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Archive for the ‘Government Spending’ Category

The good news is that the election season is almost over. The bad news is that we’ll have a president next year who does not embrace classical liberal principles of free markets and social tolerance.

But that doesn’t mean Trump and Biden are equally bad. Depending on what issues you think are most important, they’re not equally bad in what they say. And, because politicians often make insincere promises, they’re not equally bad in what they’ll actually do.

Regarding Trump, we have a track record. We know he’s pro-market on some issues (taxes and red tape) and we know he’s anti-market on other issues (spending and trade).

Regarding Biden, we have his track record in the United States Senate, where he routinely voted to expand the burden of government.

But we also have his presidential platform. And that’s the topic for today’s column. We’re going to review the major economic analyses that have been conducted on his proposals.

We’ll start with a report from Moody’s Analytics, authored by Mark Zandi and Bernard Yaros, which compares the economic impacts of the Trump and Biden agendas.

The economic outlook is strongest under the scenario in which Biden and the Democrats sweep Congress and fully adopt their economic agenda. In this scenario, the economy is expected to create 18.6 million jobs during Biden’s term as president, and the economy returns to full employment, with unemployment of just over 4%, by the second half of 2022. During Biden’s presidency, the average American household’s real after-tax income increases by approximately $4,800, and the homeownership rate and house prices increase modestly. Stock prices also rise, but the gains are limited. …Near-term economic growth is lifted by Biden’s aggressive government spending plans, which are deficit-financed in significant part. …Greater government spending adds directly to GDP and jobs, while the higher tax burden has an indirect impact through business investment and the spending and saving behavior of high-income households. …The economic outlook is weakest under the scenario in which Trump and the Republicans sweep Congress and fully adopt their economic agenda. …Trump has proposed much less expansive support to the economy from tax and spending policies.

Here’s the most relevant set of graphs from the report.

The Moody’s study is an outlier, however. Most other comprehensive analyses are less favorable to Biden.

For instance, a study for the Hoover Institution by Timothy Fitzgerald, Kevin Hassett, Cody Kallen, and Casey Mulligan, finds that Biden’s plan will weaken overall economic performance.

We estimate possible effects of Joe Biden’s tax and regulatory agenda. We find that transportation and electricity will require more inputs to produce the same outputs due to ambitious plans to further cut the nation’s carbon emissions, resulting in one or two percent less total factor productivity nationally. Second, we find that proposed changes to regulation as well as to the ACA increase labor wedges. Third, Biden’s agenda increases average marginal tax rates on capital income. Assuming that the supply of capital is elastic in the long run to its after-tax return and that the substitution effect of wages on labor supply is nontrivial, we conclude that, in the long run, Biden’s full agenda reduces fulltime equivalent employment per person by about 3 percent, the capital stock per person by about 15 percent, real GDP per capita by more than 8 percent, and real consumption per household by about 7 percent.

Wonkier readers may be interested in these numbers, which show that there’s a modest benefit from unwinding some of Trump’s protectionism, but there’s a lot of damage from the the other changes proposed by the former Vice President.

In a report authored by Garrett Watson, Huaqun Li, and Taylor LaJoie, the Tax Foundation estimated the impact of Biden’s proposed policies. Here are some of the highlights.

According to the Tax Foundation General Equilibrium Model, Biden’s tax plan would reduce the economy’s size by 1.47 percent in the long run. The plan would shrink the capital stock by just over 2.5 percent and reduce the overall wage rate by a little over 1 percent, leading to about 518,000 fewer full-time equivalent jobs. …Biden’s tax plan would raise about $3.05 trillion over the next decade on a conventional basis, and $2.65 trillion after accounting for the reduction in the size of the U.S. economy. While taxpayers in the bottom four quintiles would see an increase in after-tax incomes in 2021 primarily due to the temporary CTC expansion, by 2030 the plan would lead to lower after-tax income for all income levels.

Table 2 from the report is worth sharing because it shows what policies have the biggest economic impact.

The bottom line is that it’s not a good idea to raise the corporate tax burden and it’s not a good idea to worsen the payroll tax burden.

Here are some excerpts by a study authored by Professor Laurence Kotlikoff for the Goodman Institute.

The micro analysis is based on The Fiscal Analyzer (TFA), which uses data from the Federal Reserve’s Survey of Consumer Finance to calculate how much representative American households will pay in taxes net of what they will receive in benefits over the rest of their lives. …The key micro issues…are the degree to which the Vice President’s reforms alter relative remaining lifetime net tax burdens and lifetime spending of the rich and poor within specific age cohorts and the impact of the reforms on incentives to work, i.e., remaining lifetime marginal net tax rates. The macro analysis is based on the Global Gaidar Model (GGM)…a dynamic, 90-period OLG, 17-region general equilibrium model. …The analysis includes three sets of findings. The first is the change in lifetime net taxes defined as the change in lifetime net taxes. The second is the percentage change in lifetime spending, defined as the change in the present value of outlays on all goods and services as well as bequests, averaged across all survivor path. The third is the lifetime marginal net tax rate from earning an extra $1,000. TFA’s lifetime marginal net tax rate measure takes full account of so-called double taxation. …The GGM predicts a close to 6 percent reduction in the U.S. capital stock. The GGM predicts close to a 2 percent permanent reduction in annual U.S. GDP.  The GGM predicts a roughly 2 percentage-point reduction in wages of U.S. workers, with a larger reduction in the wages of high-skilled workers.

In a study for the Committee to Unleash Prosperity, Professor Casey Mulligan estimated the following effects.

This study addresses the impact of these tax rate changes on economic behavior – work, investment, output and growth. This study finds that the Biden tax agenda will reduce production, incomes, and employment per capita by increasing taxation of both labor and business capital. Employment will be about 3 million workers less in the long run (five to ten years). This employment effect is primarily due to the agenda’s expansion of health insurance credits, which raises the average marginal tax rates on labor income by 2.4 percentage points. Biden also plans to increase taxes on businesses and their owners by a combined 6 to 10 percentage points. These taxes will reduce long-run wages, GDP per worker, and business capital per worker in the long run. By decreasing both the number of workers per capita and GDP per worker, respectively, these two key elements of Biden’s agenda reinforce to significantly reduce GDP per capita and average household incomes. I estimate that, as a result of Biden’s tax agenda, real GDP per capita would be 4 to 5 percent less, which is about $8,000 per household per year in the long run. The two parts of the tax agenda combine to reduce real per capita business capital by 7 to 12 percent in the long run.

Here’s a table from the study.

I’ll add two points to the above analyses.

First, the reason that the Moody’s study produces wildly different results is that its model is based on Keynesian principles. As such, a bigger burden of government spending is assumed to stimulate growth.

For what it’s worth, I think borrowing and spending can lead to short-run increases in consumption, but I’m very skeptical that Keynesian policies can generate increases in national income (i.e., what we produce rather than what we consume) over the medium-run or long-run.

All of the other studies rely on models that estimate how government policies impact incentives to engage in productive behavior. They don’t all measure the same things (some of the studies look solely at taxes, some look at overall fiscal policy, and some also include a look at regulatory proposals) but the methodologies are similar.

Second, I’ll re-emphasize the point I made at the beginning about how politicians routinely say things during campaigns that are either insincere or impractical.

For instance, Trump promised to restrain domestic discretionary spending by $750 billion and he actually increased it by $700 billion.

Likewise, I don’t expect Biden (assuming he prevails) to deliver on his campaign promises. In this case, that’s good news since he won’t increase taxes and spending by nearly as much as what he’s embraced during the campaign (in my fantasy world, he turns out be like Bill Clinton and actually delivers a net reduction in the burden of government).

P.S. For those on the losing side of the upcoming election, I’ll remind you that Australia is probably the best option if you want to escape the United States. Though you may want to pick Switzerland if you have a lot of money.

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For a land-locked nation without many natural resources, Switzerland is remarkably successful.

One reason for the country’s success is pro-market policy. Switzerland routinely scores in the top 5 according to both Economic Freedom of the World and Index of Economic Freedom.

More specifically, I’m a big fan of the country’s fiscal policy, especially the “Debt Brake,” which was imposed when voters overwhelmingly adopted the provision (84.7 percent approval) early this century.

There’s always been a debate, however, whether Switzerland’s good outcomes are because of the debt brake, or because of some random reason, such as the sensibility of Swiss voters.

Three academic economists, Michele Salvi, Christoph Schaltegger, and Lukas Schmid, investigated this issue in a study for Kyklos, a scholarly journal published by the University of Basel.

A prominent means to prevent excess debt accumulation is the use of fiscal rules. In fact,fiscal rules focus on securing solvency of governments by concentrating on the intertemporal budget constraint. …there is a strong positive association between constrained fiscal discretion and improved fiscal performance. …Our paper presents evidence on the effect of a fiscal rule with a strict enforcement mechanism… We analyze the consequences of the centrally imposed balanced budget rule on public debt in Switzerland. …the Swiss debt containment rule stands out as a clearly defined fiscal rule with a constitutional basis that constrains deviating from a balanced budget in the long-term. …The rule consists of a simple mechanism stating that expenditure may not exceed revenues over the course of an economic cycle. …The debt containment rule brings a“top-down”element into the budgeting process, which has a strong disciplinary appeal and leads to more accurate budgeting. …one key aspect is the fact that the debt containment rule sets a clear expenditure ceiling.

The key parts from the above excerpt are “expenditure may not exceed” and “clear expenditure ceiling.”

Those statements ratify my oft-made point that the debt brake is really a spending cap. And spending caps are far and away the only effective macro-fiscal rule.

The policy certainly has generated good results for Switzerland. Here’s what the authors found when thy crunched numbers to compare the country’s current fiscal trajectory with what would have happened without a spending cap.

To construct the counterfactual outcome of the debt ratio for Switzerland without a debt containment rule, we select a control group…countries expected to be driven by a similar structural process as Switzerland. …Due to the availability of comprehensive debt data, the observation period is restricted to last from 1980 until 2010. …we divide the time period into a pre-treatment period from 1980 to 2002 and a postintervention period from 2003 to 2010. …Figure 2 displays the central government debt ratio for Switzerland and its synthetic counterpart during the study period. …In 2003, the two debt ratio curves start to diverge. …it appears that the introduction of the debt containment rule led to a substantial and persistent decrease in the debt ratio in Switzerland.

And here’s the relevant set of charts from the study.

Here’s one more sentence I want to cite since it echoes the argument I’ve made to my Keynesian friends about how they also should support a Swiss-style spending cap.

The debt containment rule has made a significant contribution to switching from a procyclical to a cyclically appropriate fiscal policy.

Simply stated, the political tradeoff embedded in the debt brake is that politicians get to modestly increase spending during a downturn, even though revenues are falling, but they also can only enact modest spending increases during growth years, even if revenue is growing much faster.

By the way, you will have noticed that the study focused on how the debt brake helped to reduce red ink.

Regular readers know that I’m far more interested in focusing on the real fiscal problem, which is excessive government spending.

So I’ll close by looking at some additional evidence from Switzerland. Here’s a chart, based on IMF data, showing that the growth rate of spending fell sharply after the debt brake was adopted.

I looked at the 2003-2010 period, since it matched the years in the study discussed above.

But I also calculated the spending growth rate for 2003-2019 and confirmed that the debt brake’s success hasn’t just been a temporary phenomenon.

P.S. Click here for a short presentation on the debt brake, as well as similar presentations on Hong Kong’s spending cap and Colorado’s TABOR spending cap.

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One of the problems with state balanced budget requirements is that tax revenues are very sensitive to economic conditions.

Boom Years: When there’s robust economic growth, politicians collect unanticipated revenue because more people have good jobs and more businesses are earning money.

And what do politicians do when this happens? They spend a big chunk of that unanticipated tax revenue.

Bust Years: When there’s a recession and tax revenues unexpectedly decline, state politicians are in a tough position because they’ve made lots of promises to spend money, including for the extra spending that took place when the economy was growing.

And what do politicians do when this happens? They usually respond with a combination of spending cuts and tax increases.

This boom-bust budgeting is unwise for many reasons, but I don’t like it because it leads to a long-run expansion in the size of government (the spending increases in the boom years almost always are greater than the cutbacks in the bust years).

Indeed, one of the reasons why I prefer a spending cap instead of a balanced budget requirement is that you avoid this “ratchet effect.”

Now let’s look at some real-time data on why this matters. Given what’s happened with the coronavirus, we’re currently in a “bust year” and many governors and state legislators claim that they’re dealing with special conditions that necessitate a bailout from Washington.

In a column for the Wall Street Journal, Jonathan Williams of the American Legislative Exchange Council and Dave Trabert of the Kansas Policy Institute explore the topic.

Many governors now seek a federal bailout, but borrowing trillions more will only make matters worse for taxpayers… Every state provides the same basic services, but some do it at much lower cost, which allows them to have lower taxes. ……high-spending states are at the front of the line for a federal bailout. …Too many elected officials would rather have taxpayers submit to a tax increase now, or pay off bailout debt later, than do the hard work of eliminating unnecessary spending.

Their column includes plenty of hard data showing that the states clamoring for the bailouts wouldn’t be facing any fiscal problems if they weren’t spending so much money.

…The 41 states with an income tax spent 55% more per resident in 2018 than did the nine states without an income tax. Florida, which doesn’t have an income tax, spent the least, at $2,327 per resident. Texas and New Hampshire, also without income taxes, have the next lowest spending at $2,585 and $2,773, respectively. New Hampshire is frugal enough to avoid a sales tax. …New York, which has an income tax, spends $5,231 per resident. Gov. Andrew Cuomo threatens to cut services unless he gets a $60 billion bailout over two years. If New York spent at Florida’s level per resident, the Empire State would save $56.7 billion each year. If Illinois Gov. Jay Pritzker were to trim his state’s per resident spending to match Texas’, he would save his taxpayers $22.3 billion a year—and there would be no need for any income-tax increase. Gov. Gavin Newsom could save Californians $64.6 billion annually if his state matched New Hampshire’s spending.

Here’s the map that accompanied the column, showing per-capita spending levels in each state.

Earlier this year, I looked at state data, but also included spending by local governments.

But slicing the numbers in a different way doesn’t change the fact that some states spend much more (and without delivering more and/or better services).

Some people portray this as a battle of red states vs. blue states, but I prefer to avoid the politics and simply compare big-spending states to modest-spending states. For instance, compare New York and Florida. If that’s not enough, also compare Texas and California.

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Bernie Sanders was considered a hard-core leftist because his platform was based on higher taxes and higher spending.

Elizabeth Warren also was considered a hard-core leftist because she advocated a similar agenda of higher taxes and higher spending.

And Joe Biden, even though he is considered to be a moderate, is currently running on a platform of higher taxes and higher spending.

Want to know who else is climbing on the economically suicidal bandwagon of higher taxes and higher spending? You probably won’t be surprised to learn that the pro-tax International Monetary Fund just published its World Economic Outlook and parts of it read like the Democratic Party’s platform.

Here are some of the ways the IMF wants to expand the burden of government spending.

Investments in health, education, and high-return infrastructure projects that also help move the economy to lower carbon dependence… Moreover, safeguarding critical social spending can ensure that the most vulnerable are protected while also supporting near-term activity, given that the outlays will go to groups with a higher propensity to spend their disposable income… Some fiscal resources…should be redeployed to public investment—including in renewable energy, improving the efficiency of power transmission, and retrofitting buildings to reduce their carbon footprint. …social spending should be expanded to protect the most vulnerable where gaps exist in the safety net. In those cases, authorities could enhance paid family and sick leave, expand eligibility for unemployment insurance, and strengthen health care benefit coverage…social spending measures…strengthening social assistance (for example, conditional cash transfers, food stamps and in-kind nutrition, medical payments for low-income households), expanding social insurance (relaxing eligibility criteria for unemployment insurance…), and investments in retraining and reskilling programs.

And here’s a partial list of the various class-warfare taxes that the IMF is promoting.

Although adopting new revenue measures during the crisis will be difficult, governments may need to consider raising progressive taxes on more affluent individuals and those relatively less affected by the crisis (including increasing tax rates on higher income brackets, high-end property, capital gains, and wealth) as well as changes to corporate taxation that ensure firms pay taxes commensurate with profitability. …Efforts to expand the tax base can include reducing corporate tax breaks, applying tighter caps on personal income tax deductions, instituting value-added taxes.

Oh, by the way, if nations have any rules that protect the interests of taxpayers, the IMF wants “temporary” suspensions.

Where fiscal rules may constrain action, their temporary suspension would be warranted

Needless to say, any time politicians have a chance to expand their power, temporary becomes permanent.

When I discuss IMF malfeasance in my speeches, I’m frequently asked why the bureaucrats propose policies that don’t work – especially when the organization’s supposed purpose is to promote growth and stability.

The answer is “public choice.” Top IMF officials are selected by politicians and are given very generous salaries, and they know that the best way to stay on the gravy train is to support policies that will please those politicians.

And because their lavish salaries are tax free, they have an extra incentive to curry favor with politicians.

P.S. I wish there was a reporter smart enough and brave enough to ask the head of the IMF to identify a single nation – at any point in history – that became rich by expanding the size and cost of government.

P.P.S. There are plenty of good economists who work for the IMF and they often write papers pointing out the economic benefits of lower taxes and smaller government (and spending caps as well!). But the senior people at the bureaucracy (the ones selected by politicians) make all the important decisions.

 

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According to the Fraser Institute’s calculations of overall economic freedom, Delaware apparently has the worst politicians and New Hampshire has the best ones.

According to comprehensive estimates of economic liberty in Freedom in the 50 States, New York’s politicians seem to be the worst and Florida’s are the best.

But what if we focus just on fiscal policy?

Earlier this year, I wrote three columns that illustrated different ways – income taxes, sales taxes, and government spending burden – of measuring the quality of state fiscal policy.

Today, let’s look at a comprehensive assessment of the nation’s governors, courtesy of Chris Edwards. Here’s his core methodology.

…this year’s 15th biennial fiscal report card on the governors…examines state budget actions since 2018. It uses statistical data to grade the governors on their tax and spending records—governors who have restrained taxes and spending receive higher grades, while those who have substantially increased taxes and spending receive lower grades. …Scores ranging from 0 to 100 were calculated for each governor on the basis of seven tax and spending variables. Scores closer to 100 indicate governors who favored smaller-government policies. 

Only four governors got the highest grade (and that’s using a curve!), led by Chris Sununu of New Hampshire.

Those of you who follow politics may be interested in knowing that Kristi Noem (R-SD) and Ron DeSantis (R-FL), both potential presidential candidates in 2024, got “B” grades. So good, but not great.

Now let’s look at the most profligate chief executives.

The worst of the worst is Jay Inslee of Washington. So however bad Biden’s agenda is for the country, let’s be happy that Governor Inslee didn’t win the Democratic presidential nomination.

I’m not surprised by the other “F” governors. Though I am surprised that Gov. Pritzker isn’t in last place, given his efforts to get rid of the the Illinois flat tax.

For what it’s worth, the best-ranked Democrat (a “B” grade) is Steve Sisolak of Nevada. I assume this means he hasn’t tried to ruin the state’s zero-income-tax status. The worst-ranked Republican (a “D” grade) is Bill Lee of Tennessee and his bad score is because of huge increases in the state spending burden.

Last but not least, Chris identifies a systemic problem impacting almost all states. Simply stated, government spending has been growing too rapidly, more than double what would be needed to keep pace with inflation.

General fund spending grew at an annual average rate of 4.1 percent between 2010 and 2020, including increases of 5.5 percent in 2019 and 5.8 percent in 2020.

Here’s the accompanying chart.

In the study, Chris says states should use “rainy day funds” to avoid boom-and-bust budgeting (in other words, set aside some revenue when the economy is growing so it’s not necessary to make big adjustments when there’s a recession).

That’s definitely a prudent approach, and the study points out that some blue-leaning states like California follow that policy, while others (most notably, Illinois) recklessly spent surplus revenue.

My two cents is that a spending cap is the best long-run solution, and Colorado’s TABOR is easily the best fiscal rule among the 50 states.

P.S. Governor Sununu of New Hampshire needs to continue getting good scores to atone for his father’s terrible role, as Chief of Staff for George H.W. Bush, in pushing through the failed 1990 tax increase.

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I identified four heroes from the “Battle of Ideas” video I shared in late August – Friedrich Hayek, Milton Friedman, Ronald Reagan, and Margaret Thatcher. Here’s one of those heroes, Milton Friedman, explaining what’s needed to control big government.

For all intents and purposes, Friedman is pointing out that there’s a “public choice” incentive for government to expand.

To counteract that disturbing trend, he explains that we need a high level of “societal capital.” In other words, we need a self-reliant and ethical populace – i.e., people who realize it’s wrong to use the coercive power of government to take from others.

Sadly, I don’t think that’s an accurate description of today’s United States.

So how, then, can we get control of government?

Since politicians are unlikely to control spending in the short run (their time horizon is always the next election), our best hope is to get them to agree to a rule that constrains what can happen in the future.

I’ve repeatedly argued in favor of a spending cap. Such a policy has a proven track record, and is far more effective than a balanced budget requirement.

That’s what should happen.

Now let’s focus on what shouldn’t happen. As Milton Friedman famously observed in 2001, tax increases are never the solution because politicians will simply spend any additional revenue (and the tax increases also will hurt the economy and cause Laffer-Curve feedback effects).

P.S. You can enjoy more wisdom from Friedman on issues such as the role of the firm, spending other people’s money, and so-called Robber Barons.

P.P.S. On the issue of spending other people’s money, here’s an example of Jay Leno channeling Friedman.

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Last night’s train-wreck debate reinforced my disdain for politicians.

But let’s ignore the immature theatrics from Trump and Biden and focus on one of their policy disagreements.

The two candidates squabbled over whether creating a government-administered health plan (see page 31 for a description of Biden’s so-called  “public option“) would lead to the demise of the current system of employer-provided health insurance.

For what it’s worth, there are two big reasons why I’m not a fan of the current employer-based system.

That being said, I’m very aware of the fact that politicians are always capable of making things worse (the “lather-rinse-repeat cycle” of government failure).

So let’s consider this key question: Government intervention has made our health system expensive and inefficient, but would a “public option” make things better or worse?

About two months ago, I shared this video which explains why the so-called public option will wind up being an expensive boondoggle.

Given the track record of health entitlements, I think the video you just watched is correct. A public option would be a fiscal nightmare.

But does that mean it also would be a threat to the employer-based system of private health insurance?

I think the answer is yes, largely because the subsidies that will make the system more expensive are also the subsidies that will make the public option seem like a good deal.

Let’s use two analogies to get this point across.

  • Fannie Mae and Freddie Mac dominate housing finance, not because government-created entities are efficient, but because they use subsidies from the federal government to under-price private competitors.
  • Parents know private schools produce much better educational outcomes than government schools, but most families opt for the inferior option because it’s already being financed by their tax dollars.

I fear the same thing will happen with the so-called public option. Politicians (in their never-ending efforts to but votes) will keep increasing the subsidies. That will make employer-based health plans seem less attractive by comparison.

And there will also be political pressure to provide an ever-more-extensive set of benefits (as illustrated by the cartoon). That will also make employer-based health plans seem less attractive by comparison.

The net result of all this is that even though the vast majority of workers are happy with their current employer-provided health plans, Biden’s public option will slowly but surely squeeze them out of the market.

The bottom line is that we’ll wind up with single-payer, government-run healthcare, but politicians would be sneaking it in the back door.

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I’ve previously written that Keynesian economics is like Freddy Kreuger. No matter how many times it is killed off by real-world evidence, it comes back to life whenever a politician wants to justify a vote-buying orgy of new spending.

And there will always be Keynesian economists who will then crank up their simplistic models that churn out results predicting that a bigger burden of government spending somehow will produce additional growth.

They never bother to explain why they think draining funds from the private sector is good for growth, of course, or why they think politicians supposedly spend money more wisely than households and businesses.

Nonetheless, there are some journalists who are willing to act as stenographers for their assertions.

In a September 25 story for the Washington Post, Tory Newmyer gives free publicity to Keynesian predictions that the economy will grow faster if Biden wins and then imposes his profligate agenda – which they underestimate to include $7.3 trillion of new spending and $4.1 trillion of new taxes over the next 10 years.

A Democratic sweep that puts Joe Biden in the White House and the party back in the Senate majority would produce 7.4 million more jobs and a faster economic recovery than if President Trump retains power. …Moody’s Analytics economists Mark Zandi and Bernard Yaros…see the higher government spending a Biden administration would approve — for emergency relief programs, infrastructure, and an expanded social safety net — giving the economy a potent injection of stimulus. …while a Biden administration would seek to offset some of his proposed $7.3 trillion in new spending over the next decade with $4.1 trillion in higher taxes on corporations and the wealthy, “the net of these crosscurrents is to boost economic activity,” the economists write.

Here’s one of the charts that was included in the story, which purports to show how bigger government leads to faster growth.

If there was a contest for the world’s most inaccurate economist, Zandi almost surely would win a gold medal.

But his laughable track record is hardly worth mentioning. What matters more is that we have decades of real-world experience with Keynesian economics. And it never works.

It’s also worth pointing out that Keynesians have been consistently wrong with predicting economic damage during periods of spending restraint.

Now let’s look at another example of how Keynesian predictions are wrong.

Professor Casey Mulligan from the University of Chicago analyzed what happened when turbo-charged unemployment benefits recently ended.

July was the final month of the historically disproportionate unemployment bonus of $600 per week. The termination or reduction of benefits will undoubtably make a difference in the lives of the people who were receiving them, but old-style Keynesians insist that the rest of us will be harmed too. …Paul Krugman explained in August that “I’ve been doing the math, and it’s terrifying. . . . Their spending will fall by a lot . . . [and there is] a substantial ‘multiplier’ effect, as spending cuts lead to falling incomes, leading to further spending cuts.” GDP could fall 4 to 5 percent, and perhaps as much as ten percent… Wednesday the Census Bureau’s advance retail-sales report provided our first extensive look at consumer spending in August, which is the first month with reduced benefits (reduced roughly $50 billion for the month). Did consumer spending drop by tens of billions, starting our economy on the promised path toward recession?

Not exactly. As shown in this accompanying chart, “…retail sales increased $3 billion above July.”

Professor Mulligan explains why Keynesian economics doesn’t work in the real world.

Two critical elements are missing from the old-style Keynesian approach. The first piece is that employment, which depends on benefits and opportunity costs to employer and employee, is a bigger driver of spending than government benefits are. For every person kept out of work by benefits, that is less aggregate spending that is not made up elsewhere in the economy. The second missing piece is that taxpayers and lenders to our government finance these benefits and therefore have less to spend and save on other things. Even a foreign lender who decides to lend that extra $1 million to our government may well be lending less to U.S. households and companies. At best, redistribution from workers to the unemployed reallocates demand rather than increasing its total.

Amen.

At best, Keynesian policy enables a transitory boost in consumption, but there’s no increase in production. At the risk of stating the obvious, a nation’s gross domestic income does not increase when the government borrows money from one group of people and redistributes it to another group of people.

P.S. Since today’s topic is Keynesian economics here’s the famous video showing the Keynes v. Hayek rap contest, followed by the equally entertaining 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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The Congressional Budget Office released it’s 2020 Long-Term Budget Outlook yesterday.

Almost everybody has focused on CBO’s projections for record levels of red ink. And it is worrisome that debt is heading to Greek/Japanese levels (especially if the folks who buy government bonds think American politicians are more like Greek politicians rather than Japanese politicians).

But what should really have us worried, both in the short run and the long run, is that the burden of government spending is on an upward trajectory.

CBO has some charts showing that federal government spending will consume more than 30 percent of GDP by 2050, assuming the budget is left on autopilot.

But I dug into CBO’s database and created my own chart because I think it does a much better job of illustrating our problem.

As you can see, the problem is that government spending is projected to grow too fast, violating the Golden Rule of fiscal policy.

The solution to this problem is very simple.

We need spending restraint, ideally enforced by some sort of spending cap.

And if we control the growth of spending (preferably so that it grows no more than the rate of inflation), the projections for ever-rising levels of red ink will disappear.

In other words, you can get rid of symptoms (red ink) when you cure the underlying disease (big government).

P.S. Given all the profligacy over the past year, you won’t be surprised to learn that this year’s long-run forecast from CBO is more depressing than last year’s forecast.

P.P.S. While the solution is simple, it’s not easy. Restraining the growth of spending – especially in the long run – will require entitlement reforms, especially for Medicare and Medicaid.

P.P.P.S. Tax increases almost certainly would make a bad situation even worse by weakening the economy and encouraging more spending.

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With the election less than two months away, there’s a lot of discussion and debate about Trump’s performance.

I put together a report card last year showing that his economic policies have been a mixed bag, with good grades on tax and regulation, but bad grades on trade and spending.

Today, let’s focus specifically on fiscal issues and try to identify the best and worst changes that have occurred during his presidency.

Let’s start with the good news.

For what it’s worth, I’m somewhat conflicted between two different provisions of the 2017 tax reform.

I’m a huge fan of the cap on the state and local tax deduction. For years, I had been arguing that it was very foolish for the federal tax system to subsidize high-tax states.

So I was delighted that the 2017 law restricted this subsidy (and I’m further delighted that we’re already seeing a positive impact with people “voting with their feet” against states such as New York, Illinois, and California).

However, that reform is not permanent. Like many other provisions of that law, it automatically expires at the end of 2025.

Which is why I’m going to choose the lower corporate tax rate as Trump’s best policy. Not only is that reform permanent (at least until/unless Joe Biden takes office), but it was enormously important for American competitiveness since the United States used to have the highest corporate tax rate in the developed world.

And the rate is still too high today, especially if you include the impact of state corporate tax rates, but at least the 2017 reform took a big step in the right direction.

And that big step is good news for jobs, wages, investment, and competitiveness.

Now for the bad news.

I could make the case that Trump’s overall spending increase is the problem.

Indeed, in a column for Reason, Matt Welch points out that Trump has not been a fiscal conservative.

The most traditional way to measure the size of government is to count how much money it spends. In Barack Obama’s last full fiscal year of 2016…, the federal government spent $3.85 trillion… In fiscal year 2020, before the coronavirus pandemic triggered a record amount of spending, the federal government was on course to cough up $4.79 trillion… So under Trump’s signature, before any true crisis hit, the annual price tag of government went up by $937 billion in less than four years—more than the $870 billion price hike Obama produced in an eight-year span… You can argue plausibly that Joe Biden and the Democratic Party will grow the government more. But the fact is, the guy railing against socialism…has grown spending faster than his predecessor and shown considerably less interest in confronting the entitlement bomb.

All of this is true, but I want to focus on specific policies, not just the overall spending performance.

Which is why I would argue that Trump’s worst fiscal policy is captured by this table from the Committee for a Responsible Federal Budget.

It shows what Trump promised compared to what he delivered and I’ve highlighted his awful record on non-defense discretionary spending (which is basically domestic spending other than entitlements). He promised $750 billion of reductions over 10 years and instead he saddled the American economy with $700 billion of additional increases.

P.S. Click here if you want background info on the different types of federal spending. But all you probably need to know is that many parts of the federal government that shouldn’t exist (Department of Education, Department of Agriculture, Department of Housing and Urban Development, Department of Transportation, etc) get much of their funding from the non-defense discretionary budget.

P.P.S. Trump has failed to address entitlements, which is reckless, but that’s a sin of omission. The increase in non-defense discretionary is a sin of commission.

P.P.P.S. I also thought about listing Trump’s failure to follow through on his proposal to get rid of taxpayer subsidies for the Paris-based Organization for Economic Cooperation and Development.

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New York is in trouble from bad economic policy, especially excessive taxing and spending.

This is one of the reasons why there’s been a steady exodus of taxpayers from the Empire State.

The problem is especially acute for New York City, which has been suffering from Mayor Bill De Blasio’s hard-left governance.

To be sure, not all of the city’s problems are self-inflicted. The 2017 tax reform removed the IRS loophole for state and local tax payments, which means people living in places such as NYC no longer can artificially lower their tax liabilities. And the coronavirus hasn’t helped, either, particularly since Governor Cuomo bungled the state’s response.

The net result of bad policy and bad luck is that New York City has serious economic problems. And this leads, as one might expect, to serious fiscal problems.

What’s surprising, however, is that the normally left-leaning New York Times actually wrote an editorial pointing out that fiscal restraint is the only rational response.

New York is facing…a budget hole of more than $5 billion… Mayor Bill de Blasio has asked the State Legislature to give him the authority to borrow… But borrowing to meet operating expenses is especially hazardous. Cities that do so over and over again are at greater risk of the kind of bankruptcy faced by New York in the late 1970s and Detroit in 2013. …Before Mr. de Blasio adds billions to the city’s debt sheet…he needs to find savings. …The city’s budget grew under Mr. de Blasio, to $92 billion last year from about $73 billion in 2014, his first year in office. Complicating matters, the mayor has hired tens of thousands of employees over his tenure, adding significantly to the city’s pension and retirement obligations. …the mayor will have to be creative, make unpopular decisions and demand serious cost-saving measures… One way to begin is with a far stricter hiring freeze. …The mayor will need to do something he has rarely been able to: ask the labor unions to share in the sacrifice. …There are other cuts to be made.

Wow, this may be the first sensible editorial from the New York Times since it called for abolishing the minimum wage in 1987.*

Mayor De Blasio, needless to say, doesn’t want any form of spending restraint. Depending on the day, he either wants to tax-and-spend or borrow-and-spend.

Both of those approaches are misguided.

Kristin Tate explained in a column for the Hill that the middle class suffers most when class-warfare politicians such as De Blasio impose policies that penalize the private sector.

Finance giant JPMorgan is…slowly relocating many of its operations and jobs to lower tax locations in Ohio, Texas, and Delaware. The Lone Star State currently hosts 25,000 of its employees, and Texas will likely surpass the New York portion in coming years. The resulting move will harm the middle earners of New York far more than that of the wealthy… The exodus is part of a trend sweeping traditionally Democratic states over the last several years. …A whopping 1,800 businesses left California in 2016 alone, while manufacturing firm Honeywell moved its headquarters from New Jersey to greener pastures in North Carolina. …the primary losers in this formula are middle class workers. Between the loss of jobs and revenue, these states and cities press even harder on millions of middle income taxpayers to make up the difference. …Many of the Democrats…who are in charge of the blue state economic models…love to preach that their proposals will make the economy fairer by targeting the most productive members of their states and cities. However, the encompassing butterfly effect spells bad news for people like you and me. Every time you vote for a proposition or a candidate promising a repeat of bad policy, just remember that it will ultimately be the middle class that will pay the largest share.

My contribution to this discussion is to point out that New York City’s fiscal problems are the entirely predictable result of politicians spending too much money over an extended period of time.

In other words, they violated my Golden Rule.

Indeed, the burden of government spending has climbed more than three times faster than inflation during De Blasio’s time in office.

If this story sounds familiar, that’s because excessive spending is the cause of every fiscal crisis (as I’ve noted when writing about Cyprus, Alaska, Ireland, Alberta, Greece, Puerto Rico, California, etc).

My final observation is that New York City’s current $5 billion budget shortfall would be a budget surplus of more than $6 billion if De Blasio and the other politicians had adopted a spending cap back in 2015 and limited budget increases to 2 percent annually.

*The New York Times also endorsed the flat tax in 1982, so there have been rare outbursts of common sense.

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If Donald Trump wins the 2020 election, I don’t expect any serious effort to rein in the burden of government spending.

And if Joe Biden wins the 2002 election, I don’t expect any serious effort to rein in the burden of government spending.

At the risk of understatement, this is rather unfortunate since fiscal policy in the United States is on a very worrisome path.

Thanks to demographic changes and poorly designed entitlement programs, the federal budget – assuming it is left on autopilot – is going to consume an ever-larger share of the nation’s economic output.

And that means fewer resources for the economy’s productive sector.

In a new study from the Hoover Institution, Professor John F. Cogan, Daniel L. Heil, and Professor John B. Taylor investigate the potential consequences of bigger government – and the potential benefits of spending restraint.

In this paper we consider an illustrative fiscal consolation proposal that restrains the growth in federal spending. The policy is to hold federal expenditures as a share of GDP at about the 20 percent ratio that prevailed before the pandemic hit. We estimate the policy’s impact using a structural macroeconomic model with price and wage rigidities and adjustment costs. The spending restraint avoids a potentially large increase in future federal taxes and prevents the outstanding debt relative to GDP from rising from its current level. The simulations show that the consolidation plan boosts short-run annual GDP growth by as much as 10 percent and increases long-run annual GDP growth by about 7 percent.

The authors believe that there will be some tax increases over the next few decades – an assumption that I fear will be accurate.

…our baseline assumes that future Congresses will enact tax increases to finance a portion of rising future federal spending. Specifically, we have assumed that Congress will finance half of the projected higher baseline outlays with higher tax rates. The tax rate increases are assumed to be gradually phased-in and are in the form of equi-proportionate increases in personal income tax rates, corporate income tax rates, and social insurance tax rates. Under these assumptions, tax rates will be about 20 percent higher in 2045 than in 2022.

Here are their projection over the next 25 years.

The authors then create an alternative scenario based on spending restraint, including entitlement reform.

To illustrate the potential positive impact of a fiscal consolidation plan on economic growth, we have chosen a stylized long-term budget policy that reduces the growth in federal spending, maintains federal tax rates at their current levels, and limits the outstanding federal debt relative to GDP to its pandemic high level. …the spending side of the plan has three essential elements. One, reductions in government spending from the baseline which come exclusively from permanent changes in entitlement programs; the principal source of the federal government’s long-term fiscal imbalance. …Two, the plan contains an immediate one-time reduction in entitlement program spending that permanently lowers the overall level of government spending. Three, the plan permanently reduces the growth in entitlement spending thereafter from this lower level.

They then estimate what happens to the fiscal burden of government if policy makers choose spending restraint instead of bigger government and tax increases.

In 2033, ten years from the initiation of the policy, total federal spending as a percent of GDP, including interest on the debt, would be 3.3 percent lower than baseline expenditures. In twenty years, it would be 5.7 percent lower. …the consolidation plan would maintain all federal tax rates.at their current statutory levels. …revenue as a share.. of GDP would rise slightly over time due to real bracket creep. Thus, the plan is designed to prevent the approximately 15 percent tax rate increases that are presumed in the budget baseline.

Here’s a chart from the study that shows how the burden of redistribution spending and social insurance programs is significantly smaller with the restraint approach.

Now we get to key results.

Cogan, Heil, and Taylor use a model of the U.S. economy to estimate what happens if there is spending restraint instead of bigger government.

Unsurprisingly, there’s more prosperity when there’s a smaller burden of spending.

The impact of the consolidation strategy is shown in Figure 4. Observe that there is a substantial increase in real GDP in the short run, and that this positive change occurs throughout the simulation through 2045. The short-run increase of about 0.5 percent in the first two years following the policy’s implementation amounts to about a 10 percent increase in the real GDP growth rate. Over the longer-term, GDP increases by about 3.7 percent after 25 years. This is equivalent to a 7 percent increase in the economy’s real growth rate.

This chart from the study shows the economic benefits of spending restraint.

These results are consistent with what other economists have produced.

Heck, even economists at left-leaning international bureaucracies such as OECD, World Bank, and IMF have acknowledged that smaller government is better for prosperity.

P.S. The unanswered question, of course, is how to convince self-interested politicians to choose spending restraint instead of buying votes with other people’s money. A spending cap is probably a necessary but not sufficient condition (it’s an approach that has been very successful in Switzerland, Hong Kong, and Colorado – and which was recently adopted in Brazil).

P.P.S. Even small differences in economic growth have a significant long-run impact on living standards.

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Last week, I shared some data showing how the economy enjoyed a strong recovery from recession in the early 1920s when President Warren Harding cut government spending.

(And these were genuine cuts, not the nonsense we get from today’s politicians, who claim they’ve cut spending simply because the budget increases by 5 percent rather than 7 percent.)

What happened nearly 100 years ago is very relevant today since we still have advocates of Keynesian economics who claim that more spending (especially debt-financed spending) is a recipe for more growth.

To show why this view is misguided, let’s now look at what happened in the 1940s after World War II came to an end.

In a column for today’s Wall Street Journal, Professor Richard Vedder explains that the Keynesians predicted economic disaster because of big reductions in government spending.

…many Americans assumed the end of the war would mean a resumption of the Depression, which was cut off by the World War II military buildup. In the middle of the fighting, America’s leading Keynesian economist, Alvin Hansen of Harvard, said: “When the war is over, the government cannot just disband the Army, close down munitions factories, stop building ships, and remove economic controls.” …When the sudden end of combat became apparent in late August 1945, economist Everett Hagen predicted that the unemployment rate in the first quarter of 1946 would be 14.8%.

So what actually happened?

Vedder points out that the Keynesian predictions of massive unemployment were wildly inaccurate.

Millions of military personnel did become jobless within months and defense spending plummeted, putting more out of work. In June 1946 federal employment was almost precisely 10 million less than a year earlier. Yet the sharp rise in overall unemployment didn’t occur. The total unemployment rate for 1946 was 3.9%… Perhaps most interesting for today, all this occurred as the U.S. moved from an extremely expansionary fiscal policy—with budget deficits equal to almost 25% of gross domestic product in 1944 (the equivalent of more than $5 trillion today)—to an extremely contractionary one. The U.S. by 1947 was running a budget surplus exceeding 5% of output—the equivalent of more than $1 trillion today. …This was the complete reverse of the expectation of the newly dominant Keynesian economists.

In the following chart, you can see the numbers from the Office of Management and Budget’s Historical Tables (Table 1.2), which show that fiscal policy between 1945 and 1948 was very contractionary, at least as defined by the Keynesians.

There definitely were huge spending cuts (the real kind, not the fake kind) during those years, and big deficits also became big surpluses.

Professor Vedder’s column explained that this anti-Keynesian policy didn’t produce mass unemployment.

But what about economic growth?

Well, you’ll see in the chart below the data from the Bureau of Economic Analysis for the 1945-48 period. There was a recession in 1946, which could be interpreted as evidence for Keynesianism.

But then look what happened in the next couple of years. There were more budget cuts, deficits became surpluses, and the economy enjoyed a strong rebound.

According to Keynesian theory, these two charts can’t exist. There can’t be an economic recovery when spending and deficits are falling.

Yet that’s exactly what happened after World War II (just as it happened under Harding, as Thomas Sowell observed).

Maybe, just maybe, Keynesianism is simply wrong. Maybe it’s nothing more than the economic version of a perpetual motion machine?

P.S. It’s also worth noting that huge increases in spending and debt under Hoover and Roosevelt didn’t produce good results in the 1930s.

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

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

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

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

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

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

Amen. Japan has become a parody of Keynesian spending.

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

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

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

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

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

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

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

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

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

The author explains how America can be saved.

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

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

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

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

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

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

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We did not get good policy during the economic crisis of the 1930s. Indeed, it’s quite likely that bad decisions by Herbert Hoover and Franklin Roosevelt deepened and lengthened the Great Depression.

Likewise, George Bush and Barack Obama had the wrong responses (the TARP bailout and the faux stimulus) to the economic downturn of 2008-09.

But people in government don’t always make mistakes. If we go back nearly 100 years ago, we find that Warren Harding oversaw a very rapid recovery from the deep recession that occurred at the end of Woodrow Wilson’s disastrous presidency.

In a column for the Foundation for Economic Education, Robert Murphy has a very helpful tutorial on what happened.

…the U.S. experience during the 1920–1921 depression—one that the reader has probably never heard of—is almost a laboratory experiment …the government and Fed did the exact opposite of what the experts now recommend. We have just about the closest thing to a controlled experiment in macroeconomics that one could desire. To repeat, it’s not that the government boosted the budget at a slower rate, or that the Fed provided a tad less liquidity. On the contrary, the government slashed its budget tremendously… If the Keynesians are right about the Great Depression, then the depression of 1920–1921 should have been far worse. …the 1920–1921 depression was painful. The unemployment rate peaked at 11.7 percent in 1921. But it had dropped to 6.7 percent by the following year and was down to 2.4 percent by 1923. …the 1920–1921 depression “purged the rottenness out of the system” and provided a solid framework for sustainable growth. …The free market works. Even in the face of massive shocks requiring large structural adjustments, the best thing the government can do is cut its own budget and return more resources to the private sector.

Writing for National Review, David Harsanyi points out that there are many reasons why Warren Harding should be celebrated over Woodrow Wilson.

Wilson was one of the most despicable characters in 20th-century American politics: a national embarrassment. The Virginian didn’t merely hold racist “views;” he re-segregated the federal civil service. He didn’t merely involve the United States in a disastrous war in Europe after promising not to do so; he threw political opponents and anti-war activists into prison. Wilson, the first president to show open contempt for the Constitution and the Founding, was a vainglorious man unworthy of honor. Fortunately, we have the perfect replacement for Wilson: Warren Harding, the most underappreciated president in American history… Harding, unlike Wilson — and most of today’s political class, for that matter — didn’t believe politics should play an outsized role in the everyday lives of citizens. …Where Wilson had expanded the federal government in historic ways, creating massive new agencies such as the War Industries Board, Harding’s shortened term did not include any big new bureaucracies… Wilson left the country in a terrible recession; Harding turned it around, becoming the last president to end a downturn by cutting taxes, and slashing spending and regulations. Harding cut spending from $6.3 billion in 1920 to $3.3 billion by 1923.

Walter Block, in an article for the Mises Institute, explains that what happened almost 100 years ago can provide a good road map if President Trump wishes to restore prosperity today (especially when compared to the disastrous policies of Hoover and Roosevelt).

…let us look back a bit at some economic history regarding recessions and depressions… The depression in 1921 was short lived—maybe not a V, but at least a very narrow U. …Happily, during the 1921 depression, the government of President Warren G. Harding did not intervene…and the entire episode was over not in a matter of weeks (the V) or years (a fattish U), but months (a narrow U). The Great Depression, which stretched from 1929–41 (a morbidly obese U) stemmed from identical causes. …But Presidents Herbert Hoover and Franklin D. Roosevelt “fixed” this by propping up heavy industries whose extent was overblown by the previous artificially lowered interest rates, in an early “too big to fail” paroxysm. The Smoot-Hawley Tariff added insult to injury, and put the kibosh on any early recovery. …I now predict the sharpest of Vs, but if and only if, all other things being equal, the Trump administration cleaves to market principles. …So, Mr. President, embrace the free enterprise system, attain a V, a very narrow and sharp one, and the prognostication for November will be significantly boosted.

Professor Block’s analysis is very sound…except for the part where he speculates that Trump will do the right thing and copy Harding.

Given Trump’s awful track record on spending, it would be more accurate to speculate that I’ll be playing in the outfield for the Yankees when they win this year’s World Series.

Suffice to say, though, that it would be great to find another Warren Harding. Here’s a chart based on OMB data showing that he actually cut spending (and we’re looking at genuine spending cuts, not the make-believe spending cuts that happen in DC when politicians boost the budget by less than previously planned).

According to fans of Keynesian economics, these spending cuts should have tanked the economy, but instead we got a boom.

P.S. By the way, something similar happened after World War II.

P.P.S. Back in 2012, I shared some insightful analysis from Thomas Sowell about Harding’s economic policy.

P.P.P.S. Harding also lowered tax rates.

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I wrote last month about “anarcho-capitalists” who think we don’t need any government because markets can provide everything.

Most people, though, think that there are certain things (such as national defense and the rule of law) that are “public goods” because they won’t exist if they’re not provided by government.

Academics tell us, if we want to be rigorous, that there are two characteristics that define public goods.

  1. They are goods that people won’t buy because they can reap the benefit without paying (economists say this means the good is “non-excludable” while normal people refer to this as the free-rider problem).
  2. They are goods that can be universally shared since one person’s consumption of the good doesn’t limit another person’s consumption of the good (economists say such goods are “non-rival”).

That’s a bit wonky, so let’s consider the example of national defense.

In a world with bad countries (or, to be more accurate, a world with nations governed by bad people), there’s a risk or external aggression. Since most people wouldn’t want to be conquered – and presumably mistreated – by foreign aggressors, national defense is valuable.

But how would it be provided in the absence of government? Maybe Bill Gates and Jeff Bezos would have an incentive to cough up some cash since they have a lot of wealth to protect, but most people (including most rich people) might figure that someone else would cover the cost and they could enjoy protection for free.

This two-part series from Marginal Revolution University explains public goods, using the example of asteroid defense. Here’s an introductory video.

And here’s a follow-up version that has a bit more detail.

I’m writing about this wonky issue because the debate over public goods, at least in some quarters, also is a debate about the size of government.

Consider this image of supposed public goods.

It shows all sorts of activities where governments today play a role, but most of those things aren’t actually public goods since they can be – and sometimes are – privately provided (see examples for fire protection, money, roads, education, health, air traffic control, and parks).

In other words, as Professor Tabarrok noted in the second video, something isn’t a public good just because it’s currently being handled by government.

Indeed, let’s look at the classic example of lighthouses, which often are cited as an example of something that absolutely must be provided by government. Yet scholars have found that the private sector led the way (before being supplanted by government).

For a more prudent view of public goods, Ronald Reagan’s FY1987 budget included a set of principles to help guide whether the federal government should play a role in various areas.

Those six principles could even be boiled down to one principle: Always opt for the private sector whenever possible.

I’ll close by identifying the bureaucracies in Washington that provide genuine public goods. As you can see, much of the federal government (Department of Housing and Urban Development, Department of Education, Department of Energy, Department of Agriculture, Department of Transportation, etc) doesn’t qualify.

To be sure, I’m using a broad-brush approach with this image. Some of the bureaucracies that I crossed out do a few things that qualify as public goods (such as nuclear weapons research at the Department of Energy), and the bureaucracies that didn’t get crossed out do lots of things (such at veterans health care) that should be in the private sector.

The bottom line is that much of the federal government isn’t needed, based on what’s a genuine public good. And for much of America’s history, at least prior to the 1930s, Washington was only a tiny burden because it was only involved in a few areas, such as national defense.

Though it’s worth noting that government could – and should – be much smaller even using an expansive definition of public goods and the role of government.

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Because of changing demographics and poorly designed entitlement programs, the burden of government spending in the United States (in the absence of genuine reform) is going to increase dramatically over the next few decades.

That bad outlook will get even worse thanks to all the coronavirus-related spending from Washington.

This is bad news for America since more of the economy’s output will be consumed by government, leaving fewer resources for the private sector. And that problem would exist even if all the spending was magically offset by trillions of dollars of unexpected tax revenue.

Many people, however, think the nation’s future fiscal problem is that politicians will borrow to finance  that new spending. I think that’s a mistaken view, since it focuses on a symptom (red ink) rather than the underlying disease (excessive spending).

But regardless of one’s views on that issue, fiscal policy is on an unsustainable path. And that means there will soon be a fight between twho different ways of addressing the nation’s grim fiscal outlook.

  • Restrain the growth of government spending.
  • Divert more money from taxpayers to the IRS.

Fortunately, we now have some new evidence to help guide policy.

A new study from the Mercatus Center, authored by Veronique de Rugy and Jack Salmon, examines what actually happens when politicians try to control debt with spending restraint or tax increases.

Here’s what the authors wanted to investigate.

Fiscal consolidation can take two forms: (1) adopting a debt-reduction package driven primarily by tax increases or (2) adopting a package mostly consisting of spending restraint. …What policymakers might not know is which of these two forms of consolidation tend to be more effective at reining in debt levels and which are less harmful to economic performance: tax-based (TB) fiscal consolidation or expenditure-based (EB) fiscal consolidation.

Here’s their methodology.

Our analysis focuses on large fiscal consolidations, or consolidations in which the fiscal deficit as a share of GDP improves by at least 1.5 percentage points over two years and does not decrease in either of those two years. …A successful consolidation is defined as one in which the debt-to-GDP ratio declines by at least 5 percentage points three years after the adjustment takes places or by at least 3 percentage points two years after the adjustment. …Episodes in which the consolidation is at least 60 percent revenue increases are labeled TB, and episodes in which the consolidation is at least 60 percent spending decreases are labeled EB.

And here are their results.

…of the 45 EB episodes, more than half were successful, while of the 67 TB episodes, less than 4 in 10 were successful. …The results in table 2 show that while in unsuccessful adjustments most (74 percent) of the changes are on the revenue side, in successful adjustments most (60 percent) of the changes are on the expenditure side. In successful adjustments, for every 1.00 percent of GDP increase in revenues, expenditures are cut by 1.50 percent. By contrast, in unsuccessful adjustments, for every 1.00 percent of GDP increase in revenues, expenditures are cut by less than 0.35 percent. From these findings we conclude that successful fiscal adjustments are those that involve significant spending reductions with only modest increases in taxation. Unsuccessful fiscal adjustments, however, typically involve significant increases in taxation and very modest spending reductions.

Table 2 summarizes the findings.

As you can see, tax increases are the least effective way of dealing with the problem. Which makes sense when you realize that the nation’s fiscal problem is too much spending, not inadequate revenue.

In my not-so-humble opinion, I think the table I prepared back in 2014 is even more compelling.

Based on IMF data, it shows nations that imposed mutli-year spending restraint and how that fiscally prudent policy generated very good results – both in terms of reducing the spending burden and lowering red ink.

When I do debates at conferences with my left-wing friends, I almost always ask them to show me a similar table of countries that achieved good results with tax increases.

Needless to say, none of them have ever even attempted to prepare such a list.

That’s because nations that repeatedly raise taxes – as we’ve seen in Europe – wind up with more spending and more debt.

In other words, politicians pull a bait-and-switch. They claim more revenue is needed to reduce debt, but they use any additional money to buy votes.

Which is why advocates of good fiscal policy should adamantly oppose any and all tax increases.

Let’s close by looking at two more charts from the Mercatus study.

Here’s a look at how Irish politicians have mostly chose to restrain spending.

And here’s a look at how Greek politicians have mostly opted for tax increases.

It goes without saying (but I’ll say it anyhow) that the Greek approach has been very unsuccessful.

P.S. For fiscal wonks, one of the best parts of the Mercatus study is that it cites a lot of academic research on the issue of fiscal consolidation.

Scholars who have conducted research find – over and over again – that spending restraint works.

In a 1995 working paper, Alberto Alesina and Roberto Perotti observe 52 efforts to reduce debt in 20 Organisation for Economic Co-operation and Development (OECD) countries between 1960 and 1992. The authors define a successful fiscal adjustment as one in which the debt-to-GDP ratio declines by at least 5 percentage points three years after the adjustment takes place. In successful adjustments, government spending is reduced by almost 2.2 percent of gross national product (GNP) and taxes are increased by less than 0.5 percent of GNP. For unsuccessful adjustments, government expenditure is reduced by less than 0.5 percent of GNP and taxes are increased by almost 1.3 percent of GNP. These results suggest that successful fiscal adjustments are those that cut spending and include very modest increases in taxation.

International Monetary Fund (IMF) economists John McDermott and Robert Wescott, in a 1996 paper, examine 74 episodes of fiscal adjustment in which countries attempted to address their budget gaps. The authors define a successful fiscal adjustment as a reduction of at least 3 percentage points in the ratio of gross public debt to GDP by the second year after the end of an adjustment. The authors then divide episodes of fiscal consolidation into two categories: those in which the deficit was cut primarily (by at least 60 percent) through revenue increases, and those in which it was reduced primarily (by at least 60 percent) through expenditure cuts. Of the expenditure-based episodes of fiscal consolidation, almost half were successful, while of the tax-based episodes, less than one out of six met the criteria for success.

Jürgen von Hagen and Rolf Strauch observe 65 episodes in 20 OECD countries from 1960 to 1998 and define a successful adjustment as one in which the budget balance stands at no more than 75 percent of the initial balance two years after the adjustment period. …it does find that successful consolidations consist of expenditure cuts averaging more than 1.2 percent of GDP, while expenditure cuts in unsuccessful adjustments are smaller than 0.3 percent of GDP. The opposite pattern is true for revenue-based adjustments: successful consolidations consist of increases in revenue averaging around 1.1 percent, while unsuccessful adjustments consist of revenue increases exceeding 1.9 percent.

American Enterprise Institute economists Andrew Biggs, Kevin Hassett, and Matthew Jensen examine over 100 episodes of fiscal consolidation in a 2010 study. The authors define a successful fiscal adjustment as one in which the debt-to-GDP ratio declines by at least 4.5 percentage points three years after the first year of consolidation. Their study finds that countries that addressed their budget shortfalls through reduced spending burdens were far more likely to reduce their debt than countries whose budget-balancing strategies depended upon higher taxes. …the typical successful adjustment consists of 85 percent spending cuts and just 15 percent tax increases.

In a 1998 Brookings Institution paper, Alberto Alesina and coauthors reexamined the research on the economic effects of fiscal adjustments. Using data drawn from 19 OECD countries, the authors assess whether the composition of fiscal adjustments results in different economic outcomes… Contrary to the Keynesian view that fiscal adjustments are contractionary, the results of this study suggest that consolidation achieved primarily through spending reductions often has expansionary effects.

Another study that observes which features of fiscal adjustments are more or less likely to predict whether the fiscal adjustment is contractionary or expansionary is by Alesina and Silvia Ardagna. Using data from 20 OECD countries during 1960 to 1994, the authors label an adjustment expansionary if the average GDP growth rate in the period of adjustment and in the two years after is greater than the average value (of G7 countries) in all episodes of adjustment. …The authors conclude, “The composition of the adjustment appears as the strongest predictor of the growth effect: all the non-expansionary adjustments were tax-based and all the expansionary ones were expenditure-based.”

French economists Boris Cournède and Frédéric Gonand adopt a dynamic general equilibrium model to compare the macroeconomic impacts of four debt reduction scenarios. Results from the model suggest that TB adjustments are much more costly than spending restraint when policymakers are attempting to achieve fiscal sustainability. Annual consumption per capita would be 15 percent higher in 2050 if consolidation were achieved through spending reductions rather than broad tax increases.

In a review of every major fiscal adjustment in the OECD since 1975, Bank of England economist Ben Broadbent and Goldman Sachs economist Kevin Daly found that “decisive budgetary adjustments that have focused on reducing government expenditure have (i) been successful in correcting fiscal imbalances; (ii) typically boosted growth; and (iii) resulted in significant bond and equity market outperformance. Tax-driven fiscal adjustments, by contrast, typically fail to correct fiscal imbalances and are damaging for growth.”

Economists Christina and David Romer investigated the impact of tax changes on economic activity in the United States from 1945 to 2007. The authors find that an exogenous tax increase of 1 percent of GDP lowers real GDP by almost 3 percent, suggesting that TB adjustments are highly contractionary.

…the IMF released its annual World Economic Outlook in 2010 and included a study on the effects of fiscal consolidation on economic activity. The results of studying episodes of fiscal consolidation for 15 OECD countries over three decades…reveals that EB fiscal adjustments tend to have smaller contractionary effects than TB adjustments. For TB adjustments, the effect of a consolidation of 1 percent of GDP on GDP is −1.3 percent after two years, while for EB adjustments the effect is just −0.3 percent after two years and is not statistically significant. Interestingly, TB adjustments also raise unemployment levels by about 0.6 percentage points, while EB adjustments raise the unemployment rate by only 0.2 percentage points.

…a 2014 IMF study…estimates the short-term effect of fiscal consolidation on economic activity among 17 OECD countries. The authors of the IMF study find that the fall in GDP associated with EB consolidations is 0.82 percentage points smaller than the one associated with TB adjustments in the first year and 2.31 percentage points smaller in the second year after the adjustment.

Focusing on the fiscal consolidations that followed the Great Recession, Alesina and coauthors…find that EB consolidations are far less costly for economic output than TB adjustments. They also find that TB adjustments result in a cumulative contraction of 2 percent of GDP in the following three years, while EB adjustments generate very small contractions with an impact on output not significantly different from zero.

A study by the European Central Bank in 2018…finds that macroeconomic responses are largely caused by differences in the composition of the adjustment plans. The authors find large and negative multipliers for TB adjustment plans and positive, but close to zero, multipliers for EB plans. The composition of adjustment plans is found to be the largest contributor to the differences in economic performance under the two types of consolidation plans.

The bottom line is that nations enjoy success when they obey fiscal policy’s Golden Rule. Sadly, that doesn’t happen very often because politicians focus mostly on buying votes in the short run rather than increasing national prosperity in the long run.

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Back in 2011, the Center for Freedom and Prosperity released this video citing four nations – Canada, Ireland, Slovakia, and New Zealand – that achieved very good results with multi-year periods of genuine spending restraint.

Today, let’s focus on what’s been happening with government spending in Canada.

As explained in the video, America’s northern neighbor enjoyed a five-year period in the 1990s when government spending increased by an average of just 1 percent annually, with most of that progress occurring when the Liberal Party was in charge.

This fiscal probity – an example of my Golden Rule before I even invented the concept – paid big dividends.

The overall burden of government spending, measured as a share of economic output, declined substantially.

And because Canadian lawmakers dealt with the underlying problem of too much spending, that automatically solved the symptom of red ink.

That’s the good news.

The bad news is that Canada’s current prime minister, Justin Trudeau, has been spending a lot of money.

Jon Hartley, in an article for National Review, looks at his fiscal policy.

In June, Fitch downgraded Canada’s sovereign debt, revoking its prized AAA status. …Canadian finance minister Bill Morneau recently revealed that Canada’s projected 2020 deficit is now C$343 billion, a whopping 16 percent of GDP. …The Trudeau government now finds itself in a quandary over how to get to grips with its increased government spending. …This won’t be the first time that Canada has had to wrestle with its federal debt… Perhaps unsurprisingly, there has been speculation that the Trudeau government is now looking to institute a controversial federal housing-equity tax on primary residences… Canada now has high middle-class tax rates and, if federal and provincial taxes are combined, a top marginal tax rate of over 53 percent in the most populous province, Ontario. …Simply printing money to pay for Canadian sovereign debt is probably not on the cards either. …What’s lacking for now is any obvious policy path to return the country to economic normality and restore a semblance of control to the nation’s finances.

This is helpful analysis, especially when thinking about how Canada will try to climb back out of the fiscal hole caused by the coronavirus.

But I think it’s more revealing to see Trudeau’s track record before the virus.

So I went to the database for the IMF’s World Economic Outlook, which was released late last year before the disease wreaked havoc with government finances.

Here’s the data showing the spending burden has grown almost twice as fast under Trudeau (2016-2020) as it did in the previous five years (2011-2015).

Since Canada has a federal system, this data includes spending increases by sub-national governments. So it’s not clear how much Trudeau should be blamed compared to his predecessor.

But surely we can conclude that fiscal policy has deteriorated during his reign.

Also, the IMF data for the Trudeau years is preliminary. But since we want to see what was happening before the coronavirus, these numbers are actually the ones we want to use.

The bottom line is that Canada was moving in the wrong direction before the coronavirus and the spending burden has jumped dramatically since the disease hit.

This does not bode well for Canada’s long-run economic health.

P.S. Notwithstanding fiscal deterioration under Trudeau, Canada is still a surprisingly pro-market country, ranked #8 in the world. Moreover, it has some very sensible policies involving school choice, welfare reformcorporate tax reform, bank bailoutsregulatory budgeting, the tax treatment of saving, and privatization of air traffic control.

P.P.S. Here’s my early assessment (from 2016) of Trudeau’s agenda, and here’s what I wrote last year about his misguided tax policy.

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Way back in January of 2017, I predicted for a French TV audience that Donald Trump would be a big spender like George Bush instead of a small-government conservative like Ronald Reagan.

Sadly, I was right.

I crunched the numbers earlier this year and showed that Trump has been a big spender, no matter how the data is sliced.

Perhaps most shocking, he’s even allowed domestic spending to increase faster than it did under Bill Clinton, Jimmy Carter, and Barack Obama.

That’s a terrible track record, especially compared to Reagan’s impressive performance (by the way, these calculations were made before all the coronavirus-related spending, so updated numbers would make Trump look even worse by comparison).

Anyhow, I’m looking at this issue today because of a recent story in the Washington Post.

The Reagan Foundation just told the Trump people to stop using the Gipper’s likeness in their fundraising appeals.

The Ronald Reagan Presidential Foundation and Institute, which runs the 40th president’s library near Los Angeles, has demanded that President Trump and the Republican National Committee (RNC) quit raising campaign money by using Ronald Reagan’s name and likeness. …What came to the foundation’s attention — and compelled officials there to complain — was a fundraising email that went out July 19… The solicitation offered, for a donation of $45 or more, a “limited edition” commemorative set featuring two gold-colored coins, one with an image of Reagan and one with an image of Trump. …Proceeds from the coin sales went to the Trump Make America Great Again Committee, a joint fundraising operation that benefits both the Trump campaign and the RNC. …In the 1990s, both Reagan and his wife Nancy signed legal documents that granted the foundation sole rights to their names, likenesses and images. …the RNC accepted the foundation’s demand regarding the fundraising emails.

It’s unclear why the Reagan Foundation made the request.

For what it’s worth, I hope officials were motivated at least in part by disappointment with Trump’s anti-conservative record on government spending (and also on trade).

Simply stated, Trump is no Reagan.

While I’m a big fan of the Gipper, I don’t pretend he had a perfect track record. But I think it’s correct to say that his goal was to advance liberty by shrinking government, even if there were occasional detours.

For instance, Holman Jenkins noted in his Wall Street Journal column that Reagan always had the right long-run goals even when he made short-run comprises on trade that were unfortunate.

Reagan slapped import quotas on cars, motorcycles, forklifts, memory chips, color TVs, machine tools, textiles, steel, Canadian lumber and mushrooms. There was no market meltdown. Donald Trump hit foreign steel and aluminum, and the Dow Jones Industrial Average fell more than 600 points… The real difference is that Reagan’s protectionist devices were negotiated. They were acts of cartel creation… This was unattractive but it wasn’t a disaster, and Reagan’s protectionism quickly fell away when a global upswing began. …Mr. Trump wants a spectacle with himself at the center. …His confused and misguided ideas about trade are one of his few long and deeply held policy commitments.

And if you need more evidence, look at what Reagan said about trade here, here, and here.

Can you imagine Trump giving such remarks? Or even understanding the underlying principles?

There are also important differences in the populism of Trump and Reagan, as explained by Jonah Goldberg of the American Enterprise Institute.

…there are different kinds of conservative populism. Until recently, right-wing populism manifested itself in the various forms of the tea party, which emphasized limited government and fiscal restraint. That populism…is very different from Trump’s version. …Reagan’s themes and rhetoric were decidedly un-Trumpian. The conservative populist who delivered “A Time for Choosing” used broadly inclusive language, focusing his ire at a centralized government that reduced a nation of aspiring individuals to “the masses.” …Reagan’s populist rhetoric was informed by a moderate, big-hearted temperament, a faith in American exceptionalism… He warned of concentrated power that corrodes self-government.

I’ll close with the observation that Trump has enacted some good policies, especially with regard to taxes and red tape.

The bottom line is that I’m not trying to convince anyone to vote for Trump or to vote against Trump.

Instead, I simply want people to be consistent and principled advocates of economic liberty instead of blind partisans.

As explained in my Ninth Theorem of Government.

In other words, I don’t care if you’re an enthusiastic supporter of Trump. Just don’t let that support lead you to somehow rationalize that wasteful spending and protectionism are somehow good ideas.

And I don’t care if you’re an enthusiastic never-Trumper. Just don’t let that hostility lead you to somehow decide that tax cuts and deregulation are bad ideas.

P.S. In my speeches over the past few years, I’ve run into many people who tell me that Trump must be good because the media hates him the same way they hated Reagan. It’s certainly true that the establishment press has visceral disdain for both of them. I’ll simply point out that media hostility is a necessary but not sufficient condition for determining whether a Republican believes in smaller government.

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Two days ago, I looked at top income tax rates for the various states.

Yesterday, I shared the data for the states on sales tax rates.

The big takeaway from those two sources of data is that California politicians are very greedy.

But are they the greediest politicians in the country? What if we also measure other sources of tax revenue (property taxes, excise taxes, severance taxes, etc)?

And what about the various fees and charges that also are imposed by state and local governments?

To account for all these factors, we obviously need a comprehensive measure. And since the real cost of government is how much it is spending (regardless of whether the outlays are financed by taxes or borrowing), the most accurate approach is to calculate the relative spending burdens imposed by state and local governments.

The Census Bureau actually collects that data (albeit with a lag, so the most-recent data is for 2017).

But you don’t simply want to look at total spending by state and local governments. You also want to adjust for population (specifically, the population data for 2017) so we can calculate the per-capita burden of state spending.

Moreover, it’s also important to understand that some states have varying levels of income (for historic reasons, policy reasons, and difference in the cost of living). So if you want to calculate the economic burden of state and local spending, you also need data on state personal income for 2017.

So I put all these numbers into an excel file and crunched the numbers to see how the 50 states (plus Washington, DC) compare based on these two ways of showing fiscal burdens.

The following table shows the good states, at least relatively speaking. I’m amazed to see Connecticut and New Jersey in the top 10 for spending as a share of personal income. This merits further investigation, but one obvious takeaway is that it’s good to be a high-income state.

The goal, of course, should be to appear on both lists. On that basis, Idaho, Florida, and Nevada deserve praise.

But this three-part series isn’t designed to highlight the good states.

We want to know which states have the greediest politicians. And greed is being measured by their propensity to buy votes by spending other people’s money.

Once again, we’ll show the spending data both as a share of personal income and as a per-capita calculation. On this basis, Alaska is terrible (the politicians spend oil money with reckless abandon), as is the District of Columbia.

Wyoming also is a state with profligate politicians. It has no income tax and a modest sales tax, but lawmakers (just like in Alaska) can’t resist buying votes with all the money generated by energy taxes (which is why I penalized the state when writing about good state tax systems back in 2015).

This explains why North Dakota is on both lists as well.

If we focus on states that don’t get lots of money from energy taxes, than New York and Oregon deserve special scorn for appearing in both columns.

P.S. One area that requires further exploration (partially explained by the Third Theorem of Government) is the impact of 1,386 federal transfer programs that subsidize/encourage more spending by state and local governments.

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Some people say that California is the worst-governed state (I would probably choose Illinois or New Jersey, but it’s a close race).

And if you wanted to pick the worst-governed place in California, San Francisco might be at the top of the list.

The city manages to combine horrible zoning laws with insufferable red tape (there have been efforts to ban everything from Happy Meals to…umm…foreskins).

Most disturbing of all, San Francisco now has a major problem with public defecation (not that the sewer system is anything to brag about).

In an article for City Journal, Erica Sandberg explores the latest bit of upside-down governance from The City by the Bay.

San Francisco is surreptitiously placing homeless people in luxury hotels by designating them as emergency front-line workers, a term that the broader community understands to mean doctors, nurses, and similar professionals. …the city has evoked emergency-disaster law to keep the information private. Officials refuse to notify the public about what is happening in their community and are blocking the press by withholding the list of hotels and preventing reporters from entering the properties. …obfuscation is ultimately futile. Security guards standing outside hotel entrances, where they had never been before, are clear indicators that something is amiss. An uptick in crime, drug activity, and vagrancy around the hotels is another clue.

This sounds crazy, but it gets even worse.

The Department of Public Health manages the controversial free alcohol, cigarette, and cannabis program for homeless people placed in the hotels. …A public-records investigation into the matter has revealed that, as of June 16, DPH approved $3,795.98 to buy the homeless guests vodka and beer (cigarettes have been scrapped). …concerned inside sources report destroyed rooms and rampant illegal drug use. In one hotel, guests are given needle kits and are advised to call the front desk before shooting up. …The hotels were pressured into accepting the homeless guests, though they were also eager for the chance to recoup some revenue lost to the Covid-19 lockdowns. …The city-sponsored guests also receive personal grooming, sanitary, and cleaning supplies, three delivered meals, and laundry service for clothes and linens.

Free hotel room, along with free food and laundry service? And booze and pot?

Who knew being homeless was such a good racket!

Since I’m a fiscal wonk, this is the part that captured my attention.

Rooms are rented at close to $200 per night, totaling $6,000 a month—nearly double the cost of a private one-bedroom apartment in San Francisco.

Though I shouldn’t be surprised by such profligacy. The state government’s “success story” was spending “billions of dollars” to cause homelessness to “dip by 1 percent.”

And San Francisco’s government had a different program for the homeless that cost about $700 per night. So maybe the new approach described in above article is a fiscal bargain.

By the way, it appears that taxpayers across the country are contributing to this insane policy.

Hotel owners consented to the arrangements fully aware of the potential pitfalls, having been assured that FEMA dollars would cover at least some of the damages incurred.

Good ol’ FEMA. Always ready, willing, and able to foolishly spend taxpayer money.

P.S. While San Francisco is a bit of a mess, folks in other cities (such as Seattle, Chicago, New York City, Detroit, etc) can make a legitimate claim that they have the nation’s worst local government.

P.P.S. When he crunched all the numbers, Dean Stansel of Southern Methodist University found that the Riverside-San Bernardino-Ontario metropolitan statistical area in California had the worst policy in the country (San Francisco was #38 out of the 55 MSAs with at least 1 million residents).

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There are plenty of people on the left who write serious and substantive articles about fiscal policy. For instance, I strongly disagree with many of the policy prescriptions from the IMF and the OECD, but those international bureaucracies are reasonably rigorous with data.

Heck, they even use real data when they’re being dishonest.

Some people, though, churn out analysis that is utterly disconnected from reality. I’m even thinking of creating a Fiscal Fantasyland Club to commemorate their fact-deprived writings.

  1. In a column for the Washington Post, Dana Milbank blamed the “disastrous philosophy” of “anti-government conservatism” for leaving the federal government without the resources to fight the coronavirus.
  2. In an article for the Atlantic, George Packer told readers that the federal government screwed up because it has been subjected to “steady defunding” by right-wing ideologues intent on “squeezing it dry.”
  3. Another columnist for the Washington Post, Dan Balz, claims that the botched response to coronavirus was caused by “underinvestment” and “hollowing out” of the federal budget.

The reason we may need a special club (akin to my collection of “Poverty Hucksters“) is that all of these writers are wildly wrong.

Even a cursory look at budget data confirms that the federal government has been getting bigger over time.

Much bigger.

As such, only someone who is completely ignorant or totally dishonest is capable of writing an article based on the notion that there have been reductions in the burden of federal spending.

If I create this club, I know who will be fourth member.

Writing for the Bulwark, Richard North Patterson argues that President Trump’s personal shortcomings are somehow connected to Reagan-type opposition to big government.

He starts with one of my favorite quotes from The Gipper and then tells us that this type of hostility to statism is no longer appropriate or desirable.

In 1986, Ronald Reagan cheerfully gibed: “The nine most terrifying words in the English language are ‘I’m from the government, and I’m here to help.’” Then it seemed amusing. But 34 years later, the convergence of COVID-19 and a racial conflagration makes Reagan’s quip sound myopic. …Only government can ensure the safety of our food and drugs and protect our natural environment. And government can help navigate our racial fissures, and provide the economic and public health interventions indispensable to combating a deadly pandemic.

Given that Washington’s response to the coronavirus has been spectacularly incompetent, well beyond what even libertarians would have predicted, it’s remarkable that Patterson thinks this is a moment in time when people should embrace big government.

And let’s not forget that today’s racial unrest was triggered by government misbehavior, enabled by corrupt deals between local politicians and government employee unions.

But the real problem with Patterson’s rhetoric is that he seems to assume that an argument for some government is the same as an argument for lots of government.

He’s obviously not familiar with the Rahn Curve, which is based on the insight that some government may be good for growth (assuming the outlays are for core public goods) but that lots of government (particularly when spending is for consumption and redistribution) is bad for growth.

To be fair, I understand why Patterson, who is mostly known for being a very successful novelist, isn’t familiar with the academic research on the growth-maximizing size of government.

But since he’s decided to pontificate on these issues, he should feel an obligation to know some basic data.

For instance, he’s a wealthy man and presumably has traveled the world. Hasn’t he noticed that nations with big governments don’t do a better job of providing public goods – even if we use an expansive concept of what government should be doing?

Let’s look at some more of his article.

Patterson not only rejects the notion of smaller government, he seems to embrace bigger government.

What was once a philosophical preference for limited government has degenerated into phobia. “Long before Trump,” GOP strategist Stuart Stevens observes, “the Republican Party adopted as a key article of faith that more government was bad. But somewhere along the way, it became ‘all government is bad.’ Now we are in a crisis that can be solved only by massive government intervention.” …Witnessing so much death and disturbance, one cannot but ponder how poorly Reagan’s casual nostrum has aged. Farhad Manjoo nails it: “The most comforting words I can think of now, amid so much uncertainty, chaos and confusion, are these: ‘I’m from the government, and I’m here to help.’”

There’s a lot of nonsense in those few sentences. Regarding Manjoo’s quote, I’ll simply repeat my earlier observation about how the federal government has hindered rather than helped the fight against the coronavirus.

The quote from Stuart Stevens is even stranger, at least the the latter part, because it is so completely contrary to real-world data.

While it is true that Reagan briefly reoriented Republicans and did a good job of controlling spending while he was in office, every other Republican in recent history has been a big spender.

They’ve even increased domestic spending at a faster rate than Democratic presidents.

Yet Stevens wants people to believe that’s the track record of a party that thinks “all government is bad.”

I also want to debunk the notion that there’s been a “decades-long gutting of government,” as asserted in the subtitle of Patterson’s article.

Here’s a chart that I shared back in April, which shows that federal spending has tripled since 1980 – and that’s after adjusting for inflation.

If you read Patterson’s entire article, you’ll find that he mostly focuses on President Trump’s chaotic management of the executive branch.

Since I’ve gone on TV and referred to Trump as being akin to the crazy uncle you deal with during family holidays, I’m certainly not going to argue with his criticisms of the White House’s governing style.

But surely it should be possible to criticize the president without relying on make-believe budget analysis.

P.S. I wonder if Patterson and other members of the Fiscal Fantasyland Club have been tricked into thinking that there have been budget cuts.

P.P.S. If Patterson decides to learn and use real budget data, I hope he’ll join me in criticizing Trump for being a big spender.

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Should high-tax states such as California and New York get a bailout?

I explained last month why that would be a mistake, in large part because bailouts would reward states for irresponsible fiscal policy (similar to my argument that countries like Austria and the Netherlands shouldn’t be bullied into providing bailouts for Italy and Spain).

And I’ve shared two videos (here and here) for those who want more information about how bailouts encourage “moral hazard.” And this is true for banks (think TARP) as well as governments.

Today, though, I want to focus on some numbers that show what’s really causing fiscal problems in some states.

Adam Michel and David Ditch of the Heritage Foundation have generated some startling data on state government finances.

Instead of waiting on a handout from Washington, states should clear the way for a more robust economic recovery by addressing their unsustainable finances. States and local government spending has increased over the recent past… After adjusting for inflation and increases in population, state and local spending (in constant 2019 dollars) has grown from $5,596 per person in 2000 to $7,268 per person in 2019. That amounts to a 30% increase in the real cost of state and local government over just two decades, even without the thousands of dollars per person the federal government sends to states and localities through a wide variety of programs. …not all states spend equally. As of 2017, Florida, Georgia, and Arizona spent about $5,800 per person on state and local governments, but New York spent more than $11,700 per person.

The most important number is the above excerpt is that there’s been a 30 percent increase in per-capita state spending after adjusting for inflation.

That’s a very worrisome trend.

But not all states are created equal. Or, to be more precise, they’re not all equally profligate. Here’s the chart that starkly illustrates why some states are in trouble.

At the risk of understatement, California and New York have not complied with the Golden Rule for fiscal policy.

Needless to say, there’s no justification for the notion that taxpayers in well-run states such as Texas and Florida should be coerced into providing bailouts for politicians in poorly run states.

And now we have a compelling visual that settles the argument.

P.S. Over the past several years, I’ve done multiple columns comparing Texas and California and also several columns comparing New York and Florida, all of which underscore that blue states have created their own problems by taxing too much and spending too much.

P.P.S. Thankfully, people can vote with their feet by moving from high-tax states to low-tax states. Let’s hope that Congress doesn’t enact a bailout so they’re forced to subsidize the states that drove them away.

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Margaret Thatcher was the British version of Ronald Reagan, a leader who resuscitated a nation by rolling back the size and scope of government.

She also is famous for one of the most accurate observations ever made about fiscal policy.

Her warning proved prophetic when the Soviet Bloc collapsed.

Her wise words also could be applied to what happened about a decade ago in Greece. And what’s about to happen in Italy.

But let’s not forget that the United States isn’t immune to the problem of excessive government. The Wall Street Journal has a sobering editorial on the pro-spending sentiment that dominates the nation’s capital.

…in Washington the politicians are debating how to spend another few trillion dollars in the name of virus relief. …Mrs. Pelosi’s House bill promises another $3 trillion for her various constituencies on top of the $2.7 trillion or so Congress has already spent on the pandemic. The goal is income redistribution… This political strategy may work since Republicans, as usual, are divided and defensive. …Mr. Trump…seems torn about what to support and is thinking only as far as November. This is a recipe for another deal on Democratic terms… Sooner or later the pandemic will end. The question is what kind of economy will be left. A second Cares Act would leave a legacy of vastly larger government that would mean slower growth and take years to overcome.

Yes, the spending binge will mean slower growth.

But I’m even more worried about what will happen in the future. Here are three things to keep in mind.

  1. Largely because of Bush, Obama, and Trump, the federal budget has tripled since 1980 (Reagan and Clinton were comparatively frugal). Keep in mind that the increase in the accompanying chart shows the growth in spending after adjusting for inflation.
  2. The burden of federal spending is projected to skyrocket in future years because of the combination of demographic changes and poorly designed entitlement programs. In other words, our fiscal outlook is grim even if politicians don’t approve an additional penny of new spending.
  3. However, politicians are spending more money. A lot more.  As shown in the accompanying chart, this has caused a huge spike in per-capita outlays. And the crowd in Washington wants to make the red portion much bigger.

Given all this bad news, does Thatcher’s warning about running out “of other people’s money” apply to the United States?

As bad as the numbers are, my two cents is that the U.S. won’t suffer a fiscal crisis anytime soon. As I noted at the end of this interview, Washington can probably continue with business-as-usual fiscal policy for several more decades (Adam Smith observed that it usually takes a lot of bad policy over a long period of time to cause economic ruin).

But that doesn’t mean it’s a good idea to travel down that path.

Here’s an analogy. Smoking three packs of cigarettes a day presumably won’t kill someone within the first 10 years, but it’s definitely not a recipe for long-run health and vitality. Sooner or later, there will be consequences.

A mature and sensible people (like the Swiss) take steps to avoid the fiscal version of those bad consequences.

For what it’s worth, similar reforms have been proposed for the United States. Unfortunately, too many American politicians and consumed by self-interest and don’t think past the next election.

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Politicians from New York want states to get a big bailout from Uncle Sam. I explained earlier this month that this would be a bad idea.

Simply stated, the Empire State is in big trouble because it has a bloated government, not because of the coronavirus.

Probably the strongest piece of evidence is that New York is ranked #50 for fiscal policy according to Freedom in the 50 States.

If you want to understand how New York’s politicians have created a fiscal disaster, let’s compare the Empire State to Florida, which is ranked #1.

I’ve already done that three times (Round #1, Round #2, and Round #3), so this will be Round #4.

The Wall Street Journal compared the two states in an editorial two days ago.

…let’s do the math to consider which state has managed its economy and finances better over the last decade. …Democrats in Albany are claiming to be victims of events that are out of their control. But they have increased spending by $43 billion since 2010—about $570,000 for each additional person. Florida’s budget has increased by $28 billion while its population has grown 2.7 million—a $10,400 increase per new resident. New York has a top state-and-local tax rate of 12.7%, while Florida has no income tax. Yet New York has a growing budget deficit, while Mr. Scott inherited a large deficit but built a surplus and paid down state debt. The difference is spending. …Blame New York’s cocktail of generous benefits, loose eligibility standards and waste. New York spends about twice as much per Medicaid beneficiary and six times more on nursing homes as Florida though its elderly population is 20% smaller. …The rate of private job growth in Florida has been about 60% higher than in New York from January 2010 to January 2020. Finance jobs expanded by 25% in Florida compared to 9.7% in New York. …The policy question is why taxpayers in Florida and other well-managed states should pay higher taxes to rescue an Albany political class that refuses to restrain its tax-and-spend governance. Public unions soak up an ever-larger share of tax dollars, but Albany refuses to change.

If you want further details on the difference between the two states, Chris Edwards takes a close look at the burden of government spending.

New York and Florida have similar populations of 20 million and 21 million, respectively. But governments in New York spent twice as much as governments in Florida, $348 billion compared to $177 billion. On some activities, spending in the two states is broadly similar… But in other budget areas, New York’s excess spending is striking. New York spent $69 billion on K-12 schools in 2017 compared to Florida’s $28 billion. Yet the states have about the same number of kids enrolled—2.7 million in New York and 2.8 million in Florida. New York spent $71 billion on public welfare compared to Florida’s $28 billion. Liberals say that governments provide needed resources to people truly in need. Conservatives say that generous handouts induce high demand whether people need it or not. Given that New York’s welfare costs are 2.5 times higher than Florida’s, the latter effect probably dominates. …New York governments employed 1,196,632 workers in 2017 compared to Florida’s 889,950 (measured in FTEs). …Most New York residents do not benefit from bloat in government payrolls, inefficient transit, excessive welfare, and deficit spending. To them, the high taxes are disproportionate to the government services received. That is why they are moving to better‐​managed states with lower taxes.

Here’s the accompanying chart.

And he also compares the level of bureaucracy in both states.

New York’s excess includes spending more on handouts such as welfare. Another cause of New York’s high spending is employment of more government workers and paying them more than in Florida. …New York governments employ 34 percent more workers than Florida governments. …The two states have similar K-12 school enrollments of 2.7 million in New York and 2.8 million in Florida. But New York employs 31 percent more teachers and administrators than Florida. Do the 111,000 extra staff in New York generate better school outcomes? Apparently not…study puts Florida near the top and New York in the middle on school quality. Does New York really need two times more highway workers than Florida and three times more welfare workers? …Government workers in New York make 42 percent more in wages than government workers in Florida, on average.

Here’s the accompanying chart.

The bottom line is that New York is a great place to be an over-paid bureaucrat in an over-staffed bureaucracy.

But if you’re a taxpayer, Florida is the easy winner – which may explain why so many productive people are leaving the Empire State and permanently migrating to the Sunshine State.

P.S. The same pattern exists all across the United States. Taxpayers are escaping the poorly managed states and fleeing to low-tax states. Especially ones with no income taxes.

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When I write enough columns with the same underlying point, I sometimes create a special page to highlight the theme, such as the “Bureaucrat Hall of Fame” and “Poverty Hucksters.”

I may have to do something similar for people who assert that America’s response to the coronavirus has been hampered because the federal government is too small.

For instance, Dana Milbank wrote in the Washington Post last month that “anti-government conservatism…caused the current debacle with a deliberate strategy to sabotage government.”

Ironically, the nations he cited for their successful approach – Singapore, South Korea, and Taiwan – all have a much smaller burden of government spending than the United States.

Which actually supports my argument that bigger governments are less effective and competent.

But evidence doesn’t seem to matter to some journalists.

One of Milbank’s colleagues, Dan Balz, has just authored a long article that regurgitates the assertion that there’s been “underinvestment” in the federal government.

The government’s halting response to the coronavirus pandemic represents the culmination of chronic structural weaknesses, years of underinvestment and political rhetoric that has undermined the public trust… The nation is reaping the effects of decades of denigration of government and also from a steady squeeze on the resources needed to shore up the domestic parts of the executive branch. This hollowing out has been going on for years as a gridlocked Congress preferred continuing resolutions and budgetary caps… The question is whether the weaknesses and vulnerabilities exposed by the current crisis will generate a newfound interest among the nation’s elected officials — and the public — in repairing the infrastructure of government. …“We don’t want to invest in the capacity of government to get the job done,” Kettl said. …said David E. Lewis, a political science professor at Vanderbilt University…“We’re seeing a government that is suffering now from a long period of neglect that began well before this administration. And that neglect has accelerated during this administration.”

What’s especially remarkable is that the article cites the government’s lack of testing capacity as evidence of “underinvestment.”

Over these years, there have been a series of major government breakdowns that helped shake confidence in government’s competence. …The pandemic has forced another critical look at government’s competence. …more tests might have helped contain the spread. It is the case now as businesses look to reopen but cannot assure safety for workers or their communities without the widespread availability of tests, which so far does not exist.

Yet the bureaucracies with responsibility for testing – the FDA and CDC – have received big budget increases.

Was that money well spent?

Hardly. Not only have they failed in their mission, their red tape and inefficiency have hindered the private sector’s ability to develop and deploy tests.

Notwithstanding all this evidence, Balz wants readers to believe that people don’t have faith in government because of hostile rhetoric from politicians.

Marc Hetherington, a professor at the University of North Carolina, said the public conversation about government began to shift with the election of Ronald Reagan in 1980. …“What changed with Reagan and the decades since is that the conversation moves away from what government ought to do to government is incompetent to do things,” he said. …Democratic politicians have engaged in some of the same kind of thing. “Every candidate has campaigned on a bureaucracy-bashing theme,” Nabatchi said. “That message has gotten through to affect people’s confidence in government.”

The alternative explanation, needless to say, is that people don’t have confidence in the public sector because government has a long track record of mistakes and incompetence.

But I guess that’s merely my opinion.

So let’s instead close today’s column with some hard data.

Here’s a chart I shared last month while debunking an article by George Packer for the Atlantic (he claimed we have “a federal government crippled by years of…steady defunding”).

It shows that federal spending has tripled since 1980. And that’s after adjusting for inflation!

Which led me to observe that, “The bottom line is that I can’t figure out whether to be more dismayed that journalists are innumerate or that major publications apparently don’t have fact checkers.”

That same sentiment obviously applies to Dan Balz and the Washington Post.

P.S. While Balz and Milbank were guilty of avoiding numbers, the Washington Post doesn’t have a great track record when its journalists try to use numbers. In other words, maybe the problem is bias rather than innumeracy.

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The good news is that there will be a record reduction next year in the burden of government spending. Unfortunately, the bad news is that this reduction will only occur because of gigantic spending increases this year.

In this webinar, I explain how fiscal policy is being affected by coronavirus, and then explain why a spending cap is the way to restore fiscal sanity.

You can watch the full webinar, organized by Lebanon’s Modern University for Business and Science, by clicking here.

But if you don’t want to watch the entire event, or even my 11-minute presentation, all you really need to understand is that red ink is exploding this year. Not just in the United States, but in other nations as well.

The fiscal wreckage, as illustrated in this chart I shared for the audience, is greater than the world experienced during the financial crisis/great recession.

For what it’s worth, I wish the chart specified how much of the debt is caused by additional spending and how much is caused by declining tax revenues.

It’s also worth noting that these numbers will probably deteriorate even further over the next few months. Politicians are likely to approve more handouts and subsidies. And if there’s not a rapid economic recovery (I express doubt about that outcome in my remarks), tax revenue will continue to fall far short of baseline estimates.

The sad reality is that we don’t know the full degree of the coronavirus-caused fiscal wreckage. That being said, it’s safe to assume that – sooner or later – there will be a big debate in Washington over how to reverse the damage. And in other nations as well.

In my presentation, I explained why a Swiss-style spending cap is the right approach. In other words, simply impose a limit so that government grows slower than the private economy – i.e., fiscal policy’s Golden Rule.

I’d like to be able to specifically show how a spending cap would undo the current mess, but that’s not possible because we can only make wild guesses about the full extent of the fiscal fallout.

That being said, I’ll share two pieces of evidence to show the value of a spending cap.

First, here’s an estimate I prepared earlier this year to show how America’s fiscal situation would have been much stronger today if a spending cap had been imposed back in 2000.

Needless to say, it would have been nice if the U.S. had big surpluses when the coronavirus hit.

Our second piece of evidence is the experience of the U.S., France, and the U.K. in the decades before World War I.

All three nations had enormous debt burdens as a result of previous conflicts.

And all three countries dramatically reduced debt by using the same strategy of long-run spending restraint.

The bottom line is that spending restraint has worked in the past and it can work in the future.

Unfortunately, I doubt that either Donald Trump or Joe Biden is interested in that approach.

P.S. One thing we can say for certain is that responding with tax increases almost surely will make a bad situation even worse.

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I’ve warned that the budgetary impact of the coronavirus may trigger another fiscal crisis in Europe.

Especially Italy.

But what about the United States? Will we reach a point, as Margaret Thatcher famously warned, of running out of other people’s money?

We probably still have a couple of decades before that happens, as I speculated at the end of a recent interview, but that doesn’t mean we should continue down our current path.

The Wall Street Journal opined on this topic yesterday, citing newly released estimates from the Congressional Budget Office.

Friday’s Congressional Budget Office report on the federal fisc for April…usually a surplus month as tax payments roll in, but the Treasury postponed tax day this year until July 15. We are grateful for such small government favors. Spending more than doubled in April from the year before and revenue fell by 55%. …we are all apparently supposed to be converts to Modern Monetary Theory. This is the view that governments can spend whatever they like because the Federal Reserve can monetize it without economic harm. We may get to test this proposition. …the damage from so much spending will come in two ways. First, in resources misallocated to government rather than into private hands to invest. Second, in the tax increases that the political class will eventually impose, perhaps starting as early as 2021.

As is so often the case, the WSJ is correct in its analysis.

The fiscal crisis won’t be too much red ink. That’s merely the symptom of the real disease, which is that government is getting far too big.

As the editorial warns, this undermines prosperity because resources get diverted from the economy’s productive sector.

And as that spending burden increases, it means more and more pressure for tax increases, which further penalize growth. I’ve already noted that politicians will try to exploit the crisis by imposing a wealth tax, but I think the real prize – in the mind of statists – is a money-gobbling value-added tax.

I’ll close by sharing a chart from Brian Riedl of the Manhattan Institute, which estimates the per-capita burden of inflation-adjusted federal spending in the United States.

The red portion of the chart is coronavirus-related spending, plus future interest payments on the additional borrowing for all that spending, and the blue portion is spending in prior years plus estimates of future spending (already on an upward trajectory because of poorly designed entitlement programs).

That chart does not paint a pretty picture, but Brian’s numbers may be too optimistic. He assumes that the coronavirus-related emergency spending is just temporary and that additional interest on a bigger debt is the only long-run impact.

But if politicians make some of that spending permanent (which will be in their self-interest), then we’ll be traveling even faster in the wrong direction.

All the more reason to impose a spending cap, which is the only major fiscal reform with a track record of success.

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A couple of weeks ago, I debunked a remarkably anti-empirical column by Dana Milbank of the Washington Post.

He claimed that America’s response to the coronavirus was hampered because government is too small, yet the nations he cited as successful role models actually have much smaller public sectors than the United States.

I congratulated him for accidentally making a strong case for libertarianism and providing evidence for my Seventh Theorem of Government.

Unfortunately, other journalists share Mr. Milbank’s ignorance with regards to easily accessible data on fiscal policy.

Writing for the Atlantic, George Packer asserts that the U.S. response to the coronavirus has been a miserable failure because government is too small.

Every morning in the endless month of March, Americans woke up to find themselves citizens of a failed state. …a federal government crippled by years of right-wing ideological assault, politicization by both parties, and steady defunding. …tests for the virus were almost impossible to find… years of attacking government, squeezing it dry and draining its morale, inflict a heavy cost that the public has to pay in lives. All the programs defunded, stockpiles depleted, and plans scrapped meant that we had become a second-rate nation.

Michael Brendan Dougherty of National Review takes apart Packer’s column.

He points out that CDC funding has increased, while also noting that the bureaucracy has squandered the additional money it has received.

…the CDC’s funding has increased — not that it has made good use of the extra money. This is not a lean and mean virus-fighting machine, getting by on starvation-level resources. It maintains a Hollywood liaison to consult on films. In recent years, it has expanded beyond its core mission to promote motorcycle safety and sponsor programs dedicated to fostering “safe, stable, nurturing relationships” in schools. If you’re wondering why there was lots of political and social messaging larding up CDC documents on COVID-19, just realize that when Congress increases an agency’s funding, the result is likely to be more ideological make-work jobs rather than a more effective workforce. …as for public-sector health-care spending, ours is not notably low — it’s roughly equivalent to those of the developed nations of Western Europe.

And he also observes that nations with smaller governments have done a better job than countries with bigger governments.

…The East Asian states that have done best in fighting COVID-19 are not social-democratic but hyper-capitalist. Compared with them — and to America —Western Europe has done much worse at containing the spread of the coronavirus and the holding down the death toll.

Excellent points.

For my contribution to this debate, I’m going to investigate whether Mr. Packer is right about “steady defunding” of the federal government.

To see whether he is correct about “programs defunded,” I went to Table 1.3 of the Historical Tables of the Budget and created the following chart to see what happened to inflation-adjusted spending over the past 40 years.

Lo and behold, it turns out that Mr. Packer is completely wrong. There hasn’t been any defunding. Not even close.

Instead, the inflation-adjusted burden of government is almost three times greater today than it was the year Reagan was elected (and it will be more than three times greater once all the emergency spending is included).

The bottom line is that I can’t figure out whether to be more dismayed that journalists are innumerate or that major publications apparently don’t have fact checkers.

P.S. There were periods when spending grew faster than at other times. There were also times when the private sector grew faster than the government (fulfilling the Golden Rule). And we also can see the how government exploded because of TARP and Obama’s faux stimulus and then was briefly constrained during the Tea Party era (and is now climbing rapidly under Trump).

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As explained in this short video, a spending cap limits how fast a government’s budget can grow each year.

That’s a very sensible approach, sort of like having a speed limit in a school zone, and even left-leaning international bureaucracies have concluded it’s the best fiscal rule.

That being said, not all spending caps are created equal. A fiscal rule that allows continuous increases in the burden of government spending is akin to an excessive speed limit on the road in front of an elementary school.

At a minimum, a spending cap should keep the spending burden constant (relative to the economy’s productive sector). Even better, a spending cap should fulfill the Golden Rule of fiscal policy by slowly but surely reducing the size of government.

Let’s learn from a real-world example.

Ben Wilterdink, a Visiting Fellow with the Alaska Policy Forum, explains for readers of the Peninsula Clarion that the state has a spending cap, but one that is set too high.

Alaska is in the midst of a perfect fiscal storm. …Even before the present crisis, our state faced large budget deficits and tough decisions about how to make ends meet. …That’s why adopting a functional limit on the growth in state spending is essential for long-term economic success. …a functional limit in the growth of state spending decreases the temptation to dramatically increase spending when economic times are good, creating new budget expectations that are difficult to maintain during inevitable economic downturns… Technically, Alaska already has a constitutional spending cap in place, but the formula used renders it basically meaningless. …While Alaskans can’t retroactively adopt a meaningful spending limit, we can ensure that those economic benefits are captured going forward.

So why is a spending cap now an important issue?

Because the state relies overwhelmingly on energy taxes, which are very cyclical, and the drop in oil prices is putting pressure on state finances.

This isn’t an overnight phenomenon. Here’s some of what Henry Olsen wrote last year for the Washington Post.

Alaskans have long financed their state government without paying for it themselves. Alaska has no personal income tax and no statewide sales or property tax. Instead, the state uses taxes and royalties on oil and gas producers to fund the overwhelming share of its government. …Alaska Gov. Mike Dunleavy (R) told his constituents that the gravy train is over. Oil prices and production have been down for many years… Dunleavy showed the leadership that many conservatives contend is lacking in Washington and proposed slashing state spending by nearly 25 percent. Those cuts are real, not some phony accounting scheme against “projected” spending. …Dunleavy’s budget is forcing Alaskans to decide how much government they want and how much they are willing to pay for it.

The bad news is that Alaskans may decide they want more government. Indeed, Olsen suggests in his column that this may be the outcome.

That might even lead politicians in the state to do something really unfortunate, such as adopting a state income tax.

The key thing to understand, however, is that the state would not be in this position if it had the kind of meaningful spending cap that Ben Wilterdink discussed in his column.

I wrote about Alaska’s fiscal policy back in 2015 and shared a very depressing chart showing that the burden of state spending tripled in the eight-year period between 2005 and 2013.

Just imagine, though, if spending during that period only grew at the rate of population plus inflation. The state would be in a very strong fiscal position today instead of dealing with a big mess (that’s also the case for the federal government, which also deals with revenue fluctuations).

So what’s the bottom line? Here’s another excerpt from Wilterdink’s column, noting that Colorado’s spending cap is a good role model.

…the most effective is Colorado’s Taxpayer Bill of Rights (TABOR), which constitutionally limits spending growth to the rate of inflation plus estimated population growth. The stable budget and tax climate created by TABOR has served Coloradans remarkably well. Over the past decade, Colorado’s gross state product (GSP) has grown by 45.5%, personal income has grown by 59.5%, and non-farm payroll employment has grown by 15.8%.

Amen. Colorado’s TABOR policy is a common-sense policy with a strong track record. And Colorado voters, most recently last November, routinely reject proposals to bust the state’s spending cap. So it’s an economic success and a political success.

P.S. If Alaska (or any other jurisdiction) wants global examples of successful spending caps, Switzerland and Hong Kong are good role models.

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