Understanding Keynesian Economics

While speaking last week at the Acton Institute in Michigan, I responded to a question about the perpetual motion machine of Keynesian economics.

For purposes of today’s column, let’s try to understand the Keynesian viewpoint.

First and foremost, they think spending drives the economy, whether consumer spending or government spending.

Critics like me argue that the focus should be on income and production. We want to increase saving, investment, entrepreneurship, and labor supply. Simply stated, money has to be earned before anyone spends it.

Keynesian economists, by contrast, think it is very important to distinguish between the long run and short run. In the long run, they generally would agree with the previous paragraph.

But they would argue that “stimulus” policies can be desirable in the short run if there is an economic downturn.

More specifically, they argue you can stop or minimize a recession with fiscal Keynesianism (politicians borrowing in order to boost spending) and/or monetary Keynesianism (the central bank creating money to boost spending).

I then point out that Keynesianism has a history of failure when looking at real-world evidence.

• It didn’t work for Hoover.
• It didn’t work for Roosevelt.
• It didn’t work for Japan.
• It didn’t work for Europe.
• It didn’t work for Obama.
• It didn’t work for Biden.

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

• They were wrong about growth after World War II (and would have been wrong, if they were around at the time, about growth when Harding slashed spending in the early 1920s).
• They were wrong about Thatcher in the 1980s.
• They were wrong about Reagan in the 1980s.
• They were wrong about Canada in the 1990s.
• They were wrong after the sequester in 2013.
• They were wrong about unemployment benefits in 2020.

As you might expect, Keynesians would claim I’m misreading the evidence. They would argue that their policies prevented even-deeper recessions. Or that periods of spending restraint prevented the economy from growing faster.

So you can see why the debate never gets settled.

I’ll close with the observation that Keynesian policies actually can impact the economy. As I pointed out in the video, we can artificially boost overall consumption and spending in the short run if politicians finance a so-called stimulus by borrowing money from overseas. And we can lure people and businesses into borrowing and spending in the short run by having a central bank create more money.

But that’s sugar-high economics, the kind of approach that only helps vote-buying politicians.

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More Evidence for Switzerland’s Spending Cap

Back in 2012, I wrote a column for the Wall Street Journal to highlight the success of Switzerland’s spending cap (also known as the “debt brake”).

Swiss voters voted for this spending cap in 2001 and ever since it took effect in 2003, government spending has increased by an average of 2.2 percent annually, only about half as fast as it was growing in the decades before the cap was imposed.

To show the ongoing success of the debt brake, here’s a map comparing changes in the burden of spending in Switzerland and its four major neighbors (France, Germany, Italy, and Austria). As you can see, IMF data reveals that Switzerland has been more responsible.

I even calculated changes in national spending burdens since the start of the pandemic.

You can see that all governments used the virus as an excuse for more spending, but the fiscal damage was most contained in Switzerland.

Seems like Switzerland is a role model, right?

Professors Steve Hanke and Barry Poulson presumably agree. They have a column in National Review arguing in favor of a similar spending cap for the United States.

President Biden’s budget proposal for 2024 makes it clear that the U.S. needs a budget straitjacket sooner rather than later. …Switzerland has been arguably the most successful country in reining in budget deficits and its debt burden. …The Swiss debt brake requires that expenditures be brought into balance with revenues. A cap is imposed on spending based on expected revenue, and revenue is projected based on long-term trends in the real growth of national income. Expenditures may exceed the cap in response to extraordinary events such as war, but if that’s the case, eventually, revenues from budget surpluses must be generated and set aside to offset this excess expenditure. We propose a debt brake for the U.S. that would initially be more stringent than the Swiss debt brake…a spending limit (read: cap) be calculated each year, and that the cap be reduced by 1 percent.

Interestingly, they want a spending cap that is stricter than the Swiss version.

That would be ideal (the tighter the cap, the greater the progress), but I’d settle for the Swiss approach. Why? Because here’s the data comparing US profligacy and Swiss prudence.

When I contemplate these numbers, my disdain for Bush, Obama, Trump, and Biden becomes even more intense.

They all put political ambition about what’s best for America.

But I’m digressing. Let’s put the focus back on the success of the Swiss spending cap.

It’s worth noting, for instance, that Switzerland also is out-performing the United States when comparing changes in government debt.

And the Swiss also have been enjoying better economic performance since they imposed a spending cap on their politicians.

I’ll close by observing that a spending cap would have prevented massive debt accumulation in the United States. And the same is true for other nations as well.

P.S. Colorado has a very successful spending cap known as TABOR.

P.P.S. There’s plenty of academic evidence for Switzerland’s debt brake. But what’s more surprising are that pro-spending cap studies from the International Monetary Fund (here and here), the Organization for Economic Cooperation and Development (here and here) and the European Central Bank (here and here).

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The Most Important Thing to Understand about Biden’s New Budget

President Biden has released his 2024 budget, which mostly recycles the tax-and-spend proposals that he failed to achieve as part of his original “Build Back Better” plan.

It is not easy figuring out his worst policy.

• Is it one of the proposed tax increases, such as the higher corporate tax rate or the increased burden of the death tax?
• Is it one of the expansions of the welfare state, such as the per-child handouts that would gut Bill Clinton’s welfare reform?

I could probably write dozens of columns (as I did the past two years) about the many bad policies that Biden is pushing.

For today, though, let’s focus on the aggregate numbers.

We’ll start with the fact that Biden’s budget violates the Golden Rule of fiscal policy. He wants the burden of government spending over the next 10 years to increase at twice the rate of inflation (based on Table S-1 and S-9 of his budget)

If you want raw numbers, Biden wants the spending burden to rise from about $6.4 trillion this year to $10 trillion-plus in 2033.

On the revenue side, he wants the tax burden to jump from $4.8 trillion this year to nearly $8 trillion in 2033.

To be fair, spending and taxes automatically increase every year, thanks to inflation, demographic change, and previously enacted legislation.

You can see those “baseline” numbers in Table S-3 of Biden’s budget.

So if we want to see the net effect of what Biden is proposing, we should compared the “baseline” data to his budget numbers.

And when we do that, we find that he wants an additional $1.85 trillion of spending over the next 10 years. Even more shocking, he wants an additional $4.85 trillion of tax revenue.

I’ll close with a couple of observations.

First, Biden has a giant gimmick in his budget. If you look at the details for his proposed per-child handout (Table S-6 of his budget, bottom of page 142), you’ll notice that he’s only proposing the policy for one year.

Why? Because it is enormously expensive, with an annual cost of more than $250 billion.

Yet we know the White House and congressional Democrats want this policy to be permanent. So if we extended the cost of the per-child handout for the full 10 years, the amount of new spending in Biden’s budget would be much closer to the level of new taxes in his budget.

Second, Biden’s budget shows why supporters of good fiscal policy should not focus on deficits. A myopic fixation on red ink allows a big spender like Biden to claim the moral high ground because his proposed tax increase is even bigger than his proposed spending increase.

The variable that matters is the overall burden of government spending. And the goal should be reducing that burden, regardless of whether it is financed with taxes, borrowing, or printing money.

P.S. At the risk of stating the obvious, Biden’s tax-and-spend agenda would cause considerable economic damage.

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Deficit Spending and Inflation

In this segment from a December interview, I explain that budget deficits are most likely to produce inflation in countries with untrustworthy governments.*

The simple message is that budget deficits are not necessarily inflationary. It depends how budget deficits are financed.

If a government finances its budget deficits by selling bonds to private savers and investors, there is no reason to expect inflation.**

But if a government finances its budget deficits by having its central bank create money, there is every reason to expect inflation.

So why would politicians ever choose the second option? For the simple reason that private savers and investors are reluctant to buy bonds from some governments.

And if those politicians can’t get more money by borrowing, and they also have trouble collecting more tax revenue, then printing money (figuratively speaking) is their only option (they could restrain government spending, but that’s the least-preferred option for most politicians).

Let’s look at two real-world examples.

• Consider the example of Japan. It has been running large deficits for decades, resulting in an enormous accumulation of debt. But Japan has very little inflation by world standards. Why? Because governments bonds are financed by private savers and investors, who are very confident that the Japanese government will not default..
• Consider the example of Argentina. It has been running large deficits for decades. But even though its overall debt level if much lower than Japan’s, Argentina suffers from high inflation. Why? Because the nation’s central bank winds up buying the bonds because private savers and investors are reluctant to lend money to the government.

If you want some visual evidence, I went to the International Monetary Fund’s World Economic Outlook database.

Here’s the data for 1998-2022 showing the average budget deficit and average inflation rate in both Japan and Argentina.

The bottom line is that prices are very stable in Japan because the central bank has not been financing Japan’s red ink by creating money.

In Argentina, by contrast, the central bank is routinely used by politicians as a back-door way of financing the government’s budget.

*To make sure that my libertarian credentials don’t get revoked, I should probably point out that all governments are untrustworthy. But some are worse than others, and rule-of-law rankings are probably a good proxy for which ones are partially untrustworthy versus entirely untrustworthy.

**Borrowing from the private sector is economically harmful because budget deficits “crowd out” private investment. Though keep in mind that all the ways of financing government (taxes, borrowing, and money creation) are bad for prosperity.

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European Commission Recommends Economic Suicide

What’s the main fiscal and/or economic problem in the European Union?

• Is it that the burden of taxes and spending is very onerous today?
• Or is it that the burden of taxes and spending will become more onerous in the future?

The easy and correct answer is that both are major problems.

But some people think the problem is that EU nations don’t tax and spend enough.

To make matters worse, this kind of thinking infects the bureaucrats at the European Commission, which has released a new report that reads like a Bernie Sanders campaign screed.

It starts by pretending that that Okun’s tradeoff doesn’t exist.

…taxation can contribute to both social justice and sustainable growth, as well as financing the benefits which underpin the social citizenship contract… Contrary to the rhetoric about the inevitability of a trade-off between social justice and economic growth and a fiscal crisis of the State, the problems of financing the welfare state are far from being inevitable. …everyone should be willing to pay their share of the costs involved, whether individuals or companies.

It then explicitly endorses “pay as you go” as a model for fiscal policy, even though that approach is utterly impractical for a region with aging populations and falling birthrates.

The first specific suggestion is that a PAYG approach is the best way to link the rights and duties of generations over time, in line with the social citizenship contract at the heart of the welfare state.

The report has 21 recommendations. Here are the ones that endorse and embrace new and expanded entitlements.

As you might expect, all that new spending is accompanied by a seemingly endless list of new and expanded taxes.

There are two main options for reforming the taxation of personal income. The first is to expand the tax base by limiting or reducing the many tax breaks that are currently present, from tax credits and tax allowances to tax exemptions and preferential treatment of different sources of income, such as income from capital… The second option for reform is to make the taxation of income more progressive. …Increasing corporate taxation. …As with preferential personal income tax regimes, the EU has an important role to play in levelling the playing field, so eliminating the negative externalities of tax competition and ending the ‘race to the bottom’, as well as making multinationals pay their fair share of tax. …there are a number of arguments for higher taxes on wealth. …Increasing taxes on wealth could help to achieve greater fairness, both in the tax system and in the distribution of resources… A tax on net wealth could complement taxes on income from capital… Indirect taxes…can make it easier to achieve social objectives, as in the case of ‘sin’ taxes… Measures such as the EU carbon tax border adjustment mechanism…can prevent unfair competition… Another option is to tax excess profits… A ‘web tax’ aimed at the excess profits of digital service companies, based on their turnover, could be a transitional step… A levy on financial transactions can also be justified, on grounds of fairness… A further option for Member States is to introduce a new tax, …a surcharge levied at source on all incomes… In summary, there are many options for achieving an adequate, fair, and sustainable means of financing of social protection at both EU and Member State levels.

That’s a frightening list.

And if it looks like it might get implemented, one can only imagine how productive people in Europe would start making plans to escape.

But the bureaucrats recommend Soviet-style exit taxes so they can continue grabbing more money.

Another option would be to tax expatriates for a given number of years after they leave the EU.

Let’s close by looking at one final excerpt.

Nations in the European Union supposedly are bound the “Maastricht Critieria” from something called the Stability and Growth Pact.

These fiscal rules focus on limiting deficits and debt and thus are not nearly as good as the spending cap in Switzerland’s “debt brake.”

But even these weak rules apparently are too stringent according to the report.

…there is widespread agreement on the value of social investment for sustaining the inclusive welfare state in the EU… But…the long-term benefits of social investment constantly come up against short-term pressure for fiscal consolidation. …A new system is needed for monitoring public finances in the EU that would allow policy-makers to identify productive social investment…a golden rule should be applied, allowing borrowing for social investment… A starting point should be to exempt social investment from the new Stability and Growth Pact rules.

The bottom line is that Europe already suffers from excessive fiscal burdens.

Yet the European Commission wants to drive even faster in the wrong direction.

I feel sorry for European taxpayers. Their tax dollars were used to prepare a report that outlines various ways of confiscating an even greater share of their money. That’s adding insult to injury.

P.S. The report discussed today is terrible, but probably not as bad as the European Commission’s lies about poverty or attempted brainwashing of children.

P.P.S. That being said, the EC will never be the worst international bureaucracy. The OECD and IMF compete for that honor.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

But what about taxpayers?

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

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

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

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

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

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

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Lessons from the Texas Budget

I shared some data last month from the National Association of State Budget Officers to show that Texas lawmakers have been more fiscally responsible than California lawmakers over the past couple of years.

California politicians were more profligate in 2021 when politicians in Washington were sending lots of money to states because of the pandemic.

And California politicians also increased spending faster in 2022 when conditions (sort of) returned to normal.

These results are not a surprise given California’s reputation for profligacy.

What may be a surprise, however, is that (relative) frugality in Texas has only existed for a handful of years. Here are some excerpts from a report written for the Texas Public Policy Foundation by Vance Ginn and Daniel Sánchez-Piñol.

Over the last two decades, Texas’ total state biennial budget growth has had two different phases. The first phase had budget growth above the rate of population growth plus inflation for five of the six budgets from 2004–05 to 2014–15. The second phase…had budget growth below this rate… Figure 1 shows the average biennial growth rates for the six state budgets passed before 2015 and for the four since then. The average biennial budget growth rate in the former period was 12% compared with the rate of population growth plus inflation of 7.4%. In the latter period, the average biennial growth rate of the budget was cut by more than half to 5.2%, which was well below the estimated rate of population growth plus inflation of 9.4%. This improved budget picture must be maintained to correct for the excessive budget growth in the earlier period. …there could be a $27 billion GR surplus at the end of the current 2022–23 biennium. …the priority should be to effectively limit or, even better, freeze the state budget. Texas should use most, if not all, of the resulting surplus to reduce…property tax collections…these taxes could be cut substantially by restraining spending and using the surplus to reduce school district M&O property taxes to ultimately eliminate them over time.

The article has this chart, which is a good illustration of the shift to fiscal restraint in Texas.

For all intents and purposes, Texas in 2016 started abiding by fiscal policy’s Golden Rule.

And this means the burden of government is slowly but surely shrinking compared to the private sector.

That approach is paying big dividends. Spending restraint means there is now a big budget surplus, which is enabling a discussion of how to reduce property taxes (Texas has no income tax).

P.S. I shared data back in 2020 looking at the fiscal performance of Texas and Florida compared to New York and California.

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The Simple (but Definitely not Easy) Way to Avert America’s Fiscal Crisis

Every six months or so, the Congressional Budget Office produces a 10-year forecast and most fiscal experts focus on the projections for deficit and debt.

Those are important (and worrisome) numbers, but I first look at the data showing what will happen to taxes and spending.

And you can see from this chart that the fiscal burden of the federal government is projected to grow at a very rapid pace over the next decade.

Other fiscal experts fret that deficits and debt are increasing between now and 2033, but the above chart shows that the real problem is that the spending burden is rising faster than the tax burden.

The real fiscal fight in Washington is how to close the gap between the red spending line and the green revenue line (supporters of Modern Monetary Theory say we can just print money to finance big government, but let’s ignore them for purposes of today’s column).

Since I think Washington is spending far too much, I want to close the gap by restraining the growth of government.

So here’s a second chart illustrating what would happen if there was some sort of spending cap. As you can see, a spending freeze (like we had from 2009-2014) would balance the budget by 2030.

And spending would have to be limited to 1.3 percent annual growth if the goal is to balance the budget within 10 years,

We can solve the problem. That’s the good news.

The bad news is that politicians don’t want to restrain spending.

And, even if they did want to do the right thing, adhering to a 1.3 percent spending cap would require serious entitlement reform. So don’t hold your breath hoping for immediate progress.

P.S. The numbers are out of date, but here’s a video that explains how spending restraint is the key to fiscal balance. And here’s a video on how some other nations made enormous progress with multi-year spending restraint.

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

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

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

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

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

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

So that leaves only two options.

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

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

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

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

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

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

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

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

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

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

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

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

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Assessing North Carolina’s Fiscal Policy

When I first started citing the Tax Foundation’s State Business Tax Climate Index back in 2013, North Carolina was one of the 10 worst states.

In a remarkable turnaround, North Carolina is now one of the 10 best states.

The big improvement is partly because the state joined the flat tax club.

But there were other tax cuts as well, along with some much-needed spending restraint.

Sounds like great news, but you won’t be surprised to learn that not everyone is happy about what’s happened in the Tarheel State.

In a column for the Raleigh News & Observer, Ned Barnett opined yesterday against tax cuts – both the ones that already have occurred and the new ones that the state legislature is considering.

Republican state lawmakers think cutting taxes makes North Carolina more attractive to new businesses, but cutting taxes too much has the opposite effect. …Now, with the General Assembly back in session, they’re looking to cut some more. It’s a reckless path… Since Republicans began aggressively cutting taxes in 2013, the state has lost billions of dollars in revenue. …North Carolina has excess revenue because the state has reduced what it has historically spent as a share of the state economy – a drop from 5.8 percent to 4 percent… The state corporate tax has fallen from 6.9 percent to 2.5 percent and will be phased out by 2030. The personal income tax has been stepped down from a two-tier progressive tax with a top rate of 7.75 percent to a flat tax of 4.75 percent today. Now state Senate leader Phil Berger says the legislature should consider cutting the personal income tax to 2.5 percent.

The most important data cited above is that the burden of state government spending has dropped from 5.8 percent to 4 percent of the state economy.

This upsets Mr. Barnett, but the rest of us should view this as a major triumph for genuine fiscal responsibility.

And by imposing genuine spending restraint, North Carolina lawmakers created the “fiscal space” for meaningful tax cuts.

So why is Mr. Barnett upset? In the column, he complains that some parts of the budget are not increasing as fast as he would like. But he never offers any evidence that the state is suffering economic harm.

I suspect he offered no evidence because he has no evidence.

Or perhaps he offered no evidence because the data shows that he’s wrong.

And that’s exactly what I discovered when I checked the St. Louis Federal Reserve Bank’s per-capita income data. Lo and behold, incomes in North Carolina are growing faster than the national average and faster than the regional average.

The differences are not huge, but it’s nonetheless better to have faster income growth rather than slower income growth.

Some of my more sophisticated friends on the left doubtlessly will point out that states in other regions still have higher overall levels of average income, which is a fair point, but it’s also fair for me to respond by noting that the cost-of-living is generally much lower in North Carolina.

The bottom line is that North Carolina’s better tax policy has the state moving in the right direction while high-tax states are moving in the wrong direction.

P.S. North Carolina also is close to being among the 10 best states for educational freedom.

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Does America Have an Under-Taxation Problem?

When leftists (or misguided rightists) tell me that Americans are under-taxed and that the government has lots of red ink because of insufficient revenue, I sometimes will direct them to the Office of Management and Budget’s Historical Tables in hopes of changing their minds.

I’ll specifically ask them to look at the data in Table 1-3 so they can see what’s happened to federal tax revenue over time. As you can see from this chart, nominal tax revenues have skyrocketed.

The reason that I send them to Table 1-3 is that they can also peruse the numbers after adjusting for inflation.

On that basis, we see the same story. Inflation-adjusted federal tax revenues have grown enormously.

The two charts we just examined are very depressing.

So now let’s peruse at a chart that is just mildly depressing.

If you look at federal tax revenues as a share of economic output, you’ll see that Uncle Sam currently is collecting slightly more than 18 percent of economic output. Since the long-run average is about 17 percent of GDP, that’s not a horrific increase.

However, there are still some reasons to be quite concerned.

• The Congressional Budget Office projects the tax burden as a share of GDP will expand even further over the next few decades.
• That means that politicians in DC not only are getting more money because of inflation, but also because the economy is expanding.
• Third, not only are politicians getting more money because the economy expanding, they’re slowly but surely expanding their share.

That’s very bad news for those of us who don’t like higher taxes and bigger government.

Some people, however, have a different perspective

In one of his columns for the New York Times, Binyamin Appelbaum argues that Americans are undertaxed.

…the United States really does have a debt problem. …Americans need more federal spending. The United States invests far less than other wealthy nations in providing its citizens with the basic resources necessary to lead productive lives. …Measured as a share of G.D.P., public spending in the other Group of 7 nations is, on average, more than 50 percent higher than in the United States. …There is another, better way to fund public spending: collecting more money in taxes. …If the debt ceiling serves any purpose, it is the occasional opportunity for Congress to step back and consider the sum of all its fiscal policies. The nation is borrowing too much but not because it is spending too much. The real crisis is the need to collect more money in taxes.

I give Appelbaum credit for honesty. He openly advocates for higher taxes and bigger government, explicitly writing that “Americans need more federal spending.”

And he is envious that spending in other major nations is “more than 50 percent higher than in the United States.”

But this raises the very obvious point about whether we should copy other nations with their bigger welfare states and higher tax burdens. After all, European nations suffer from weaker economic performance and lower living standards.

Does Appelbaum think we’ll have “productive lives” if our living standards drop by 50 percent?

Does he think that “invest” is the right word for policies that lead to lower economic performance?

The bottom line is that I’m completely confident that Appelbaum would be stumped by the never-answered question.

P.S. Dishonest leftists claim tax increases will lead to less red ink while honest leftists like Appelbaum admit the real goal is a bigger burden of government.

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“Prioritization” and Debt Limit Nonsense

Back in 2016, here’s what I said about the debt limit during some congressional testimony (and I made very similar points in some 2013 testimony).

Near the end of my testimony (about 4:55) I discuss “prioritization,” which is what would happen if the debt limit is not raised and the Treasury Department has to decide which payments are made (and which payments are delayed).

I then pointed out that federal tax revenues in 2017 were expected to be 11 times greater than annual interest payments.

As such, there obviously would have been plenty of cash available to make interest payments, as well as to finance other economically or politically sensitive items (I assume, for instance, that Treasury would have prioritized monthly Social Security benefits as well).

Would this have been messy? Yes. Would it have been uncharted territory not covered by the law? Yes. But would it have been better than default, which would have caused turmoil in financial markets? Another yes.

Which now brings us to the present day. We’re now in another debt limit fight, so I decided to look at the most-recent data from the Congressional Budget Office to see whether the federal government will still have plenty of cash so that interest payments on the debt can be prioritized.

Lo and behold, annual tax revenue this fiscal year is going to be more than 11 times greater than annual interest payments. Just like in 2017.

In other words, we presumably can sleep easy. There’s plenty of money to pay interest on the debt.

There would only be a default if Joe Biden or Janet Yellen (the Treasury Secretary) deliberately chose not to prioritize. And the odds of that happening presumably are way below 1 percent.

Some people may wonder why we should accept even that small risk? Why not simply increase the debt limit so that the odds of a default are 0 percent?

That’s a fair point, but it must be balanced by the recognition that the United States is on a path to long-run economic and fiscal chaos. So I can also understand why some lawmaker say the debt limit should only be raised if accompanied by some much-need spending restraint.

And, for those who care about real-world evidence, that’s what has happened in the past. Indeed, Brian Riedl notes that it’s the only plausible vehicle for altering the nation’s fiscal trajectory.

I’ll close by expressing pessimism that House Republicans will achieve anything in the current fight over the debt limit.

We won’t get something really good, like a spending cap. But I start with very low expectations, so I guess I’m happy that Republicans are at least pretending to care once again about excessive government spending.

A journey of a thousand miles begins with a first step!

P.S. I partially disagree with Brian Riedl’s list. The 1990 Bush tax increase was not a “deficit-reduction law.” And it was post-1994 spending restraint that produced a balanced budget, not Clinton’s 1993 tax increase.

P.P.S. Remember that debt is bad, but it should be viewed as a symptom. The underlying disease is excessive government spending.

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

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

But he embraced huge tax increases in an indirect fashion.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Macron’s Pension Reform Is Necessary (but Inadequate)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Washington’s Fake Spending Cut Charade

Two days ago, I dug into the C-Span archives to share a 15-year old clip of me explaining the theoretical virtues of a national sales tax.

Let’s now go back more than 30 years for this segment from a 1990 interview.

So why am I sharing my thoughts on Washington’s use of misleading budget rhetoric?

Because while I’ve pontificated about this issue in the past (three times in 2011 and two times in 2012), it’s definitely time for a refresher course.

I’m motivated by this chart from the folks at the Committee for a Responsible Federal Budget. They want readers to believe that balancing the budget over the next 10 years would require drastic spending cuts.

To understand what’s wrong with this CRFB chart, let’s go to the latest 10-year forecast from the Congressional Budget Office.

You’ll notice that this year’s federal budget is $5.87 trillion. And you’ll also notice that revenues in 2032 are projected to climb above $6.66 trillion.

At the risk of showing off my amazing math skills, $6.66 trillion is more than $5.87 trillion. Indeed, nearly $800 billion higher.

And what does that mean? Well, it means that we can balanced the budget by 2032 so long as spending does not increase by more than $800 billion between now and 2032. As illustrated by this chart.

To be fair to the CRFB crowd, they didn’t use make-believe numbers.

Their estimate is based on what would happen if the federal budget is left on autopilot, which means the budget grows every year because of factors such as inflation, demographic change, and previously legislated program expansions.

They then compared that artificial “baseline” to projected revenues. That’s how they came up with an estimate of a 26 percent budget cut.

In reality, though, government would be spending more than 13 percent more in 2032 when compared to 2023.

Here’s the bottom line: If CRFB or anyone else wants to argue that the budget should grow by more than 13 percent over the next nine years, they can make that argument. They can say that various programs are important and that overall spending should increase because of inflation. Or demographics.

Heck, they can even say spending should grow at a rapid pace because AOC and Bernie want bigger government.

We can then have an honest and fair debate. I’ll argue we need a TABOR-style spending cap and they can argue we should be like Greece or Italy.

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Fiscal Follies: Texas vs. California, Part VIII

I have a seven-part series (here, here, here, here, here, here and here) comparing Texas and California, mostly to demonstrate that the not-so-Golden State has hurt itself with excessive taxation and a bloated government.

Today, we’re going to augment our comparisons by looking at a very practical example of how California’s approach is much worse.

The National Association of State Budget Officers publishes an interesting document (at least if you’re a budget wonk) entitled State Expenditure Report.

And if you to to Table 2 of that report, you’ll find the most important measure of state fiscal policy, which shows how fast the burden of government spending increased over the past two years.

Lo and behold (but to no one’s surprise), California politicians increased the spending burden much faster than their Texas counterparts.

As you can see, both states were irresponsible the first year, thanks in large part to the all the pandemic-related handouts approved by Trump and Biden.

But California was twice as bad. Politicians in Sacramento used federal handouts to finance a grotesque spending binge (whereas the spending binge in Texas deserves a more mild adjective, such as massive).

Both states were better the second year, with California’s spending burden climbing by 2.2 percent in 2022 and Texas actually delivering a spending cut.

Remember, though, that the spending burden exploded between 2020 and 2021, so the 2022 numbers only look reasonable compared to the bloated trendline.

Now let’s consider whether California’s grotesque spending binge had negative consequences.

The answer is yes, according to a Wall Street Journal editorial.

Gov. Gavin Newsom last year touted a $100 billion budget surplus as evidence of California’s progressive superiority. He was less triumphant…when announcing a $22.5 billion deficit in the coming year, a contrast to Texas’s record $32.7 billion surplus. …California’s problem, as usual, is that Democrats baked too much spending into their budget baseline. They expanded Medicaid to undocumented immigrants over the age of 50, enacted universal pre-school and school lunches, extended paid family leave by two weeks, and boosted climate spending by $10 billion. …Much of Texas’s surplus this year owes to surging sales-tax revenue from inflation and population growth—i.e., Californians moving to Texas and spending their tax savings. Mr. Newsom claimed Tuesday that California has a more “fair” tax system than the Lone Star State and that Texans pay more in taxes. This is disinformation. According to the Census Bureau, California’s per capita state tax collections ($6,325) were second highest in the country in 2021 after Vermont. Texas’s ($2,214) were second lowest after Alaska. …California’s budget problems will grow as more of its rich and middle class move to lower-tax states like Texas.

Per-capita state tax collections are the most striking numbers in the editorial.  The average Californian is paying $6,325 for state government, nearly three times as much as the $2,214 that is paid by the average Texan.

Does anyone think that Californians are getting nearly three times as much value as their counterparts in the Lone Star State?

Based on how people are voting with their feet, the answer is obvious. But if you prefer more technical measures of state government value, California loses that contest as well.

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The Solution to Maine’s Fiscal Problems – and a Lesson for the Entire Nation

When I write about fiscal policy, there are two ever-present themes.

• Bad tax policy reduces growth and competitiveness, driving away jobs, people, and investment.
• Bad spending policy occurs when budgets grow faster than the economy’s productive sector.

And both of these themes can be found in a comprehensive new report issued by the Maine Policy Institute.

The report provides lawmakers with a detailed analysis of the state’s fiscal status and it shows specific spending reforms that would save money and create “fiscal space” for pro-growth tax reforms.

I realize that readers from most places won’t care very much about some of the Maine-specific data, but the report contains some charts that teach a very important lesson that can be applied in other states, as well as in Washington and other national capitals.

Consider, for instance, this chart showing that Maine is getting in trouble because spending in recent years is growing significantly faster than inflation.

The same is true in Washington, except the problem is far worse.

And in other states. And various cities. And other nations.

In other words, governments at all levels and in almost all places have a hard time complying with fiscal policy’s Golden Rule.

That being said, spending caps are a universal solution to this universal problem. Let’s look at Figure 10 from the report, which shows how a TABOR-style spending cap would have produced very good results for Maine.

Once again, we can take this information and apply it very broadly.

A spending cap is the smart and effective way of dealing with irresponsible fiscal policy at all levels of government.

For instance, Switzerland is well know for its spending cap, known as the debt brake. This approach has yielded very good results for the nation’s finances, but less well know is the fact that many subnational governments in Switzerland’s federalist system have their own versions of a spending cap.

The bottom line is that good fiscal policy is universally applicable. And spending restraint is a necessary precondition for that to happen.

P.S. Some people ask whether a balanced budget amendment would be better than a spending cap. This question gives me an excuse to share one more chart from the study. As you can see from Figure 9, annual tax revenues are very unstable. Sometimes they grow rapidly, sometimes they grow slowly, and sometimes they actually shrink (and the same thing is true in Washington).

This means that a balanced budget requirement is very difficult to enforce and often does not produce good results. During boom years, when revenue is rapidly increasing, politicians have too much leeway to increase spending. And during downturns, when revenue if stagnant or falling, politicians claim that spending restraint would be too difficult and they raise taxes instead.

The advantage of a spending cap is that it targets the real problem of spending (rather than the symptom of red ink). Moreover, politicians are subject to a rule that is much easier to enforce (increasing spending by, say, 2 percent every year is very straightforward compared to the wild swings in spending that occur with a balanced budget rule).

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Control the Burden of Government Spending

As part of my annual “Hopes and Fears” column, a rejuvenated interest in spending restraint was at the top of my list.

This clip from a recent interview summarizes the economic issues.

If you don’t want to watch the video, here are the three things to understand.

1. Tax-financed spending is bad for prosperity.
2. Debt-financed spending is bad for prosperity.
3. Monetary-financed spending is bad for prosperity.

And if you understand those three things, then you realize that the real problem is spending.

At the risk of over-simplifying, taxes, borrowing, and printing money should be viewed as different ways of doing a bad thing.

Since I mentioned over-simplifying, I’ll close with a couple of observations that are somewhat contradictory.

• First, I don’t worry very much about whether there is a surplus or a deficit in any particular year, but it is a good idea to have long-run fiscal balance (compared to the alternatives of financing the budget with borrowing or printing money).
• Second, while taxes are the most appropriate way to finance spending, tax increases are a reckless and irresponsible option because we have so much evidence that politicians will respond with additional spending and additional debt.

Which brings us back to the main lesson, which is that spending is the problem and spending restraint is the solution.

Not just a solution. The only solution.

P.S. This video is a bit dated, but all of the economic analysis is still completely accurate.

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The Most Laughable Tweet of 2022

I’ve shared some notable tweets this year.

• Most enjoyable
• Most savage
• Most succinct
• Most clueless
• Most informative

Today, we’re going to expand on this list with the “most laughable” tweet of 2022. But this tweet from the Republican National Committee is a case of accidental humor rather than deliberate humor.

As you might expect, the RNC did not bother trying to prove its statement.

That’s because the Republican party generally does a terrible job. Donald Trump expanded government. George W. Bush expanded government. And George H.W. Bush expanded government.

You have to go all the way back to Ronald Reagan to find a Republican who actually was on the side of taxpayers (and before him, you have to go all the way back to Coolidge).

Indeed, Republicans usually wind up expanding government faster than Democrats.

And that’s not because of the defense budget. Even when looking at just domestic spending, Republicans (other than Reagan) have a worse track record.

I have to wonder whether the folks at the RNC were doing hallucinogenic drugs when they sent out that tweet? Or was it a naive intern who heard a few speeches and was tricked into thinking the GOP actually cared about shrinking government.

The latter possibility is a good excuse to share this cartoon.

But let’s also look at some serious analysis.

Here are some excerpts from a column in the Wall Street Journal by Kimberley Strassel. She was motivated by a pork-filled handout to the tech industry this past summer, but then proceeded to list many other sins.

The GOP that is assisting in this quarter-trillion-dollar spendathon is the same GOP that last year provided the votes for a $1 trillion infrastructure boondoggle. The same GOP that in 2020 signed on to not one, not two, three or four, but five Covid “relief” bills, to the tune of some $3.5 trillion. The same GOP that…blew through discretionary spending caps. The same GOP that has unofficially re-embraced earmarks. The party occasionally takes a breather—say to gripe about the Democrats’ $1.9 trillion Covid bill in 2021—but then it’s right back to the spending grindstone. When was the last time anyone heard a Republican talk about the need to reform Social Security or Medicare? That disappeared with the election of Donald Trump (opposed to both)… Instead, a growing faction of the party sees a future in buying the votes of working- and middle-class voters with costly new entitlement proposals of their own, such as expanded child tax credits.

I don’t know whether to laugh or cry.

But since laughing is more fun, here’s a cartoon about earmarks (which recently were endorsed by Republican lawmakers).

I’ll close with a tiny bit of optimism.

I’ve dealt with hundreds of politicians over the years, most of whom were Republicans.

By and large, they usually understand that big government is bad for prosperity. But there are two things that have an impact on their voting behavior.

1. They are afraid of being rejected by voters who want freebies (especially the ones they already are receiving).
2. But they might be willing to cast courageous votes if there is a real chance of a long-run change in policy.

To elaborate on the second point, there have been three periods of spending restraint in my lifetime: 1) the Reagan years, 2) the Clinton years, and 3) the Tea Party years.

In all three cases, there was a critical mass of lawmakers who were willing to do the right thing in spite of the usual incentives in Washington to do the wrong thing.

Is there a 4th period in our future? That depends on whether the GOP returns to Reaganism.

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Understanding Biden and Red Ink

I don’t worry much about budget deficits. Simply stated, it is far more important to focus on the overall burden of government spending.

To be sure, it is not a good idea to have too much debt-financed spending. But it’s also not a good idea to have too much tax-financed spending. Or too much spending financed by printing money.

Other people, however, do fixate on budget deficits. And I get drawn into those debates.

For instance, I wrote back in July that Biden was spouting nonsense when he claimed credit for a lower 2022 deficit. But some people may have been skeptical since I cited numbers from Brian Riedl and he works at the right-of-Center Manhattan Institute.

So let’s revisit this issue by citing some data from the middle-of-the-road Committee for a Responsible Federal Budget (CRFB). They crunched the numbers and estimated the impact, between 2021 and 2031, of policies that Biden has implemented since becoming president.

The net result: $4.8 trillion of additional debt.

By the way, this is in addition to all the debt that will be incurred because of policies that already existed when Biden took office.

If you want to keep score, the Congressional Budget Office projects additional debt of more than $15 trillion over the 2021-2031 period, so Biden is approximately responsible for about 30 percent of the additional red ink.

Some readers may be wondering how Biden’s 10-year numbers are so bad when the deficit actually declined in 2022.

But we need to look at the impact of policies that already existed at the end of 2021 compared to policies that Biden implemented in 2022.

As I explained back in May, the 2022 deficit was dropping simply because of all the temporary pandemic spending. To be more specific, Trump and Biden used the coronavirus as an excuse to add several trillion dollars of spending in 2020 and 2021.

That one-time orgy of spending largely ended in 2021, so that makes the 2022 numbers seem good by comparison.

Sort of like an alcoholic looking responsible for “only” doing 7 shots of vodka on Monday after doing 15 shots of vodka every day over the weekend.

If that’s not your favorite type of analogy, here’s another chart from the CRFB showing the real reason for the lower 2022 deficit.

I’ll close by reminding everyone that the real problem is not the additional $4.8 trillion of debt Biden has created.

That’s merely the symptom.

The ever-rising burden of government spending is America’s real challenge.

P.S. If you want to watch videos that address the growth-maximizing size of government, click here, here, here, here, and here.

P.P.S. Surprisingly, the case for smaller government is bolstered by research from generally left-leaning international bureaucracies such as the OECD, World Bank, ECB, and IMF.

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Earmarks Enable a Bigger Burden of Government

As we have seen in nations such as Greece and Argentina, voters sometimes cannot resist the temptation to support profligate politicians – a process that can lead to “goldfish government.”

In effect, voters choose fiscal suicide.

There’s even a quote, often mistakenly attributed to Ben Franklin, that this is the Achilles’ Heel of democratic governments (for what it’s worth, it appears that a Scottish historian, Alexander Fraser Tytler, was the real source).

Is the United States traveling down that path? Based on long-run fiscal projections, I’m not optimistic.

The good news is that there is still time to fix our problems.

The bad news is that the crowd in Washington is not interested in doing the right thing.

If you think I’m being unduly pessimistic, consider what House Republicans did earlier this week. As Kimberly Strassel explained in her Wall Street Journal column, they decided that the swamp is actually a hot tub.

Self-awareness isn’t one of the modern GOP’s strong suits, as House Republicans proved again this week. …Leader Kevin McCarthy in September unveiled to great fanfare the party’s Commitment to America, which vowed that Republicans would “curb wasteful government spending”… Then came Wednesday’s first test of whether this was all hot air… Rep. Tom McClintock moved to repeal the recent party rule allowing earmarks. The caucus routed his motion, voting it down 158-52. Commitment to America? More like Commitment to Spoils.

She added some historical context.

The GOP swore off earmarks in 2011, when it stood for something… But when a Democratic Congress in 2021 announced intentions to bring them back, GOP trough-feeders rushed to sign up. …And the addicts aren’t interested in rehab.

Her conclusion does not pull punches.

If Republicans can’t muster the backbone to get rid of earmarks that are an affront to spending discipline, good governance and federalism, voters won’t muster the enthusiasm to keep them in charge.

Back during the era of the Tea Party, Republicans did the right thing.

Nowadays, motivated by various forces such as big-government Trumpism and big-government national conservatism, Republicans do the wrong thing.

And if you wonder whether earmarks are wrong, here are some excerpts from a column in National Review by Romina Boccia.

Earmarking contributes to excessive spending and is a distraction from more fundamental governing responsibilities, such as reining in deficit spending… Supporters of earmarks insist that they are central to Congress’s exercising its constitutional power of the purse. …To the degree that Congress leaves too much discretion to the executive to determine federal funding allocations, it should address that issue directly… Looking at the details of where the money flows, it becomes clear that earmarks mostly authorize pork-barrel spending. …Such a misdirected focus inevitably invites fraud, waste, and abuse. …The 117^th Congress included 4,963 earmarks worth a total of $9.1 billion in fiscal-year (FY) 2022 appropriations bills. From feral-swine management to aquarium subsidies to museum and theater funding to local bike paths, FY2022 earmark spending spanned the gamut of parochial interests. 

Needless to say (but I’ll say it anyhow), earmarks are directly linked to corruptions.

Politicians swap earmarks for campaign cash (and sometimes they even cut out the middleman!).

Defenders of this sleazy process sometimes claim we should not worry because earmarks represent just a small slice of a bloated federal budget.

But what they don’t realize – or what they don’t want the rest of us to understand – is that earmarks are a “gateway drug to big government addiction.”

So ask yourself a question: Do you think politicians who get lured into this oleaginous game will have any interest in controlling the overall burden of government spending?

P.S. Just in case everything I just wrote did not convince you that earmarks are a problem, then maybe this headline from September will be more compelling.

Such a depressing headline.

Such a depressing scam.

Such a corrupt system.

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Federally Subsidized State Profligacy

I was going to write about Argentina again today, following up on yesterday’s column.

But the National Association of State Budget Officers has released a new report about spending in the 50 states.

This is an opportunity to see how all the pandemic spending by Washington has encouraged bad fiscal policy at the sub-national level.

To be succinct, the answer is “a lot.”

Figure 1 shows that all the grants and handouts enabled reckless policy. For all 50 states, the burden of spending climbed 24.7 percent between 2020 and 2022.

But not all states are created equal.

So I went to Table 1 of the report to see how much spending increased in various states.

Here are some of the highlights. Special applause for Georgia (home of my beloved Bulldawgs!), which actually reduced the spending burden over the past two years. And honorary mention to North Carolina, which is further enhancing its reputation for sensible fiscal policy.

Colorado also was one of the best states, doubtlessly thanks to TABOR. And New Hampshire also deserves further plaudits for relative frugality.

The big states of Texas and Florida increased spending by less than the 24.7 percent average. As did New York, surprisingly.

I’m sure nobody is surprised to see such bad results from New Jersey and California. And Illinois deserves some sort of Booby Prize for its recklessness.

P.S. I’ll close by shifting to a different topic. As you can see from Figure 5, Medicaid (the government’s health entitlement for poor people) is consuming ever-larger shares of state budgets (and the federal budget).

Medicaid reform (block granting the program) is a very good idea to fix budget problems at the state level and to fix budget problems in Washington. And reduce fraud as well.

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

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

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

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

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

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

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

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

At the risk of understatement, I fully agree.

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

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

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

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Augmenting the Case for Spending Restraint

I explained last week that excessive government spending is responsible for about 97 percent of America’s fiscal deterioration in the 21st century.

I followed that column with two post-election pieces that explained how huge tax increases will be inevitable if there is no effort to deal with the spending problem.

Simply stated, lawmakers need to copy the fiscal restraint of the Reagan years and Clinton years.

Why? To help people enjoy better lives thanks to faster growth and more opportunity.

In the Wall Street Journal, Andy Kessler explains that smaller government is the recipe for more growth.

Winston Churchill…said: “We contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle.” The U.S. should heed that advice… economic growth is going to come from efficient supply chains and productivity in manufacturing in the U.S. Tax and spending cuts are the cure. …Republicans must resist the urge to subsidize higher energy costs and instead help slay inflation and bring back a strong, productive economy.

Let’s look at some new academic research bolstering Kessler’s argument.

Megha Jain Aishwarya Nagpal, and Abhay Jain published a study last year in the South Asia Journal of Macroeconomics and Public Finance.

The key findings deal with the Armey-Rahn Curve and can be found in the abstract.

The current study attempts to examine the linkage between government (public) spending and economic growth in the broader framework of selected South Asian Nations (SANs), BRICS and other emerging nations by using two sets of empirical modelling over the period 2007–2016 by using inverted U-shaped hypothesis, propounded by Armey curve (1995). …The key findings signify the existence of an inverted U-shaped relationship for the selected data set of emerging nations and, therefore, support the Armey curve hypothesis. The projected threshold (tipping) levels (as a percentage of GDP) are 24.31% for the government total expenditures (GTotExp), 12.92% for consumption spending (GConExp) and 7.11% for investment spending (GInvExp). It has been observed that a rise in the public spending (size) resulted in a substantial…decrease…in the growth rate when the public spending was…after…the optimal threshold level, indicating a non-monotonic association.

For what it’s worth, I think the study is wrong and that the growth-maximizing level of government spending is much lower than 24.3 percent of economic output.

But since total government spending in the United States now consumes about 40 percent of GDP, at least we can all agree that there will be more prosperity if America’s fiscal burden is dramatically reduced.

If we ever bring the spending burden back down to 24.3 percent of economic output, we can then figure out whether the ultimate goal is even lower (as it was for much of America’s history).

There is one point from the study that merits further attention. The authors estimated not only the growth-maximizing level of total spending, but also how much the government should spend on “consumption” and “investment” outlays (an issue I addressed last month).

Here’s a chart from the study showing that consumption outlays should be less than 13 percent of economic output.

P.S. If you want to watch videos that address the growth-maximizing size of government, click here, here, here, here, and here.

P.P.S. Ironically, the case for smaller government is bolstered by research from normally left-leaning international bureaucracies such as the OECD, World Bank, ECB, and IMF.

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Republican Warfare, Part III: National Conservatism and Massive Tax Increases

In yesterday’s column, I explained Republicans are not credible advocates of lower tax rates if they don’t also push for spending restraint.

And, as I explained to the Adam Smith Institute, they will be de facto advocates of higher taxes if they embrace the wrong version of national conservatism.

To understand why I’m concerned, look at the most-recent edition of the Congressional Budget Office’s long-run fiscal forecast.

It shows that the burden of government spending is going to substantially increase over the next three decades – largely due to the unchecked growth of entitlement programs such as Medicare and Medicaid.

Failure to control spending will mean two bad things – either huge tax increases or staggering levels of debt. Probably both.

And if politicians add more spending (as Biden has already done), then those long-run trend lines will get even worse.

My concern is that some national conservatives are unwilling to confront this problem and/or they support policies to make matters worse.

But first, in the interest of fairness, bigger government is not an inherent part of the national conservatism platform. At least based on the statement of principles published by The American Conservative.

That document, signed by the key advocates of national conservatism, lists 10 concepts, most of which are good from a libertarian perspective and only one of which is overtly troubling.

1. National independence (I cheer for anyone opposed to global governance)
2. Rejection of imperialism and globalism (they’re opposed to the bad form of globalism)
3. National government (very akin to “state capacity libertarianism“)
4. God and public religion (not a role for government, but they’re not pushing bad ideas)
5. The rule of law (good idea)
6. Free enterprise (they have a few unnecessary caveats)
7. Public research (I’m skeptical of this one)
8. Family and children (not a role for government, but they’re not pushing bad ideas)
9. Immigration (I’m more sympathetic than they are, but agree on the importance of assimilation)
10. Race (they want neutrality rather than preferences)

Unfortunately, some national conservatives go beyond this statement of principles and push for bigger government.

• Such as industrial policy.
• Such as per-child handouts.

But don’t believe me. Bill McGurn of the Wall Street Journal makes similar points.

Mr. Cass’s movement insists (rightly) that purely economic and material measures are limited. But whenever they move beyond rhetoric to specifics, their preferred solutions almost always turn out to be economic interventions, from child tax credits to industrial policy. …Even a cursory glance at the record of the past half-century shows government often doing the most harm to people precisely when it is trying to help them. Federal efforts to promote homeownership ended up encouraging banks to lend people more than they could afford and feeding a housing bubble. Federal college loans helped drive up tuition while leaving Americans $1.6 trillion in debt. As we ought to have learned from the Great Society, well-intentioned government policies can do immense damage to families and communities. Unfortunately, when it comes to getting the toothpaste back in the tube, government has shown much less success.

The bottom line is that national conservatives always seem to advocate bigger government when they develop or endorse specific policies.

And, to the best of my knowledge, none of them have put forth any agenda to deal with the spending problem that already exists.

That’s an agenda that guarantees future tax increases. And, for what it’s worth, one of the advocates already has embraced a tax-the-rich agenda to help finance the national conservative agenda.

If Republicans go down that path, it won’t end well (just as it didn’t end well when they embraced other fads such as compassionate conservatism, kinder-and-gentler conservatism, common-good capitalism, reform conservatism, etc).

As I’ve previously noted, there no alternative to Reaganism.

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Republican Warfare, Part II: Supply-Side Economics and Government Spending

As part of a recent discussion at the Adam Smith Institute in London, I explained why advocates of sensible taxation in the U.S. and U.K. need to be serious about controlling government spending.

At the risk of stating the obvious, it will be almost impossible to achieve better tax policy if the spending burden continues to increase and we enter an era of endless deficits and debt.

We presumably won’t get needed policy reforms from the Democratic Party (the era of JFK is long gone, and Bill Clinton’s moderate approach also is a distant memory).

But what about Republicans?

In part I of this series, I argued that Trump’s big-government populism was bad politics as well as bad policy.

But I was not arguing for establishment Republicans such as Bush or Romney.

Instead, I think the GOP needs to return to the era of Reagan-style libertarianism.

That means some things that Trumpies want, such as lower tax rates, but it also means genuine spending restraint. Which we didn’t get during the Trump years.

In part II, let’s contemplate whether this is a realistic hope, at least once we get past the Biden years.

If history is any guide, the answer is yes. Here’s another video, from more than 10 years ago, that shows the fiscal discipline the nation enjoyed under both Reagan and Clinton.

If you want more recent evidence, we also had a five-year spending freeze after the so-called Tea Party Republicans took power in 2010.

What about today? Can Republicans sober up and once again become fiscal hawks, morphing into good supply-siders who want better tax policy and spending restraint?

Or are they the bad supply-siders, meaning they spout rhetoric about tax cuts but don’t take the tough steps (such as entitlement reform) that are needed to make lower tax rates realistic?

I’ll close with a very depressing observation. The current fiscal situation is bad, but remember that things will get much worse because of demographic changes such as population aging.

Those who oppose entitlement reform necessarily are embracing huge tax increases and perpetual economic stagnation. Not to mention handing more power to Democrats.

There is no alternative.

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America’s Fiscal Problem Is Excessive Government Spending

I don’t spend much time worrying about why the United States has a big budget deficit. I’m much more concerned about the fact that the federal government is too big and that it is spending too much.

Moreover, there’s plenty of evidence that we can quickly get rid of deficits with some long-overdue spending restraint. In other words, deal with the underlying disease of excessive government and the symptom of red ink goes away.

But since many people focus first and foremost on fiscal balance, let’s take a look at why budget surpluses at the turn of the century have turned into big budget deficits.

I’m motivated to address this issue because of this chart from Brian Riedl’s impressive collection. It shows spending increases are responsible for 97.5 percent of the shift.

Some of you may be wondering if the chart is accurate. I can easily imagine my friends on the left exclaiming, “What about the Bush tax cuts and the Trump tax cuts?!?”

Those tax cuts did happen, but they were mostly offset by Obama’s “fiscal cliff” tax increase and real bracket creep (the tax burden tends to increase over time since even small increases in economic growth will push households into higher tax brackets).

So the net result of all these factors is that there has been a very small reduction (0.2 percentage points) in tax revenue as a share of economic output.

Others of you may be wondering if the spending numbers may be exaggerated because of pandemic-related spending.

That is a fair question since the crowd in Washington used the opportunity to spend a couple of trillion dollars. But the silver lining to that dark cloud is that it was almost entirely one-time spending that took place in 2020 and 2021 (for what it’s worth, budget experts have mocked Biden’s claim of deficit reduction this year since it is simply a result of expiring emergency outlays).

There is some one-time spending in 2022. As noted in the chart, Biden’s reckless student loan bailout is a big chuck of the increase in “other mandatory spending.”

As such, I suppose I should say that higher spending is “only” responsible for 96.8 percent of today’s higher deficits, not 97.5 percent.

The bottom line is that all 21st-century presidents (and Congresses) have been big spenders.

P.S. According to the long-run forecast from the Congressional Budget Office, a bad situation will get even worse over the next 30 years. And more than 100 percent of that future decline will be the result of excessive spending (something that’s been true for many years).

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TABOR Is America’s Fiscal “Gold Standard”

If Republicans do as well as expected in next Tuesday’s mid-term elections, especially with regard to gubernatorial and state legislative contests, I expect that more states will enact and expand on school choice in 2023.

That will be great news for families.

But I also want great news for taxpayers, and that’s why I’m hoping that we also will see progress on fiscal policy. To be more specific, I want to see more states copy Colorado’s very successful spending cap.

Known as the Taxpayer Bill of Rights (TABOR), it basically limits the growth of annual tax revenue to the growth of population-plus-inflation. Any revenue above that amount automatically must be returned to taxpayers.

And since the state also has a balanced-budget requirement, that means spending can only increase as fast as population-plus-inflation as well. A very simple concept.

Has TABOR been successful? Has it produced better fiscal policy and more economic prosperity?

The answer is yes. In a column for National Review, Jonathan Williams and Nick Stark say it is the “gold standard” for state fiscal policy.

TABOR is a state constitutional amendment that limits the amount of revenue Colorado lawmakers can retain and spend to a reasonable formula of population plus inflation growth. If the state government collects more tax revenue than TABOR allows, the money is returned to taxpayers as a refund. Just this year, Colorado taxpayers will receive nearly $4 billion in TABOR refund checks. If any government in Colorado intends to spend surplus revenue, increase taxes or fees, or increase debt, it must submit the proposed measure to the ballot and win the approval of a majority of voters. …Following the low-tax-plus-limited-government formula, Colorado developed into one of the most competitive business climates in the nation in the years following TABOR’s adoption. During the past three decades, Colorado has been one of the most competitive and fastest-growing economies in the nation. …Even in the face of this tremendous economic-success story, the tax-and-spend crowd have spent a tremendous amount of resources trying to demonize TABOR, often attempting to find work-arounds or suing to have TABOR declared unconstitutional. Why? In short, because it is an effective limit on the growth of government, and it restricts the wild spending increases that fund their constituencies — who generally favor big government. …Other states trying to implement meaningful checks and balances on the inexorable government-growth machine…should follow Colorado’s example.

Courtesy of Jon Caldera, here’s some of Colorado’s fiscal history, which began with a flat tax in the 1980s and then culminated with TABOR in the 1990s.

Colorado used to have a progressive income tax where people and companies would pay a higher tax rate the more money they earned. Thanks to the Independence Institute…and…economist Barry Poulson, the legislature was convinced to switch from the progressive tax to a flat one in the mid-1980s. Poulson urged that the new tax rate be 4.5% so that it would bring in the same amount of revenue as the system it was replacing. …So, of course, the legislature set the new rate at 5% to create a fine windfall, which it did. Even so, the flat income tax did what it was predicted to do. It lit the engine of Colorado’s economy. When productive people and their companies are looking to locate, they are attracted to states with low and stable tax policy. The flat tax began the Colorado boom. That boom resulted in massive tax receipts to the state. So much so that the legislature quickly felt the growing pressure of a tax rebellion. …So, we then passed the Taxpayer’s Bill of Rights in 1992. The combination of our flat tax and TABOR attracted more and more businesses and jobs to Colorado. So much so that in the late 1990s the state had to refund some $3.2 billion of surplus tax revenue to taxpayers. …The combination of our flat-rate income tax and TABOR has made for a sustainable gold rush which has turned Colorado into one of the most economically vibrant states in the country with one of the lowest unemployment rates.

I’ll close by explaining why folks on the left also should support TABOR-style spending caps.

Part of the reason is that they should care about future generations.

Part of the reason is that they should care about economic growth.

But another reason is that it may be politically beneficial. Check out these excerpts from a column in the Denver Post by Scott Gessler.

TABOR requires a vote of the people to raise taxes, incur debt, or spend excess government funds. Practically, it makes all three much harder. So Democrats hate TABOR. …conservatives love TABOR. They rarely support tax increases or additional borrowing, and for them TABOR imposes fiscal discipline and forces government to live within its means. And Colorado has avoided the ongoing fiscal crises that have plagued other states like Illinois or California. Plus, it’s hard to argue against the public’s right to vote on taxes and debt. …But what about Republicans? They’re the ones who have paid the political price. …Today, voters can oppose Republicans and support Democrats, with little fear taxes will go up. …So expect the continued irony, as Democrats attack TABOR with a unified voice, while Republicans usually support it, yet lose political strength.

Since I care about policy rather than partisanship, I hope lots of Democrats read this article and then embrace spending caps. If they don’t want to copy Colorado, they can opt for the Swiss version of a spending cap. So long as they choose something real, it will work.

That would be bad for Republicans, but good for prosperity.

P.S. Colorado is now a blue-leaning state, but voters in 2019 rejected an effort by the pro-spending lobbies to eviscerate TABOR.

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European Fiscal Policy Week, Part VI: The Swiss Spending-Cap Solution

As part of “European Fiscal Policy Week,” I’ve complained about bad Italian fiscal policy, bad Europe-wide fiscal policy, bad British fiscal policy, and also the unhelpful role of the European Union.

But I want to end the week on an optimistic note, so let’s take a look at Switzerland‘s spending cap.

Known as the “debt brake,” the rule was approved by 84.7 percent of voters back in 2001 and took effect with the 2003 fiscal year.

And if you want to know whether it has been successful, here’s a comparison of average spending increases before the debt brake and after the debt brake.

The above data comes directly from the database of the IMF’s World Economic Outlook.

There are some caveats, to be sure.

• The IMF data cited above is not adjusted for inflation, though inflation has not been a problem in Switzerland.
• The IMF numbers also show total government spending rather than just the outlays of the central government, but most cantons also have spending caps.

The bottom line is that Swiss fiscal policy dramatically improved after the spending cap took effect.

Switzerland’s Federal Finance Administration has a nice English-language description of the policy.

The debt brake is a simple mechanism for managing federal expenditure. …Expenditure is limited to the level of structural, i.e. cyclically adjusted, receipts. This allows for a steady expenditure trend and prevents a stop-and-go policy. …The debt brake has passed several tests since its introduction in 2003… The binding guidelines of the debt brake helped to swiftly balance the federal budget when it was introduced. The debt brake prevented the high tax receipts from the pre-2009 economically strong years from being used for additional expenditure. Instead, it was possible to build up surpluses and reduce debt. …s public finances are well positioned when compared internationally. Aside from the Confederation, most of the cantons have a debt brake too.

Here’s a chart from the report. It shows that debt is on a downward trajectory, especially when measured as a share of economic output (the right axis).

For what it’s worth, I’m glad the debt brake reduced debt, but I care more about controlling government spending. That being said, the Swiss spending cap also is a success on that basis.

The burden of spending as a share of GDP was increasing before the debt brake was approved. And since 2003, it’s been on a downward trajectory.

Here’s what Avenir Suisse, a Swiss think tank, wrote back in 2017.

Since the early 2000’s, Switzerland’s fiscal institutions have been successful in keeping the overall levels of taxation and spending at moderate levels. The country’s high fiscal strength is based on…Switzerland’s debt brake, a key institutional mechanism for managing public finances which subjects the Confederation’s fiscal policy to a binding rule…and contributes significantly to the country’s fiscal discipline. …Switzerland’s spending cap has helped the country avoid the fiscal crisis affecting so many other European nations. …The Swiss debt brake is the ideal model for other countries lacking fiscal discipline to embrace. …The Swiss debt brake’s most important contribution, however, cannot be measured in figures… In the early 1990s fiscal policy was oriented more towards the demands of the public sector… Today, however, the administration, the government and the parliaments believe it is self-evident that expenditures must develop in the medium term in line with revenue. Fiscal federalism, as an important element in the cantons, protects against overcrowding access to the tax side.

That last sentence deserves some elaboration. The authors are noting (“overcrowding access to the tax side”) that it is possible to increase spending by increasing taxes, but that’s not an easy option in Switzerland because voters can use direct democracy to reject tax hikes (as they have in the past).

P.S. The Debt Brake has an opt-out clause that allows more spending in an emergency. And, during the pandemic, spending did jump by more than 12 percent in just one year. But there’s also a claw-back provision that requires lawmakers to be extra frugal in subsequent years. And that policy seems to be successful. The big spending surge in 2020 was followed by two years of zero spending growth (with another year of no spending growth projected for 2023).

P.P.S. Look at this map if you want to see how much better Switzerland is than the rest of Europe.

P.P.P.S. Look at these charts if you want to see how Switzerland is doing better than the United States.

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European Fiscal Policy Week, Part III: A Continent-Wide Spending Problem

I discussed Italy’s looming fiscal crisis on Monday and then argued against a potential bailout on Tuesday.

Today, let’s focus on the rest of Europe.

I gave a presentation yesterday in Brussels about “Public Finances in the Eurozone” and used the opportunity to explain that governments are too big in Europe and to warn that demographic changes were going to lead to an even-bigger burden of government in the future.

My assessment is very mainstream, at least with regards to what will happen to national budgets in European nations.

A study from the Organization for Economic Cooperation and Development, authored by Yvan Guillemette and David Turner, examines the long-run fiscal position of member nations.

It warns that government debt levels will increase dramatically if they don’t change current policies.

… secular trends such as population ageing and the rising relative price of services will keep adding pressure on government budgets. Without policy changes, maintaining current public service standards and benefits while keeping public debt ratios stable at current levels would increase fiscal pressure in the median OECD country by nearly 8 percentage points of GDP between 2021 and 2060, and much more in some countries. …governments will need to re-assess long-run fiscal sustainability in the context of higher initial government debt levels…when considering expenditure pressures associated with ageing…, the OECD structural primary balance would deteriorate rapidly and net government debt would more than double as a share of GDP by 2050 (Figure 12).

Here is the aforementioned Figure 12. As you can see, both deficits (left chart) and debt (right chart) are driven by the cost of age-related entitlement programs.

The report also explains that the increase in red ink is being caused by a bigger burden of government spending.

Under a ‘business-as-usual’ hypothesis, in which no major reforms to government programmes are undertaken, public expenditure is projected to rise substantially in most countries… Public health and long-term care expenditure is projected to increase by 2.2 percentage points of GDP in the median country between 2021 and 2060… Public pension expenditure is projected to increase by 2.8 percentage points of GDP in the median country between 2021 and 2060… Other primary expenditures are projected to rise by 1½ percentage points of GDP in the median country between 2021 and 2060 (Figure 13, Panel A). This projection excludes potential new sources of expenditure pressure, such as climate change adaptation.

Here’s Figure 13, mentioned above. Notice the projected increases in spending in most European nations.

So what’s the best response to this slow-motion fiscal disaster?

Since more government spending is the problem, you might think the OECD would recommend ways to restrain budgetary expansion.

But that would be a mistake. As is so often the case, OECD bureaucrats think giving politicians more money is the best approach.

The present study…uses an indicator of long-run fiscal pressure that is premised on the idea that governments would seek to stabilise public debt ratios at projected 2022 levels by adjusting structural primary revenue from 2023 onward. … all OECD governments would need to raise taxes in this scenario to prevent gross government debt ratios from rising over time… The median country would need to increase structural primary revenue by nearly 8 percentage points of GDP between 2021 and 2060, but the effort would exceed 10 percentage points in 11 countries.

To be fair, the authors acknowledge that there might be some complications.

Raising taxes…appears feasible in some countries…, in other countries it may present a substantial challenge. In Belgium, Denmark, Finland and France, for instance, structural primary revenue is already around 50% of GDP… Pushing mainstream taxes on incomes or consumption further up, even by only a few percentage points of GDP, may be politically difficult and fiscally counter-productive if it means reaching the downward-sloping segment of the Laffer curve… Lundberg…identifies five OECD countries where top effective marginal tax rates (accounting for income, payroll and consumption taxes) are already beyond revenue-maximizing levels (Austria, Belgium, Denmark, Finland and Sweden). Thus, if taxes are to rise, it might be necessary to look to other bases, such as housing, capital gains, inheritance or wealth. Recent international efforts to establish a minimum global corporate tax could also enable more revenue to be raised from corporate taxes.

I’m happy that the study acknowledges the Laffer Curve, though that is not much of a concession since even Paul Krugman agrees that it exists.

And even when OECD bureaucrats admit that it may be unwise to increase some taxes, their response is to suggest that other taxes can be increased.

Sigh.

Now you understand why I’ve argued that the OECD may be the world’s worst international bureaucracy. Especially since OECD bureaucrats get tax-free salaries while urging higher taxes on the rest of us.

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