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Archive for the ‘Fiscal Policy’ Category

There’s a famous quote attributed to George Washington.

Government is not reason, it is not eloquence — it is force. Like fire it is a dangerous servant and a fearful master; never for a moment should it be left to irresponsible action.

But it’s apparently an urban legend. There’s no evidence Washington wrote or spoke those words.

That being said, I obviously appreciate the sentiment.

So much so that I’m tempted to make up a similar quote and start a rumor that it comes from Washington.

Politicians don’t have reason or sense – they are consumed by ambition. Like fire they are capable of causing great damage and only have value in very controlled circumstances.

That statement surely would apply to the ruling class in Washington, particularly those running for President. And it also would apply to many of the “outsider” candidates as well, including Donald Trump.

In other words, we should accept the fact that politicians are pathologically ambitious narcissists (which is why these jokes and cartoons are so funny) and simply try to figure out whether they might be vehicles for good and necessary reforms.

I have a very straightforward rule for determining whether politicians “have value in very controlled circumstances.” Simply stated, if they are open to tax hikes, then I can state – with 99 percent confidence – that they have no desire to control the size, cost, and power of the federal government.

Based on that rule, I’m skeptical about Donald Trump.

To understand my doubts, here are some passages from a story on the topic in the New York Times.

For years, Republicans have run for office on promises of cutting taxes… But this election cycle, the Republican presidential candidate who currently leads in most polls is taking a different approach… Mr. Trump has…suggested he would increase taxes on the compensation of hedge fund managers. And he has vowed to change laws that allow American companies to benefit from cheaper tax rates by using mergers to base their operations outside the United States.

These policy positions are raising a lot of eyebrows.

“All of those are anti-growth policies,” said David McIntosh, the president of the Club for Growth… “Those aren’t the types of things a typical Republican candidate would say,” said Michael R. Strain, a scholar at the conservative American Enterprise Institute, referring to the candidate’s comments on hedge funds, support for entitlement spending and the imposing of trade tariffs.

And Trump’s failure to sign the no-tax-hike pledge exacerbates the concerns, particularly when combined with his inconsistent statements on tax reform.

Mr. Trump and former Gov. Jeb Bush of Florida are the only leading Republican candidates who have not signed a pledge to not raise taxes. …In an interview with Fox News last week, Mr. Trump said a flat tax would be a viable improvement to America’s tax system. Moments later, he suggested that a flat tax would be unfair because the rich would be taxed at the same rate as the poor.

Trump’s views – to the extent that they can be deciphered – are causing angst for some GOPers, as illustrated by these excerpts from a column in the Washington Post.

Trump’s surging campaign has pushed the party in a different direction, one that often clashes with free-market principles that have long underpinned GOP economic policy. …Traditional supply-side thinkers…have urged candidates to flatten tax rates and reduce regulations to unleash faster economic growth.

Byron York of the Washington Examiner writes about Trump’s fiscal policy in the context of traditional Republican orthodoxy.

Trump is preparing a tax proposal that will again set him far apart from the party’s powers-that-be. …Trump has been sending signals that his tax proposal, which he says will be “comprehensive,” will include higher rates for some of the richest Americans, a position generally at odds with Republican orthodoxy. “I want to see lower taxes,” Trump said at an appearance in Norwood, Mass., on Friday night. “But on some people, they’re not doing their fair share.”

And if his campaign manager is accurately channeling Trump’s views. the candidate even equates higher taxes with making America great.

Trump campaign manager Corey Lewandowski would say little about Trump’s intentions, but noted that “Mr. Trump has said that he does not mind paying what is required to make our country great again.” Raising taxes on anyone, even the super rich, has generally been anathema to Republicans for a generation.

Wow, what’s next, a Biden-esque assertion that higher tax payments are patriotic?!?

Though, to be fair, it’s unclear whether Trump actually wants the federal government to have more money.

Perhaps the tax increases that he supports would be offset by tax cuts elsewhere, which is what would happen with major tax reform proposals such as the flat tax.

Though the fact that Trump so far has refused to sign the no-tax-hike pledge obviously makes me suspicious of his true goals.

In his column for the New York Times, Ross Douthat also wonders whether Trump will upend existing GOP thinking.

In movement conservatism, there’s an ongoing, interesting tension between starve-the-leviathan theories and the supply-side vision, exemplified by the Wall Street Journal editorial page among other sources, in which low taxes on high incomes and investment can allegedly make the public coffers fuller. …my own (modest) faction, the reform conservatives, whose preferred tax vision (in its varying forms) basically seeks a rebalancing of conservative tax policy, an approach that’s still responsive to supply-side and pro-growth ideas but also addresses both the anxieties of middle class families… The Republican Party is the limited-government, anti-tax party, and the weird rise of Trumpism isn’t going to change that basic fact. But the way anti-tax sentiment manifests itself, and the policies associated with those sentiments, can alter with time and circumstances, and for the G.O.P.’s sake they need to change right now.

I’m mostly in the starve-the-beast camp, though I like the supply-side approach (perfectly captured in this image) because of the recognition of how good tax policy boosts growth.

And I see the “reform conservatives” as allies even if their ideal version of tax reform has a few warts.

So I’m willing to have a “big tent”…on the sole condition that I get to exclude those who want higher taxes.

And it remains to be seen whether Trump’s in that distasteful group.

P.S. Speaking of distasteful, keep in mind that when Trump says favorable things about trade protectionism, he’s really saying that he wants higher taxes on American consumers.

P.P.S. I care about policy rather than politics, so don’t hold your breath waiting for me to endorse any candidate (indeed, I’ve only made one presidential endorsement in the past six years).

But given my passionate support for the Georgia Bulldogs, I might overlook some of Donald Trump’s dubious views simply because he has support from someone who made my college years very enjoyable.

Herschel Walker…, the former running back stated the Republican hopeful is his No. 1 choice for president. “There’s not a doubt in my mind right now he is my frontrunner,” Walker told USA Today. …”(Trump) wanted to win and he was prepared to go out and do whatever it took to win,” Walker said. “He was a guy that always did what he said he was going to do.” …”When are we going to get back to what’s best for this country?” Walker said. “I think that’s what’s Donald is pushing to do.”

That being said, I’m only aware of one other time Herschel endorsed a politician and that guy lost.

P.P.P.S. Today’s column has focused on Trump’s worrisome views on tax policy. Well, one of the reasons he may be weak on taxes is because he has no desire to control spending. You don’t have to believe me. These are his own words.

“I’m not going to cut Social Security like every other Republican and I’m not going to cut Medicare or Medicaid,” Trump told The Daily Signal. “Every other Republican is going to cut, and even if they wouldn’t, they don’t know what to do because they don’t know where the money is. I do.”

Huh?!?

Let’s take a look at “where the money is.”

If “The Donald” doesn’t think we need genuine entitlement reform, there are only a few possible explanations.

  • He’s clueless.
  • He’s dishonest.
  • Or he wants the status quo and that’s why he’s leaving the door open for massive tax hikes.

If it’s the final option, he’s the GOP version of Bernie Sanders.

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Earlier this month, Americans for Prosperity held a “Road to Reform” event in Las Vegas.

I got to be the warm-up speaker and made two simple points.

First, we made a lot of fiscal progress between 2009 and 2014 because various battles over debt limits, shutdowns, and sequestration actually did result in real spending discipline.

Second, I used January’s 10-year forecast from the Congressional Budget Office to explain how easy it would be to balance the budget with a modest amount of future spending restraint.

Here’s my speech (you can see the entire event by clicking here).

I realize I sound uncharacteristically optimistic in these remarks, but it is amazing how easy it is to make progress with even semi-effective limits on the growth of government.

Genuine spending cuts would be very desirable, of course, but we move in the right direction so long as government spending grows slower than the private sector.

The challenge, needless to say, is convincing politicians to limit spending.

Well, we now have some new data in that battle. The CBO released its Update this morning, which means the numbers I shared in Nevada are now slightly out of date and that I need to re-do all my calculations based on the new 10-year forecast.

But it doesn’t really make a difference.  As you can see from the chart, we can balance the budget by 2021 if spending is capped so that it grows by 2 percent annually. And even if spending is allowed to grow by 3 percent per year (about 50 percent faster than projected inflation), the budget is balanced by 2024.

At this point, I feel compelled to point out that the goal should be smaller government, not fiscal balance.

But since fiscal policy debates tend to focus on how to eliminate red ink and balance the budget, I may as well take advantage of this misplaced focus to push a policy (spending restraint) that would be desirable even if we had a budget surplus.

And that’s the purpose of this video I narrated for the Center for Freedom and Prosperity back in 2010. The numbers obviously have changed over the past five years, but the underlying argument about the merits and efficacy of spending restraint are exactly the same today.

For more information on the merits of smaller government, here’s my tutorial on government spending.

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This century has not been good news for economic liberty in the United States.

According to Economic Freedom of the World, America has dropped from being the 3rd-freest economy of the world in 2001 to the 12th-freest economy in the most recent rankings.

Perhaps more important, our aggregate score has fallen from 8.20 to 7.81 over the same period.

So why has the U.S. score dropped? Was it Bush’s spending binge? Obama’s stimulus boondoggle? All the spending and taxes in Obamacare? The fiscal cliff tax hike?

I certainly think all those policies were mistaken, but if you dig into the annual data, America’s score on “size of government” only fell from 7.1 to 7.0 between 2001 and 2012.

Which means economic freedom in the United States mostly declined for reasons other than fiscal policy. In other words, our score dropped because of what happened to our scores for trade policy, monetary policy, regulatory policy, and property rights and rule of law.

That triggered my curiosity. If America is #12 in the overall rankings, how would we rank if fiscal policy was removed from the equation?

Here are the results, showing the top 25 jurisdictions based on the four non-fiscal policy factors. As you can see, the United States drops from #12 to #24, which means we trail 14 European nations in these important measures of economic freedom.

If you look in the second column, you’ll notice how many of those European nations have double-digit increases when you look at their non-fiscal rankings compared to their overall rankings.

This is for two reasons.

First, their fiscal scores are terrible because of high tax rates and a stifling burden of government spending.

Second, these same nations are hyper-free market on issues such as trade, regulation, money, rule of law and property rights.

In other words, the data back up points I’ve made about policy in nations such as Denmark and Sweden.

In an ideal world, countries should have free markets and small government. In Northern Europe, they manage to get the first part right. Which is important since non-fiscal factors account for 80 percent of a nation’s overall grade.

Now let’s return to the issue of America’s decline.

Here are the non-fiscal rankings from 2001. As you can see, the United States was #5 at the time, scoring higher than even Singapore and Hong Kong. And the U.S. was behind only three European nations back in 2001.

For what it’s worth, America’s score has fallen primarily because of a significant drop in the trade category (from 8.7 to 7.7) and a huge drop for rule of law and property rights (from 8.7 to 7.0).

In other words, it’s not good for prosperity when a nation begins to have problems such as protectionism and politicized courts.

P.S. The erosion of America’s score for non-fiscal factors is particularly disappointing since improvements in those factors have played a big role in protecting the world from the negative economic consequences of more spending and taxes.

P.P.S. I think this is an example of correlation rather than causation, but the above rankings for non-fiscal economic liberty seem somewhat similar to the rankings I shared last week looking at overall societal freedom.

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The United States has what is arguably the worst business tax system of any nation.

That’s bad for the shareholders who own companies, and it’s also bad for workers and consumers.

And it creates such a competitive disadvantage that many U.S.-domiciled companies are better off if they engage in an “inversion” and shift their corporate charter to a jurisdiction with better tax policy.

Unsurprisingly, the Obama White House doesn’t like inversions (with some suspicious exceptions) because the main effect is to reduce tax revenue.  But the Administration’s efforts to thwart them haven’t been very successful.

The U.K.-based Economist has just published an article on American companies re-domiciling in jurisdictions with better tax law.

A “tax inversion” is a manoeuvre in which a (usually American) firm acquires or merges with a foreign rival, then shifts its domicile abroad to reap tax benefits. A spate of such deals last year led Barack Obama to brand inversions as “unpatriotic”. …The boardroom case for inversions stems from America’s tax exceptionalism.

But this isn’t the good kind of exceptionalism.

The internal revenue code is uniquely anti-competitive.

It levies a higher corporate-tax rate than any other rich country—a combined federal-and-state rate of 39%, against an OECD average of 25%. And it spreads its tentacles worldwide, so that profits earned abroad are also subject to American taxes when they are repatriated.

And that worldwide tax system is extremely pernicious, particularly when combined with America’s punitive corporate tax rate.

Given these facts, the Economist isn’t impressed by the Obama Administration’s regulatory efforts to block inversions.

Making it hard for American firms to invert does precisely nothing to alter the comparative tax advantages of changing domicile; it just makes it more likely that foreign firms will acquire American ones. That, indeed, is precisely what is happening.

So what’s the answer?

If American policymakers really worry about losing out to lower-tax environments, they should get rid of the loopholes that infest their tax rules, drop the corporate-income tax rate and move to a territorial system. …jobs would be less likely to flow abroad.

In a companion article, the Economist lists some of the firms that are escaping from the IRS.

…companies have continued to tiptoe out of America to places where the taxman is kinder and has shorter arms. On August 6th CF Industries, a fertiliser manufacturer, and Coca-Cola Enterprises, a drinks bottler, both said they would move their domiciles to Britain after mergers with non-American firms. Five days later Terex, which makes cranes, announced a merger in which it will move to Finland. For many firms, staying in America is just too costly. Take Burger King, a fast-food chain, which last year shifted domicile to Canada after merging with Tim Horton’s, a coffee-shop operator there.

I’ve previously shared lists of inverting companies, as well as a map of where they go, and this table from the article is a good addition.

So how should Washington react to this exodus? The Economist explains once again the sensible policy response.

The logical way to stem the tide would be to bring America’s tax laws in line with international norms. Britain, Germany and Japan all have lower corporate rates and are among the majority of countries that tax firms only on profits earned on their territory.

But the Obama Administration’s response is predictably unhelpful. And may even accelerate the flight of firms.

…the US Treasury has been trying to make it harder for them to leave. …Despite such speed bumps, inversions still make enormous sense for companies with large overseas operations. If anything, the rule changes have led to more companies looking to get out before it is too late.

The Wall Street Journal opined on this issue earlier this month and reached a similar conclusion.

…a mountain of evidence that an un-competitive tax system has made the U.S. an undesirable location for corporate headquarters and investment. …high tax rates matter a great deal in determining where a company is based and where it grows.

The WSJ also pointed out that taxpayers have a right and an obligation to legally protect themselves from bad tax policy.

Shareholders deserve nothing less from management than the Warren Buffett approach of paying the lowest possible legal tax rate.

But since the White House isn’t very interested in helpful reform, expect more inversions.

Which is one more piece of evidence that punitive corporate taxation isn’t good news for workers.

…absent American tax reform will end up pushing more U.S. companies into foreign hands. …The ultimate losers in all of this aren’t so much the owners as American workers, who often lose their jobs when a company moves abroad. …It’s well past time for our government to stop creating advantages for foreign competitors.

In looking at this issue, it’s easy to be discouraged since the Obama Administration is unwilling to even consider pro-growth policy responses.

As such, the problem will fester until at least 2017.

But it’s possible that there could be pro-reform legislation once a new President takes office.

Particularly since the Senate’s Permanent Subcommittee on Investigations (which used to be chaired by the clownish Sen. Levin, infamous for the FATCA disaster) has produced a very persuasive report on how bad U.S. tax policy is causing inversions.

Here are some excerpts from the executive summary.

The United States has the highest corporate tax rate in the industrialized world, and (alone among its peers) has retained a worldwide system that taxes American companies for the privilege of repatriating their overseas earnings. Meanwhile, most other nations with advanced economies have adopted competitive tax rates and territorial-type tax systems. As a result, U.S. firms too often have a significant incentive to relocate their headquarters overseas. Corporate inversions may be the most dramatic manifestation of that incentive… The lesson policymakers should draw from our findings is straightforward: The high U.S. corporate tax rate and worldwide system of taxation are competitive disadvantages that make it easier for foreign firms to acquire American companies. Those policies also strongly incentivize cross-border merging firms, when choosing where to locate their new headquarters, not to choose the United States. The long term costs of these incentives can be measured in a loss of jobs, corporate headquarters, and revenue to the Treasury.

Those are refreshing and intelligent comments, particularly since politicians were in charge of putting out this report rather than economists.

So maybe there’s some hope for the future.

For more information on inversions and corporate tax policy, here’s a short speech I gave to an audience on Capitol Hill.

P.S. Let’s close with some political satire.

I’ve written about Bernie Sanders being a conventional statist rather than a real socialist.

But that wasn’t meant to be praise. He’s still clueless about economics, as illustrated by this amusing Venn diagram.

Though I’m sure many other politicians would occupy that same space.

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If you took a poll of Washington’s richest and most powerful people, you would probably find more than 90 percent of them support tax increases.

At first glance, this doesn’t make sense. Why would a group of upper-income people want tax hikes? Are they self-loathing and guilt-ridden?

Perhaps, but there’s a better explanation. These are people whose lavish lifestyles are because of big government. And when government gets even bigger, they have more chances to obtain unearned wealth.

So it makes perfect sense for them to support tax increases. They may send an additional 5 percent of their income to the IRS, but their income will be 20 percent higher because of all the money sloshing around Washington.

Once you understand their motivations, it’s easy to understand why Washington insiders are so supportive of “bipartisan budget deals” and why they salivate so much for a value-added tax.

And you can also see why they’re so anxious to get a President who hasn’t signed the no-tax-hike pledge.

Which may explain why Jeremy Scott, the editor of Tax Notes, is upset that Governor Jeb Bush is now expressing opposition to tax hikes. Here’s some of what he wrote for Forbes, starting with a description of Bush’s original open-to-tax-hikes position.

Before announcing his candidacy, former Florida Gov. Jeb Bush said he wouldn’t agree to Grover Norquist’s pledge not to raise taxes, and he hinted that he would, in fact, trade $10 of spending cuts for $1 of tax increases. …he went out of his way earlier this year to talk about his flexibility on fiscal policy.

That part of Mr. Scott’s column is accurate.

I also noticed Gov. Bush’s stance at the time, albeit it caused me to worry because politicians will never impose meaningful spending restraint and reform entitlements if they think tax increases are feasible.

Anyhow, Scott then points out that Gov. Bush seems to have moved to an anti-tax hike position.

At an August 2 conference…, Bush flatly said no when asked if he would accept tax hikes as part of a budget deal. “We’ve raised taxes. What we need to be doing is entitlement reform, curbing the growth of spending, creating a high-growth scenario,” the former governor elaborated.

I’m not sure if what Bush said puts him firmly in the no-tax-hike camp, but it’s certainly true that his rhetoric has moved in the right direction.

Which doesn’t make Scott happy. And here’s where he veers from accurate reporting to sloppy and bizarre assertions.

If Jeb Bush needs to shore up his right flank on taxes, it reveals that the GOP has veered far from its positional flexibility that made the 1980s so successful for tax reform efforts. President Reagan was willing to accept tax increases as part of grand bargains on taxes and fiscal policy. …the GOP…won’t control 60 seats in the upper chamber. That means they will need at least some Democratic support. And no party will want to undertake tax reform without at least some bipartisanship. A Jeb Bush victory in 2016 seemed like the best-case scenario for people who want some kind of broad tax reform. His retreat on a willingness to compromise is a major blow to those hopes.

Wow, that’s a lot of misleading statements in a short excerpt.

Let’s correct some of Mr. Scott’s mistakes.

  1. The 1986 Tax Reform Act was revenue neutral. In other words, it was designed so that the government didn’t get any additional money. Scott is completely wrong to assert that a willingness to raise taxes is a prerequisite for tax reform.
  2. Scott is correct that Reagan acquiesced to some tax increases, but he conveniently fails to share the data showing that “grand bargains” with tax hikes invariably failed to produce good results. The only deal that led to a balanced budget was the 1997 agreement that lowered taxes.
  3. It is incorrect to assert that 60 votes are needed in the Senate to enact major fiscal legislation. Yes, the filibuster still exists, but budget rules explicitly allow “reconciliation” bills that don’t require supermajority support.
  4. A pro-tax hike candidate is only the “best-case scenario” if one thinks that voters should be tricked by using tax reform as a Trojan Horse for tax increases.

The final point is the one that really matters. To reiterate what I stated earlier, the Washington establishment is unified in its support of higher taxes for the obvious reason that more money flowing to Washington is good news for politicians, bureaucrats, consultants, lobbyists, cronyists, special interests, contractors, and other insiders.

Simply stated, a bigger government means they get richer (and they’ve been quite successful, as you can see from this depressing map).

Here’s the bottom line.

Using the term “grand bargain” also doesn’t change the fact that higher taxes will lead to weaker growth, more spending, and larger deficits.

And (mis)using the term “tax reform” doesn’t change the fact that higher taxes will lead to weaker growth, more spending, and larger deficits.

Nor does a reference to “flexibility” change the fact that higher taxes will lead to weaker growth, more spending, and larger deficits.

I could continue, but you get the point.

P.S. Let’s close by shifting to another topic. Many people express disbelief when I argue that politicians such as Barack Obama and Bernie Sanders are not socialists.

In my defense, I’m making a technical point about the economic definition of socialism, which means government ownership of the means of production. And the vast majority of American leftists don’t seem overly interested in having government steel companies, government banks, or government farms. They prefer instead to allow private ownership combined with high levels of taxation and regulation.

If you want to see a real socialist, look on the other side of the Atlantic, where the Labour Party appears poised to elect a complete loon as its leader. The U.K.-based Independent reports that Jeremy Corbyn favors “common ownership” of industry.

…the man who has set alight the leadership race says the party needs to reinstate a clear commitment to public ownership of industry in a move which would reverse one of the defining moments in Labour’s history. …Corbyn reveals that he wants to reinstate Clause Four, the hugely symbolic commitment to socialism scrapped under Tony Blair 20 years ago, in its original wording or a similar phrase that weds the Labour Party to public ownership of industry. …The old Clause Four stated that the party was committed to “common ownership of the means of production, distribution and exchange”

I can’t think of any Democrats who admit to favoring similar language for their party platform.

Though I should acknowledge that we have a government-run rail company in America, a government-run postal service, a government-run retirement system, and a government-run air traffic control system, all of which would be better in the private sector. And I’m sure Obama, Sanders, and many other politicians would be opposed to privatization.

So maybe the most accurate way of describing leftist politicians in America is to say that they’re redistributionists with a side order of socialism.

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I never watched That ’70s Show, but according to Wikipedia, the comedy program “addressed social issues of the 1970s.”

Assuming that’s true, they need a sequel that addresses economic issues of the 1970s. And the star of the program could be the Congressional Budget Office, a Capitol Hill bureaucracy that apparently still believes – notwithstanding all the evidence of recent decades – in the primitive Keynesian view that a larger burden of government spending is somehow good for economic growth and job creation.

I’ve previously written about CBO’s fairy-tale views on fiscal policy, but wondered whether a new GOP-appointed Director would make a difference. And I thought there were signs of progress in CBO’s recent analysis of the economic impact of Obamacare.

But the bureaucracy just released its estimates of what would happen if the spending caps in the Budget Control Act (BCA) were eviscerated to enable more federal spending. And CBO’s analysis was such a throwback to the 1970s that it should have been released by a guy in a leisure suit driving a Ford Pinto blaring disco music.

Here’s what the bureaucrats said would happen to spending if the BCA spending caps for 2016 and 2017 were eliminated.

According to CBO’s estimates, such an increase would raise total outlays above what is projected under current law by $53 billion in fiscal year 2016, $76 billion in fiscal year 2017, $30 billion in fiscal year 2018, and a cumulative $19 billion in later years.

And here’s CBO’s estimate of the economic impact of more Washington spending.

Over the course of calendar year 2016,…the spending changes would make real (inflation-adjusted) gross domestic product (GDP) 0.4 percent larger than projected under current law. They would also increase full-time-equivalent employment by 0.5 million. …the increase in federal spending would lead to more aggregate demand than under current law. …Over the course of calendar year 2017…CBO estimates that the spending changes would make real GDP 0.2 percent larger than projected under current law. They would also increase full-time-equivalent employment by 0.3 million.

Huh?

If Keynesian spending is so powerful and effective in theory, then why does it never work in reality? It didn’t work for Hoover and Roosevelt in the 1930s. It didn’t work for Nixon, Ford, and Carter in the 1970s. It didn’t work for Japan in the 1990s. And it hasn’t worked this century for either Bush or Obama. Or Russia and China.

And if Keynesianism is right, then why did the economy do better after the sequester when the Obama Administration said that automatic spending cuts would dampen growth?

To be fair, maybe CBO wasn’t actually embracing Keynesian primitivism. Perhaps the bureaucrats were simply making the point that there might be an adjustment period in the economy as labor and capital get reallocated to more productive uses.

I’m open to this type of analysis, as I wrote back in 2012.

…there are cases where the economy does hit a short-run speed bump when the public sector is pruned. Simply stated, there will be transitional costs when the burden of public spending is reduced. Only in economics textbooks is it possible to seamlessly and immediately reallocate resources.

But CBO doesn’t base its estimates on short-run readjustment costs. The references to “aggregate demand” show the bureaucracy’s work is based on unalloyed Keynesianism.

But only in the short run.

CBO’s anti-empirical faith in the magical powers of Keynesianism in the short run is matched by a knee-jerk belief that government borrowing is the main threat to the economy’s long-run performance.

…the resulting increases in federal deficits would, in the longer term, make the nation’s output and income lower than they would be otherwise.

Sigh. Red ink isn’t a good thing, but CBO is very misguided about the importance of deficits compared to other variables.

After all, if deficits really drive the economy, that implies we could maximize growth with 100 percent tax rates (or, if the Joint Committee on Taxation has learned from its mistakes, by setting tax rates at the revenue-maximizing level).

This obviously isn’t true. What really matters for long-run prosperity is limiting the size and scope of government. Once the growth-maximizing size of government is determined, then lawmakers should seek to finance that public sector with a tax system that minimizes penalties on work, saving, investment, risk-taking, and entrepreneurship.

Remarkably, even international bureaucracies such as the World Bank and European Central Bank seem to understand that big government stifles prosperity. But I won’t hold my breath waiting for the 1970s-oriented CBO to catch up with 21st-century research.

P.S. Here’s some humor about Keynesian economics.

P.P.S. If you want to be informed and entertained, here’s the famous video showing the Keynes v. Hayek rap contest, followed by the equally clever sequel, which features a boxing match between Keynes and Hayek. And even though it’s not the right time of year, here’s the satirical commercial for Keynesian Christmas carols.

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Let’s celebrate some good news.

When politicians can be convinced (or pressured) to exercise even a modest bit of spending restraint, it’s remarkably simple to get positive results.

Here’s some of what I wrote earlier this year.

…one of the few recent victories for fiscal responsibility was the 2011 Budget Control Act (BCA), which only was implemented because of a fight that year over the debt limit. At the time, the establishment was screaming and yelling about risky brinksmanship. But the net result is that the BCA ultimately resulted in the sequester, which was a huge victory that contributed to much better fiscal numbers between 2009-2014.

And “much better fiscal numbers” really are much better.

Here’s a chart I put together showing how the burden of federal spending declined between 2009 and 2014. And this happened for the simple reason that spending was flat and the economy had a bit of growth.

But now let’s look at some bad news.

It won’t surprise anyone to learn that the big spenders in Washington don’t like fiscal discipline.

They don’t like the modest restraint required by the Budget Control Act and they want to repeal or eviscerate the law. And they’ve already enjoyed some success, replacing spending restraint with tax hikes and budget gimmicks back in 2013.

And now there’s pressure for a similar capitulation this year, led by the Committee (gee, what a shocker) that’s in charge of spending money.

An article in Politico captures some of the internal dynamics.

…what should have been a dream job for House Appropriations Chairman Hal Rogers (R-Ky.) has instead become an exercise in frustration. Despite his plum position, Rogers finds himself at odds with GOP leadership… He’s calling for his party to raise strict spending caps he says are choking off necessary funding… But Rogers’ calls for a budget deal have fallen flat.

By the way, it’s not the main point of today’s column, but the article also shows why it was so important to eliminate “earmarks.”

Lawmakers no longer can be bribed to support more spending in exchange for pork-barrel projects.

It’s a reminder of the sway lost by the once powerful appropriations panel, in an age when earmarks are outlawed… The committee, once an aspiration for every lawmaker, is struggling to make its voice heard… appropriator Steve Womack (R-Ark.)…cheered Rogers for “pushing our leaders to the extent that he can” toward a budget accord. “Appropriators are in a tough spot … We just don’t have the grease that we formerly possessed.”

Good. I don’t want big spenders to have “grease” that facilitates a bigger burden of government.

But getting rid of earmarks didn’t win the war. Washington is still filled with lobbyists, bureaucrats, cronies, special interests, and other insiders who want more spending.

They want to bust the spending caps so they can line their pockets at the expense of the American people. Which is why maintaining the BCA caps are a critical test of whether Republicans are sincere about controlling Leviathan.

To understand the importance of the spending caps, here’s a chart from the Center on Budget and Policy Priorities, a left-wing group that supports bigger government. I won’t vouch for their specific numbers since they have an incentive to exaggerate and overstate the amount of fiscal discipline that’s been imposed, but there’s no question that the big spenders have been handcuffed in recent years.

Now that we’ve reviewed why it’s important to have spending caps, let’s talk about the elephant in the room.

There are two reasons why Republicans may sell out. First, as already discussed, some of them are spendaholics. They like bribing voters with other people’s money.

The second reason the GOP may capitulate is that the President and congressional Democrats may force a “government shutdown” fight.

To be more specific, the annual spending (or “appropriations”) bills are supposed to be completed by October 1, which is the start of the new fiscal year.

If President Obama uses his veto pen, which is what most observers expect, there will be a shutdown. And even though previous shutdowns have yielded positive policy changes, Republicans are afraid that they will suffer political blowback.

Given that they won a landslide election in 2014 after the 2013 shutdown (and also prevailed after the 1995 shutdown fight), this skittishness is a bit of a mystery, but the conventional wisdom is that GOPers will capitulate to Obama and agree to a deal that busts the spending caps.

Which would be very unfortunate for the cause of good fiscal policy.

On the issue of big government and spending discipline, I recently appeared on John Stossel’s show, along with my colleague Chris Edwards, while participating in FreedomFest. Here’s what we said about the importance of shrinking Washington to promote freedom and prosperity.

P.S. In this video, Chris and I pontificate at greater length on fiscal policy issues.

P.P.S. While I’m critical of the politicians on the Appropriations Committee, I don’t think they’re necessarily any worse than other lawmakers. As I explained last month when analyzing the bad behavior of politicians who are on the committees that deal with transportation, the system creates a perverse incentive structure to expand government.

P.P.P.S. Here’s some government shutdown humor. And some more at the bottom of this post.

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