Archive for the ‘Mitchell’s Golden Rule’ Category

Republicans are probably going to surrender on spending caps, thus allowing Obama to reverse his biggest-ever defeat.

Moreover, GOPers almost surely will get nothing in exchange for raising the debt limit, thus squandering an opportunity to limit profligacy in Washington.

So I should be feeling very glum. And, truth be told, I am routinely frustrated by what happens in DC.

But one thing I’ve learned over the past three decades is that it’s very hard to win battles without doing the hard work that helps to build a consensus for policy reform.

With this in mind, I’m going to express some optimism about the case for long-run spending restraint. This may seem counter intuitive given the probable defeats that will occur in the next month or two on the BCA spending caps and the debt limit.

But I’m thinking this may be Obama’s last hurrah and that things will change dramatically after the 2016 elections.

My medium-term hopefulness isn’t based on the election of any specific candidate. Instead, it’s a reflection of the growing consensus for good policy.

For instance, Congressman Kevin Brady of Texas, writing in National Review, says that the BCA spending caps need to be expanded.

Congress’s latest effort at fiscal restraint — the Budget Control Act of 2011 — targeted the one-third of federal spending that goes for discretionary programs. This act has helped to shrink Washington’s budget deficit by two-thirds and shave Washington’s spending by a significant three percentage points of GDP. …Unfortunately, the…Budget Control Act does not address entitlements. And without common-sense reforms, the massive uncontrolled growth in entitlements will leave America with a bleak fiscal future. …Congress must build on the success of the Budget Control Act. We need smarter, 21st-century budget guardrails… The upcoming fight over the federal debt limit gives Congress an opportunity to think smartly and act boldly by enacting a responsible spending cap that limits federal spending in relation to the size of our economy.

Congressman Brady has a specific plan to cap spending growth, and he explains that it is similar to Switzerland’s very effective approach.

The Maximizing America’s Prosperity Act of 2015 (MAP) would cap federal primary spending (which includes both discretionary and entitlement spending) as a percentage of potential GDP. Under MAP, primary spending would gradually decline from 19 percent of potential GDP in fiscal year 2016 to 16 percent of potential GDP over ten years. …MAP is a very prudent approach similar to the “debt brake” that has successfully capped the growth of government spending in Switzerland.

Since I’ve already written favorably about the Swiss Debt Brake and specifically noted that the MAP Act is the closest thing to that approach in the Untied States, it’s obvious that I like spending caps.

But what about other fiscal experts in Washington?

Well, there’s significant agreement on this issue.

Kevin Hassett of the American Enterprise Institute testified on the issue earlier this month.

…countries have increasingly begun to rely on specific expenditure targets… The adoption of such targets makes a great deal of sense. …Marking spending to potential GDP would be an effective way to enact budget legislation that is transparent and difficult to game. …I encourage Congress to consider adopting a budget rule that caps spending in the U.S. (other than interest payments) at some agreed upon fraction of GDP.

By the way, Kevin mentioned in his testimony that even the IMF has identified spending caps as the only effective fiscal rule.

Returning to the views of American fiscal experts, Romina Boccia of the Heritage Foundation shared favorable thoughts about spending caps in an article for The National Interest.

…how could Congress…make long-overdue spending reforms? One way is to enact spending caps in line with Congress’s budget to pave the way for concrete reforms with the threat of automatic cuts. Such a statutory spending cap would encourage lawmakers to prioritize federal spending, enable them to say “no” to special interests, and help to protect American taxpayers from wasteful spending burdens. Lawmakers should build on the success of the Budget Control Act and its spending caps enforced by sequestration to motivate entitlement reforms. Rep. Kevin Brady (R-TX) recently reintroduced the Maximizing America’s Prosperity Act (H.R. 2471), which would impose a statutory spending cap across all non-interest outlays, in line with the spending targets established in Congress’s budget resolution.

And here’s some of what Veronique de Rugy wrote for the Mercatus Center.

…the caps and accompanying sequestration enforcement mechanism have been successful in constraining the discretionary share of the federal budget. …One of the chief criticisms of the caps is that they are largely limited to the discretionary programs, which comprise an increasingly smaller share of the overall federal budget. That’s a fair criticism. …policymakers should lock in these gains for taxpayers and seek to expand limits on federal funding to include more of the mandatory side of the budget.

By the way, here’s a chart Veronique prepared showing how the BCA spending caps have saved taxpayers a lot of money.

From this chart, you can see why I think it’s so important to preserve the spending caps and not surrender to Obama’s veto threats.

But let’s not dwell on potential bad developments and instead focus on the best approach, which is expanding the caps to constrain a far greater share of the federal budget.

Here are some excerpts from an article in Reason by A. Barton Hinkle, who explains how spending caps produce fiscal progress.

How do we avoid the iceberg up ahead? …sequestration has helped slow the growth of the federal government. Before it took effect, federal spending was on track to consume one-fourth of America’s GDP. By last year, Washington sopped up only one-fifth of America’s wealth. …there’s a[n]…option that could put America in the black… Hold the growth of government spending to 2 percent per year. That’s it. If Washington did only that, the federal budget would be balanced within six years. …many other advanced democracies have held their spending in similar check. Sweden, Canada, the Netherlands, and Italy did so during the 1990s; Germany, Switzerland, Israel and Taiwan did so in the 2000s. And because their economies grew somewhat faster, their government debt burdens shrank.

Wow. If you have Cato, AEI, Heritage, Mercatus, and Reason all endorsing spending caps, that’s a noteworthy development.

And remember that this approach also has been lauded by the International Monetary Fund, which definitely is not part of the vast right wing conspiracy.

Here’s the bottom line, which presumably explains the growing support for spending caps.

We have lots of examples of countries that have successfully addressed fiscal problems with multi-year periods of spending restraint.

And we have further evidence that explicit spending caps are the only sure-fire way of ensuring long-run fiscal discipline.

So no wonder lots of people and institutions are joining forces in the campaign to create a successful enforcement mechanism for fiscal policy’s Golden Rule.

But I don’t want to get cocky. Building a coalition for good policy is a necessary but not sufficient condition for reform.

I’ll feel more confident about possible changes if some of the presidential candidates openly embrace spending caps and put forth plans to restrain the burden of government spending.

But if we get enough people in the parade for good policy, I suspect a few politicians will suddenly see the wisdom of getting to the front of the line.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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I have a very mixed view of the Committee for a Responsible Federal Budget, which is an organization representing self-styled deficit hawks in Washington.

They do careful work and I always feel confident about citing their numbers.

Yet I frequently get frustrated because they seem to think that tax increases have to be part of any budget deal, regardless of the evidence that such an approach will backfire.

So when CRFB published a “Fiscal FactChecker” to debunk 16 supposed budget myths that they expect during this campaign season, I knew I’d find lots of stuff I would like…and lots of stuff I wouldn’t like.

Let’s look at what they said were myths, along with my two cents on CRFB’s analysis.

Myth #1: We Can Continue Borrowing without Consequences

Reality check: CRFB’s view is largely correct. If we leave policy on autopilot, demographic changes and poorly structured entitlement programs  will lead to an ever-rising burden of government spending, which almost surely will mean ever-rising levels of government debt (as well as ever-rising tax burdens). At some point, this will lead to serious consequences, presumably bad monetary policy (i.e., printing money to finance the budget) and/or Greek-style crisis (investors no longer buying bonds because they don’t trust the government will pay them back).

The only reason I don’t fully agree with CRFB is that we could permanently borrow without consequence if the debt grew 1 percent per year while the economy grew 3 percent per year. Unfortunately, given the “new normal” of weak growth, that’s not a realistic scenario.

Myth #2: With Deficits Falling, Our Debt Problems are Behind Us

Reality check: The folks at CRFB are right. Annual deficits have dropped to about $500 billion after peaking above $1 trillion during Obama’s first term, but that’s just the calm before the storm. As already noted, demographics and entitlements are a baked-into-the-cake recipe for a bigger burden of government and more red ink.

That being said, I think that CRFB’s focus is misplaced. They fixate on debt, which is the symptom, when they should be more concerned with reducing excessive government, which is the underlying disease.

Myth #3: There is No Harm in Waiting to Solve Our Debt Problems

Reality check: We have a spending problem. Deficits and debt are merely symptoms of that problem. But other than this chronic mistake, CRFB is right that it is far better to address our fiscal challenges sooner rather than later.

CRFB offers some good analysis of why it’s easier to solve the problem by acting quickly, but this isn’t just about math. Welfare State Wagon CartoonsIt’s also important to impose some sort of spending restraint before a majority of the voting-age population has been lured into some form of government dependency. Once you get to the point when more people are riding in the wagon than pulling the wagon (think Greece), reform becomes almost impossible.

Myth #4: Deficit Reduction is Code for Austerity, Which Will Harm the Economy

Reality check: The folks at CRFB list this as a myth, but they actually agree with the assertion, stating that deficit reduction policies “have damaged economic performance and increased unemployment.” They even seem sympathetic to “modest increases to near-term deficits by replacing short-term ‘sequester’ cuts”, which would gut this century’s biggest victory for good fiscal policy!

There are two reasons for CRFB’s confusion. First, they seem to accept the Keynesian argument about bigger government and red ink boosting growth, notwithstanding all the evidence to the contrary. Second, they fail to distinguish between good austerity and bad austerity. If austerity means higher taxes, as has been the case so often in Europe, then it is unambiguously bad for growth. But if it means spending restraint (or even actual spending cuts), then it is clearly good for growth. There may be some short-term disruption since resources don’t instantaneously get reallocated, but the long-term benefits are enormous because labor and capital are used more productively in the private economy.

Myth #5: Tax Cuts Pay For Themselves

Reality check: I agree with the folks at CRFB. As a general rule, tax cuts will reduce government revenue, even after measuring possible pro-growth effects that lead to higher levels of taxable income.

But it’s also important to recognize that not all tax cuts are created equal. Some tax cuts have very large “supply-side” effects, particularly once the economy has a chance to adjust in response to better policy. So a lower capital gains tax or a repeal of the death tax, to cite a couple of examples, might increase revenue in the long run. And we definitely saw a huge response when Reagan lowered top tax rates in the 1980s. But other tax cuts, such as expanded child credits, presumably generate almost no pro-growth effects because there’s no change in the relative price of productive behavior.

Myth #6: We Can Fix the Debt Solely by Taxing the Top 1%

Reality check: The CRFB report correctly points out that confiscatory tax rates on upper-income taxpayers would backfire for the simple reason that rich people would simply choose to earn and report less income. And they didn’t even include the indirect economic damage (and reductions in taxable income) caused by less saving, investment, and entrepreneurship.

Ironically, the CRFB folks seem to recognize that tax rates beyond a certain level would result in less revenue for government. Which implies, of course, that it is possible (notwithstanding what they said in Myth #5) for some tax cuts to pay for themselves.

Myth #7: We Can Lower Tax Rates by Closing a Few Egregious Loopholes

Reality check: It depends on the definition of “egregious.” In the CRFB report, they equate “egregious” with “unpopular” in order to justify their argument.

But if we define “egregious” to mean “economically foolish and misguided,” then there are lots of preferences in the tax code that could – and should – be abolished in order to finance much lower tax rates. Including the healthcare exclusion, the mortgage interest deduction, the charitable giving deduction, and (especially) the deduction for state and local taxes.

Myth #8: Any Tax Increases Will Cripple Economic Growth

Reality check: The CRFB folks are right. A small tax increase obviously won’t “cripple” economic growth. Indeed, it’s even possible that a tax increase might lead to more growth if it was combined with pro-growth policies in other areas. Heck, that’s exactly what happened during the Clinton years. But now let’s inject some reality into the conversation. Any non-trivial tax increase on productive behavior will have some negative impact on economic performance and competitiveness. The evidence is overwhelming that higher tax rates hurt growth and the evidence is also overwhelming that more double taxation will harm the economy.

The CRFB report suggests that the harm of tax hikes could be offset by the supposed pro-growth impact of a lower budget deficit, but the evidence for that proposition if very shaky. Moreover, there’s a substantial amount of real-world data showing that tax increases worsen fiscal balance. Simply stated, tax hikes don’t augment spending restraint, they undermine spending restraint. Which may be why the only “bipartisan” budget deal that actually led to a balanced budget was the one that lowered taxes instead of raising them.

Myth #9: Medicare and Social Security Are Earned Benefits and Should Not Be Touched

Reality check: CRFB is completely correct on this one. The theory of age-related “social insurance” programs such as Medicare and Social Security is that people pay into the programs while young and then get benefits when they are old. This is why they are called “earned benefits.”

The problem is that politicians don’t like asking people to pay and they do like giving people benefits, so the programs are poorly designed. The average Medicare recipient, for instance, costs taxpayers $3 for every $1 that recipient paid into the program. Social Security isn’t that lopsided, but the program desperately needs reform because of demographic change. But the reforms shouldn’t be driven solely by budget considerations, which could lead to trapping people in poorly designed entitlement schemes. We need genuine structural reform.

Myth #10: Repealing “Obamacare” Will Fix the Debt

Reality check: Obamacare is a very costly piece of legislation that increased the burden of government spending and made the tax system more onerous. Repealing the law would dramatically improve fiscal policy.

But CRFB, because of the aforementioned misplaced fixation on red ink, doesn’t have a big problem with Obamacare because the increase in taxes and the increase in spending are roughly equivalent. So the organization is technically correct that repealing the law won’t “fix the debt.” But it would help address America’s real fiscal problem, which is a bloated and costly public sector.

Myth #11: The Health Care Cost Problem is Solved

Reality check: CRFB’s analysis is correct, though it would have been nice to see some discussion of how third-party payer is the problem.

Myth #12: Social Security’s Shortfall Can be Closed Simply by Raising Taxes on or Means-Testing Benefits for the Wealthy

Reality check: To their credit, CRFB is basically arguing against President Obama’s scheme to impose Social Security payroll taxes on all labor income, which would turn the program from a social-insurance system into a pure income-redistribution scheme.

On paper, such a system actually could eliminate the vast majority of Social Security’s giant unfunded liability. In reality, this would mean a huge increase in marginal tax rates on investors, entrepreneurs, and small business owners, which would have a serious adverse economic impact.

Myth #13: We Can Solve Our Debt Situation by Cutting Waste, Fraud, Abuse, Earmarks, and/or Foreign Aid

Reality check: Earmarks (which have been substantially curtailed already) and foreign aid are a relatively small share of the budget, so CRFB is right that getting rid of that spending won’t have a big impact. But what about the larger question. Could our fiscal mess (which is a spending problem, not a “debt situation”) be fixed by eliminating waste, fraud, and abuse?

It depends on how one defines “waste, fraud, and abuse.” If one uses a very narrow definition, such as technical malfeasance, then waste, fraud, and abuse might “only” amount to a couple of hundred billions dollars per year. But from an economic perspective (i.e., grossly inefficient misallocation of resources), then entire federal departments such as HUD, Education, Transportation, Agriculture, etc, should be classified as waste, fraud, and abuse.

Myth #14: We Can Grow Our Way Out of Debt

Reality check: CRFB is correct that faster growth won’t solve all of our fiscal problems. Unless one makes an untenable assumption that economic growth will be faster than the projected growth of entitlement spending. And even that kind of heroic assumption would be untenable since faster growth generally obligates the government to pay higher benefits in the future.

Myth #15: A Balanced Budget Amendment is All We Need to Fix the Debt

Reality check: CRFB accurately explains that a BBA is simply an obstacle to additional debt. Politicians still would be obliged to change laws to fulfill that requirement. But that analysis misses the point. A BBA focuses on red ink, whereas the real problem is that government is too big and growing too fast. State balanced-budget requirement haven’t stopped states like California and Illinois from serious fiscal imbalances and eroding competitiveness. The so-called Maastricht anti-deficit and anti-debt rules in the European Union haven’t stopped nations such as France and Greece from fiscal chaos.

This is why the real solution is to have some sort of enforceable cap on government spending. That approach has worked well in jurisdictions such as Switzerland, Hong Kong, and Colorado. And even research from the IMF (a bureaucracy that shares CRFB’s misplaced fixation on debt) has concluded that expenditure limits are the only effective fiscal rules.

Myth #16: We Can Fix the Debt Solely by Cutting Welfare Spending

Reality check: The federal government is spending about $1 trillion this year on means-tested (i.e., anti-poverty) programs, which is about one-fourth of total outlays, so getting Washington out of the business of income redistribution would substantially lower the burden of federal spending (somewhat offset, to be sure, by increases in state and local spending). And for those who fixate on red ink, that would turn today’s $500 billion deficit into a $500 billion surplus.

That being said, there would still be a big long-run problem caused by other federal programs, most notably Social Security and Medicare. So CRFB is correct in that dealing with welfare-related spending doesn’t fully solve the long-run problem, regardless of whether you focus on the problem of spending or the symptom of borrowing.

This has been a lengthy post, so let’s have a very simple summary.

We know that modest spending restraint can quickly balance the budget.

We also know lots of nations that have made rapid progress with modest amounts of spending restraint.

And we know that the tax-hike option simply leads to more spending.

So the only question to answer is why the CRFB crowd can’t put two and two together and get four?

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As far as I’m concerned, a key gateway test of whether someone might be a libertarian is whether they get upset when ordinary people are mistreated or brutalized by government.

Though admittedly any decent person should get upset by those examples.

So perhaps we need something more detailed to identify supporters of limited government, individual freedom, and personal responsibility. So when one of my friends sent me the “definitive political orientation test,” I immediately was tempted to see my score.

I don’t know if it’s the “definitive” test, but it seems reasonably accurate. As you can see, I’m about as libertarian as you can be without being an anarchist who wants zero government.

Though I should point out that there aren’t any questions on anarchism. I think the test probably assumes anarchism if your answers are both anti-welfare state and anti-defense.

This “circle test” is probably a simpler way of determining where you are on the big government-some government-no government spectrum.

But the most more sophisticated measure of libertarianism is Professor Bryan Caplan’s test. I only got a 94 out of a possible 160, which sounds bad, but that was still enough for my views to be considered “hard-core.”

And since we’re looking at online surveys, here are my results from the “I Side With” quiz. I don’t endorse candidates (as if anyone would care), but this quiz suggests that Rand Paul is closest to my views, followed by Scott Walker and Marco Rubio.

For what it’s worth, I’m not exactly shocked to see Hillary Clinton and Bernie Sanders at the bottom.

By the way, since we’ve shifted to a discussion of the 2016 race, I was the warm-up speaker for Governor Jeb Bush at a recent “Road to Reform” event in New Hampshire sponsored by Americans for Prosperity. Here’s what I said about fixing the budget mess in Washington.

You can watch the entire event and also see what the governor said by clicking here.

And for folks in Nevada, I’ll be the warm-up speaker for a similar event with Ted Cruz on August 14.

P.S. The most inaccurate political quiz was the one that classified me as a “moderate” with “few strong opinions.”

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The European Commission’s data-gathering bureaucracy, Eurostat, has just published a new report on government finances for the region.

And with Greece’s ongoing fiscal turmoil getting headlines, this Eurostat publication is worthwhile because it debunks the notion, peddled by folks like Paul Krugman, that Europe has been harmed by “savage” and “harsh” spending cuts.

Here’s some of what’s in the report.

In 2014, total general government expenditure amounted to €6 701 bn in the European Union (EU). This represented almost half (48.1%) of EU GDP in 2014… Among EU Member States, general government expenditure varied in 2014 from less than 35% of GDP in Lithuania and Romania to more than 57% in Finland, France and Denmark.

Not only is government spending consuming almost half of economic output, redistribution outlays are the biggest line item in the budgets of European nations.

…the function ‘social protection’ was by far the most important, accounting for 40.2% of total general government expenditure. The next most important areas in terms of general government expenditure were ‘health’ (14.8%)… Its weight varied across EU Member States from 28.6% of total general government expenditure in Cyprus to 44.4% in Luxembourg. Eight EU Member States devoted more than 40% of their expenditure to social protection.

At this point, some readers may be thinking that the report shows European nations have very big governments with very large welfare states, but that doesn’t prove one way or the other whether there’s been austerity.

After all, austerity supposedly measures the degree to which there have been big spending cuts, not whether government consumes a large or small share of economic output.

So let’s now look at some of the underlying annual spending data from Eurostat.

Here’s their chart showing annual levels of government spending, both for the entire European Union (EU-28) and for the nations using the euro currency (EA-19). As you can see, there haven’t been any “harsh” or “savage” cuts.

Heck, there haven’t even been “timid” and “meek” cuts. The burden of government spending keeps climbing.

None of this should come as a surprise.

I’ve shared analysis making this point from experts on European fiscal policy such as Steve Hanke, Brian Wesbury, Constantin Gurdgiev, Fredrik Erixon, and Leonid Bershidsky.

So why is there a mythology about supposed spending cuts in Europe?

There are three answers.

  • First, there are lots of ignorant of mendacious people who don’t understand the numbers or don’t care about the truth. You can take a wild guess about the identity of some of these people.
  • Second, while overall government spending has continuously risen in Europe, a few nations (generally the ones that were most profligate last decade) have been forced to make some non-trivial spending cuts.
  • Third, some people cherry pick data on the burden of government spending relative to economic output and assert that austerity exists if government grows slower than GDP.

The people in the first category should be dismissed as cranks and ideologues.

Regarding the second category, if you look at Eurostat’s annual fiscal data, you’ll find that most EU nations since 2008 have had at least one year in which government spending declined. Indeed, the only exceptions are Belgium, France, Luxembourg, Austria, Poland, Slovakia, Finland, and Sweden.

But we’ve also had a few years of spending reductions in the United States since 2008, yet it would be silly to argue we’ve had “savage” and “harsh” cuts. The real question is whether any governments have been forced to make non-trivial reductions in the burden of spending. And if that’s defined as spending less today than they did in 2008, the only nations on that list are Greece, Latvia, and Ireland. But they’re also high on the list of countries that were most profligate in the years before 2008, so is it “austerity” if you give up drinking for a week or two after spending a week or two in an alcoholic haze? Perhaps the answer is yes, but the real problem was having a spending binge in the first place.

The third category is also worth exploring because the best way to determine if a country has responsible policy is to see whether government spending is falling as a share of economic output (i.e., are they following Mitchell’s Golden Rule). But you can’t cherry pick the data. For instance, look at this chart from Eurostat. If 2009 is used as the base year, it appears that EU nations have been frugal. But 2009 also was the year with the biggest bailouts and faux stimulus packages. So while government spending has receded a bit from the 2009 peak, the overall burden of spending today is significantly higher than it was before the 2008 crisis. Not exactly a very rigorous definition of austerity.

The bottom line is that there hasn’t been serious austerity in Europe, at least if austerity is defined as non-trivial spending cuts.

To be sure, there have been big fiscal changes in Europe. The bad news is that those changes have been big increases in income tax rates and big increases in value-added tax rates.

So if folks are looking for a good explanation of why Europe is suffering from anemic growth, that might be a place to start.

P.S. Unlike other European countries, the Baltic nations focused on genuine spending cuts rather than tax hike and their economies are doing comparatively well.

P.P.S. Even though Switzerland isn’t a member of the EU, Eurostat does include annual spending data for that nation. And it’s worth noting that spending has only grown by 2.07 percent per year since the implementation of the debt brake (which is really a spending cap). So that’s actually the best role model in Europe, as explained here by a representative from the Swiss Embassy.

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When I make speeches about fiscal policy, I oftentimes share a table showing the many nations that have made big progress by enforcing spending restraint over multi-year periods.

I then ask audiences a rhetorical question about a possible list of nations that have prospered by going in the opposite direction. Are there any success stories based on tax hikes or bigger government?

The answer is no, which is why I’ve never received a satisfactory answer to my two-part challenge, even if I limit the focus to fiscal policy.

And nobody will be surprised to learn that the fiscal crisis in Puerto Rico reinforces these lessons.

Writing for the Wall Street Journal, Daniel Hanson explains that the American territory in the Caribbean is on the verge of default.

As Puerto Rico struggles under the weight of more than $70 billion in debt, it has become popular to draw parallels with Greece.

The one theme that is common with the two jurisdictions is that their fiscal crises are the result of too much government spending.

How bad is the problem in Puerto Rico?

It’s hard to answer that question because government budgeting isn’t very transparent and the quality and clarity of the numbers that do exist leaves a lot to be desired.

But I’ve done some digging (along with my colleagues at Cato) and here’s some data that will at least illustrate the scope of the problem.

First, we have numbers from the World Bank showing inflation-adjusted (2005$) government consumption expenditures over the past few decades. As you can see, overall spending in this category increased by 100 percent between 1980 and 2013 (at a time when the population increased only 12 percent).

In other words, Puerto Rico is in trouble because it violated the Golden Rule and let government grow faster than the private sector over a sustained period (just like Greece, just like Alberta, just like the United States, etc, etc).

Here’s another chart and this one purports to show total outlays.

The numbers aren’t adjusted for inflation, so the increase looks more dramatic. But even if you consider the impact of a rising price level (average annual increase of about 4 percent since the mid-1980s), it’s obvious that government spending has climbed far too fast.

To be more specific, Puerto Rico has allowed the burden of government to rise much faster than population plus inflation.

A government can get away with that kind of reckless policy for a few years. But when bad policy is maintained for a long period of time, the end result is never positive.

Now that we’ve established that Puerto Rico got in trouble by violating my Golden Rule, what’s the right way of fixing the mess? Is the government responding to its fiscal crisis in a responsible manner?

Not exactly. Like Greece, it’s too beholden to interest groups, and that’s making (the right kind of) austerity difficult.

Indeed, Mr. Hanson says there haven’t been any cuts in the past few years.

In the past four years, when the fiscal crisis has been most severe, four successively larger budgets have been enacted. The budget proposed for the coming year is $235 million larger than last year’s and $713 million, or 8%, higher than four years ago. Austerity this is not.

What special interest groups standing in the way of reform?

The government workforce would be high on the list. One of the big problems in Puerto Rico is that there are far too many bureaucrats and they get paid far too much (gee, this sounds familiar).

Here are some details from Mr. Hanson’s column.

…more than two-thirds of the territory’s budget is payroll. The proposed budget…contains no plans for head-count reductions. …Median household income in Puerto Rico hovers around $20,000, according to the U.S. Census Bureau, but government workers fare much better. Public agencies pay salaries on average more than twice that amount, a 2014 report from Banco Popular shows. Salaries in the central government in San Juan are more than 90% higher than in the private sector. Even across comparable skill sets, the wage disparity persists.

In other words, life is pretty good for the people riding in the wagon, but Puerto Rico doesn’t have enough productive people to pull the wagon.

So we’re back to where we started. It’s the Greece of the Caribbean.

P.S. This column has focused on fiscal policy, but it’s important to recognize that there are many other bad policies hindering prosperity in Puerto Rico. And some of them are the result of Washington politicians rather than their counterparts in San Juan. Nicole Kaeding and Nick Zaiac have explained that the Jones Act and the minimum wage are particularly destructive to the territory’s economy.

P.P.S. At least Puerto Rico is still a good tax haven for American citizens.

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I suggested earlier this year that Denmark’s ratio of private sector workers compared with government dependents produced the world’s most depressing Powerpoint slide.

It’s hard to be optimistic, after all, if a nation has an ever-growing number of people riding in the wagon (or the “party boat“) and a stagnant population of productive people.

But I don’t want to be overly pessimistic. Denmark may have a big welfare state and a punitive tax system (I’ve joked that birthers should accuse Obama of being born there rather than Kenya), but it is very pro-market in other policy areas.

Indeed, it beats the United States in 3 out of the 5 major categories in the Fraser Institute’s Economic Freedom of the World Index.

And while the United States has a higher overall score – ranked #12 compared to #19, Denmark had more overall economic freedom than the United States as recently as 2010 and 2011.

With this introduction, you’re probably guessing that I plan on saying something nice about the Danes. And you’d be right. It turns out that our Nordic friends are slowly but surely adopting my Golden Rule of spending restraint.

Look at this data on government spending from the IMF’s database. As you can see, the burden of spending has been climbing at a much slower rate in recent years, and the forecast shows even more frugality in the near future.

Perhaps most important, the modest fiscal discipline that began in 2009 is paying big dividends.

Government spending that year consumed nearly 58 percent of Denmark’s economic output. Now, the burden of spending is “only” 53 percent of GDP.

Still astronomically high, to be sure, but heading in the right direction. And if Denmark maintains the spending restraint projected by the IMF, the burden of spending will drop to less than 51 percent of GDP in 2017.

And that may actually happen. Just a few days ago, Denmark’s left-wing government was voted out of office and the new center-right government is promising tighter control of the purse strings.

I would like to think I played a very tiny role in this development. My friend Mads Lundby Hansen from Denmark’s free-market think tank (CEPOS) took part in a debate before the election and promoted the Golden Rule.

Here’s a picture from his Facebook page.

Unfortunately, even though I would like to think I played a role, Mads burst my bubble by informing me that the Golden Rule “wasn’t an issue in the election.”

But I don’t care if politicians are overtly cognizant of the Golden Rule. And I certainly don’t care if they know my name. I just want good policy.

So the moment the burden of government spending drops below 50 percent of GDP in Denmark, I’m going to declare victory in the battle.

Though I won’t declare victory in the war until we shrink government to its growth-maximizing level.

P.S. Denmark’s most famous welfare recipient is “Lazy Robert,” who was honored for his lack of contribution to society by being selected to the Moocher Hall of Fame.

P.P.S. One important lesson from Denmark is that a nation can somewhat successfully endure bad fiscal policy by being hyper-free market in other policy fields.

P.P.P.S. Another Nordic nation, Sweden, already enjoyed a big improvement in fiscal policy thanks to a multi-year period of spending restraint.

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