply vote for it. But you will lose your top ten percent worldwide standard if living. Or you can listen to politicians who say you can have both. You have created a self selecting political environment whereby the only politicians to rise are those who believe in the same delusion as you: Production in the top ten percent of the world, built on unexceptional effort reward curves. It should not surprise anyone that this delusional shortcut to prosperity is so inebriating.
[…] For any Fiscal Policy Question, Spending Restraint Is the Answer […]
Health care, eating, housing and jobs, then, are not fiscal policy questions.
Letting your child go unvaccinated is stupid, bordering on child abuse. Same for your poor neighbor’s kid.
It may save you $30 not to get the measles jab. But your insurance company will get 100 times that from you later, to pay for the kids who didn’t get the jab, got measles instead, and suffered complications at the hospital.
The Car Guys are right: The Cheapskate always pays more. He may have money in his bank account, but less than he would have had, and he’s living a life of poverty of the spirit.