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Archive for the ‘Fiscal Policy’ Category

There are two things everyone should understand about the federal budget.

Sadly, the politicians in Washington generally aren’t interested in sensible fiscal policy. They have a “public choice” incentive to spend more money in hopes of buying more votes.

Congressman Chip Roy, a freshman from Texas, is one of the few lawmakers who objects to the spend-like-there’s-no-tomorrow mentality in Washington.

Here’s some of what he wrote for the Hill.

…both parties appear to have reached a consensus on one major issue: busting spending caps is their solution to disagreements over spending. …Members of my party would be happy to agree with Democrats’ demands to spend outside our means, so long as they get all the money they want for defense. …The truth is Washington is all about power rather than solving the problem. It’s politically easier for Republicans to press for defense spending and Democrats to push for non-defense spending… Years of out-of-control spending and poor decision making is catching up with us.

He specifically wants to maintain the spending caps that apply to annually appropriated outlays.

Instead of wringing our hands and finding political convenient reasons to spend outside our means, Congress should stick to the caps. Doing so will force us – Republicans and Democrats – to sit at the table and negotiate—a lost art in Washington… allowing an across-the-board sequester to kick-in is more responsible than what Congress appears on track to do. …we must act now to do our job. We must stick to the budget caps.

He’s right about the desirability of a sequester.

Indeed, the sequester that took place in 2013 was the biggest victory for fiscal discipline during Obama’s presidency.

Sadly, politicians since then have been jumping through all sorts of hoops to avoid a second sequester. And the Democrats in the House of Representatives are proposing to bust the spending caps once again.

Here’s a chart prepared by Republicans on the House Budget Committee.

By the way, I’m not citing material from Republicans because they deserve praise.

So even though House Democrats are now proposing something that’s “absurdly terrible,” Republicans don’t have much credibility on the issue.

I’ll close with an observation about Greece’s fiscal tragedy.

There was no single decision that caused that country’s economic crisis. Instead, it was hundreds of short-sighted choices to spend more on Program A, Initiative B, Plan C, and Project D, along with every kind of tax increase under the sun.

And when some people warned that the fiscal orgy eventually would produce bad consequences, they were dismissed or ignored.

Sadly, American is heading down the same path. We know the solution, but politicians are more interested in buying votes than doing what’s right for America.

That includes the President. Trump has the power to force a sequester. All he has to do is veto any spending bill that busts the caps. But don’t hold your breath waiting for that to happen.

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Today is the 10th anniversary of International Liberty, and I was initially tempted to commemorate the day with another introspective column.

But I decided on a different focus because I just read a story that combines two things – wasteful spending and Washington dishonesty – that I don’t like.

Let’s look at the article, which was published in The Hill.

The Senate Budget Committee on Thursday approved a GOP-backed budget resolution that would allow for draconian spending cuts by reducing both defense and nondefense spending for 2020. …The Senate’s budget sticks to the legal caps for defense — falling from $716 billion to $643 billion, including off-book funds — and nondefense, which would drop from $640 billion to $542 billion. …The spending blueprint also would decrease spending on Medicaid, children’s health insurance and Affordable Care Act subsidies by $281 billion, and on Medicare by $77 billion. “…this is a disastrous budget for the middle class and working families of this country,” said Sen. Bernie Sanders (I-Vt.), the panel’s ranking member.

I was initially semi-excited when I read the story.

After all, we desperately need “draconian spending cuts” in Washington.

But I was only “semi-excited” because I feared – based on past experience – that these supposed reduction were fake.

So I decided to look at the actual numbers in the Senate’s proposed budget.

Lo and behold, my skepticism was warranted. There are zero genuine cuts. Instead, spending increases by an average of 3.5 percent annually under the Senate’s “draconian” budget plan.

Politicians claim there are “cuts” because spending levels in the Senate plan (orange line) don’t rise as fast as what would happen if spending was left on autopilot (blue line).

But this simply means that the burden of government spending won’t grow as fast as previously planned. I’ve exposed this scam in discussions with John Stossel and Judge Napolitano.

And I’ve condemned the Washington Post for playing this dishonest game as well. You also won’t be surprised that Obama used this dodgy approach.

The political elite like this dodgy game because they can pretend they are fiscally responsible while simultaneously making government bigger.

The bottom line is that politicians should be honest. If they want to argue that spending should grow 3.5 percent yearly (or even more), they should explain why Washington deserves more money.

But don’t lie to us about supposed spending cuts when the budget is expanding.

P.S. Remember the “sequester”? Politicians and interest groups squealed that the world was going to end because of an automatic spending cut that wasn’t even a cut.

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It’s not easy to identify the worst international bureaucracy.

Some days, I’m tempted to pick the Organization for Economic Cooperation and Development. After all, the Paris-based bureaucracy is infamous for pushing bigger government and higher taxes.

Other days, I want to select the International Monetary Fund, which leverages its bailout authority to relentlessly coerce governments into imposing higher taxes to finance bigger budgets.

At least for today, I’m going to argue that the IMF wins the dubious prize of being the worst.

That’s because the bureaucracy is doubling down on its ideological zeal for bigger government. Here are some excerpts from a speech earlier this week by the organization’s top bureaucrat, Christine Lagarde (who, incidentally, receives a lavish tax-free salary).

Our issue today is international corporate taxation. …I believe we need new rules in this area. …reasons why a new approach is urgent. …the three-decade long decline in corporate tax rates, undermines faith in the fairness of the overall tax system. …New IMF research published two weeks ago analyzes various options in…better addressing profit-shifting and tax competition.

Ms. Lagarde wants to boost the tax burden on business, and she complained about the fact that corporate tax rates have come down in recent decades.

What she cleverly didn’t acknowledge, though, is that the IMF’s own research shows that lower rates have not resulted in less revenue.

But you have to give Lagarde and her minions credit. They act on their beliefs.

The IMF has been pushing for big tax increases in Bahrain.

The International Monetary Fund (IMF) has called on the Bahrain government to take further action to shore up its shaky financial position, saying a large package of revenue and expenditure measures – including new taxes – is “urgently needed”. …the IMF set out a number of policy ideas – including the controversial tax proposal – in a statement… Bikas Joshi, the official who led the IMF team that visited Bahrain…went on to say that a “large fiscal adjustment is a priority” for the country…he said. “The implementation of a value-added tax, as planned, would be important. Additional revenue measures—including consideration of a corporate income tax—would be welcome.”

The IMF has been warning against tax cuts and instead pushing for tax increases in Ireland.

The International Monetary Fund (IMF) has urged the Government not to cut taxes in the upcoming budget, warning it risked “over-stimulating” Ireland’s fast-growing economy. …The fund recommended boosting housing supply through State-backed social housing projects… It recommended the Government pursues a small budget surplus in 2019… To achieve this, it advised broadening the tax base. One way this could be done was by increasing the tax on diesel… In addition, the IMF recommended getting rid of various tax exemptions and preferential rates such as the lower 9 per cent VAT rate for the hospitality sector.

The IMF has urged so many taxes that it created a backlash in Jordan.

Thousands of Jordanians heeded a strike call…to protest at major, IMF-guided tax rises they say will worsen an erosion in living standards. …warning the government that sweeping tax amendments…would impoverish employees already hit by unprecedented tax hikes implemented earlier this year. …tens of thousands of public and private sector employees accused the government of caving in to International Monetary Fund (IMF) demands and squeezing a middle class… The amendments, which would double the income tax base, are a key condition of a three-year IMF economic program that aims to generate more state revenue… Jordan earlier…raised taxes on hundreds of food and consumer items.

The examples are part of a pattern. I’ve also written about the IMF pimping for higher taxes in big countries, in small countries, and even entire continents.

Needless to say, the IMF also agitates for tax increases in the United States.

And it’s even specifically targeted poor nations for tax increases! Maybe now you’ll understand why I joked about nations not allowing IMF bureaucrats to visit.

I want to close today’s column by returning to Lagarde’s speech because there was another part of her speech that belies belief. She actually wants people to think that higher taxes and bigger government are a recipe for more growth.

…the current situation is especially harmful to low-income countries, depriving them of much-needed revenue to help them achieve higher economic growth.

Yes, your eyes are not deceiving you. The IMF’s top bureaucrat made the absurdly anti-empirical argument that higher taxes are good for growth.

Even though that’s directly contrary to evidence on the factors that enabled North America and Western Europe to become rich.

Sadly, this is now a common rhetorical tactic by international bureaucracies. The OECD does the same thing, as does the United Nations.

I guess they all think if they repeat nonsense often enough, people will somehow conclude up is down and black is white.

For what it’s worth, I’ll wait for them to name a single country that ever became rich by imposing higher taxes and bigger government.

P.S. There are some good economists working in the research division of the IMF, and they periodically publish good research on topics such as spending caps, debt, decentralization, the size of government, demographics, government spending, and taxation. Too bad the bureaucrats working on policy never read those studies.

P.P.S. My favorite IMF study was the one that accidentally provided very compelling evidence against the value-added tax.

P.P.P.S. My least favorite IMF studies were the ones that actually suggested that it would be desirable if everyone had lower living standards so long as rich people disproportionately suffered. Disgusting.

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In the absence of genuine entitlement reform, the United States at some point is going to suffer from a debt crisis.

But red ink is merely a symptom. I used numbers from Greece in this interview to underscore the fact that the real problem is government spending.

The discussion was triggered by comments from the Chairman of the Federal Reserve.

Federal Reserve Chairman Jerome Powell said Wednesday that reducing the federal debt needs to return to the forefront of the agenda, warning that the government’s finances are unsustainable. “I do think that deficits matter and do think it’s not really controversial to say our debt can’t grow faster than our economy indefinitely — and that’s what it’s doing right now,” Powell said.

As I noted in my comments, Powell is right, but he’s focusing on the wrong variable.

The real crisis is that spending is growing faster than the private sector (Powell needs to learn the six principles to guide spending policy).

To be more specific, politicians are violating my Golden Rule.

Spending grew too fast under Bush. It grew too fast under Obama (except for a few years when the “Tea Party” was in the ascendancy). And it’s growing too fast under Trump.

Most worrisome, the burden of spending is expected to grow faster than the private sector far into the future according to the long-run forecast from the Congressional Budget Office.

That doesn’t mean we’ll have a crisis this year or next year. We probably won’t even have a crisis in the next 10 years or 20 years.

But I cited Greek data in the interview to point out that excessive spending eventually does create a major problem.

Here’s the data from International Monetary Fund’s World Economic Outlook database. To make matters simple (I should have done this for the interview as well), I adjusted the numbers for inflation.

So how can America avoid a Greek-style fiscal nightmare?

Simple, just impose a spending cap. At the end of the interview, I added a plug for the very successful system in Switzerland, but I’d also be happy if we copied Hong Kong’s spending cap. Or the Taxpayer Bill of Rights from Colorado.

The bottom line is that spending restraint works and a constitutional spending cap is the best way to achieve permanent fiscal discipline.

P.S. By contrast, proponents of “Modern Monetary Theory” argue governments can finance ever-growing government by printing money. For what it’s worth, nations that have used central banks to finance big government (most recently, Venezuela and Zimbabwe) are not exactly good role models.

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I wrote a couple of weeks ago about how New York is committing slow-motion fiscal suicide.

The politicians in Illinois must have noticed because they now want (another “hold my beer” moment?) to accelerate the already-happening collapse of their state.

The new governor, J.B. Pritzker, wants to undo the state’s 4.95 percent flat tax, which is the only decent feature of the Illinois tax system.

And he has a plan to impose a so-called progressive tax with a top rate of 7.95.

Here are some excerpts from the Chicago Tribune‘s report., starting with the actual plan.

Democratic Gov. J.B. Pritzker embarked on a new and potentially bruising political campaign Thursday by seeking to win public approval of a graduated-rate income tax that he contended would raise $3.4 billion by increasing taxes for the wealthy…for his long-discussed plan to replace the state’s constitutionally mandated flat-rate income tax. Currently, all Illinois residents are taxed at 4.95 percent… Pritzker’s proposal is largely reliant on raising taxes significantly on residents making more than $250,000 a year, with those earning $1 million and up taxed at 7.95 percent of their total income. …The corporate tax rate would increase from the current 7 percent to 7.95 percent, matching the top personal rate. …The governor’s proposal would give Illinois the second-highest top marginal tax rate among its neighboring states.

And here’s what would need to happen for the change to occur.

Before Pritzker’s plan can be implemented, three-fifths majorities in each chamber of the legislature must approve a constitutional amendment doing away with the flat tax requirement. The measure would then require voter approval, which couldn’t happen until at least November 2020. …Democrats hold enough seats in both chambers of the legislature to approve the constitutional amendment without any GOP votes. Whether they’ll be willing to do so remains in question. Democratic leaders welcomed Pritzker’s proposal… voters in 2014 endorsed the idea by a wide margin in an advisory referendum.

The sensible people on the Chicago Tribune‘s editorial board are not very impressed, to put it mildly.

…how much will taxes increase under a rate structure Pritzker proposed? You might want to cover your eyes. About $3.4 billion annually… That extraction of dollars from taxpayers’ pockets would be in addition to roughly $5 billion raised annually in new revenue under the 2017 income tax hike. …How did Springfield’s collection of all that new money work out for state government and taxpayers? Here’s how: Illinois remains deeply in debt, continues to borrow to pay bills, faces an insurmountable unfunded pension liability and is losing taxpayers who are fed up with paying more. The flight of Illinoisans to other states is intensifying with 2018’s loss of 45,116 net residents, the worst of five years of consistent, dropping population. …Illinois needs to be adding more taxpayers and businesses, not subtracting them. When politicians raise taxes, they aren’t adding. A switch to a graduated tax would eliminate one of Illinois’ only fishing lures to attract taxpayers and jobs: its constitutionally protected flat income tax. …Pritzker’s proposal, like each tax hike before it, was introduced with no meaningful reform on the spending side of the ledger. This is all about collecting more money. …In fact, the tax hike would come amid promises of spending new billions.

And here’s a quirk that is sure to backfire.

For filers who report income of more than $1 million annually, the 7.95 percent rate would not be marginalized; meaning, it would be applied to every dollar, not just income of more than $1 million. Line up the Allied moving vans for business owners and other high-income families who’ve had a bellyful of one of America’s highest state and local tax burdens.

The Tax Foundation analyzed this part of Pritzker’s plan.

This creates a significant tax cliff, where a person making $1,000,000 pays $70,935 in taxes, while someone earning one dollar more pays $79,500, a difference of $8,565 on a single dollar of income.

That’s quite a marginal tax rate. I suspect even French politicians (as well as Cam Newton) might agree that’s too high.

Though I’m sure that tax lawyers and accountants will applaud since they’ll doubtlessly get a lot of new business from taxpayers who want to avoid that cliff (assuming, of course, that some entrepreneurs, investors, and business owners actually decide to remain in Illinois).

While the tax cliff is awful policy, it’s actually relatively minor compared to the importance of this table in the Tax Foundation report. It shows how the state’s already-low competitiveness ranking will dramatically decline if Pritzker’s class-warfare plan is adopted.

The Illinois Policy Institute has also analyzed the plan.

Unsurprisingly, there will be fewer jobs in the state, with the losses projected to reach catastrophic levels if the new tax scheme is adjusted to finance all of the Pritzker’s new spending.

And when tax rates go up – and they will if states like Connecticut, New Jersey, and California are any indication – that will mean very bad news for middle class taxpayers.

The governor is claiming they will be protected. But once the politicians get the power to tax one person at a higher rate, it’s just a matter of time before they tax everyone at higher rates.

Here’s IPI’s look at projected tax rates based on three different scenarios.

The bottom line is that the middle class will suffer most, thanks to fewer jobs and higher taxes.

Rich taxpayer will be hurt as well, but they have the most escape options, whether they move out of the state or rely on tax avoidance strategies.

Let’s close with a few observations about the state’s core problem of too much spending.

Steve Cortes, writing for Real Clear Politics, outlines the problems in his home state.

…one class of people has found a way to prosper: public employees. …over 94,000 total public employees and retirees in Illinois command $100,000+ salaries from taxpayers…former Chicago Mayor Richard M. Daley, who earned a $140,000 pension for his eight years of service in the Illinois legislature. …Such public-sector extravagance has fiscally transformed Illinois into America’s Greece – only without all the sunshine, ouzo, and amazing ruins.

So nobody should be surprised to learn that the burden of state spending has been growing at an unsustainable rate.

Indeed, over the past 20 years, state spending has ballooned from $34 billion to $86 billion according to the Census Bureau. At the risk of understatement, the politicians in Springfield have not been obeying my Golden Rule.

And today’s miserable fiscal situation will get even worse in the near future since Illinois is ranked near the bottom when it comes to setting aside money for lavish bureaucrat pensions and other retirement goodies.

Indeed, paying off the state’s energized bureaucrat lobby almost certainly is the main motive for Pritzker’s tax hike. As as happened in the past, this tax hike is designed to finance bigger government.

Yet that tax hike won’t work.

Massive out-migration already is wreaking havoc with the state’s finances. And if Pritzker gets his tax hike, the exodus will become even more dramatic.

P.S. Keep in mind, incidentally, that all this bad news for Illinois will almost certainly become worse news thanks to the recent tax reform. Restricting the state and local tax deduction means a much smaller implicit federal subsidy for high-tax states.

P.P.S. I created a poll last year and asked people which state will be the first to suffer a fiscal collapse. Illinois already has a big lead, and I won’t be surprised if that lead expands if Pritzker is able to kill the flat tax.

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Back in January, I wrote about the $42 trillion price tag of Alexandria Ocasio-Cortez’s Green New Deal.

To pay for this massive expansion in the burden of government spending, some advocates have embraced “Modern Monetary Theory,” which basically assumes the Federal Reserve can finance new boondoggles by printing money.

I debated this issue yesterday on CNBC. Here’s a clip from that interview.

Wow, this Modern Monetary Theory (MMT) reminds me of the old joke about “I can’t be out of money. I still have checks in my checkbook.”

I don’t know how far Ms. Kelton would go with this approach. I know from previous encounters that she’s a genuine Keynesian and thus willing to borrow lots of money to finance a larger public sector. But her answer at 2:45 of the interview also suggests she’s okay with using the Federal Reserve to finance bigger government.

In either case, our debate is really about the size of government.

And anybody who wants a bigger burden of government is at least semi-obliged to say how it would be financed. The MMT crowd stands out because they basically say the Federal Reserve can print money.

To help understand the various options, I’ve created a helpful flowchart.

It’s possible, of course, for my statist friends to say “all of the above,” so these are not mutually exclusive categories.

Though the MMT people who select “Print money!” are probably the craziest.

And I hope that they are not successful. After all, nations that have used the printing press to finance big government (most recently, Venezuela and Zimbabwe) are not exactly good role models.

I noted in the interview that MMT is so radical that it is opposed by conventional economists on the right and left.

For instance, Michael Strain of the right-leaning American Enterprise Institute opines that the theory is preposterous and nonsensical.

…modern monetary theory…freshman Democratic Representative Alexandria Ocasio-Cortez spoke favorably about it earlier this month. …MMT is…sometimes a theory of money. MMT is also being discussed in the context of a political program to justify huge increases in social spending. Finally, there is its role as a prescription for macroeconomic policy. …The bedrock observation of MMT is correct: Any government that issues its own currency can always pay its bills. …this is about all that can be said favorably regarding modern monetary theory. …it is in its ideas about macroeconomic policy that MMT fully earns its place on the fringe. …what does MMT have to say about inflation when it does materialize? …it falls to the institution with authority over tax and budget policy — the U.S. Congress — to make sure prices are stable by raising taxes… MMT seems to call for tax increases in order to restrain inflation. …Modern monetary theory…if enacted it could cause great harm to the U.S. economy.

From the left side of the spectrum, here’s some of what Joseph Minarik wrote on the topic.

MMT rests on simplistic observations that have just enough truth to take in those who need to believe. Believers in MMT see crying societal needs… By common reckoning, government lacks the resources to address all of those needs immediately. MMT solves that problem with a simple and (literally) true observation: The federal government can just print the money. …And that is what willing policymakers choose to hear: Anything. Without limit. It is so convenient —  “too good to check.” …to MMT adherents, the Federal Reserve and all other inflation “Chicken Littles” are and forever have been totally wrong. There has not been rapid inflation for 20 years or so. Therefore, there never will be inflation again. …Yes, inflation is low. But it always is before it rises. And once inflation begins, slowing it is hard and painful. MMT is the perfect theory for the video game generation, which never saw the 1960s economic miscalculations so much like what MMT advocates today, and apparently believes that such mistakes can be reversed painlessly by just hitting the reset button. …the consequences could be catastrophic.

Catastrophic indeed.

Letting the inflation genie out of the bottle is not a good idea. And the policies of the MMT crowd presumably would lead to something far worse than what America experienced in the 1970s.

Rescuing the economy from that inflation was painful, so it’s not pleasant to imagine what would be needed to salvage the country if the MMT people ever got their hands on the levers of power.

Let’s wrap this up. Earlier this week, I presented a guide to fiscal policy based on six core principles.

If Modern Monetary Theory gains more traction, I may have to add a postscript.

P.S. If ever imposed, I suspect MMT would be very good news for people with a lot of gold and/or a lot of Bitcoin.

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When I’m asked for a basic tutorial on fiscal policy, I normally share my four videos on the economics of government spending and my primer on fundamental tax reform.

But this six-minute interview may be a quicker introduction to spending issues since I had the opportunity to touch on almost every key principle.

Culled from the discussion, here is what everyone should understand about the spending side of the fiscal ledger.

Principle #1 – America’s fiscal problem is a government that is too big and growing too fast. Government spending diverts resources from the productive sector of the economy, regardless of how it is financed. There is real-world evidence that large public sectors sap the private sector’s vitality, augmented by lots of academic research on the negative relationship between government spending and economic performance.

Principle #2 – Entitlements programs are the main drivers of excessive spending. All the long-run forecasts show that the burden of spending is rising because of the so-called mandatory spending programs. Social Security, Medicare, and Medicaid were not designed to keep pace with demographic changes (falling birthrates, increasing longevity), so spending for these program will consume ever-larger shares of economic output.

Principle #3 – Deficits and debt are symptoms of the underlying problem. Government borrowing is not a good idea, but it’s primarily bad because it is a way of financing a larger burden of spending. The appropriate analogy is that, just as a person with a brain tumor shouldn’t fixate on the accompanying headache, taxpayers paying for a bloated government should pay excessive attention to the portion financed by red ink.

Principle #4 – Existing red ink is small compared to the federal government’s unfunded liabilities. People fixate on current levels of deficits and debt, which are a measure of all the additional spending financed by red ink. But today’s amount of red ink is relatively small compared to unfunded liabilities (i.e., measures of how much future spending will exceed projected revenues).

Principle #5 – A spending cap is the best way to solve America’s fiscal problems. Balanced budget rules are better than nothing, but they have a don’t control the size and growth of government. Spending caps are the only fiscal rules that have a strong track record, even confirmed by research from the International Monetary Fund and Organization for Economic Cooperation and Development.

Here’s one final principle, though I didn’t mention it in the interview.

Principle #6 – Increasing taxes will make a bad situation worse. Since government spending is the real fiscal problem, higher taxes, at best, replace debt-financed spending with tax-financed spending. In reality, higher taxes loosen political constraints on policy makers and “feed the beast,” so the most likely outcome – as seen in Europe – is that overall spending levels increase and long-term debt actually increases.

In an ideal world, these six principles would be put in a frame and nailed above the desk of every politician, government official, and bureaucrat who deals with fiscal policy.

Not that it would make much difference since their decisions are guided by “public choice” no matter what principles they see at their desk, but it’s nice to fantasize.

Here are a few other observations from the interview.

P.S. Needless to say, I wish limits on enumerated powers were still a guiding principle for fiscal policy. Sadly, the days of Madisonian constitutionalism are long gone.

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