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Archive for the ‘Fiscal Policy’ Category

When I tell journalists and politicians that the European fiscal situation is worse today than it was immediately prior to the crisis, they don’t believe me. What about all the spending cuts, they ask? What about the draconian austerity? And the Troika-imposed fiscal restraint?

I tell them it’s mostly been a mirage. It turns out that “austerity” in Europe is simply another way of saying massive tax increases. National governments have boosted tax burdens substantially, but there hasn’t been much spending restraint.

This is a topic I spoke about earlier today at a conference in Prague, which was hosted by the European Conservatives and Reformers bloc of the European Parliament.

My panel’s topic was “Current Challenges to the Transatlantic Partnership” and I focused on economic stagnation and fiscal crisis.

Regarding economic stagnation, I pointed out that there’s very little growth in Europe and substandard growth in the United States.

By itself, that’s a problem but not a crisis.

The crisis (or at least what I argue is a looming crisis) is that Europe’s fiscal situation is worse today than it was when last decade’s fiscal chaos began.

To put this in concrete terms, I crunched the data for both the “eurozone” nations (those using the common currency) and for the overall European Union.

And here are the numbers showing how the burden of government spending has increased in Europe between 2007 and 2015.

At the risk of stating the obvious, there hasn’t been any overall spending restraint on the other side of the Atlantic. This is the chart I will now share with politicians and journalists (as well as anyone else) who is under the illusion that there have been big spending cuts in Europe.

But just as slow growth is a problem rather than a crisis, the same can be said about bigger government. Yes, a larger fiscal burden saps an economy’s vitality and weakens national competitiveness, but it presumably doesn’t by itself produce a crisis.

The crisis, at least if last decade is any indication, materializes when investors decide they don’t want to buy a nation’s government debt because they fear they won’t get repaid (i.e., a default). And that happens when a nation’s debt level is perceived to have reached an unsustainable level when compared to the ability of that country’s economy to generate enough output to support that debt.

And I suspect it’s just a matter of time before Europe experiences another such crisis. Here are the numbers, both for euro-using nations as well as the entire European Union, showing that government debt is substantially higher today than it was at the dawn of last decade’s meltdown.

I should point out that there’s no reason why a crisis need occur. If European governments copied Switzerland and put in place some sort of spending cap (a good one that ensures that the burden of government expanded slower than the private sector), then red ink quickly would fall and investors would be much less fearful of a default.

Unfortunately, all the pressure is in the other direction. Indeed, to the limited degree there was any spending restraint after the last crisis, it has largely evaporated.

A story in the New York Times from two years ago illustrates why the mess in Europe is so intractable.

The reporters who authored the story were correct that there was disagreement between Germany and other nations.

…many of the largest European countries are now rebelling against the German gospel of belt-tightening and demanding more radical steps to reverse their slumping fortunes.

But they naively reported that there were genuine cutbacks and they also believed the silly Keynesian argument that smaller government somehow reduces growth.

…eurozone nations buckled under to German demands to slash budget deficits and roll back public services, and then watched in dismay as unemployment rates shot into the double digits and growth collapsed.

In any event, Europe’s self-styled elite decided on a return to the types of bad policy that led to last decade’s fiscal crisis.

Now, France, Italy and the European Central Bank have coalesced into a bloc against Chancellor Angela Merkel of Germany, and they are insisting that Berlin change course. …France, which has in modern times been Germany’s indispensable partner in European crisis management, is now in near revolt, and President François Hollande has joined forces with Mr. Renzi, who has presented an expansionary 2015 budget that will cut taxes despite pressure from Brussels to meet deficit targets. Mario Draghi, the president of the European Central Bank, has pressed Germany to temper its insistence on budgetary discipline and to spend more on public works to stimulate the eurozone economy. The French have cheered him on

For what it’s worth, I would have been on Merkel’s side if she was actually pushing for meaningful spending restraint.

But that was not the case. She myopically focused on fiscal balance rather than the size of government, which is bad enough since higher taxes are always the first (and second, and third, …) resort of politicians. But to make matters worse, her motives have always been suspect because of fears that she’s mostly concerned about protecting German banks that foolishly lent a lot of money to profligate governments.

Though that presumably shouldn’t be a major concern today since the European Central Bank is now buying lots of government bonds as part of 1) a foolish experiment in monetary Keynesianism, and 2) an indirect bailout of dodgy governments. Any banks with competent management will have used this opportunity to sell their holdings so the risk of sovereign defaults is borne by the general public.

But let’s set aside speculation on Merkel’s motives. All that really matters is that government in Europe is now bigger and more expensive, with lots of additional red ink. And the European Central Bank is helping to build the house of cards even higher.

This won’t end well, though I very much hope my fears are misplaced.

P.S. Anybody who wants to argue that Europe’s fiscal problems can be solved with higher taxes first needs to explain this set of charts.

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Proponents of liberty generally are big fans of federalism. In part, this is simply an issue of “good governance” since both voters and lawmakers at the state and local level are more likely to actually understand the real issues in communities and be able to develop policies that are more sensible.

But we also like federalism because it’s relatively easy for people to move across state and local borders and this means governments have to compete with each other, both in terms of not driving away productive people and also in terms of not attracting those who want to mooch off the government.

The obvious implication is that if we can dramatically shrink the federal government so that it only handles the few (enumerated) powers envisioned by the Founding Fathers, that would give states far more authority to determine tax burdens and the degree of redistribution, and they would presumably do a better job because they would compete with each other for jobs and investment.

This is why I’m always interested when organizations produce rankings that show the degree to which states seem inclined to adopt good policy. For instance, I routinely highlight the findings of the Tax Foundation’s State Business Tax Climate Index so I can see which states have acceptable tax policy. And the Mercatus Center’s Ranking the States by Fiscal Condition is a must-read publication to see which states follow sensible budget policy.

The latest addition to this group is the Cato Institute’s Freedom in the 50 States. It’s a comprehensive publication with lots of data and number-crunching, so wonks will have a field day digging into the details.

But if you simply want the highlights, I first looked to see which states have the best fiscal policy. Here’s the relevant table from the document and I’ve modified it to show which states have no income tax (blue stars), which ones have flat taxes (red stars), and which ones have no sales tax (black stars).

The obvious implication is that having no state income tax is probably the single most important way of controlling the fiscal burden of government.

But fiscal policy is just one variable of economic freedom. And while states obviously don’t have any leeway on monetary policy and trade policy, they have considerable powers over issues related to regulation.

And when you add these factors to the mix, you can get a measure of overall economic freedom.

If you compare these first two tables, there are some predictable similarities (New York and California score poorly while South Dakota, Tennessee, and New Hampshire do well).

But you also get some odd results. Pennsylvania, for instance, is 13th for fiscal policy, but drops to 30th for overall economic policy. I guess this means they are regulatory maniacs.

By contrast, Indiana is ranked a mediocre 26th for fiscal policy, but jumps to 11th place for overall economic policy, which presumably means a very laissez-faire approach to red tape.

Now let’s add personal freedom issues to the equation (issues such as guns, gambling, sex, education, booze, and even fireworks).

The bottom line, if you value overall liberty, is that you better be tolerant of cold weather since New Hampshire and Alaska are atop the rankings. New York is in last place by a comfortable margin.

Interestingly, if you compare the fiscal ranking with the above table for overall freedom, you’ll notice that there’s a lot of overlap. New Hampshire is first in both and New York is last, for instance.

But there are some odd anomalies. Iowa, for example is 9th for overall freedom but only 30th for fiscal freedom, a gap of 21 spots. There’s also a big difference for Kansas, which is 33rd in fiscal freedom but 16th for overall freedom.

Conversely, Texas is 10th for fiscal freedom, but drops to 28th place for overall freedom. And Alabama also has a split personality, ranking 6th for fiscal policy but 23rd for overall freedom.

Why are some states bad on fiscal policy but good on regulation and personal freedom, like Iowa and Kansas? Or, in the case of states like Alabama and Texas, the other way around?

Beats me. Maybe some southern states like controlling people’s lives so long as it doesn’t involve the power of the purse (sort of like Singapore). And maybe some farm states exploit the power of the purse, both otherwise leave people alone (sort of like the Nordic nations).

Here’s something easier to understand, a measure of which states have improved the most and deteriorated the most in the 21st century.

The bad news is that only nine states have moved in the right direction, with Oklahoma easily winning the prize for pro-liberty reforms. Honorable mention to Alaska, Maine, and Idaho.

By the way, is anybody surprised that Illinois is in last place? The dropping scores for Hawaii, New Jersey, and Connecticut also aren’t surprising.

But why have Kentucky, Nebraska, and Tennessee fallen so much?

P.S. Since we’re ranking states, here’s one final bit of information.

I wrote recently to debunk the left’s claim that California is an economic success story. My main point was to share per-capita income data from the BEA to who that California has been losing ground over the medium-term and long-term to states such as Kansas and Texas. And even in the short-term as well if you look at Census Bureau data on median household income.

But some leftists pushed back by arguing that the numbers nonetheless showed higher income levels in California. That’s certainly what we see in both the BEA and Census data, though I would argue that’s actually not relevant unless one (incorrectly) claims that California became a rich state because of big government. As i wrote in that column, “we’re focusing on changes in per-capita income (i.e., which state is enjoying the most growth, regardless of starting point or how much money can buy in that state).”

Speaking of “how much money can buy,” let’s look at some great work from the Tax Foundation on that topic. If you have $100 of income, where will you be able to buy the best basket of goods and services. As you can see, you’re far better off in Texas or (especially) Kansas than in California.

The bottom line is that living standards in Texas and Kansas would be higher than those in California if BEA and Census numbers were adjusted for purchasing power parity (as happens when comparing living standards across nations).

Some people may want to live in California (or some other high-tax state) because of the climate or scenery. They just have to accept lower living standards caused by bigger government. Just like there are certain benefits of living in nations such as France and Italy, but you have to accept bloated government and economic stagnation as part of the package

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I have a love-hate relationship with corporations.

On the plus side, I admire corporations that efficiently and effectively compete by producing valuable goods and services for consumers, and I aggressively defend those firms from politicians who want to impose harmful and destructive forms of taxes, regulation, and intervention.

On the minus side, I am disgusted by corporations that get in bed with politicians to push policies that undermine competition and free markets, and I strongly oppose all forms of cronyism and coercion that give big firms unearned and undeserved wealth.

With this in mind, let’s look at two controversies from the field of corporate taxation, both involving the European Commission (the EC is the Brussels-based bureaucracy that is akin to an executive branch for the European Union).

First, there’s a big fight going on between the U.S. Treasury Department and the EC. As reported by Bloomberg, it’s a battle over whether European governments should be able to impose higher tax burdens on American-domiciled multinationals.

The U.S. is stepping up its effort to convince the European Commission to refrain from hitting Apple Inc. and other companies with demands for possibly billions of euros… In a white paper released Wednesday, the Treasury Department in Washington said the Brussels-based commission is taking on the role of a “supra-national tax authority” that has the scope to threaten global tax reform deals. …The commission has initiated investigations into tax rulings that Apple, Starbucks Corp., Amazon.com Inc. and Fiat Chrysler Automobiles NV. received in separate EU nations. U.S. Treasury Secretary Jacob J. Lew has written previously that the investigations appear “to be targeting U.S. companies disproportionately.” The commission’s spokesman said Wednesday that EU law “applies to all companies operating in Europe — there is no bias against U.S. companies.”

As you can imagine, I have a number of thoughts about this spat.

  • First, don’t give the Obama Administration too much credit for being on the right side of the issue. The Treasury Department is motivated in large part by a concern that higher taxes imposed by European governments would mean less ability to collect tax by the U.S. government.
  • Second, complaints by the US about a “supra-national tax authority” are extremely hypocritical since the Obama White House has signed the Protocol to the Multilateral Convention on Mutual Administrative Assistance in Tax Matters, which effectively would create a nascent World Tax Organization (the pact is thankfully being blocked by Senator Rand Paul).
  • Third, hypocrisy by the US doesn’t change the fact that the European Commission bureaucrats are in the wrong because their argument is based on the upside-down notion that low tax burdens are a form of “state aid.”
  • Fourth, Europeans are in the wrong because the various national governments should simply adjust their “transfer pricing” rules if they think multinational companies are playing games to under-state profits in high-tax nations and over-state profits in low-tax nations.
  • Fifth, the Europeans are in the wrong because low corporate tax rates are the best way to curtail unproductive forms of tax avoidance.
  • Sixth, some European nations are in the wrong if they don’t allow domestic companies to enjoy the low tax rates imposed on multinational firms.

Since we’re on the topic of corporate tax rates and the European Commission, let’s shift from Brussels to Geneva and see an example of good tax policy in action. Here are some excerpts from a Bloomberg report about how a Swiss canton is responding in the right way to an attack by the EC.

When the European Union pressured Switzerland to scrap tax breaks for foreign companies, Geneva had most to lose. Now, the canton that’s home to almost 1,000 multinationals is set to use tax to burnish its appeal. Geneva will on Aug. 30 propose cutting its corporate tax rate to 13.49 percent from 24.2 percent…the new regime will improve the Swiss city’s competitive position, according to Credit Suisse Group AG. “I could see Geneva going up very high in the ranks,” said Thierry Boitelle, a lawyer at Bonnard Lawson in the city. …A rate of about 13 percent would see Geneva jump 13 places to become the third-most attractive of Switzerland’s 26 cantons.

This puts a big smile on my face.

Geneva is basically doing the same thing Ireland did many years ago when it also was attacked by Brussels for having a very low tax rate on multinational firms while taxing domestic firms at a higher rate.

The Irish responded to the assault by implementing a very low rate for all businesses, regardless of whether they were local firms or global firms. And the Irish economy benefited immensely.

Now it’s happening again, which must be very irritating for the bureaucrats in Brussels since the attack on Geneva (just like the attack on Ireland) was designed to force tax rates higher rather than lower.

As a consequence, in one fell swoop, Geneva will now be one of the most competitive cantons in Switzerland.

Here’s another reason I’m smiling.

The Geneva reform will put even more pressure on the tax-loving French.

France, which borders the canton to the south, east and west, has a tax rate of 33.33 percent… Within Europe, Geneva’s rate would only exceed a number of smaller economies such as Ireland’s 12.5 percent and Montenegro, which has the region’s lowest rate of 9 percent. That will mean Geneva competes with Ireland, the Netherlands and the U.K. as a low-tax jurisdiction.

Though the lower tax rate in Geneva is not a sure thing.

We’ll have to see if local politicians follow through on this announcement. And there also may be a challenge from left-wing voters, something made possible by Switzerland’s model of direct democracy.

Opposition to the new rate from left-leaning political parties will probably trigger a referendum as it would only require 500 signatures.

Though I suspect the “sensible Swiss” of Geneva will vote the right way, at least if the results from an adjoining canton are any indication.

In a March plebiscite in the neighboring canton of Vaud, 87.1 percent of voters backed cutting the corporate tax rate to 13.79 percent from 21.65 percent.

So I fully expect voters in Geneva will make a similarly wise choice, especially since they are smart enough to realize that high tax rates won’t collect much money if the geese with the golden eggs fly away.

Failure to agree on a competitive tax rate in Geneva could result in an exodus of multinationals, cutting cantonal revenues by an even greater margin, said Denis Berdoz, a partner at Baker & McKenzie in Geneva, who specializes in tax and corporate law. “They don’t really have a choice,” said Berdoz. “If the companies leave, the loss could be much higher.”

In other words, the Laffer Curve exists.

Now let’s understand why the development in Geneva is a good thing (and why the EC effort to impose higher taxes on US-based multinational is a bad thing).

Simply stated, high corporate tax burdens are bad for workers and the overall economy.

In a recent column for the Wall Street Journal, Kevin Hassett and Aparna Mathur of the American Enterprise Institute consider the benefits of a less punitive corporate tax system.

They start with the theoretical case.

If the next president has a plan to increase wages that is based on well-documented and widely accepted empirical evidence, he should have little trouble finding bipartisan support. …Fortunately, such a plan exists. …both parties should unite and demand a cut in corporate tax rates. The economic theory behind this proposition is uncontroversial. More productive workers earn higher wages. Workers become more productive when they acquire better skills or have better tools. Lower corporate rates create the right incentives for firms to give workers better tools.

Then they unload a wealth of empirical evidence.

What proof is there that lower corporate rates equal higher wages? Quite a lot. In 2006 we co-wrote the first empirical study on the direct link between corporate taxes and manufacturing wages. …Our empirical analysis, which used data we gathered on international tax rates and manufacturing wages in 72 countries over 22 years, confirmed that the corporate tax is for the most part paid by workers. …There has since been a profusion of research that confirms that workers suffer when corporate tax rates are higher. In a 2007 paper Federal Reserve economist Alison Felix used data from the Luxembourg Income Study, which tracks individual incomes across 30 countries, to show that a 10% increase in corporate tax rates reduces wages by about 7%. In a 2009 paper Ms. Felix found similar patterns across the U.S., where states with higher corporate tax rates have significantly lower wages. …Harvard University economists Mihir Desai, Fritz Foley and Michigan’s James R. Hines have studied data from American multinational firms, finding that their foreign affiliates tend to pay significantly higher wages in countries with lower corporate tax rates. A study by Nadja Dwenger, Pia Rattenhuber and Viktor Steiner found similar patterns across German regions… Canadian economists Kenneth McKenzie and Ergete Ferede. They found that wages in Canadian provinces drop by more than a dollar when corporate tax revenue is increased by a dollar.

So what’s the moral of the story?

It’s very simple.

…higher wages are relatively easy to stimulate for a nation. One need only cut corporate tax rates. Left and right leaning countries have done this over the past two decades, including Japan, Canada and Germany. Yet in the U.S. we continue to undermine wage growth with the highest corporate tax rate in the developed world.

The Tax Foundation echoes this analysis, noting that even the Paris-based OECD has acknowledged that corporate taxes are especially destructive on a per-dollar-raised basis.

In a landmark 2008 study Tax and Economic Growth, economists at the Organization for Economic Cooperation and Development (OECD) determined that the corporate income tax is the most harmful tax for economic growth. …The study also found that statutory corporate tax rates have a negative effect on firms that are in the “process of catching up with the productivity performance of the best practice firms.” This suggests that “lowering statutory corporate tax rates can lead to particularly large productivity gains in firms that are dynamic and profitable, i.e. those that can make the largest contribution to GDP growth.”

Sadly, there’s often a gap between the analysis of the professional economists at the OECD and the work of the left-leaning policy-making divisions of that international bureaucracy.

The OECD has been a long-time advocate of schemes to curtail tax competition and in recent years even has concocted a “base erosion and profit shifting” initiative designed to boost the tax burden on businesses.

In a study for the Institute for Research in Economic and Fiscal Issues (also based, coincidentally, in Paris), Pierre Bessard and Fabio Cappelletti analyze the harmful impact of corporate taxation and the unhelpful role of the OECD.

…the latest years have been marked by an abundance of proposals to reform national tax codes to patch these alleged “loopholes”. Among them, the Base Erosion and Profit Shifting package (BEPS) of the Organization for Economic Cooperation and Development (OECD) is the most alarming one because of its global ambition. …The OECD thereby assumes, without any substantiation, that the corporate income tax is both just and an efficient way for governments to collect revenue.

Pierre and Fabio point out that the OECD’s campaign to impose heavier taxes on business is actually just a back-door way of imposing a higher burden on individuals.

…the whole value created by corporations is sooner or later transferred to various individuals, may it be as dividends (for owners and shareholders), interest payments (for lenders), wages (for employees) and payments for the provided goods and services (for suppliers). Second, corporations as such do not pay taxes. …at the end of the day the burden of any tax levied on them has to be carried by an individual.

This doesn’t necessarily mean there shouldn’t be a corporate tax (in nations that decide to tax income). After all, it is administratively simpler to tax a company than to track down potentially thousands – or even hundreds of thousands – of shareholders.

But it’s rather important to consider the structure of the corporate tax system. Is it a simple system that taxes economic activity only one time based on cash flow? Or does it have various warts, such as double taxation and deprecation, that effectively result in much higher tax rates on productive behavior?

Most nations unfortunately go with the latter approach (with place such as Estonia and Hong Kong being admirable exceptions). And that’s why, as Pierre and Fabio explain, the corporate income tax is especially harmful.

…the general consensus is that the cost per dollar of raising revenue through the corporate income tax is much higher than the cost per dollar of raising revenue through the personal income tax… This is due to the corporate income tax generating additional distortions. … Calls by the OECD and other bodies to standardize corporate tax rules and increase tax revenue in high-tax countries in effect would equate to calls for higher prices for consumers, lower wages for workers and lower returns for pension funds. Corporate taxes also depress available capital for investment and therefore productivity and wage growth, holding back purchasing power. In addition, the deadweight losses arising from corporate income taxation are particularly high. They include lobbying for preferential rates and treatments, diverting attention and resources from production and wealth creation, and distorting decisions in corporate financing and the choice of organizational form.

From my perspective, the key takeaway is that income taxes are always bad for prosperity, but the real question is whether they somewhat harmful or very harmful. So let’s close with some very depressing news about how America’s system ranks in that regard.

The Tax Foundation has just produced a very helpful map showing corporate tax rates around the world. All you need to know about the American system is that dark green is very bad (i.e., a corporate tax rate that is way above the average) and dark blue is very good.

And to make matters worse, the high tax rate is just part of the problem. A German think tank produced a study that looked at other major features of business taxation and concluded that the United States ranked #94 out of 100 nations.

It would be bad to have a high rate with a Hong Kong-designed corporate tax structure. But we have something far worse, a high rate with what could be considered a French-designed corporate tax structure.

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It’s not a big day for normal people, but today is exciting for fiscal policy wonks because the Congressional Budget Office has released its new 10-year forecast of how much revenue Uncle Sam will collect based on current law and how much the burden of government spending will expand if policy is left on auto-pilot.

Most observers will probably focus on the fact that budget deficits are projected to grow rapidly in future years, reaching $1 trillion in 2024.

That’s not welcome news, though I think it’s far more important to focus on the disease of too much spending rather than the symptom of red ink.

But let’s temporarily set that issue aside because the really big news from the CBO report is that we have new evidence that it’s actually very simple to balance the budget without tax increases.

According to CBO’s new forecast, federal tax revenue is projected to grow by an average of 4.3 percent each year, which means receipts will jump from 3.28 trillion this year to $4.99 trillion in 2026.

And since federal spending this year is estimated to be $3.87 trillion, we can make some simple calculation about the amount of fiscal discipline needed to balance the budget.

A spending freeze would balance the budget by 2020. But for those who want to let government grow at 2 percent annually (equal to CBO’s projection for inflation), the budget is balanced by 2024.

So here’s the choice in front of the American people. Either allow spending to grow on autopilot, which would mean a return to trillion dollar-plus deficits within eight years. Or limit spending so it grows at the rate of inflation, which would balance the budget in eight years.

Seems like an obvious choice.

By the way, when I crunched the CBO numbers back in 2010, they showed that it would take 10 years to balance the budget if federal spending grew 2 percent per year.

So why, today, can we balance the budget faster if spending grows 2 percent annually?

For the simple reason that all those fights earlier this decade about debt limits, government shutdowns, spending caps, and sequestration actually produced a meaningful victory for advocates of spending restraint. The net result of those budget battles was a five-year nominal spending freeze.

In other words, Congress actually out-performed my hopes and expectations (probably the only time in my life I will write that sentence).*

Here’s a video I narrated on this topic of spending restraint and fiscal balance back in 2010.

Everything I said back then is still true, other than simply adjusting the numbers to reflect a new forecast.

The bottom line is that modest spending restraint is all that’s needed to balance the budget.

That being said, I can’t resist pointing out that eliminating the deficit should not be our primary goal. It’s not good to have red ink, to be sure, but the more important goal should be to reduce the burden of federal spending.

That’s why I keep promoting my Golden Rule. If government grows slower than the private sector, that means the burden of spending (measured as a share of GDP) will decline over time.

And it’s why I’m a monomaniacal advocate of spending caps rather than a conventional balanced budget amendment. If you directly address the underlying disease of excessive government, you’ll automatically eliminate the symptom of government borrowing.

Which is why I very much enjoy sharing this chart whenever I’m debating one of my statist friends. It shows all the nations that have enjoyed great success with multi-year periods of spending restraint.

During these periods of fiscal responsibility, the burden of government falls as a share of economic output and deficits also decline as a share of GDP.

I then ask my leftist pals to show a similar table of countries that have gotten good results by raising taxes.

As you can imagine, that’s when there’s an uncomfortable silence in the room, perhaps because the European evidence very clearly shows that higher taxes lead to bigger government and more red ink (I also get a response of silence when I issue my challenge for statists to identify a single success story of big government).

*Congress has reverted to (bad) form, voting last year to weaken spending caps.

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Remember Bill Murray’s Groundhog Day, the 1993 comedy classic about a weatherman who experiences the same day over and over again?

Well, the same thing is happening in Japan. But instead of a person waking up and reliving the same day, we get politicians pursuing the same failed Keynesian stimulus policies over and over again.

The entire country has become a parody of Keynesian economics. Yet the politicians make Obama seem like a fiscal conservative by comparison. They keep doubling down on the same approach, regardless of all previous failures.

The Wall Street Journal reports on the details of the latest Keynesian binge.

Japan’s cabinet approved a government stimulus package that includes ¥7.5 trillion ($73 billion) in new spending, in the latest effort by Prime Minister Shinzo Abe to jump-start the nation’s sluggish economy. The spending program, which has a total value of ¥28 trillion over several years, represents…an attempt to breathe new life into the Japanese economy… The government will pump money into infrastructure projects… The government will provide cash handouts of ¥15,000, or about $147, each to 22 million low-income people… Other items in the package included interest-free loans for infrastructure projects…and new hotels for foreign tourists.

As already noted, this is just the latest in a long line of failed stimulus schemes.

The WSJ story includes this chart showing what’s happened just since 2008.

And if you go back farther in time, you’ll see that the Japanese version of Groundhog Day has been playing since the early 1990s.

Here’s a list, taken from a presentation at the IMF, of so-called stimulus plans adopted by various Japanese governments between 1992-2008.

And here’s my contribution to the discussion. I went to the IMF’s World Economic Outlook database and downloaded the numbers on government borrowing, government debt, and per-capita GDP growth.

I wanted to see how much deficit spending there was and what the impact was on debt and the economy. As you can see, red ink skyrocketed while the private economy stagnated.

Though we shouldn’t be surprised. Keynesian economics didn’t work for Hoover and Roosevelt, or Bush and Obama, so why expect it to work in another country.

By the way, I can’t resist making a comment on this excerpt from a CNBC report on Japan’s new stimulus scheme.

Abe ordered his government last month to craft a stimulus plan to revive an economy dogged by weak consumption, despite three years of his “Abenomics” mix of extremely accommodative monetary policy, flexible spending and structural reform promises.

In the interest of accuracy, the reporter should have replaced “despite” with “because of.”

In addition to lots of misguided Keynesian fiscal policy, there’s been a radical form of Keynesian monetary policy from the Bank of Japan.

Here are some passages from a very sobering Bloomberg report about the central bank’s burgeoning ownership of private companies.

Already a top-five owner of 81 companies in Japan’s Nikkei 225 Stock Average, the BOJ is on course to become the No. 1 shareholder in 55 of those firms by the end of next year…. BOJ Governor Haruhiko Kuroda almost doubled his annual ETF buying target last month, adding to an unprecedented campaign to revitalize Japan’s stagnant economy. …opponents say the central bank is artificially inflating equity valuations and undercutting efforts to make public companies more efficient. …the monetary authority’s outsized presence will make some shares harder to buy and sell, a phenomenon that led to convulsions in Japan’s government bond market this year. …the BOJ doesn’t acquire individual shares directly, it’s the ultimate buyer of stakes purchased through ETFs. …investors worry that BOJ purchases could give a free ride to poorly-run firms and crowd out shareholders who would otherwise push for better corporate governance.

Wow. I don’t pretend to be an expert on monetary economics, but I can’t image that there will be a happy ending to this story.

Just in case you’re not sufficiently depressed about Japan’s economic outlook, keep in mind that the nation also is entering a demographic crisis, as reported by the L.A. Times.

All across Japan, aging villages such as Hara-izumi have been quietly hollowing out for years… Japan’s population crested around 2010 with 128 million people and has since lost about 900,000 residents, last year’s census confirmed. Now, the country has begun a white-knuckle ride in which it will shed about one-third of its population — 40 million people — by 2060, experts predict. In 30 years, 39% of Japan’s population will be 65 or older.

The effects already are being felt, and this is merely the beginning of the demographic wave.

Police and firefighters are grappling with the safety hazards of a growing number of vacant buildings. Transportation authorities are discussing which roads and bus lines are worth maintaining and cutting those they can no longer justify. …Each year, the nation is shuttering 500 schools. …In Hara-izumi, …The village’s population has become so sparse that wild bears, boars and deer are roaming the streets with increasing frequency.

Needless to say (but I’ll say it anyhow), even modest-sized welfare states eventually collapse when you wind up with too few workers trying to support an ever-growing number of recipients.

Now maybe you can understand why I’ve referred to Japan as a basket case.

P.S. You hopefully won’t be surprised to learn that Japanese politicians are getting plenty of bad advice from the fiscal pyromaniacs at the IMF and OECD.

P.P.S. Maybe I’m just stereotyping, but I’ve always assumed the Japanese were sensible people, even if they have a bloated and wasteful government. But when you look at that nation’s contribution to the stupidest-regulation contest and the country’s entry in the government-incompetence contest, I wonder whether the Japanese have some as-yet-undiscovered genetic link to Greece?

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I’ve written (some would say excessively) about the fact that America has too many bureaucrats and that they’re paid too much.

That’s true in Washington. That’s true at the state level. And it’s true for local governments.

But since I’m a big believer in beating a dead horse, let’s revisit this issue. We’ll narrow our focus today and look solely at the issue of retirement benefits for state and local bureaucrats.

Why? Because, as explained by Andrew Biggs of the American Enterprise Institute, the unfunded liability for these schemes has mushroomed into a giant $5 trillion problem.

If the Actuarial Standards Board enacts recommendations from its Pension Task Force, actuarial valuations for state and local government pensions will report unfunded liabilities of over $5 trillion and funding ratios of just 39 percent. The public pensions industry will hate it, but those figures are the best available measures of the costs of public employee retirement plans. …That $5.2 trillion is the number most economists would think is most relevant to considering the costs of public sector pensions. …The simple reality is that public pension underfunding is a significant problem that can only really be addressed by increasing contributions or by lower pension benefits, choices that pretty much everyone involved in the pension world would prefer to avoid.

You won’t be surprised to learn that some states are more irresponsible than others.

CNBC reports that Nebraska is the most prudent and Alaska is the worst (politicians can’t resist squandering oil revenue). Several blue states rank poorly (think Illinois, Connecticut, California, and New Jersey), but there also are red states (such as Louisiana and Kentucky) that have made very foolish promises.

In Nebraska, for example, the pension liability amounts to about $386 per person, the lowest in the nation. That compares with Alaska ($19,394 per person: the highest in the country), Illinois ($15,158 per person) and Connecticut ($14,769). The average pension shortfall in 2014 amounted to $4,383.

The Wall Street Journal has an interactive table that allows readers to see which states have the biggest shortfall.

Meanwhile, Governing has an interactive map showing which states have the biggest gaps.

In other words, state and local bureaucrats have been promised a lot of money when they retire.

Much more money than is available.

And when you add Social Security benefits to the mix, as Andrew Biggs has calculated, you wind up having lots of bureaucrats enjoying very lavish levels of retirement income.

I tabulated the pension benefits paid to full-career “regular” state government employees (meaning, non-public safety) retiring in 2012. For states in which public employees participated in Social Security, I estimated the Social Security benefit the retiree would be eligible to receive. And finally, I compared total retirement benefits to the worker’s earnings immediately preceding retirement. …Mississippi paying the lowest replacement rate of 54% of final earnings. …West Virginia paid the most generous benefits, equal to 115% of final earnings, followed by New Mexico (113%), Oregon (105%), California (102%) and, yes, conservative Texas (101%).

Here’s a map that accompanied the article.

But maybe big numbers, maps and tables are too abstract.

To give some examples of how this is leading to a fiscal crisis, consider these recent news reports.

A story from the Las Vegas Review-Journal:

Nevadans should brace for reduced services, higher taxes or both — the necessary consequence of the Public Employee Retirement System of Nevada (PERS) having badly missed its investment target last year…PERS has now missed its target over the past five, 10, 15, 20 and 25 years — suggesting that another taxpayer-rate hike is on its way. Remarkably, this shortfall has occurred even though markets have nearly tripled from their 2009 lows, and currently sit at or near all-time highs. Nevada’s soaring pension costs — ranked third-highest in the nation at 9.8 percent of own-source revenue, according to 2013 data from the Public Plans Database — aren’t just due to overly optimistic investment assumptions, however. Another factor is the extraordinarily generous nature of the benefits.

A column from the Orange County Register:

…in the world of public sector pensions – among the biggest institutional investors in global markets – politicians…pretend they can count on big investment returns every year, while disregarding warning signs, mounting debts and increasingly unsustainable pension systems. We’re seeing the latest pension fund returns come in, and almost uniformly, it was a terrible year for states – and thus taxpayers. The California Public Employees’ Retirement System, the largest U.S. public pension fund, logged a paltry annual return of 0.6 percent. …CalPERS is currently only 76 percent funded, a figure that will inevitably drop given the latest weak returns.

A report from the Portland Tribune:

Oregon’s major business groups want lawmakers to start dealing with rising public pension costs as early as the session that opens Feb. 1. Although those costs start to kick in with the 2017-19 budget cycle — 18 months away — advocates say it’s not too early to whittle down an unfunded liability projected at $18 billion over the next few decades. …projected increases in contributions to PERS, which covers about 95 percent of Oregon’s public workers, will eat deeply into what they can spend over the next several two-year budget cycles. Cheri Helt, co-chair of the Bend-La Pine School Board, says pension costs will jump from the current 16 percent of payroll to 20 percent in 2017-19, and to 25 percent in the cycle afterward. …Jamie Moffitt, vice president and chief financial officer for the University of Oregon, says rising pension costs will eat up 40 percent — about 2 percentage points — of the 5.5 percent average annual increase in tuition.

An editorial about New Jersey in the Wall Street Journal:

New Jersey’s Senate president is in a Brando-like fight with government unions that he says are trying to extort or bribe legislators into doing their bidding. …At issue is the woefully underfunded state pension system. The teachers union wants to put a measure on the November ballot to amend the state constitution to require quarterly state pension payments of increasing amounts. …government unions have so much political sway over politicians that they often call the shots on their own pensions and benefits. …New Jersey’s public pensions are underfunded to the tune of $82 billion. Thomas Healey of the state’s bipartisan Pension and Health Benefit Study Commission notes that pensions and health care now eat up 11% of New Jersey’s budget, and without reform this will grow to 28% by 2025. …The pension commission has proposed reforms—including a shift to a hybrid retirement plan that includes features more akin to a 401(k)—but unions have blocked them. They now want voters to rewrite the state constitution so pension reform would be all but impossible.

A column about the corrupt system in Illinois:

Illinois’s government, says [Gov.] Rauner, “is run for the benefit of its employees.” Increasingly, it is run for their benefit when they retire. Pension promises [are] unfunded by at least $113 billion… The government is so thoroughly unionized (22 unions represent almost all government employees), that “I can’t,” Rauner says, “turn on a light switch without permission.” He exaggerates, somewhat, but the process of trying to fire someone is a career, not an option. …high-tax Illinois will continue bleeding population and businesses, but with one contented cohort — the Democratic political class, for whom the system is working quite well.

The crux of the problem is that most state and local governments have “defined-benefit” plans for bureaucrats, which means that taxpayers are on the hook to provide retiring bureaucrats a specific amount of benefits (not just retirement income, but other goodies such as health care) based on formulas that count years in the workforce, highest salary levels, and other factors. That may not sound totally unreasonable, but politicians realize they can buy votes by cutting deals with government unions and providing retirement benefits that are extremely generous, especially compared to what’s available for workers in the private sector.

But that’s simply one part of the problem. The other part of the problem is the employers with defined-benefit plans (usually referred to as “DB plans”) are supposed to set aside money in investment funds so that there’s a growing pool of assets that can be used to pay for the lavish benefits promised to the bureaucracy. But as we’ve already learned, politicians often are reluctant to take this step. They like committing lots of future money to bureaucrats, but when putting together annual budgets, they generally can buy more votes by allocating money to things like schools and roads rather than depositing money into a pension fund.

So the net result is that there’s a big unfunded liability, meaning that the amount that politicians have promised to give bureaucrats is larger than what’s set aside in the pension funds. And to make matters worse, the pension funds usually have dodgy accounting (they assume the investments will earn more money than is realistic). Which is why the actual shortfall is about $5.2 trillion, as noted above.

Given this ticking time bomb, some of you may be wondering why the title says there’s a libertarian quandary. Surely the answer is to cauterize this fiscal wound with immediate cuts and to avoid an even bigger long-run disaster by shifting newly hired bureaucrats to a defined-contribution system such as IRAs or 401(k)s. This type of reform automatically eliminates any liability for taxpayers since retirement benefits for bureaucrats would be solely a function of contributions to retirement accounts and the investment performance of those funds (most state and local bureaucrats also are part of the Social Security system).

Yes, that is the answer, but the quandary (to add to my collection) is whether the federal government should force, or even encourage, this type of reform. Don’t state and local governments, after all, have the right to make stupid decisions?

Writing for the Wall Street Journal, Ed Bachrach argues that Uncle Sam should limit these suicidal policies.

The pensions of states and local governments are, collectively, trillions of dollars in the hole. This debt is crippling budgets and will dump an enormous burden on future generations. Yet state and local politicians have proven that they cannot, or will not, solve the problem. The federal government ought to step in. But how? Instead of bailing out these pensions, Congress should pass a law allowing states and local governments to reduce promised benefits—something that is now illegal under some states’ statutes or constitutions. …Many pensions allow retirement at age 55; states and local governments could mandate that benefits cannot be drawn until age 65. Payments could be capped at 150% of the median income in the local jurisdiction. Automatic cost-of-living increases that now exceed expected inflation could instead be tied to increases in the median income. …Local governments must also be required to terminate their defined-benefit plans. These should be replaced with defined-contribution plans, like 401(k)s or 403(b)s… Rep. Devin Nunes (R., Calif.) proposed withholding federal aid to government entities that don’t accurately report pension funding. That would be a step forward but would not solve the problem of underfunding.

I obviously agree that there should be no bailouts, but I’m still not convinced that Washington should mandate good policy by state and local governments.

Federalism means the freedom to adopt good policy…but also the leeway to commit fiscal suicide.

Though Andrew Biggs points out that the part about accurate reporting certainly sounds reasonable.

Congress has a tremendous opportunity to require state and local government employee pension plans to accurately disclose their multi-trillion dollar unfunded liabilities. …For years, economists and government agencies like the Congressional Budget Office have called for so-called “fair market valuation,” which both more accurately calculates the value of public pension liabilities and accurately tells those plans that taking more investment risk doesn’t make their plans cheaper. …there’s legislative language already written: Rep. Devin Nunes’s Public Employee Pension Transparency Act (PEPTA), which has a number of Congressional co-sponsors including House Speaker Paul Ryan, would require state and local plans to accurately disclose their liabilities using fair market valuation. The federal government would respect state and local rights by not forcing any changes to how pensions are funded, but Nunes’s plan would require that state and local governments to tell the public – including people thinking of purchasing municipal bonds – how much they really owe to their pensions.

P.S. By the way, advocates of limited government don’t experience many victories, but there actually was a very good reform of the pension system for federal bureaucrats during the Reagan years. Yes, federal bureaucrats are still over-compensated, but it’s not nearly as bad as it used to be. Yet another example of how Reaganomics was a success.

P.P.S. Shifting to bad news (or laughable news), the hacks in California tried to argue that lavish pensions for bureaucrats boost the economy. Andrew Biggs does a great job of debunking this nonsense.

The California Public Employee Retirement System (CalPERS) issued a report in July claiming that its benefit payments to retired government employees in 2013-2014 “supported 104,974 jobs throughout California and generated more than $15.6 billion in additional economic output.” …To reduce pension benefits for public employees, the study implies, would harm the overall California economy. …This study is nothing short of propaganda that wouldn’t get a passing grade in a freshman economics course. …the CalPERS study lacks one important component, called “counting both sides of the equation.” It needs to count economic costs as well as economic benefits. …CalPERS doesn’t create money out of thin air. Every single dollar of CalPERS benefits comes from a dollar that taxpayers or government employees contributed to the program or from the interest earned on those contributions.

Sounds like the bureaucrats at CalPERS should be working for the Congressional Budget Office.

P.P.P.S. The focus of this column is on the inherent instability of defined-benefit pension plans for bureaucrats, but let’s not lose sight of the fact that the underlying issue is that bureaucrats are ripping off taxpayers. Here are some blurbs from a Reason report by Eric Boehm on how this scam works in California.

If public service truly is a sacrifice, then join me in shedding a tear for the 20,900 public workers in California who pulled down more than $100,000 in retirement benefits during 2015. …Leading the way for 2015 was Michael Johnson. The former Solano County administrator received a $388,407 pension last year. …Rounding out the top three are Stephen Maguin, a former Los Angeles County Sanitation District general manager who pulled down $340,811 in 2015 and Joaquin Fuster, a former UCLA professor who got a pension worth $338,412 last year. …Curtis Bowden, a former member of the California Highway Patrol…retired all the way back in 1947, which means he’s been collecting pension checks for 68 years, after working just 5.3 years for the state. He got $24,800 from CalPERS in 2015.

Wow, I’m not sure what’s more impressive, Getting an annual pension of nearly $400K after being a country bureaucrat or working for just a bit over five years and getting 68 years worth of retirement checks?

Seems like both of them should be part of the Bureaucrat Hall of Fame.

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I don’t like election years because the policy debate tends to revolve around the various proposals put forth by candidates. And since those ideas generally don’t make much sense, it’s a frustrating period.

But the silver lining to that dark cloud is that it does create opportunities to comment on what the candidates are saying…and hopefully steer the discussion in a more productive direction.

For instance, I just authored a column about Trump’s plan for Time. I pointed out what’s good (such as a lower corporate rate and death tax repeal), what’s bad (pork-barrel infrastructure and a whiff on entitlement reform), and what’s ugly (protectionism and a new loophole for childcare costs).

But my biggest complaint, which was part of the “bad” section, dealt with Trump’s failure to produce any plan to control the size of government. And echoing a point I made late last year, a big tax cut simply isn’t viable unless it’s accompanied by a credible proposal to rein in Leviathan.

It will be very hard to have a tax cut of any size unless Trump also has some sort of plan to limit the growth of government spending. Unfortunately, outside of vague rhetoric about “waste, fraud, and abuse,” it’s unclear that he is serious about the spending side of the fiscal ledger.

I also made similar points in this CNBC interview, which covered all of the main features of Trump’s economic agenda.

You’ll notice in the interview that I said Trump should propose some sort of spending cap.

Well, maybe my wish will be granted. A story published by Bloomberg looks at Trump’s flirtation with a specific form of spending cap known as the Penny Plan.

Donald Trump on Tuesday revisited a budget-trimming measure called the “penny plan” in response to fresh questions about how he’d finance his agenda. “Well, we’re cutting back, I mean whether it’s a penny plan—which is something that, as simple as it is, I’ve always sort of liked,” the Republican presidential nominee said on Fox Business… Trump remained short on further specifics about how he’d pay for his proposals.

But let’s say he goes beyond sympathetic comments and actually embraces the Penny Plan. The article gives some detail of the proposal.

In variations of the “penny plan,” …one cent is cut per dollar in the federal budget over a period of six or seven years and a spending cap is imposed until the budget is balanced. Different programs can see greater than 1 percent cuts—or no cuts—as long as overall spending is reduced by 1 percent each year… The math generally works out, the nonpartisan fact-checking website PolitiFact found in 2012 when analyzing a Republican lawmaker’s version of the proposal.

And for further detail, Justin Bogie and Romina Boccia have a column in the Daily Signal.

Last week, a House Budget Committee member, Rep. Mark Sanford, R-S.C., and the Senate Budget Committee chairman, Sen. Mike Enzi, R-Wyo., introduced the “Penny Plan,” which would implement an aggregate spending cap beginning in 2017 and “would cut a single penny from every dollar the federal government spends.” Under this plan, for fiscal year 2017, the cap would be $3.6 trillion for total noninterest outlays minus 1 percent. For each subsequent year through 2021, outlays would be capped at the previous year’s level (not including net interest payments) minus 1 percent.

Wow, this is hard-core spending restraint.

I have written favorably about the Penny Plan, but I normally promote the Swiss Debt Brake, which is a spending cap that has allowed government spending to grow each year by an average of 2 percent.

I must be a big-government squish!

Here are more details on the Penny Plan. Most important, it is enforced by sequestration.

…spending reductions necessary to arrive at the capped level would be enforced by sequestration. Unlike the current form of sequestration applied to the Budget Control Act spending caps, the Penny Plan would not exempt any of the programs listed under the Balanced Budget and Emergency Deficit Control Act of 1985, except payments for net interest. …Spending caps, enforced with automatic cuts, serve to motivate Congress to prioritize among competing demands for resources. Designed properly, caps can curb excessive spending growth over the long run.

The bottom line, according to Bogie and Boccia, is that a sequester-enforced spending cap is critical for good long-run fiscal policy.

The Penny Plan takes a step toward consideration of a statutory spending cap to limit the growth in government and improve the nation’s fiscal course. Congress must put the country’s budget on a sustainable path to secure prosperity for current and future generations, and a spending cap is one important tool to get there.

My bottom line is similar. I’m a huge fan of spending caps (which have a much better track record than balanced budget requirements).

The key is to make sure that government grows slower than the private sector. And the more spending is restrained (especially if it’s actually cut 1 percent each year), the quicker and better the results.

There’s lots of evidence of nations getting good results when they cap spending. I don’t know if Donald Trump is serious about a spending cap (or whether he’s serious about the policies needed to make sure overall spending stays within a cap), but I know it’s the right policy.

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