Bad Math Leads to Bad Economics

The combination of demographic change and poorly designed entitlement programs is producing an ever-increasing burden of federal spending.

In my Twelfth Theorem of Government, I pointed out that this inevitably will mean big tax increases on lower-income and middle-class households.

As stated in the Theorem, if there was a way of financing big government by only taxing the rich, other nations already would have made that choice.

Some of them have tried, but there simply are not enough rich people to finance large welfare states.

But I don’t want any tax increases. Class-warfare tax increases are a bad idea, and so are tax increases on regular people.

It would be much better for the country to reform entitlement programs.

But many politicians (both Democrats and Republicans) disagree.

However, that means they want big tax increases on lower-income and middle-class household.

To emphasize this point, I unveiled my Fifteenth Theorem of Government, which drives home the point that you can’t have big government without pillaging ordinary people.

I pontificated on this issue today in a MoneyShow presentation.

There were lots of charts to justify my two theorems, but these six points hopefully are a good summary of my argument.

For what it’s worth, the first five points are basic math.

Indeed, there are some honest folks on the left (including Paul Krugman) who have made similar observations.

My final point is where the honest leftists and I have a big disagreement. They think it would be a good thing to copy Europe. But I think that would be crazy since European living standards are much lower because of bloated welfare states.

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Big-Spending Republicans Are Big-Taxing Republicans

My Fifteenth Theorem of Government points out there is an “unavoidable choice” between entitlement reform and tax policy.

Simply stated, the folks who oppose fixing entitlements – including so-called national conservatives and politicians such as Donald Trump – are in favor of giant tax increases on lower-income and middle-class Americans.

They don’t admit their support for huge tax hikes on regular people, of course, but that’s the inevitable outcome if fiscal policy is left on autopilot. Even Paul Krugman admits that’s what will happen.

This process already is underway in the United Kingdom.

The Conservative Party became recklessly profligate under Boris Johnson, causing a big bump in the country’s (already excessive) spending trajectory.

And bad spending policy is now leading to bad tax policy (the British pound no longer is the world’s reserve currency, so there’s not as much ability to finance ever-expanding spending by endlessly issuing new debt).

As explained in a Wall Street Journal editorial from last November, Prime Minister Rishi Sunak and his Chancellor of the Exchequer Jeremy Hunt have a tax agenda somewhat akin to Joe Biden’s.

The Chancellor and his boss, Prime Minister Rishi Sunak, are making a particular tax grab at highly mobile workers, especially in financial services, by reducing the threshold for the top 45% income-tax rate to £125,000 from £150,000. The Treasury pretends this will rake in an additional £3.8 billion in revenue over six years… Mr. Hunt is increasing the top corporate tax rate to 25% from 19% and imposing a global minimum tax not even the European Union has managed to implement. …Mr. Sunak’s Conservative Party ditched Ms. Truss’s supply-side tax and regulatory reforms in favor of this plan to tax and spend Britain to prosperity. One of those strategies boasts a proven track record of success and the other has a history of failure. The Tories can explain their choice to voters at the next election.

In a column for CapX, Conor Holohan made similar points, while also pointing out the corporate tax hike won’t raise nearly as much money and Sunak and Hunt are hoping to collect.

Hunt is right to want to balance the books and avoid passing on huge levels of debt to future generations. But to raise corporation tax on such a scale risks turning away those businesses which will be central to the growth and investment we need to generate the receipts that will pay the nation’s bills…. But that static approach doesn’t..reflect the fact that businesses are being discouraged from investing in Britain because of the planned increase in corporation tax. …The TaxPayers’ Alliance (TPA) dynamic tax model..suggests the planned corporation tax rise could cost £30.2bn of lost GDP after a decade. This slower growth would see almost two thirds of the expected revenue from the rise to be lost through lower receipts. …By raising corporation tax on this scale, the Government will be eroding that tax base, and we will see more companies like AstraZeneca deciding that there are more competitive places to be investing.

Steve Entin of the Tax Foundation also did some economic analysis and is not impressed with the Sunak-Hunt tax-and-spend agenda.

…the Sunak-Hunt tax plan will raise labor costs and reduce hours worked. It will increase tax hurdles for new corporate investment, discouraging capital formation. With less labor and capital, real output and employment will fall, increasing the economic pain… The system phases out the untaxed personal allowance for incomes between £100,000 and £125,140, at a rate of £1 for every £2 of income over £100,000. This results in a de facto 60 percent tax band in the middle of the 40 percent band. …The Sunak-Hunt plan…leaves the pending rise in the corporation tax in place. It raises the windfall profits tax on oil and gas producers and imposes a new tax on electricity generation, which will drive up the cost of energy, prompting the government to promise more spending on energy grants to consumers. …The Sunak-Hunt tax plan…estimates another 6 million workers will be pushed onto the tax roles due to the freezes. …History is clear. Lowering budget deficits via spending restraint frees resources for additional private output and jobs. …It is folly to think deficit reduction by means of a corporation tax increase would lower interest rates enough to spur investment despite the direct damage from the tax

Let’s close with a few passages from another Wall Street Journal editorial, this one published just yesterday.

U.K. Prime Minister Rishi Sunak promised economic expertise… British businesses think he needs a refresher. Witness the brewing revolt against the mammoth tax increases Mr. Sunak cooked up with Chancellor Jeremy Hunt. …they want to raise the top corporate tax rate to 25% from 19%; reduce the threshold for the top 45% personal income-tax rate to £125,140 from £150,000; and soak the middle class by freezing tax brackets… The ruling Conservatives have convinced themselves that only a balanced budget can induce businesses to invest in Britain. But…James Dyson of vacuum cleaner fame wrote in the Telegraph in January that the Tory policy of tax hikes and overregulation is “short-sighted” and “stupid.” …Pharma giant AstraZeneca last month said it will build a £320 million factory in low-tax Ireland instead of the U.K. “because the [U.K.] tax rate was discouraging.” Shell is reevaluating $25 billion in oil and gas investments after Mr. Hunt cranked up a windfall-profits tax on top of the regular corporate rate. …The business revolt is a warning that the taxes will be fiscal duds. …That may leave the Tories defending a record of slow growth, high taxes and more deficits and debt at the next election. A party of the right that loses its low-tax, pro-growth economic credibility is headed for defeat.

Some readers may not care about fiscal policy in the United Kingdom.

But today’s column is a warning sign about what will happen in the United States if Republicans surrender on spending and entitlement programs are left on autopilot.

I won’t pretend that genuine entitlement reform will be politically easy. But my message to my Republicans friends is that a tax-increase agenda is not just economically destructive, but also politically suicidal.

A GOP that strays from Reagan-style classical liberalism is bad news.

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Biden and Trump Should Learn from Sweden’s Social Security Reform

Some American politicians, such as Joe Biden and Donald Trump, are very much opposed to dealing with Social Security, even though the current system has a massive $56 trillion cash-flow deficit.

For all intents and purposes, both the current president and his predecessor want to kick the can down the road, which surely is a recipe for massive future tax increases and may cause drastic changes to promised benefits.

Given their advanced ages, they probably won’t be around next decade when the you-know-what hits the fan.

But the rest of us will have to deal with a terrible situation thanks to their selfish approach.

Other nations are more fortunate, with leaders who put the national interest above personal political ambition.

Johan Norberg has a new column in the Wall Street Journal about how Swedish lawmakers adopted personal retirement accounts and undertook other reforms to strengthen their pension system.

President Biden refuses to consider any reforms, and so do many Republicans. But that won’t save the program; it’ll doom it. …Sweden faced the same problem in the early 1990s. The old pay-as-you-go pension system had promised too much. With fewer births and longer lives, projections showed the system would be insolvent a decade later. …Its politicians chose not to deceive the voters. …In 1994 the Social Democrats agreed with the four center-right parties to create an entirely new system based on the principle that pensions should correspond to what the beneficiary pays into the system—a system in which the contribution, not the benefits, is defined. …Sweden introduced partial privatization of the kind the American left derides as a Republican plot… The Swedish government withholds roughly 2.3% of wages and puts it into individual pension accounts. Workers are allowed to choose up to five different funds in which to invest this money…the average Swede has made an impressive average return of roughly 10% a year since its inception in 1995, despite the dot-com crash, the financial crisis and the pandemic. …Sweden’s pension system was recently described as the world’s best by the insurance group Allianz, based on a combination of sustainability and adequacy.

Back in 2018, I wrote about Sweden’s pension reforms, and I cited a study I co-authored back in 2000 for the Heritage Foundation.

Readers who want to learn more about the details of the Swedish system should read those publications.

For purposes of today’s column, though, let’s zoom out and see how Sweden’s system compares to other nations.

We’ll start by looking at a report by Mercer and the Chartered Financial Analyst Institute, which compared retirement systems in 43 developed countries. You can click here to view the full report and full rankings, but let’s focus on the United States and Sweden.

As you can see, Sweden beats America in every category, including a giant lead for integrity.

It’s also worth noting that Sweden is above average in every category while the United States is below average in two of the three categories.

Based on the Mercer/CFA report, we know Sweden’s system is good for workers.

But what about taxpayers?

Here’s a table showing the fiscal burden of old-age programs in European nations, taken from a report by the International Monetary Fund.

As you can see for both the present and the future, Swedish taxpayers face one of the lowest burdens, with old-age spending consuming significantly less than 10 percent of economic output.

I’ll close with a couple of very important observations about the international data.

• Sweden is not the top nation in the Mercer/CFA report. It trails Australia, Denmark, Iceland, Israel, Netherlands, and Norway – all of which have systems that are fully or partly based on mandatory private savings.
• Sweden does have the lowest spending burden in the IMF. The Baltic nations all do better – and all of those countries have systems that are partly based on mandatory private savings.

It’s almost as if there’s a lesson to be learned, even if Biden and Trump want to bury their heads in the sand.

P.S. Here’s my short video making the case for personal retirement accounts.

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Joe Biden Supports Massive Tax Increases on Middle-Class Americans

I wrote a two-part series (here and here) about Donald Trump supporting massive middle-class tax increases.

Trump does not admit that is his policy, of course, but that is an unavoidable outcome since he opposes entitlement reform.

In the interest of fairness and bipartisanship, I should explain that Joe Biden also favors huge tax increases on ordinary people.

Like Trump, he does not admit this is his agenda. But, once again, that will be the unavoidable result since he also is against entitlement reform.

But this does not mean Trump and Biden are exactly the same on fiscal policy (like they are on trade policy).

Biden has proposed two additional policies to expand the size and scope (and economic damage) of the federal government.

1. Expanding entitlement programs, including per-child handouts.
2. Class-warfare tax increases, targeting upper-income taxpayers.

Just in case someone thinks I am unfairly characterizing Biden’s policies, let’s look at some excerpts from a report by Jim Tankersley of the New York Times.

There were no economic pivots in President Biden’s first State of the Union address to a Republican House. He did not pare back his push to raise taxes on high earners or to spend big on new government programs. …The president renewed his calls for trillions of dollars of new federal programs, including for child care and community college… He did not name a single federal spending program he was willing to cut. …It was a no-quarter recommitment to a campaign theme…centered on expanding government…he called for raising taxes on corporations and the wealthy… His proposals included an expanded tax on stock buybacks and what would effectively be a sort of wealth tax on billionaires.

Let’s conclude by considering whether it is possible for Biden to impose sufficiently large taxes on rich people so that there would be no need for big middle-class tax increases.

For that to be the case, Biden’s class warfare tax increases would have to raise enough money to achieve two objectives.

• Collect enough money to finance the built-in expansions of current entitlement programs caused by demographic change.
• Collect enough money to finance his proposals for trillions of dollars of spending on new entitlement programs.

The answer is no. Not even close.

Even if you took all of Biden’s taxes and then added some other class-warfare proposals, that would not be enough to finance built-in spending for the next 10 years.

And that means no revenue to finance Biden’s proposals for additional spending.

Not to mention the built-in spending caused by demographic changes over the next 30 years.

The bottom line is that there are not enough rich people to finance big government.

All of which brings me back to where I started, namely that there will be giant tax increases on lower-income and middle-class households if we don’t figure out a way to restrain and reform entitlements.

P.S. In addition to Trump and Biden, the so-called national conservatives also support huge tax increases on American workers.

P.P.S. Even if there were more rich people, higher class-warfare taxes to finance bigger government would be a big mistake, as acknowledged even by generally left-leaning international bureaucracies such as the World Bank, the International Monetary Fund, the Organization for Economic Cooperation and Development, and the European Central Bank.

P.P.P.S. Biden and other folks on the left sometimes are very open about tax increases on ordinary people, though they have different terms for those tax hikes – such as carbon fees and import barriers.

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Donald Trump Supports Massive Tax Increases on Middle-Class Americans, Part II

Regular readers know that I generally don’t get overly agitated about government debt (I get far more upset about counterproductive spending, regardless of how it is financed).

But even I recognize that there is a point where debt becomes excessive.

So let’s start today’s column with the simple observation that America’s current fiscal trajectory is unsustainable.

The burden of federal spending is projected to jump over the next several decades up to 30 percent of GDP while taxes “only” increase to about 19 percent of GDP.

It is inconceivable that all that new spending will be – or can be – financed by borrowing. Simply stated, domestic and international investors will decide that bonds from Uncle Sam are too risky.

So that leaves only two options.

1. Spending restraint, inevitably requiring entitlement reform.
2. Massive tax increases, inevitably targeting middle-class Americans.

Regarding those two choices, Donald Trump supports massive tax increases.

He’s not overtly admitting that agenda, but that’s the unavoidable outcome based on what Joshua Green of Bloomberg recently reported about his opposition to entitlement reform.

Trump is hoping to reverse his fortunes and revive his moribund presidential campaign with a…short video message. …he looks straight to camera and declares, “Under no circumstances should Republicans vote to cut a single penny from Medicare or Social Security.” …In fact, he has been remarkably consistent and outspoken over the years in his attacks on Republican efforts to cut Social Security and Medicare. …he was viewed as the least conservative Republican nominee in decades. He favored lots of infrastructure spending…and he made a big deal about protecting Social Security and Medicare.

The story also explains that Trump was the big-government candidate among Republicans in 2016 (as I noted at the time) and suggests he will hold to that position as the 2024 race develops.

Trump’s position set him apart from the other 16 Republican presidential candidates, who generally shared Ryan’s belief, prevalent among House Republicans, that cutting Social Security and Medicare was a fiscal imperative. That’s where DeSantis comes in. …DeSantis was also one of the founding members of the House Freedom Caucus, which drove the effort to cut entitlements when he was in Congress. DeSantis voted repeatedly — in 2013, 2014, and 2015 — for budgets that slashed spending on Social Security and Medicare

By the way, the article is flat-out wrong on a few points.

It is grossly inaccurate to assert that the Ryan budgets “slashed spending.” Overall spending increased in the budgets that Ryan, DeSantis, and other Tea Party Republicans supported back in 2013, 2014, and 2015.

All that happened is that spending would not have been allowed to grow as fast as previously planned.

Also, while the Ryan budgets included genuine Medicare reform (and much-needed spending restraint), they did not address Social Security reform. So the report was wrong on that as well.

But I’m digressing. The key thing to understand is that Ryan, DeSantis and other Republicans in the House last decade tried to do the right thing.

Donald Trump, by contrast, did the wrong thing. And he wants to do the wrong thing in the future. And that means huge future tax increases on you and me.

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Donald Trump Supports Massive Tax Increases on Middle-Class Americans, Part I

Copying some self-styled national conservatives, Donald Trump this week endorsed major tax increases on lower-income and middle-class Americans.

But he embraced huge tax increases in an indirect fashion.

• He did not say “let’s adopt money-siphoning value-added taxes” like they have in Europe.
• Nor did he say “let’s impose very high income tax rates on ordinary people” like they do in Europe.
• And he didn’t say “let’s have much higher payroll tax rates” like they have in Europe.

Instead, Trump embraced huge tax increases by default. He told congressional Republicans to ignore America’s slow-motion crisis of entitlement spending.

For all intents and purposes, that is the same as embracing huge tax increases.

To be more specific, if you endorse European-style government spending, you are necessarily and unavoidably endorsing European-style tax policy.

And that’s what Trump did. Here are some excerpts from a report in the Hill by Brett Samuels.

Former President Trump on Friday urged Republicans in Congress not to cut “a single penny” from Medicare or Social Security… “Under no circumstances should Republicans vote to cut a single penny from Medicare or Social Security…,” Trump said in a recorded video statement posted to Truth Social. …The former president’s message about protecting Social Security and Medicare is consistent with his previous comments on the issue as a candidate in 2016.

For what it’s worth, I’m not surprised at what Trump said.

He favored big government as a candidate in 2016 and he expanded the burden of spending when he was President.

But some of us don’t want to surrender and doom the United States to European-style economic stagnation.

Which is why I’ve decided to take a sentence I wrote last month and turn it into the 15th Theorem of Government.

Here’s the bottom line: Genuine patriots recognize America has a problem and they have the courage to advocate reforms that will actually solve the problem.

It will be interesting to see how many Republicans fit that definition.

P.S. I’m not a never-Trumper or anti-Trumper. For instance, I praised his tax policy and said nice things about his record on regulation. But I’m loyal to ideas, not to people, so I don’t hesitate to criticize any politician who pushes ideas that are bad for America.

P.P.S. Here are the other 14 Theorems of Government.

• The “First Theorem” explains how Washington really operates.
• The “Second Theorem” explains why it is so important to block the creation of new programs.
• The “Third Theorem” explains why centralized programs inevitably waste money.
• The “Fourth Theorem” explains that good policy can be good politics.
• The “Fifth Theorem” explains how good ideas on paper become bad ideas in reality.
• The “Sixth Theorem” explains an under-appreciated benefit of a flat tax.
• The “Seventh Theorem” explains how bigger governments are less competent.
• The “Eighth Theorem” explains the motives of those who focus on inequality.
• The “Ninth Theorem” explains how politics often trumps principles.
• The “Tenth Theorem” explains how politicians manufacture/exploit crises.
• The “Eleventh Theorem” explains why big business is often anti-free market.
• The “Twelfth Theorem” explains you can’t have European-sized government without pillaging the middle class.
• The “Thirteenth Theorem” explains that people are unwilling to pay for bloated government.
• The “Fourteenth Theorem” explains how poor people are hurt by big government.

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Macron’s Pension Reform Is Necessary (but Inadequate)

It is an understatement to declare that fiscal policy in France is terrible.

• The highest burden of government spending in Europe.
• The third-highest level of pension spending in the OECD.
• One of the biggest long-run fiscal gaps in OECD countries.
• The fourth-highest tax burden on workers in the OECD.
• The sixth-highest top tax rate among developed nations.

In recent years, France has had terrible presidents such as Nicolas Sarkozy and Francois Hollande.

But when Emmanuel Macron took over, I wondered whether he might push the nation in the right direction.

And he has pushed a few good ideas. But his achievements have been so meager that I was only half-joking when I wrote last year that his reelection meant that a socialist beat a socialist.

But maybe I’ll have to apologize for that column because Macron is pushing reforms to the country’s pay-as-you-go pension system.

In a column for CNN, David Andelman summarizes the plan and explains the motives.

…the French government announced plans to raise the official retirement age from 62 to 64 to qualify for a full pension. …The French budget risks floundering on pensions that are siphoning off nearly 14% of the nation’s GDP each year – roughly twice the drain than in the United Sates and behind only Italy and Greece in Europe. …Currently, all men and women in France can retire with full pensions at 62 – tied with Sweden and Norway for the lowest retirement age in western Europe. …there are special exemptions dating back to the time of Louis XIV. After performing on the stage for 10 years, actors of the Comédie Française…are entitled to claim a lifetime pension. This dates to the company’s creation in 1680. Dancers in the Paris Opera can retire with full pension at the age of 42, a custom that dates to 1689… Stagehands at both companies can still take their retirement at 57. Then there are train conductors who can bow out at age 52. …In all, there are at least 42 different pension schemes… “The French can count on our determination to block this unfair reform,” said Marine Le Pen, leader of the far-right National Rally party, who Macron defeated in the presidential elections last April. At the other end of the spectrum, Mathilde Panot, from the far-left France Insoumise (France Unbowed) party tweeted that the plan was “archaic, unfair, brutal, cruel.”

Meanwhile, the Wall Street Journal opined last week in favor of Macron’s reform.

France currently has 42 different government-funded pension programs, which vary in retirement age and payout. Mr. Macron wants to wind down some of these programs and transition more French workers to a general pension scheme. That would make it easier for workers to change jobs, and it would also be a step toward a fairer pension system. This job mobility point is crucial and would benefit most workers and employers. …the French system scored a D grade, or 40.9 out of a possible 100, on financial sustainability on the Global Pension Index 2022, created by the consulting firm Mercer… The French system is a pay-as-you-go model in which current workers fund retiree pensions. Yet today there are only 1.7 workers for each retiree, compared to 3-to-1 in 1970 and headed to 1.4-to-1 by 2050. …Nothing short of French economic vitality is at stake. Mr. Macron twice won the Presidency with a vision of a more energetic, entrepreneurial France with more opportunity for young people. A more rational pension system is an essential part of the project.

The WSJ editorial is correct. Macron’s reform would give France a “more rational pension system.”

But it would not give the country a good pension system.

Macron is basically asking workers to pay more and get less. And it is true that his plan will prop up the government’s tax-and-transfer, pay-as-you-go scheme.

But that’s like patching the roof of a rotten house.

What France really needs is genuine reform so that younger workers can shift to a system of private savings. Which is something that already exists to varying degrees in other European nations such as Switzerland, Sweden, Denmark, and the Netherlands.

But don’t hold your breath waiting for that to happen.

P.S. Back in 2010, France went through political turmoil to raise the retirement age from 60 to 62.

P.P.S. Sadly, most of the flaws of France’s government retirement system are the same as the ones that exist in the United States.

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The Unavoidable Choice: Entitlement Reform or Massive Middle-Class Tax Increases

I worry about big tax increases because of America’s grim long-run fiscal outlook.

The video clip is less than two minutes (taken from this longer discussion with Fergus Hodgson), but I can summarize my key point in just one very important sentence

Anybody who opposes entitlement reform is unavoidably in favor of big tax increases on lower-income and middle-class Americans.

There are three reasons for this bold (and bolded) statement.

1. The burden of spending in the United States is going to dramatically expand in coming decades because of demographic change combined with poorly designed entitlement programs.
2. There presumably is a limit to how much of this future spending burden can be financed by borrowing from the private sector (or with printing money by the Federal Reserve).
3. Many politicians claim that future spending on entitlements (as well spending on new entitlements!) can be financed with class-warfare taxes, but there are not enough rich people.

My left-leaning friends almost surely would agree with the first two points. But some of them (particularly the ones who don’t understand budget numbers) might argue with the third point.

To confirm the accuracy of the argument, let’s look at this chart from Brian Riedl’s famous Chartbook.

As you can see, even confiscatory 100-percent taxes on the rich (which obviously would cripple the economy) would not be nearly enough to eliminate America’s medium-term fiscal gap.

Heck, even if we look at just the next 10 years and include every possible tax hike, it’s obvious that a class-warfare agenda (which also would have negative economic effects) would not be enough to finance all the spending that is currently in the pipeline.

Here’s another Riedl chart (which even includes some proposals that would hit the middle class).

I’ll conclude with two further observations.

• First, there are plenty of honest leftists (the ones who understand budget numbers, including Paul Krugman) who openly admit that big tax increases will be needed if the burden of government spending is allowed to increase.
• Second, there are plenty of disingenuous (or perhaps naive) folks on the right who oppose entitlement reform while not admitting that their approach means massive tax increases on lower-income and middle-class taxpayers.

Needless to say, genuine entitlement reform would be far preferable to any type of tax increase.

P.S. In the absence of entitlement reform, politicians will first choose class warfare taxes, of course, but that simply will be a precursor to higher taxes on the rest of us.

P.P.S. The bottom line is that you can’t have European-sized government without European-style taxes. Including a money-siphoning value-added tax.

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America’s Looming Entitlement Crisis

Back in July, I made the case for the right kind of entitlement reform in a discussion with the folks at Live and Let Live.

Today, I want to underscore why it is important to focus on “the right kind” of reform.

On paper, you can save money with “means testing” of benefits, but that creates an indirect penalty on work, saving, and investment.

You can also, on paper, save money by imposing price controls on health care, but that policy has a long track record of failure.

At the risk of understatement, either of those approaches represents “the wrong kind” of entitlement reform. Indeed, those policies are not really reform. Instead, they are tinkering with systems that are fundamentally broken.

For what it is worth, most politicians do not support good reform or bad reform.

As predicted by “public choice,” their preferred approach is kicking the can down the road.

Which is what Greek politicians did for many years.

But they learned in Greece that ignoring a problem does not make it disappear. Instead, it is a recipe for fiscal crisis (and we will probably have to re-learn that lesson in Italy).

So my other goal today is to show why something needs to be done.

We’ll start with a look at Medicare from Brian Riedl’s chartbook.

That’s a very sobering image, so now I’ll share some very sobering words.

James Capretta of the American Enterprise Institute summarizes America’s grim fiscal future.

In 2001, the Treasury estimated the government’s net unfunded liabilities, in present value terms, at $6.5 trillion, or 61 percent of GDP, with federal debt accounting for $3.3 trillion of the measured obligations. …By 2021, the government’s net position had deteriorated to minus $29.9 trillion, or 128 percent of GDP, with federal debt accounting for $22.3 trillion of the liabilities. The government’s unfunded commitments beyond public debt had grown by $2.9 trillion over ten years. …The financial hole is actually deeper than these numbers reveal because they exclude the dramatic effects of Social Security and Medicare. …with Social Security and Medicare included in the assessment, the federal government’s unfunded liabilities in 2021 are $93.1 trillion, or nearly 400 percent of annual GDP. That compares with $11.1 trillion as calculated in the 2001 Treasury report, which was 105 percent of GDP. …The problem posed by unfunded public liabilities is a relatively new one in U.S. history. It has only been over the past half century that the combination of an aging population and the modern entitlement system has pushed the federal government toward a financial crisis.

Having shared all this depressing data, I’ll now close with a couple of observations.

• First, doing nothing almost surely guarantees massive future tax increases. Including European-style levies like a value-added tax that will be very bad news for lower- income and middle-class taxpayers.
• Second, “funded liabilities” are hardly an improvement over “unfunded liabilities” since that simply means debt-financed spending becomes tax-financed spending. From the frying pan to the fire, or vice-versa.

As I said in the above video, we need the right kind of entitlement reform so that we save money and have better policy for old people and poor people.

P.S. Entitlements are a ubiquitous problem in developed nations.

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Republican Warfare, Part IV: Will the GOP Get Serious about Spending?

Last week, I explained that “supply siders” need to be ardent advocates of spending restraint. After all, there is no chance of good tax policy in the future if the burden of federal spending continues to expand.

I also wrote about “national conservatives” and pointed out that their opposition to entitlement reform means they implicitly embrace massive tax increases.

The bottom line is that the United States has a built-in spending crisis. Democrats are not serious about addressing the problem. So if Republicans bail as well, the nation is doomed to become a decrepit, European-style welfare state.

What does that mean? Nothing good, at least for people in the productive sector of the economy.

• Lower living standards and less growth
• Big tax burdens on lower-income people

In an article for National Review, Philip Klein speculates whether there is any appetite for spending restraint, even among self-described conservatives.

For much of the history of the American conservative movement, limiting the size and scope of government has stood as one of its central goals. …In 2022, such messages were barely anywhere to be found on the campaign trail…conservatives have largely moved on from making the case for reducing the size and power of Washington. In some cases, this shift has been passive. …It has become popular in some circles on the right to mock “zombie Reaganism” and insist that while it may have made sense back in the 1980s to argue for smaller government, such a message is now outdated. …the argument that the battle to limit government has already been lost also neglects to recognize that things could always get worse. That is, even though the federal government has gone through extraordinary growth since the New Deal, it would have grown even larger had there been no conservative movement to push back. One need only look at Europe, where conservative parties long ago made their peace with the welfare state, to see how government agencies have crowded out civil society… There is no way in which a nation with…a ballooning welfare state will be an accommodating place for conservatives in the long run, no matter how much some may fantasize about seizing the dragon and precisely aiming its fire at their enemies during the relatively brief windows in which Republicans have power. Conservatives…should not abandon the fight for limited government.

At the risk of understatement, I fully agree.

I wrote two days ago and also the previous week to make the case for spending restraint.

Those are easy columns to write since it is the same argument I’ve been making my entire life. But what is depressing now is that there is opposition from Republicans as well as Democrats.

Maybe they should all be forced to watch my video series on the economics of government spending.

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The Case for Entitlement Reform

If Joe Biden’s bungled economic policy is any indication, the GOP may wind up controlling Washington in the not-too-distant future.

If so, I hope Republicans rekindle their interest in the kind of genuine entitlement reform discussed in this interview.

But I’m not sure whether to be optimistic or pessimistic.

On the plus side, the GOP supported pro-growth entitlement reform during the Obama years.

On the minus side, the party largely punted on the issue once Trump took over.

To be sure, punting is the easy route from a “public choice” perspective. Politicians like offering freebies to voters and many voters like getting handouts.

However, that approach means America’s economy is weakened by an ever-growing burden of federal spending and eventually is plunged into fiscal crisis.

And that’s based on the programs that already exist. Joe Biden wants to expand the welfare state with even more entitlements!

The Wall Street Journal editorialized about the downside of making America more like Europe last October.

The result of…expanded entitlements is likely to be reduced incentives to work and invest, slower economic growth, lower living standards, and less fiscal space for essential public goods like national defense. That’s the lesson from Europe’s cradle-to-grave welfare states… Europe’s little-discussed secret is that its cradle-to-grave welfare states are financed by the middle class via value-added and payroll taxes. The combined employer-employee social security tax rate is 36% in Spain, 40% in Italy and 65% in France. Value-added taxes in most European economies are around 20%. There simply aren’t enough rich to finance their entitlements.

Amen. I’ve repeatedly warned that a European-sized welfare state would mean European-sized taxes on lower-income and middle-class Americans.

And what’s remarkable (and discouraging) is that some politicians in the U.S. want to expand entitlements even though many European governments now realize they made big mistakes and need to scale back.

The irony is that some European governments have tried to reform their tax and welfare systems to become more competitive. Germany and Sweden over two decades reformed their welfare and labor policies. …Other European governments are also pushing welfare-state reforms. French President Emmanuel Macron has passed pension reform and cut the corporate tax rate to 26.5% from 33% in 2017… Greece is pulling out of its debt trap with Prime Minister Kyriakos Mitsotakis’s tax, pension and regulatory reforms.

For what it’s worth, I’m happy about these reforms, but I fear many European nations are in the too-little-too-late category.

Why? Because the demographic outlook is deteriorating faster than reform is happening. In other words, most of them are probably destined to suffer Greek-style fiscal crises.

But if (or when) that happens, maybe American politicians will finally wake up and realize we need good reforms to prevent Social Security, Medicare, and Medicaid from causing a similar collapse on this side of the Atlantic Ocean..

Hopefully that epiphany will take place before it is too late for the United States.

P.S. For those who are interested in the history of fiscal policy, John Cogan of the Hoover Institution wrote about pre-20th-century entitlements earlier this year.

Here are excerpts from his column in the Wall Street Journal.

The history of U.S. entitlements is a 230-year record of continuous expansion… The first major entitlement, Revolutionary War disability benefits, was initially restricted to members of the Continental Army and Navy who were injured in battle and survivors of those killed in wartime. Eligibility was then expanded, first to state militia soldiers, then to veterans whose disabilities were unrelated to wartime service, and eventually to virtually all people who served during the war regardless of disability. Civil War disability pensions followed the same…process, except on a far grander scale. Pensions were initially confined to U.S servicemen who suffered wartime injuries and survivors of those killed in battle. Eventually they were extended to virtually all union Civil War veterans regardless of disability. …Congress followed the same liberalizing process with 20th-century entitlements.

If this excerpt doesn’t satisfy your curiosity, here’s Cogan discussing the topic for 46 minutes.

P.P.S. Not all entitlement reform is created equal.

P.P.P.S. Here an informative chart if you want to know whether to blame defense spending or entitlement spending.

P.P.P.P.S. I always argue in favor of a Swiss-style spending cap, which presumably would force politicians to address America’s entitlement problem.

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Which Nation Will Be the Next to Go Bankrupt?

Last month, I shared a chart from a study published by the European Central Bank.

It showed which European nations were in the unfortunate position of facing big future spending increases (the vertical axis) combined with already-high levels of government debt (the horizontal axis).

The bottom line is that Italy, Portugal, France and Belgium face a very difficult fiscal future.

And Estonia (at least relatively speaking) is in the best shape.

Today we are going to augment those ECB numbers by looking at some data from the OECD’s recent report on Estonia.

Here’s a chart showing how the burden of government spending is going to increase in various nations between now and 2060.

Slovakia, Spain, Norway, and the Czech Republic have the biggest problem.

Lithuania is in the best shape, surprisingly followed by Greece (I assume because that nation already hit rock bottom, not because of good policy).

I also highlight the United States, which will have to face the challenge of above-average spending increases.

But if you want to know which nation will be the next to suffer fiscal collapse, you also need to know whether (or the degree to which) it has the capacity – or “fiscal space” – to endure a bigger burden of government spending.

James Capretta addressed that topic in an article for the Bulwark.

Which governments have exercised budgetary restraint in recent years, even while confronting sequential global crises? Which have been more profligate? And what do the differences portend for their differing abilities to handle an era when servicing debt may be more expensive than it has been in many years? …Accuracy…requires assessing both assets and liabilities. …The Organization for Economic Cooperation and Development…’s most comprehensive measure of fiscal resilience is the “financial net worth” of the reporting countries, which includes the main sources of accumulated liabilities (especially public debt) along with financial assets owned by governments.

And here’s a chart showing how developed nations (with the exception of oil-rich Norway) have been spending themselves into a fiscal ditch.

Here are some of Capretta’s observations.

Among the twenty-seven OECD countries that reported data every year from 1995 to 2020, the average deterioration in their net financial position, weighted by population size, was equal to 48 percent of GDP. …Several countries stand out for the steepness of their declines. Japan’s net financial position was -20 percent of GDP in 1995, and in 2020 it was -129 percent of GDP—in other words, in just 25 years it worsened by over 100 percent of the country’s annual GDP. Similarly, the United Kingdom experienced a serious deterioration, with a net financial position in 2020 equal to -109 percent of GDP. In 1995, it was -26 percent. …France, Greece, Italy, and Spain are regularly criticized for their uneven approaches to fiscal discipline. The OECD data showing a substantial deterioration of their net financial positions over the last quarter century provides more evidence that each of these countries needs to take further steps to lower the risk of a fiscal crisis in future years.

The United States obviously is not in good shape, though I think the OECD’s methodology is imperfect.

Yes, America will have to deal with a fiscal crisis if we don’t figure out a way of controlling spending, but I suspect many other countries will reach that point before the U.S. (with Italy quite likely being the next to go belly up).

P.S. At the risk of repeating advice from previous columns, genuine entitlement reform is the only solution to America’s long-run spending problem, ideally enforced by a Swiss-style, TABOR-style spending cap.

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Europe’s Soon-to-Implode Welfare States

What’s the most depressing chart in the world?

If you believe in limited government and you’re looking back in time, this example or this example are good candidates.

But if we’re looking into the future, this chart from a new study by the European Central Bank is very sobering.

And it’s a depressing chart because it doesn’t matter whether you believe in big government or small government. That’s because this chart shows a dramatic shift in population demographics.

Simply stated, Europe’s welfare states are in deep trouble because over time there will be fewer and fewer workers to pay taxes and more and more old people expecting benefits.

Here’s what the ECB experts, Katalin Bodnár and Carolin Nerlich, wrote about their findings.

The euro area, like many other advanced economies, has entered an era of drastic demographic change. …Declining birth rates and rising life expectancy are causing the number of pensioners to increase relative to workers. In the next one and a half decades, this trend will be amplified as the sizeable baby boom generation enters retirement and the cohort of workers shrinks. …The old-age dependency ratio is projected to reach almost 54% by 2070… If left unaddressed, population ageing will pose a burden on public finances in the euro area, given the relatively strong role of publicly financed pension and health care systems. Debt sustainability challenges might arise from mounting ageing-related public spending, which will be particularly a concern in high debt countries.

That last sentence in the above excerpt should win a prize for understatement of the year.

Many of Europe’s welfare states already are on the verge of crisis. And as demographics change over time (findings replicated in the European Commission’s Ageing Report), they will go from bad to worse.

Here’s a breakdown of how the “age dependency ratio” will change in various nations.

By the way, if you look at the right side of Chart 4, you’ll see Japan’s horrible numbers as well as a worrisome trend for the United States.

Most people focus on how demographic change will lead to more debt.

I think it’s more important to focus on the underlying problem of government spending.

This next chart combines both. The vertical axis shows the increase in age-related government spending while the horizontal axis shows debt levels.

The bottom line is that countries in the top-right quadrant are in deep trouble. Especially in the long run (though Italy could go belly-up very soon).

The ECB report does suggest ways to address this looming crisis.

To safeguard against the adverse economic and fiscal consequences of population ageing, there is a need to build-up fiscal buffers during good economic times, to improve the quality of public finance and to implement growth-enhancing structural reforms. …Further pension reforms are needed that encourage workers to postpone their retirement.

Don’t hold your breath waiting for any of these things to happen. Building up “fiscal buffers” means running surpluses today to offset deficits tomorrow. But European nations are running big deficits because of excessive spending today, so there will be no maneuvering room in the future.

P.S. Here’s some comedy (and more comedy) about Europe’s fiscal mess.

P.P.S. It is possible to reduce large debt burdens, so long as governments simply restrain spending.

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Social Security’s Ever-Closer Fiscal Crisis

As part of my recent appearance on The Square Circle (we discussed Uvalde police, gun control, and Ukraine), I said that the new Social Security numbers were the under-reported story of the week.

For more details, I was referring to the latest Trustees Report, published yesterday by the Social Security Administration.

Most people, when that annual report is released, focus on when the Social Security Trust Fund runs out of money. But since the Trust Fund only contains IOUs, I view that as a largely irrelevant number.

Instead, I immediately look at Table VI.G9, which shows how much revenue is being collected and how much money is being spent every year.

Here is that data displayed in a chart. The left side shows actual fiscal numbers from 1970 to 2021 while the right side shows the projections between 2022 and 2100.

As you can see in the chart, revenues going into the system (the blue line) are growing rapidly.

But you also can see that Social Security spending (the orange line) is expanding even faster.

And when spending grows faster than revenue, one consequences is more red ink.

This next chart shows that annual deficits between now and 2100 will total $56 trillion.

At the risk of understatement, these two charts should be very sobering. Especially since they only show the taxes, spending, and red ink for Social Security.

If we also add the fiscal aggregates for other entitlement programs, it would be abundantly clear why we face a “crisis” and a “train wreck.”

So how do we solve this mess. I’ve written about the needed reforms for Medicare and Medicaid, so let’s focus today on Social Security.

The ideal approach is to take the current pay-as-you-go entitlement and turn it into a system of personal retirement accounts.

Many nations around the world have adopted this approach, most notably Chile and Australia.

But as I noted two years ago, there will be a big “transition” challenge if the United States decides to modernize.

P.S. I mentioned “public choice” at the end of that clip. You can click here to learn more about the economic analysis of political choices.

P.P.S. I mentioned that Chile and Australia have created personal retirement accounts. You can also learn about reforms in Switzerland, Hong Kong, Netherlands, the Faroe Islands, Denmark, Israel, and Sweden.

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Everything You Need to Know about the National Debt

The title of this column is an exaggeration. What we’re really going to do today is explain the main things you need to know about government debt.

We’ll start with this video from Kite and Key Media, which correctly observes that entitlement programs are the main cause of red ink.

I like that the video pointed out how tax-the-rich schemes wouldn’t work, though it would have been nice if they added some information on how genuine entitlement reform could solve the problem  (as you can see here and here, I’ve also nit-picked other debt-themed videos).

Which is why I humbly think this is the best video ever produced on the topic.

As you can see, I’m not an anti-debt fanatic. It was perfectly okay, for instance, to incur debt to win World War II.

But I’m very skeptical of running up the nation’s credit card for routine pork and fake stimulus.

But my main message, which I’ve shared over and over again, is that deficits and debt are merely a symptom. The underlying disease is excessive government spending.

And that spending hurts our economy whether it is financed by taxing or borrowing (or, heaven forbid, by printing money).

Now let’s look at some recent articles on the topic.

We’ll start with Eric Boehm’s column for Reason, which explains how red ink has exploded in recent years.

America’s national debt exceeded $10 trillion for the first time ever in October 2008. By mid-September 2017 the national debt had doubled to $20 trillion. …data released by the U.S. Treasury confirmed that the national debt reached a new milestone: $30 trillion. …Entitlements like Social Security and Medicare are in dire fiscal straits and will become even more costly as the average American gets older. Even without another unexpected crisis, deficits will exceed $1 trillion annually, which means the debt will continue growing, both in real terms and as a percentage of the economy. The Congressional Budget Office estimates that the federal government will add another $12.2 trillion to the debt by 2031.

As already stated, I think the real problem is the spending and the debt is the symptom.

But it is possible, of course, that debt rises so high that investors (the people who buy government bonds) begin to lose faith that they will get repaid.

At that point, governments have to pay higher interest rates to compensate for perceived risk of default, which exacerbates the fiscal burden.

And if there’s not a credible plan to fix the problem, a country can go into a downward spiral. In other words, a debt crisis.

This is what happened to Greece. And I think it’s just a matter of time before it happens to Italy.

Heck, many European nations are vulnerable to a debt crisis. As are many developing countries. And don’t forget Japan.

Could the United States also be hit by a debt crisis? Will we reach a “tipping point” that leads to the aforementioned loss of faith?

That’s one of the possibilities mentioned in the New York Times column by Peter Coy.

It’s hard to know how much to worry about the federal debt of the United States. …Either the United States can continue to run big deficits and skate along with no harm done or it’s at risk of losing investors’ confidence and having to pay higher interest rates on its debt, which would suppress economic growth. …the huge increase in federal debt incurred during and after the past two recessions — those of 2007-09 and 2020 — has used up a lot of the “fiscal space” the United States once had. In other words, the federal government is closer to the tipping point where big increases in debt finally start to become a real problem. …any given amount of debt becomes easier to sustain as long as the growth rate of the economy (and thus the growth rate of tax revenue) is higher than the interest rate on the debt. In that scenario, interest payments gradually shrink relative to tax revenue. …but it doesn’t explain how much more the debt can grow. …Past a certain point, there’s a double whammy of more dollars of debt plus higher interest costs on each dollar. …sovereign debt crises tend to be self-fulfilling prophecies: Investors get nervous about a government’s ability to pay, so they demand higher interest rates, which raise borrowing costs and produce the bad outcome they feared. It’s a dynamic that Argentines are familiar with — and that Americans had better hope they never experience.

For what it’s worth, I think other major nations will suffer fiscal crisis before the problem becomes acute in the United States.

I realize this will make me sound uncharacteristically optimistic, but I’m keeping my fingers crossed that this will finally lead politicians to adopt a spending cap so we don’t become Argentina.

P.S. The Wall Street Journal recently editorialized on the issue of government debt and made a very important point about the difference between the $30 trillion “gross debt” and the “debt held by the public,” which is about $6 trillion lower.

…the debt really isn’t $30 trillion. About $6 trillion of that is debt the government owes to itself in Social Security and other IOUs. …The debt held by the public is some $24 trillion, which is bad enough.

As I’ve noted when writing about Social Security, the IOUs in government trust funds are not real.

They’re just bookkeeping entries, as even Bill Clinton’s budget freely admitted.

Indeed, if you want to know whether some is both honest and knowledgeable about budget matters, ask them which measure of the national debt really matters.

As you can see from this exchange of tweets, competent and careful budget people (regardless of whether they favor big government or small government) focus on “debt held by the public,” which is the term for the money government actually borrows from credit markets.

If you want to know the difference between the various types of government debt – including “unfunded liabilities” – watch this video.

P.P.S. This column explains how and when debt matters. If you’re interested in how to reduce the debt, there’s very good evidence that spending restraint is the only effective approach. Even in cases where debt is enormous.

P.P.P.S. By contrast, the evidence is very clear that higher taxes actually make debt problems worse.

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Hopes and Fears for 2022

It’s an annual tradition (2021, 2020, 2019, 2018, etc) to list a handful of things that I hope might happen in the upcoming year, as well as the things I fear may happen.

Sadly, since I understand the economics of “public choice” (something Thomas Jefferson also implicitly understood) it’s always easier to envision the latter category.

But it’s good to begin a new year with optimism, so here are the good things that hopefully will happen in 2022.

Biden’s So-Called Build Back Better Stays Dead – The President squandered money on a fake stimulus and an infrastructure boondoggle, but we dodged the biggest bullet when Democrats couldn’t get all 50 of their Senators to support a multi-trillion dollar, growth-sapping expansion in taxes and spending.

The Supreme Court Ends Civil Asset Forfeiture – This was on my list last year, but the odious practice of “theft by government” continues. That being said, I still think it won’t survive if the Supreme Court has a chance to make a ruling (especially since America’s best Justice is very aware of the problem).

Republicans Win Congress in 2022 – I don’t have much faith in Republicans to do the right thing (especially when a Republican is in the White House), but I hope they win the House and Senate in November because they will oppose big tax increases while Democrats control the White House – even if only for partisan reasons.

In the “honorable mention” or “runner-up” category, I also hope to see further progress for school choice in 2022.

And I used to list a collapse of Venezuela’s reprehensible socialist government as one of my annual “hopes,” but I’ve largely given up (particularly since Latin Americans seem foolishly susceptible to “leftist saviors“).

Now let’s shift to the bad things that I fear will happen over the next 365 days.

Biden’s BBB Budget Plan Springs Back to Life – The President’s “Build Back Better” plan may be on life support, but sadly it’s not quite dead. I fear a scaled-down (but still horrible) version of the legislation may get approved this year. Senator Manchin of West Virginia, for instance, says he is willing to support a $1.5 trillion package and I fear the left eventually will decide that 50 percent of a (moldy and weevil-ridden) loaf is better than none.

Biden’s Remains a Protectionist – I hoped last year that Biden would reduce government trade taxes. Not because he believes in economic liberty, but simply because he wouldn’t want to continue a Trump-era policy. But that didn’t happen, and I now fear he’ll continue with protectionism in 2022. I don’t even have much hope that he’ll resuscitate the World Trade Organization.

New Tax Cartels – One of last year’s big defeats was the creation of a global tax cartel by governments. Barring some sort of miracle that prevents implementation, greedy politicians have set up a system that will require all nations to have a minimum corporate tax of 15 percent. That’s very bad news for workers, consumers, and shareholders, but I’m even more worried about the precedent it creates for additional tax cartels and ever-higher tax rates.

I’ll close by noting that last year’s list included the possibility of Kamala Harris becoming president.

But Biden has been so bad that it’s unclear that Harris would make things worse.

P.S. For the “fears” category, I could – and probably should – list entitlements every single year. Simply stated, the country is in deep long-run trouble because of an aging population and poorly designed tax-and-transfer programs. Years ago, I was semi-hopeful that we would get Medicaid and Medicare reform.

Now that seems like a distant dream and the real battle is preventing further entitlement expansions such as Biden’s per-child handout.

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Demography + Entitlements = Fiscal Crisis

It’s impossible to predict when another pandemic will strike.

But there’s one future crisis that we already know about, and I recently spoke about that issue to the Liberty International World Conference in Medellin.

At first, I wasn’t planning to share this video, particularly since I covered much of the same material in a speech back in January.

But then I saw a story in Yahoo Finance that includes this very sobering chart about how the burden of government spending will climb in G-7 nations over the next four decades.

The main takeaway is that aging populations and poorly designed tax-and-transfer programs (entitlements) are a recipe for long-run fiscal crisis in almost all developed nations.

That includes the United States. The four-decade outlook for America isn’t as bad as it is in nations such as France and Japan, but government will grow more than the fiscal burdens in Canada, Germany, and the United Kingdom.

And here are some details from the story.

The Covid-19 pandemic may have bloated public debt…, but that’s nothing compared to the fiscal difficulties brewing in the coming decades, the OECD said. …states will face rising costs, particular from pensions and health care. To maintain public services and benefits while stabilizing debt in that environment, governments would have to raise revenues by nearly 8% of gross domestic product, the OECD said. In some countries, including France and Japan, the size of the challenge would amount to more than 10% of output, and the economists didn’t even account for new expenditures such as climate change adaptation.

If you want to dig into the details, you can click here to read the underlying report from the Organization for Economic Cooperation.

I think the following excerpts are particularly relevant. As you can see, the problem is demographics, which leads to more spending for entitlement programs such as health and pensions.

And, assuming politicians decide to address the issue with revenues, this implies massive tax increases.

Public health and long-term care expenditure is projected to increase by 2.2 percentage points of GDP in the median country between 2021 and 2060… These projections are based on a pre-pandemic spending baseline, so any permanent increase in health spending in response to experience with COVID-19…would come in addition. Public pension expenditure is projected to increase by 2.8 percentage points of GDP in the median country between 2021 and 2060… Other primary expenditures are projected to rise by 1½ percentage points of GDP… This projection excludes potential new sources of expenditure pressure, such as climate change adaptation. …OECD governments would need to raise taxes in this scenario to prevent gross government debt ratios from rising over time… The median country would need to increase structural primary revenue by nearly 8 percentage points of GDP between 2021 and 2060, but the effort would exceed 10 percentage points in 11 countries.

Most interesting, the two authors of the OECD study point out that are some major problems with the tax “solution.”

The results of this section do not imply that taxes will, or even should, rise in the future. The fiscal pressure indicator is simply a metric serving to quantify and illustrate the fiscal challenge facing OECD governments. Raising taxes is only one of many possible avenues to meet this challenge. …Pushing mainstream taxes on incomes or consumption further up, even by only a few percentage points of GDP, may be politically difficult and fiscally counter-productive if it means reaching the downward-sloping segment of the Laffer curve.

I’m especially impressed that they acknowledge the Laffer Curve (the nonlinear relationship between tax rates and tax revenue that the Biden Administration wishes away).

P.S. The real solution is entitlement reform, and here’s the explanation for how to do it in the United States.

P.P.S. As I’ve regularly noted, the economists who work at the OECD often produce very solid analysis. The problem with that bureaucracy is that it has very statist leadership, which is why the OECD’s policy agenda includes anti-growth policies such as big tax increases and tax harmonization.

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The Real (and Growing) Problem with Social Security

In an ideal world, Americans would have personal retirement accounts, just like workers in Australia, Sweden, Chile, Hong Kong, Israel, Switzerland, and a few dozen other nations.

But we’re not in that ideal world. We are forced to participate in a Ponzi Scheme known as Social Security.

By the way, that’s not necessarily a disparaging description. A Ponzi Scheme can work if there are always enough new people in the system to pay off the old people.

But because of demographic changes (increasing lifespans and decreasing birthrates), that’s not what we have in the United States.

And this is why Social Security faces serious long-run problems.

How serious? The Social Security Administration finally released the annual Trustees Report. This document has a wealth of data on the program’s financial condition, and Table VI.G9 is where the rubber meets the road.

As you can see from this chart, there will be an ever-increasing burden of Social Security taxes and spending over the next 75 years. And these numbers are adjusted for inflation!

The good news (relatively speaking) is that the economy also will be growing over the next 75 years, both in nominal terms and inflation-adjusted terms.

The bad news is that spending on Social Security will grow at a faster rate, so the program will consume a larger share of the economy’s output.

And because Social Security spending is growing faster than the economy (and also faster than tax revenue), this next chart shows there is going to be more and more red ink in the future. Once again, you’re looking at inflation-adjusted data.

As indicated by the chart’s title, the cumulative shortfall over the next 75 years is nearly $48 trillion. That’s a lot of money, even by Washington standards.

And with each passing year, the problem seems to worsen. The 75-year shortfall was $44.7 trillion according to the 2020 report and $42.1 trillion according to the 2019 report.

I’ll conclude by observing that today’s column focuses on the big-picture fiscal problems with Social Security.

But let’s not forget the program’s second crisis, which is the fact that Americans are deprived of the ability to enjoy much higher levels of retirement income.

Certain groups are particularly harmed by this aspect of the current program, including minorities, women, older workers, and low-income workers.

P.S. Our friends on the left argue that the program’s fiscal problems (the first crisis) can be solved with tax increases. Perhaps that is true, but it will mean a weaker economy and it will exacerbate the second crisis by forcing workers to pay more to get less.

P.P.S. I once made a $16 trillion dollar mistake on national TV when discussing Social Security’s shaky finances.

P.P.P.S. Much of the news coverage about the Trustees Report has focused on the year the Social Security Trust Fund supposedly runs out of money. But this is sloppy journalism since the Trust Fund has nothing but IOUs (as illustrated by this joke).

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Big Government and “Financial Repression”

I just got back from Medellin, Colombia, where I gave a presentation to the Liberty International World Conference.

My topic was “The Fatal Mix of Demographic Change and the Welfare State” and I made my usual points about how poorly designed entitlement programs are going to wreak havoc, in large part because of demographic change.

Simply stated, tax-and-transfer programs collapse when there are too many beneficiaries and too few taxpayers.

This means politicians will be forced to act and I included this slide to show some of their main options (including my favorite, genuine entitlement reform).

But I noted in my speech that this was just a partial list of how politicians can respond.

• They can also reduce payments to beneficiaries (an option that I view as very unlikely)
• They can also finance promised benefits by printing money (I hope this also is very unlikely).

But there’s another option that I didn’t mention.

Politicians can indirectly finance their vote buying with “financial repression.” If you’re not familiar with that concept, Joseph Sternberg tells you what you need to know in a must-read column in Wall Street Journal.

He starts with some discussion of how repression worked in the past.

Government spending is conventionally understood as a matter of increased taxation and debt, a framing that has the virtue of being true. But that conversation is incomplete without also exploring the concept of financial repression—which ultimately underlies both the taxes and debt. …in spendthrift developing countries. Governments would suppress interest rates on domestic savings to below the rate of inflation to reduce rates on lending. The point was to service government borrowing and subsidize credit to politically favored industries. In the process, they’d create a substantial wealth transfer from private creditors to debtors… Developed economies have deployed this gimmick too. Regulation of the rates banks paid on savings was an important, and not the only, bit of financial repression perpetrated against Americans.

And he warns how repression can work today.

Financial repression nowadays consists of several overlapping phenomena beyond the classic suppression of bank interest rates. A nonexhaustive list: more-intrusive management of assets and credit allocation in the banking system via reserve requirements, capital regulations and the like; a blurring of the line between fiscal and monetary policy such that monetary authorities subsidize the fiscal authority’s borrowing while the fiscal authority creates new credit subsidies for other parties; and any press release from Sen. Elizabeth Warren demanding a new regulation on this sort of lending or that sort of borrowing. …A gaze through the lens of financial repression offers a new view of how dangerous Washington’s spending boondoggles are. …Unfettered government spending also forces voters to pay via inflation and low returns on savings in the here and now. …The redirection of savers’ resources to politically favored “borrowers” (either directly via loan guarantees or more often indirectly via the disbursement of government grants raised via deficit financing) creates inefficiency and waste.

Here’s the bottom line.

…rampant misallocation of capital and the attendant distortions of saving and investment…will create a materially worse future.

In some sense, financial repression is a back-door form of industrial policy since politicians are putting their thumbs on the scale and hindering the efficient allocation of capital.

And that’s why there’s less growth and people wind up with lower living standards as time passes.

If you’re interested in this topic (and you should be), I shared some very worrisome analysis back in 2015.

P.S. If politicians succeed in their “war on cash,” that will give them another tool for financial repression.

P.P.S. History teaches us that there is a way of climbing out of a fiscal hole without using repression.

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Social Security’s Inevitable Decline

It’s understandable that we’re now paying a lot of attention to Joe Biden’s risky proposals for higher taxes and a bigger welfare state.

After all, it’s a very bad idea to copy the economic policies of nations such as Italy, France, and Greece (unless, of course, you want much lower living standards).

But let’s not forget that that the United States also has some big economic challenges that existed before President Biden ever took office.

Most notably the entitlement programs.

Medicaid and Medicare are the biggest problems, but let’s focus today on Social Security.

Richard Rahn has a column in the Washington Times that summarizes the program’s grim outlook. Here are some excerpts.

Politicians love to talk about the Social Security “trust fund” and assure us that it will not be raided.  But the unfortunate fact is the “trust fund” is an accounting fiction without any real assets. In actuality, Social Security is a giant Ponzi scheme operated by the government. Benefits that are paid to existing retirees come from the current taxes from those working today and borrowing. …But now, Americans have fewer children, and life expectancies are growing rapidly. …There is no easy way out.  Future Social Security benefits will be cut (probably by not fully indexing for inflation), and/or taxes will be greatly and continuously increased until the system collapses.

The fact that Social Security is a Ponzi scheme isn’t necessarily fatal. After all, the government has the ability to coerce new workers into the system.

The problem is that there are fewer and fewer of those new workers to support the growing number of people getting benefits.

Here are the numbers from Richard’s column. As the old saying goes, read ’em and weep.

Richard ends his column by fretting that the United States is on a dangerous path.

The world has seen this play before.  In 1906, Argentina on a per-capita income basis was one of the richest countries in the world, rivaling the United States.  It has bountiful agricultural and mineral resources and had a relatively well-educated population of mainly European origin.  But after a century of fascist/socialist/welfare-state governments, it is now a poor country.  Venezuela went from a rich country with civil liberties to a poor oppressed country in only two decades.  As Margaret Thatcher famously said, “the problem with socialism is that eventually, you run out of other peoples’ money.”  The Greeks built a nice welfare state, largely using German taxpayers’ money – the Euro – until the Germans said, “no more.”  As a result, the Greeks have seen a drop in real incomes of more than 30 percent in seven or so years.

The good news is that our economic policy won’t be nearly as bad as Argentina and Venezuela, even if some of Biden’s crazy ideas – such a massive per-child handouts – are enacted.

The bad news is that we could become a lot more like Greece.

And that’s where Margaret Thatcher’s famous warning could become an American reality.

There is a solution to this problem, by the way. It’s been implemented in a couple of dozen nations around the world.

Sadly, American politicians are more interested in making the problem worse (with predictable consequences).

P.S. Here are a couple of humorous items about Social Security.

The first one actually understates how bad the trade is because workers actually pay 12.4 percent of their income into the program (the so-called employer share simply means lower pre-tax pay).

And the second item points out that Bernie Madoff was an amateur.

P.P.S. If you want more jokes and cartoons about Social Security, click here. There are other Social Security cartoons here, here, and here. And a Social Security joke if you appreciate grim humor.

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Biden’s Misguided Plan for a Bigger Welfare State

President Biden pushed through $1.9 trillion of new spending earlier this year, but that so-called stimulus plan was mostly for one-time giveaways. As I warn in this recent discussion on Denver’s KHOW, we should be much more worried about his proposals to permanently expand the welfare state.

When I first got to Washington, I would be upset that politicians wanted to add billions of dollars to the burden of government.

Well, those were the good ol’ days. Biden is proposing to divert trillions of dollars from the private sector to expand the welfare state.

Even worse, he wants to make more Americans dependent on the federal government.

Maybe that’s a smart way of buying votes, but it will erode societal capital.

John Cogan and Daniel Heil of the Hoover Institution warned about the consequences of this dependency agenda in a column for the Wall Street Journal.

The federal government’s system of entitlements is the largest money-shuffling machine in human history, and President Biden intends to make it a lot bigger. His American Families Plan—which he recently attempted to tie to a bipartisan infrastructure deal—proposes to extend the reach of federal entitlements to 21 million additional Americans, the largest expansion since Lyndon B. Johnson’s Great Society. …more than half of working-age households would be on the entitlement rolls if the plan were enacted in its current form. …57% of all married-couple children would receive federal entitlement benefits, and more than 80% of single-parent households would be on the entitlement rolls.

Many of the handouts would go to people with middle-class incomes.

And higher.

…The American Families Plan proposes several new entitlement programs. One promises students the government will pick up the entire cost of community-college tuition; another promises families earning 1.5 times their state’s median income that Washington will cover all daycare expenses above 7% of family income for children under 5; still another promises workers up to 12 weeks of federally financed wage subsidies to take time off to care for newborns or sick family members. …Two-parent households with two preschool-age children and incomes up to $130,000 would qualify for federal cash assistance for daycare. Single parents with two preschoolers and incomes up to $113,000 would qualify. And some families with incomes over $200,000 would be eligible for health-insurance subsidies. Other parts of the plan, such as paid leave and free community college, have no income limits at all.

The Wall Street Journal opined on this issue last month. Here are the key passages from their editorial.

The entitlements are by far the biggest long-term economic threat from the Biden agenda. …entitlements that spend automatically based on eligibility are nearly impossible to repeal, or even reform, and they represent a huge tax-and-spend wedge far into the future. …We’d highlight two points. First is the dishonesty about costs. Entitlements always start small but then soar. The Biden Families Plan is even more dishonest than usual. For example, it pretends the child tax credit ends in 2025, so its cost is $449 billion over the 10-year budget window that is used for reconciliation bills that require only 51 votes to pass the Senate. But a future Congress will never repeal the credit. …Second, these programs aren’t intended as a “safety net” for the poor or those temporarily down on their luck. They are explicitly designed to make the middle class dependent on government handouts.

The editorial explicitly warns that the United States will economically suffer if politicians copy Europe’s counterproductive redistributionism.

…on present trend the U.S. is falling into the same entitlement trap as Western Europe. Entitlement spending requires higher taxes, which grab 40% or more of GDP. Economic growth declines as more money flows to transfer payments instead of investment. The entitlement state becomes too large to afford but also too politically entrenched to reform. …Only a decade ago the Tea Party fought ObamaCare. Now most Beltway conservatives worry more about Big Tech than they do Big Government. If the Biden Families Plan passes, these conservatives will find themselves spending the rest of their careers as tax collectors for the entitlement state.

Amen. I’m baffled when folks on the left argue that we should “catch up” with Europe.

Are they not aware that American living standards are far higher? Do they not understand that low-income people in the United States often have more income than middle-class people on the other side of the Atlantic Ocean?

P.S. As I mentioned in the interview, the 21st century has been bad news for fiscal policy, with two big-government Republicans and two big-government Democrats.

For what it’s worth, the $3,000-per-child handouts are Biden’s most damaging idea. In one fell swoop, he would create a trillion-dollar entitlement program and repeal the successful Clinton-Gingrich welfare reform.

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Demographic Decline = Fiscal Crisis

As a libertarian, I don’t care if couples have zero children or 10 children.

But as an economist, I’m horrified that big changes in demographics are going to lead to fiscal crises thanks to poorly designed entitlement programs.

Simply stated, modest-sized welfare states are sustainable if more and more new taxpayers enter the system to finance benefits for a burgeoning population of old people.

But that’s not happening any more. In most nations, traditional population pyramids are becoming population cylinders because of falling birthrates and increasing longevity.

That’s the bad news.

The good news is that there is growing awareness the demographic changes are happening. Indeed, Damien Cave, Emma Bubola and Choe Sang-Hun have a big article on population decline in the New York Times.

All over the world, countries are confronting population stagnation and a fertility bust, a dizzying reversal unmatched in recorded history that will make first-birthday parties a rarer sight than funerals, and empty homes a common eyesore. Maternity wards are already shutting down in Italy. Ghost cities are appearing in northeastern China. Universities in South Korea can’t find enough students, and in Germany, hundreds of thousands of properties have been razed, with the land turned into parks. …Demographers now predict that by the latter half of the century or possibly earlier, the global population will enter a sustained decline for the first time. …The strain of longer lives and low fertility, leading to fewer workers and more retirees, threatens to upend how societies are organized — around the notion that a surplus of young people will drive economies and help pay for the old. …The change may take decades, but once it starts, decline (just like growth) spirals exponentially. With fewer births, fewer girls grow up to have children, and if they have smaller families than their parents did — which is happening in dozens of countries — the drop starts to look like a rock thrown off a cliff. …according to projections by an international team of scientists published last year in The Lancet, 183 countries and territories — out of 195 — will have fertility rates below replacement level by 2100.

Plenty of interesting data, though remarkably little focus on the fiscal implications. Sort of like writing about 1943 France with almost no reference to World War II.

In any event, the article takes a closer look at the challenges in certain nations., including South Korea.

To goose the birthrate, the government has handed out baby bonuses. It increased child allowances and medical subsidies for fertility treatments and pregnancy. Health officials have showered newborns with gifts of beef, baby clothes and toys. The government is also building kindergartens and day care centers by the hundreds. In Seoul, every bus and subway car has pink seats reserved for pregnant women. But this month, Deputy Prime Minister Hong Nam-ki admitted that the government — which has spent more than $178 billion over the past 15 years encouraging women to have more babies — was not making enough progress.

I was struck by the statement from the Deputy Prime Minister that his nation “was not making enough progress”?

That’s a strange way of describing catastrophic decline in birthrates, as noted in the article.

South Korea’s fertility rate dropped to a record low of 0.92 in 2019 — less than one child per woman, the lowest rate in the developed world. Every month for the past 59 months, the total number of babies born in the country has dropped to a record depth.

Maybe, just maybe, government handouts are not the way to boost birthrates.

I’ll conclude by noting that the real problem is tax-and-transfer entitlement programs, not low birth rates.

Both Singapore and Hong Kong have extremely low birth rates, for instance, but they aren’t facing a huge fiscal crisis because they have very small welfare states and workers are obliged to save for their own retirement.

Other Asian jurisdictions, however, made the mistake of copying Western nations, meaning entitlement programs that become mathematically impossible when populations pyramids become population cylinders (or even upside-down pyramids!).

In addition to South Korea, Japan also faces a major challenge.

And the situation is very grim in Europe, even though birth rates haven’t fallen to the same degree (though the numbers is some Eastern European nations are staggeringly bad).

P.S. The United States isn’t far behind.

P.P.S. We know the answer to this crisis, but far too many politicians are focused on trying to make matters worse rather than better.

P.P.P.S. You can read my two-part series on this topic here and here.

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The Looming Crisis of Demographic Decline and Entitlement Expansion

There are many compelling economic arguments against entitlement programs.

• They discourage savings.
• They discourage work.
• They are funded with taxes.
• They are funded with debt.

Since I’m a libertarian, I also have moral concerns about tax-and-transfer programs.

Today, though, let’s address the big problem of entitlements and demographics, especially with regards to social insurance programs that transfer money from young people to old people (most notably Social Security and Medicare).

But I’ll start by acknowledging that demographics doesn’t have to be a problem. When nations first created such programs, they generally had “population pyramids” featuring a few old people, lots of working-age people (i.e., taxpayers), and then an even greater number of children (future workers and taxpayers).

As illustrated by this image, entitlement programs can be sustainable with that type of demographic profile.

But there’s been a big shift in demographics in developed nations.

Simply stated, we’re living longer and having fewer kids. In some sense, population pyramids are becoming population cylinders.

And this creates major challenges for entitlement programs because instead of there being many workers supporting just a few retirees, you wind up with “old-age dependency ratios” that require very onerous tax burdens (or very high levels of government borrowing).

I’ve already written how this is a big problem for the United States.

Indeed, I periodically cite long-run forecasts from the Congressional Budget Office to warn about the worrisome fiscal implications.

And I’ve also noted that Japan is in serious trouble.

Today, let’s look at some recent data to show that Europe is another part of the world where this problem is acute.

The European Commission published its 2021 Ageing Report late last year and there are three visuals that deserve attention.

First, here’s a look at the European Union’s population cylinder (or maybe an upside-down pyramid).

And here’s a table that compares the number of old people with the working-age population in 2019, 2045, and 2070.

At the bottom of the table, I’ve circled in red the averages for the eurozone (nations using the single currency) and the entire European Union. From the perspective of fiscal policy, these are horrific numbers.

But there are numbers that are even worse.

Our final visual is a table showing the economic dependency ratio, which the European Commission defines as “… the ratio between the total inactive population and employment. It gives a measure of the average number of individuals that each employed person ‘supports’ economically.”

Once again, I’ve circled the averages at the bottom of the table.

The bottom line is that most European nations already have a stifling fiscal burden, yet it’s all but certain that there will be even higher taxes and more government spending in the near future.

Which means more economic stagnation for Europe (and those of us in America face that possibility as well).

At the risk of stating the obvious, there is a solution to both Europe’s woes and America’s woes. Simply stated, there needs to be genuine entitlement reform.

That means “pre-funding,” which is the jargon for mandatory private savings, presumably augmented by some form of safety net.

Singapore is probably the world’s leading example for mandatory savings, while Australia, Denmark, Chile, Switzerland, Hong Kong, Netherlands, Faroe Islands, and Sweden are a few of the many other jurisdictions that have fully or partially shifted to systems based on real savings.

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The Destabilizing Mix of Demography and Entitlements, Part II

A few days ago, I shared some slides from a presentation to an e-symposium organized by Trends Research in Abu Dhabi.

Here’s a video of my presentation, which includes 16 visuals to drive home the point that the world is facing a demographic/entitlement crisis.

Today, I want to share five more visuals to underscore the severity and magnitude of this catastrophe.

But before we look at the charts, I’ll start by saying this isn’t a fast-developing problem. It’s taken several decades to get where we are now and most nations probably have several decades before an actual crisis materializes.

Though what’s already happened in Greece (and what’s presumably about to happen in Italy) should underscore the seriousness of this issue.

This issue is global, as illustrated by this chart showing the staggering shift that will happen to the world’s population. Simply stated, there are going to be lots and lots of old people, but no concomitant increase in the number of children.

It’s not just that there’s not a corresponding increase in the number of children.

The real story is that birthrates are plummeting.

The data for Europe is particularly sobering.

Here’s a look at some other nations that face big fertility declines.

By the way, there’s absolutely nothing wrong with families deciding they want fewer children.

But it does create a big fiscal problem because governments have tax-and-transfer entitlement programs that were created when everyone thought there would always be ever-larger generations.

But that’s not happening now, which explains why the world is going from eight workers per retiree to four workers per retiree.

That’s the global data. For many developed regions, such as Europe, the situation is far more challenging.

And the United States isn’t far behind.

I’ll close by observing that there’s actually a very simple solution to this problem. We need genuine entitlement reform.

Sadly, that definitely didn’t happen in the past four years in the United States. And it also won’t be happening in the next four years.

P.S. Hong Kong and Singapore have very low birth rates and very long lifespans, but those jurisdictions are in reasonably good shape because they didn’t make the mistake of imposing western-style welfare states.

P.P.S. Some have argued that the demographic problem can be solved by having government-created incentives for fertility. At the risk of understatement, I’m skeptical of that approach.

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The Destabilizing Mix of Demography and Entitlements, Part I

I’ve written many times about demographic change and the implications for public policy – both in the United States and around the world.

Simply stated, it will be increasingly difficult to maintain tax-and-transfer entitlement programs in societies where people are having fewer children and people are living longer.

I’m raising this issue because I spoke on this topic earlier today at an e-symposium organized by Trends Research in Abu Dhabi, UAE. Here’s a slide with my main message.

Why is it bad news from an economic perspective?

As I noted in the next slide, tax-and-transfer entitlement programs for the elderly (most notably Social Security and Medicare in the United States) become harder to finance when there are lots of beneficiaries and too few taxpayers to support them.

So what’s going to happen in various nations when the irresistible force of more beneficiaries meets the immovable object of fewer taxpayers?

In my presentation, I pointed out that there are only three potential solutions.

• More taxes – A policy that Barack Obama, Hillary Clinton, and Joe Biden explicitly have embraced.
• More debt – A policy that politicians such as Donald Trump have implicitly embraced.
• Entitlement reform – A policy that some Republicans supported in the pre-Trump era.

I explained that higher tax burdens and higher debt levels would not be economically prudent.

The right approach is genuine entitlement reform, but I freely admitted that this “pre-funding” model probably won’t happen.

Here’s the relevant slide.

By the way, Singapore is the role model for pre-funding, but many other nations have adopted that approach for retirement income (such as Israel, Denmark, Switzerland, Hong Kong, Netherlands, Faroe Islands, and Sweden).

Unfortunately, most nations are heading for a demographic iceberg (including the U.S.) but I fear few of them will enact the reforms that are needed to avert a bad outcome.

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Time to Surrender on Entitlement Reform?

Back in 2015, just five years ago, it seemed like entitlement reform might happen.

Republicans in the House and Senate voted for budgets based on much-needed changes to Medicare and Medicaid. That was only a symbolic step with Obama in the White House, to be sure, but the presumption was that actual reform would be possible if Republicans controlled both the White House and Congress after the 2016 election.

The good news is that the GOP did wind up in control of Washington.

The bad news is that Donald Trump was in the White House.

Given his unfortunate views on government spending, that killed entitlement reform for the past four years.

And now Biden will be in the White House, and he wants to expand those programs, so that presumably kills reform for the next four years.

But does that change the fact that the programs should be reformed?

In a column for National Review, Fred Bauer asserts that Republicans should give up on trying to control big government.

Republicans…risk being lured toward a pivot back to 2010s-style austerity politics during the Biden administration, with a renewed focus on the federal deficit and entitlement reform. …Trying to push party-line entitlement reform has backfired on the GOP again and again in the recent past. George W. Bush’s 2005 Social Security–privatization proposal kneecapped his second term from the start. In 2012, Republicans got bogged down defending their position on Medicare reform… retreating to austerity politics could cost Republicans a chance to promote other kinds of reforms that would strengthen workers and families: fixing the medical marketplace (by reducing cartelization, revising medical licensing, etc.), passing a 21st-century infrastructure program, trying to secure a strategic industrial base, enacting smarter regulation of Big Tech that addresses market concerns and serves the public welfare, offering Americans family tax credits, and so on.

Also writing for National Review, Yuval Levin of the American Enterprise Institute explains that we have no choice but to grapple with entitlements.

The Republican Party has styled itself the party of fiscal restraint for the better part of a century… But there hasn’t been much action, or much willingness to expend political capital or make some painful deals to achieve a meaningful change in the trajectory of the government’s finances. …the willful blindness of the Trump era…means the underlying fiscal problems have grown worse… the costs of fiscal irresponsibility have more to do with constraints on future growth… Fiscal reform will need to involve changes to these programs.

Levin even suggests that entitlement reform is so important that it might be worth ceding ground in other areas.

Repub­licans should be willing to make bargains that involve leaving discretionary spending untouched, or even on a path of modest growth, if that allows for some reforms of entitlements. They should also be willing to contemplate tax increases and reforms that move the burden of federal revenue upward on the income scale, provided such changes do not unduly undermine growth.

My two cents is that Levin is right and Bauer is wrong.

To be sure, I don’t agree with everything Levin wrote (it’s theoretically possible to make a tax increase acceptable, for instance, but that won’t happen in the real world). But at least he recognizes the long-run spending outlook is so dour that entitlement reform is absolutely necessary.

Bauer, by contrast, argues that we should throw in the towel because reform is politically difficult.

I think he misreads the evidence.

Regarding Social Security, Bush got elected twice while supporting personal accounts, but the issue never went anywhere in his second term in large part because the White House never proposed a plan. Moreover, the public continued to be supportive of the idea of personal accounts, even after Bush left office.

Likewise, I think Bauer is wrong on Medicare and Medicaid. Republicans easily maintained control of the House in 2012, 2014 and 2016, notwithstanding Democratic attacks that they wanted to “push granny off a cliff.” And they still control the Senate after years of similar attacks.

But even if Bauer was right about the politics, he’s wrong about policy.

America will become another Greece if we don’t reform entitlements. That will be bad for the nation. It will be bad for our economy. It will be bad for our children and grandchildren. It will be bad for the fabric of our society.

The bottom line is that entitlement reform is the patriotic thing to do.

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Positive Rights vs Negative Rights

Back in 2017, I compared the welfare state vision of “positive rights” with the classical liberal vision of “negative rights.”

To elaborate, here’s a video from Learn Liberty that compares these visions.

For what it’s worth, I don’t like the terms “positive rights” and “negative rights” for the simple reason that an uninformed person understandably might conclude that “positive” is good and “negative” is bad.

Needless to say, I don’t think it’s good for people to think they have a right to other people’s money.

That’s why I prefer Professor Skoble’s use of the terms “liberties” and “entitlements,” which we also find in this slide from Professor Imran Ahmad Sajid of the University of Pakistan.

As you might expect, there are plenty of politicians who try to buy votes with an agenda of “positive rights.” Bernie Sanders, for instance, constantly argued that people have a “right” to all sorts of goodies.

But he wasn’t the first to make the case for unlimited entitlements.

Franklin Roosevelt was one of America’s worst presidents, in part because his policies deepened and lengthened the Great Depression. But also because he pushed the idea that people have the right to get all sorts of taxpayer-financed handouts.

Let’s see what some other people have to say about this topic.

In his National Review column, Kevin Williamson looks at the logical fallacy of positive rights.

Positive rights run into some pretty obvious problems if you think about them for a minute, which is why so much of our political discourse is dedicated to moralistic thundering specifically designed to prevent such thinking. Consider, in the American context, the notion that health care is a right. Declaring a right in a scarce good such as health care is intellectually void, because moral declarations about rights do not change material facts. If you have five children and three apples and then declare that every child has a right to an apple of his own, then you have five children and three apples and some meaningless posturing — i.e., nothing in reality has changed, and you have added only rhetoric instead of adding apples. In the United States, we have so many doctors, so many hospitals and clinics, so many MRI machines, etc. This imposes real constraints on the provision of health care. If my doctor works 40 hours a week, does my right to health care mean that a judge can order him to work extra hours to accommodate my rights? For free? If I have a right to health care, how can a clinic or a physician charge me for exercising my right? If doctors and hospitals have rights of their own — for example, property rights in their labor and facilities — how is it that my rights supersede those rights?

And here’s what he says about “negative rights.”

A negative right is a right to not be constrained. The right to free speech, for example, implies only non-interference. The right to freedom of the press doesn’t mean the government has to give you a press. The good of negative freedom is, in the economic sense, not rivalrous — your exercise of free speech doesn’t leave less freedom of speech out there for others to enjoy

And Larry Reed opines on the issue for the Foundation for Economic Education.

America is a nation founded on the notion of rights. …Despite the centrality of rights in American history, it’s readily apparent today that Americans are of widely different views on what a right is, how many we have, where rights come from, or why we have any in the first place. …if you need something, does that mean you have a right to it? If I require a kidney, do I have a right to one of yours? Is a right something that can or should be granted or denied by majority vote?

He helpfully provides a list of negative rights (a.k.a., liberties).

And he argues that positive rights (a.k.a., entitlements) are not real rights.

The bottom line, he explains, is that so-called positive rights impose obligations on other people.

Indeed, they can only be provided by coercion.

The first list comprises what are often called both “natural rights” and “negative rights”—natural because they derive from our essential nature as unique, sensate individuals and negative because they don’t impose obligations on others beyond a commitment to not violate them. The items in the second are called “positive rights” because others must give them to you or be coerced into doing so if they decline. …while I believe neither you nor I have a right to any of those disparate things in the second list, I hasten to add that we certainly have the right to seek them, to create them, to receive them as gifts from willing benefactors, or to trade for them. We just don’t have a right to compel anyone to give them to us or pay for them.

There’s not much I can add to this issue, given the wisdom contained in the video and in the articles by Williamson and Reed.

So I’ll close with the should-be-obvious point that a system based on entitlements only works if there are enough people pulling the wagon to support all the people riding in the wagon.

But that kind of society contains the seeds of its own downfall (think Greece or Venezuela) because it subsidizes dependency and penalizes production.

Which means, as Margaret Thatcher warned us, that positive rights can’t be provided when politicians run out of other people’s money.

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Will America Learn from Japan’s Fiscal Decline?

Compared to most of the world, Japan is a rich country. But it’s important to understand that Japan became rich when the burden of government was very small and there was no welfare state.

Indeed, as recently as 1970, Japan’s fiscal policy was rated by Economic Freedom of the World as being better than what exists today in Hong Kong.

Unfortunately, the country has since moved in the wrong direction. Back in 2016, I shared the “most depressing chart about Japan” because it showed that the overall tax burden doubled in just 45 years.

As you might expect, that rising tax burden was accompanied by a rising burden of government spending (fueled in part by enactment of a value-added tax).

And that has not been a good combination for the Japanese economy, as Douglas Carr explains in an article for National Review.

From 1993 to 2019, the U.S. averaged 2.6 percent growth, …far ahead of Japan’s meager 0.9 percent. …What happened? Big government happened… Japanese government spending was just 17.5 percent of the country’s GDP in 1960 but has grown, as illustrated below, to 38.8 percent of GDP today. …the island nation’s growth never recovered. The theory that government spending boosts long-term growth has failed… What government spending does is crowd out investment.

Amen. Japan has become a parody of Keynesian spending.

Here’s a chart from Mr. Carr’s article, which could be entitled “the other most depressing chart about Japan.”

As you can see, the burden of government spending began to climb about 1970 and is now represents a bigger drag on their economy than what we’re enduring in the United States.

Unfortunately, the United States is soon going to follow Japan in that wrong direction according to fiscal projections from the Congressional Budget Office.

Carr warns that bigger government in America won’t work any better than big government in Japan.

Rather than a problem confined to the other side of the world, Japan’s death spiral is a pointed warning to the U.S. The U.S. and Japanese economies are on the same trajectory; Japan is simply further along the big-government, low-growth path. …The United States is at risk of entering a Japanese death spiral.

Here’s another chart from the article showing the inverse relationship between government spending and economic growth.

Moreover, the U.S. numbers may be even worse because of coronavirus-related spending and whatever new handouts that might be created after the election.

The negative relationship of government spending with growth and investment holds with adjustments for cyclical influences such as using ten-year averages or the Congressional Budget Office’s estimates of cyclically adjusted U.S. government spending. CBO data highlight how close the U.S. is to a Japanese-style death spiral. …Of course, CBO’s recent forecast was prepared before the coronavirus shock and does not incorporate spending by a new Democratic government, so this dismal outlook is likely to worsen.

So what’s the solution? Can the United States avoid a Greek-style future?

The author explains how America can be saved.

Boosting growth means restraining government. Restraining government means reengineering entitlements… Economically, it shouldn’t be too difficult to do better. We have an insolvent, low-return government-retirement program along with an insolvent retiree-health program — part of a Rube Goldberg health-care system.

He’s right. To avoid stagnation and decline, we desperately need spending restraint and genuine entitlement reform in the United States.

Sadly, Trump is on the wrong side on that issue and Biden wants to add fuel to the fire by making the programs even bigger.

P.S. Here’s another depressing chart about Japan.

P.P.S. Unsurprisingly, the OECD and IMF have been cheerleading for Japan’s fiscal decline.

P.P.P.S. Japan’s government may win the prize for the strangest regulation and the prize for the most useless government giveaway.

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Everything You Need to Know about America’s Future Entitlement Crisis

Before our depressing discussion today about the fiscal impact of entitlement programs (Social Security, Medicare, Medicaid, EITC, Food Stamps, welfare, and Obamacare, etc), here’s a video of how it all began.

I think this is a great introduction to the issue, particularly since you learn how “public choice” (i.e., politicians engaging in self-serving behavior) played a key role in the development of today’s welfare state.

But if you don’t have the time to watch a long video, here are four key things to understand.

1. Entitlements (budget geeks sometimes use the term “mandatory spending”) are programs that automatically give people money if they meet certain requirements (such as reaching a certain age or having income below a certain level).
2. Since these programs automatically give people money, they are not part of the annual appropriations process (the “discretionary spending” parts of the budget that are determined on a yearly basis).
3. Some entitlement programs are “means tested” and designed to funnel money to low-income individuals. This type of spending is sometimes referred to as “unearned benefits.”
4. Some entitlement programs are “social insurance” since people pay specific tax in exchange for specific benefits. This type of spending is sometimes referred to as “earned benefits” (though in many cases recipient receive much more than they paid).

By the way, there’s one additional thing to understand.

Indeed, it may be the most important thing to understand if you care about America’s fiscal and economic future.

5.  Entitlement programs are a slow-motion fiscal train wreck.

Let’s look at a new study authored by James Capretta of the America Enterprise Institute. He also has some sobering observations on the history of entitlement programs.

The growing expense of entitlement programs has occurred steadily for more than a half century and is reflected in the shifting distribution of federal spending activity. …by the early 1960s, two-thirds of all spending continued to require approval by the House and Senate appropriations committees each year, and less than a third was spent on entitlement programs. … By 2019, nearly two-thirds of all spending in the budget was for entitlement programs, and less than a third went to annually appropriated accounts.

If you prefer this information visually, here are a couple of pie charts from the study.

While there are dozens of entitlement programs, the big three are Social Security, Medicare, and Medicaid.

The largest entitlement programs are Social Security, Medicare, and Medicaid. Together, they now make up nearly half of all federal spending. Their combined growth over the past half century is the primary source of intensifying fiscal pressure. …In 2019, combined federal spending on them was 9.8 percent of GDP, up from 3.7 percent in 1970. CBO expects them to cost 17.2 percent of GDP in 2050, which is almost equal to the average annual revenue collected by the federal government from 1970 to 2019.

And here’s how they’ve been consuming ever-larger shares of America’s economic output.

What’s driving this ever-increasing fiscal burden?

In part, it’s because we have more and more old people and they are living longer.

So what does all this mean?

Capretta points out that uncontrolled entitlement spending may lead to a debt crisis.

I don’t disagree, but I think that’s a secondary concern. The real problem is that government spending will become an ever-larger economic burden. And that will hinder growth whether it’s financed by borrowing or taxes.

Speaking of taxes, here’s the chart from the study that deserves our close attention. It shows the relationship between demographics, benefit generosity, and tax burdens.

Here’s how Capretta describes the relationship.

…for each of the stipulated replacement rates (25, 50, and 75 percent), the tax rate necessary to keep the program solvent rises with increases in the aged dependency ratio. This explains why social insurance taxes in many aging societies have been increased to high levels in recent decades.

I’ve taken the liberty of augmenting the chart to show how these factors interact (though the order of #1 and #2 doesn’t matter).

The bottom line is that the United States is on track to become a high-tax, European-style welfare state if fiscal policy is left on autopilot.

In other words, unless there’s genuine entitlement reform, future Americans will be condemned to lower living standards.

P.S. Here’s some more history. In a column for the American Institute for Economic Research, Richard Ebeling looked at British history to explain how the private sector played a role in social insurance before being displaced by government.

Throughout the 19th century, a primary means for the provision of what today we call the “social safety nets” was by the private sector outside of government. The British Friendly Societies were mutual assistance associations that emerged to provide death benefits for the wives and children of the breadwinner who had passed away. But they soon offered a wide array of other mutual insurance services, including health care coverage, retirement pension programs, unemployment insurance, savings clubs to purchase a family house, and a variety of others. …by the end of the 19th century around two-thirds to three-quarters of the entire British population was covered by one or more of their programs and insurances. The research also discovered that a large majority of the subscribers were in the lower income brackets of the time… What stands out is that these were all private and voluntary associations and exchanges, in which the government paid little or no role.

On a related note, here’s an excellent short video on the English “poor laws” from the 1800s.

P.P.S. In addition to the fiscal burden of entitlement programs, there’s also a major problem in the way these programs discourage work.

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The Economic Consequences of Expanding Pay-as-You-Go Social Security Systems

Despite the fact that Social Security is an ever-increasing fiscal burden with a 75-year cash-flow deficit of nearly $45 trillion, many politicians in Washington have been trying to buy votes with proposals to expand the program (Barack Obama, Hillary Clinton, Bernie Sanders, Elizabeth Warren, etc).

A new working paper from the European Central Bank gives us some insights on what will happen if they succeed.

Authored by Daniel Baksa, Zsuzsa Munkacsi, and Carolin Nerlich, the study look at the long-run impact of related policies in Europe, using Germany and Slovakia as examples.

Here’s their description of the study.

In view of the adverse macroeconomic and fiscal implications of ageing, many European countries have implemented significant pension reforms… More recently, however, the reform progress has stalled, and despite an unchanged demographic outlook, several European countries reversed, or plan to do so, parts of their previously adopted pension reforms. In this paper we offer a framework that allows us to evaluate the macroeconomic and fiscal costs of pension reform reversals. …By using a general equilibrium model with overlapping generations we can account for feedback effects between changes in pension parameters, pension expenditures and macroeconomic variables. …The model is calibrated for Germany and Slovakia.

Before sharing their findings, here’s a look at how demographics are a ticking time bomb for Europe.

The yellow dots are the 2016 numbers for the old-age dependency ratio (the number of people over 65 compared to the 15-64 working-age population) and the red dots show how that ratio will deteriorate by 2070 (the numbers for the United States are similarly grim).

These bad numbers mean that Europe’s economic outlook will worsen over time.

…population ageing has adverse macroeconomic and fiscal implications. …the results show an increase in the public debt-to-GDP ratio by around 100 percentage points until 2070, compared to the initial period, for both Germany and Slovakia. Moreover, real GDP per capita is projected to decline by almost 14% in Germany and 9% in Slovakia, compared to the initial period.

But it’s possible for the numbers to get better or worse, depending on changes to public policy.

…similar to other studies we find evidence that pension reforms help to contain the adverse implications of ageing… In particular, increases in the retirement age appear to help to alleviate ageing pressures most. …we find strong evidence for the presumption that reversals of pension reforms are potentially very costly. In fact, reform reversals would not only result in higher aggregate pension expenditure and public debt-to-GDP ratios, but would in most cases also exacerbate the adverse macroeconomic impact of ageing.

Unfortunately, public policy is now trending in the wrong direction. Here’s what’s been happening in Germany and Slovakia.

Germany recently decided to cap the decline in the benefit ratio and the increase in the contribution rate until 2025 at certain levels, and is considering whether to extend this cap even until 2040. Slovakia decided to break the automatic link between changes in life expectancy and retirement age, by capping the retirement age at 64 years. …in the reversal scenario for Germany we freeze the benefit ratio at its current level of 48% and assume that the contribution rate would not exceed the threshold of 20% until 2040. With this reform reversal scenario we assume that the agreed freeze of the benefits ratio and contribution rate until 2025 will be ex-tended until 2040. In Slovakia, we assume the retirement age to stop increasing from the year 2045 onwards.

And what do they find when countries backtrack on reform?

Here’s what they estimated in Germany.

For Germany, we find that the reform reversal would imply sizeable costs (see Table 6, column “reform reversal”). Specifically, by 2070, the increase in the public debt-to-GDP ratio can be expected to be ceteris paribus almost 60 percentage points higher than under the baseline scenario, as a result of higher pension expenditures, adverse feedback effects and lower contribution rates.

For those interested, here’s Table 6, which I’ve augmented by highlighting in red the most relevant changes. Yes, the debt increases compared to the baseline, but I think it’s equally important (if not more important) to see how young people are hurt and how the burden of government spending goes up.

Now let’s see what the authors found for Slovakia.

…we quantify the fiscal costs of the reform reversal in Slovakia by comparing the debt impact under the reform reversal scenario with that under the baseline scenario. Our results show that such a reform reversal would be very costly. In fact, the increase in the public debt-to-GDP ratio would be more than 50 percentage points higher than the estimated increase of around 100 percentage points of GDP under the baseline scenario (see Table 7).

Here’s Table 7, and again I have highlighted in red the increase in debt as well as the data showing additional harm to young people and a much bigger increase in the burden of government spending.

So what do these findings mean for the United States?

Let’s explain using a homemade infographic. I’ve put four options for Social Security on a spectrum. Here’s what they mean.

• “Expand Social Security” means more taxes and spending in pay-as-you-go systems that are already costly and out of balance.
• The “Status Quo” is a typical pay-as-you-go-system (where the United States is now and where Germany and Slovakia were before their reforms).
• “Conventional Reform” means trying to stabilize a pay-as-you-go system by demanding that workers pay more while promising to give them less (what Germany and Slovakia did).
• The most market-friendly position is “Personal Retirement Accounts,” which transforms creaky pay-as-you-go systems into real individual savings.

Here’s the infographic, including arrows to indicate that some options mean more government and others mean more prosperity.

What Germany and Slovakia did was move from “Status Quo” to “Conventional Reform.” But now they’re backtracking on those reforms and shifting back to the old version of the “Status Quo.”

In other words, a move in the direction of “More Government” and the European Central Bank’s study shows such a step will have negative consequences.

In the United States, by contrast, some folks on the left want America to move from “Status Quo” to “Expand Social Security.”

Like Germany and Slovakia, we’d be moving in the wrong direction. But the damage for the U.S. presumably would be worse because we didn’t first take a step in the right direction.

P.S. If you want to learn more about the best option, Australia, Denmark, Chile, Switzerland, Hong Kong, Netherlands, Faroe Islands, and Sweden are a few of the many jurisdictions that have fully or partially shifted to systems based on real savings.

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