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Archive for the ‘Mitchell’s Golden Rule’ Category

A balanced budget requirement is neither necessary nor sufficient for good fiscal policy.

If you want proof for that assertion, check out states such as IllinoisCalifornia, and New Jersey. They all have provisions to limit red ink, yet there is more spending (and more debt) every year. There are also anti-deficit rules in nations such as GreeceFrance, and Italy, and those countries are not exactly paragons of fiscal discipline.

The real gold standard for good fiscal policy is my Golden Rule. And the best way to make sure government doesn’t grow faster than the private sector is to have a constitutional rule limiting the growth of government.

That’s why I’m a big fan of the “debt brake” in Switzerland’s constitution and Article 107 in Hong Kong’s constitution.

And it’s also why the 49 other states, assuming they want an effective fiscal rule, should look at Colorado’s Taxpayer Bill of Rights (TABOR) as a role model.

Colorado’s Independence Institute has a very informative study on how TABOR works and the degree to which it has been effective. Here’s a good description of the system.

Colorado voters adopted The Taxpayer’s Bill of Rights in 1992. TABOR allows government spending to grow each year at the rate of inflation-plus-population. Government can increase faster whenever voters consent. Likewise, tax rates can be increased whenever voters consent. …The Taxpayer’s Bill of Rights requires that excess government revenues be refunded to taxpayers, unless taxpayers vote to let the government keep the revenue.

And here are the headline results.

Cumulatively, TABOR refunds have been over $800 per Coloradan, or $3,200 for a family of four. …If Colorado government had continued growing at the same high rate (8.56% compound annual rate) as in 1983-92, the average Coloradan would have paid an additional $442 taxes in 2012. The cumulative two-decade savings per Coloradan are $6,173—or more than $24,000 for a family of four.

However, the study notes that TABOR was most effective during its first 10 years. It was less effective in its second decade because voters acquiesced to a “TABOR time-out” as part of referendum C in 2005.

The final decade included the largest tax increase in Colorado history, enacted as Referendum C in 2005. Decade-2 was also marked by increasing efforts to evade TABOR by defining nearly 60% of the state budget as “exempt” from TABOR. …Rapid government growth resumed in Decade-2, mainly because of Referendum C.

This chart from the study shows that outcomes were much better during the first decade of TABOR.

But a weakened TABOR is better than nothing. Here’s the conclusion of the report.

The Taxpayer’s Bill of Rights Amendment has worked well to achieve its stated intention to “slow government growth.” Although government has still continued to grow significantly faster than the rate of population-plus-inflation, the Taxpayer’s Bill of Rights did partially dampen excess government growth. …In terms of economic vitality, Colorado’s Decade-1 was best for Colorado. Unlike in the pre-TABOR decade, or in TABOR Decade-2 with its record increase in taxes and spending, because of Referendum C. Colorado’s first TABOR decade saw the state economy far outperform the national economy.

But keep in mind that the economic gains occurred in the first decade.

The bottom line is that spending caps are like speed limits in school zones. If they’re set too high, that defeats the purpose.

And in Colorado, the vote for Referendum C allowed a spending surge that made a mockery of TABOR.

But only temporarily, which is why that period was known as the “TABOR time-out.” The rules once again limit spending growth to population plus inflation.

For instance, TABOR made it difficult for state politicians to spend the additional tax revenues produced by marijuana legalization.

Needless to say, the political crowd hates having their hands tied. Which is why the pro-spending lobbies are agitating to once again gut TABOR. Here’s a clip from a local news report that does a good job of describing the current fight.

The battle actually started a couple of years ago. Here are some excerpts from a 2016 report by the Associated Press.

By 2030, Colorado’s population will grow from 5 million to 7 million people, thanks in part to a strong and diverse economy, the state’s famed Rocky Mountain quality of life, and its constitutionally-mandated low taxes. …The state’s Democratic governor, John Hickenlooper, is trying to find ways to squeeze more revenue for roads from the budget, while Republicans don’t want to tamper with the fabled 1992 constitutional amendment known as TABOR that keeps a tight limit on those taxes. …Under TABOR, voters must approve any state and local tax hike. Democrats are still stung by a resounding defeat of a 2013 ballot initiative to raise $1 billion for schools.

I’m amused by the fact that the above passage starts by noting the state has a “strong” economy. Too bad the reporter didn’t put 2 and 2 together and recognize that TABOR deserves some of the credit.

Likewise, this next passage cites a leftist who acknowledges growth in the state, but pretends that it’s exogenous, like the weather.

Liberals think that’s a recipe for disaster, especially in a growing state. “What we have to stop doing is pitting necessary priorities like roads against other necessary priorities like schools and colleges,” said Tim Hoover, spokesman for the Colorado Fiscal Institute, which favors dismantling the amendment. “TABOR forces us to do that.” So far the low-tax crowd is winning. Even Hickenlooper acknowledges there isn’t a popular appetite to raise taxes, and his hopes of changing the classification of an arcane fee in the budget to free up revenue are opposed by Republicans… Republicans say the real problem is growing Medicaid spending. Colorado, which expanded the program under the Affordable Care Act, is spending about $2.5 billion on the health care plan.

Note that TABOR critics object to various interest groups having to compete for money.

But that’s exactly why a spending limit is so desirable. Politicians are forced to abide by the rules that apply to every household and business in the state. In other words, they have to (gasp!) prioritize.

Let’s conclude by reviewing some passages from a pro-TABOR column published last week in the Steamboat newspaper.

Colorado’s  has grown by nearly two-thirds since 1992, one of the fastest increases in the country. If you are part of the more than two million new residents who have arrived over this time, there are a few things you should know…the Taxpayer’s Bill of Rights is responsible for much of the state’s economic success, which likely drew you here in the first place. Between 1992 and 2016, median household income in Colorado grew by 30 percent, adjusted for inflation. …TABOR helped end years of economic stagnation and laid the groundwork for the state’s future success by keeping resources in the hands of Colorado residents who could put them to their highest valued use and checking overzealous government spending. …Its requirement that excess revenues must be refunded to taxpayers has also resulted in more than $2 billion being returned to the private economy… TABOR has empowered voters to reject roughly a dozen advocacy-backed tax hike proposals.

My favorite part is when they cite critics, who confirm that TABOR is successful.

Denver Post editorial last year complained, “TABOR’s powerful check on government spending in reality has been a padlock on the purse-strings of the General Assembly.” The check on spending is exactly the point, and it still allows spending to grow in-line with inflation and population growth. If government wants more money, all it has to do is ask. Requiring consent is hardly a “padlock.”

Amen. We could use some more padlocks in the rest of the country. TABOR should be nationally emulated, not locally emasculated.

P.S. Enjoy this amusing video from the Independence Institute. It shows politicians in a group therapy session about TABOR.

P.P.S. By the way, there is a spending cap in Washington, though it only applies to a small portion of the budget (appropriated outlays). Sadly, that very modest example of fiscal restraint has not been very effective. The group therapy session in Washington, otherwise known as Congress, voted to bust those spending caps in 2013, 2015, and earlier this year. Sort of D.C.’s lather-rinse-repeat version of Referendum C.

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I’ve half-joked in the past that spending restraint is the answer to every fiscal problem.

But I wouldn’t be surprised if it’s the right answer to 98 percent of fiscal problems. Some fiscal discipline is what we need in America, for instance, and it’s certainly an approach that works whenever and wherever it is tried.

Could it also be the answer in Jordan, which has stumbled into a fiscal crisis and is now facing domestic unrest?

The trouble began in January when the government announced a big IMF-supported tax increase. Here’s some of what was reported by Reuters.

Jordans cabinet announced on Monday a major package of IMF-guided tax hikes… The package announced on state media includes removing exemptions on general sales tax and unifying low 4 to 8 percent rates on a large number of items at 10 percent while leaving it at 16 percent ceiling for others, alongside raising special taxes on tobacco, premium gasoline and streamlining customs duties.

Interestingly, the article acknowledged that the country got in a fiscal mess because of too much spending.

The debt is at least in part due to successive governments adopting an expansionist fiscal policy characterized by job creation in the bloated public sector, and by lavish subsidies for bread and other staple goods. …Economists said Jordans ability to maintain a costly subsidy system and a large state bureaucracy was increasingly untenable in the absence of large foreign capital inflows or infusions of foreign aid.

But politicians almost always prefer tax hikes rather than spending restraint (even though – or perhaps because – higher taxes are not an effective way of controlling red ink).

The victims of those tax increases are not happy. As reported earlier this month, they took to the streets.

Jordanians took to the streets of the capital Amman on Sunday in a fourth day of nightly protests against IMF-backed price increases that have shaken the kingdom, witnesses said. …demonstrators who converged near the cabinet office chanted slogans calling for the sacking of Prime Minister Hani Mulki and saying they would disband only if the government rescinded a tax bill it sent to parliament last month which critics say worsens living standards. …Public anger over IMF-driven government policies has grown since a steep general sales tax hike earlier this year… The government says it needs more funds for public services and argues that tax reforms reduce social disparities by placing a heavier burden on high earners.

And the protests worked.

The New York Times has the cheerful news.

The government of Jordan announced on Thursday that it would withdraw a divisive tax bill after nationwide protests rocked the country, leading to the resignation of the prime minister and his cabinet. The newly appointed prime minister, Omar Razzaz, said in a statement that he had consulted members of both houses of Parliament, and that there was a consensus that the tax bill should be withdrawn. …The decision to withdraw the bill, which proposed increasing the tax rate on workers by at least five percentage points and on businesses by 20 to 40 percentage points, was lauded by many in Jordan.

Incidentally, taxpayers in the United States have been subsidizing Jordanian profligacy.

In 2015, the Obama administration and Jordan signed a three-year agreement in which the United States pledged $1 billion in assistance annually, subject to the approval of Congress. More recently, Washington pledged $6.3 billion in aid through 2022, making Jordan one of the top recipients of American foreign assistance.

These three news reports were interesting, but I wondered if they told the full story.

Maybe, just maybe, the IMF is right and tax increases are necessary because there is no leeway to reduce the burden of government spending. Perhaps the government already has been complying with Mitchell’s Golden Rule and has slashed the budget, meaning that higher revenues are the only feasible option still on the table.

So I decided to check the IMF’s World Economic Outlook database. Lo and behold, I discovered that the budget has soared from 2 billion dinar in 2000 to more than 9 billion dinar this year. What’s especially remarkable is that government spending has grown far faster than needed to keep pace with inflation.

In other words, what happened in Jordan is exactly what happened in Greece. Government grew too fast. But not just Greece. The mess in Jordan is a repeat of what happened in Western Australia. In Puerto Rico as well. And don’t forget Alberta and Alaska. The list could go on and on.

It’s sort of like the sun rising in the east and setting in the west. Or the swallows returning to Capistrano.

And for those who value predictability, it’s no surprise to once again see the IMF pushing for higher taxes. Those bureaucrats are the Dr. Kevorkian of the global economy and there’s only one medicine they prescribe.

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I wrote two days ago about how the country of Georgia has achieved impressive economic performance thanks to major reforms to reduce the size and scope of government.

Indeed, Georgia jumped from #56 to #8 in Economic Freedom of the World between 2004 and 2015, a remarkable climb.

Today, I want to focus on what the country has achieved with regard to fiscal policy.

In part, this is an opportunity to highlight that Georgia is one of many nations to adopt a flat tax. Georgia’s 20 percent flat tax not only has a single rate, but also doesn’t have destructive forms of double taxation like a death tax or capital gains tax (it also has an Estonian-style corporate tax).

But my main goal is to draw attention to the fiscal rules in Georgia. Both the nation’s Constitution and its Organic Law have provisions that are designed to limit the growth of government.

First, let’s look at Article 94 of the Georgian Constitution, which states that no new taxes are allowed unless approved by a vote of the people.

The Organic Law also has good provisions on taxation, most notably a prohibition on using a referendum to adopt a discriminatory “progressive” tax (too bad we don’t have such a provision in America!).

Here’s the part that I really like.

There’s an aggregate spending cap. The government’s budget can’t consume more than 30 percent of economic output.

It also includes European Union-style “Maastricht” limits on deficits and debt, though I’ll simply observe that those rules are irrelevant if there’s a limit on overall spending.

In any event, the burden of spending in Georgia does comply with the spending cap, according to IMF data. Though I’ll be curious to see what happens if there’s ever a serious recession. If that happens, GDP falls, which could make it politically difficult to obey the cap.

Which is why I prefer the Swiss approach of simply allowing government to grow by a small amount every year. That seems more politically sustainable. But I’m happy with anything to fulfills my Golden Rule.

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During the election season, I speculated Trump was a big government Republican, and he confirmed my analysis this past February when he acquiesced to an orgy of new spending and agreed to bust the spending caps.

That awful spending spree gave huge increases to almost every part of the budget, and I pointed out that the deal probably will create the conditions for future tax hikes.

I got so upset at profligate GOPers that I crunched the numbers and revealed that (with the notable exception of Reagan) Republican presidents are even bigger spenders than Democrats.

Well, Senate Republicans recently had a chance to atone for their sins by voting for a proposal from Rand Paul to balance the budget.

So what did they do? Rejected it, of course.

In a column for Reason, Eric Boehm justly condemns Republicans for being big spenders.

The Senate on Thursday resoundingly rejected the Kentucky Republican’s plan to balance the federal budget by 2023, voting 76 to 21 against a bill that would have required a $400 billion cut in federal spending next year, followed by 1 percent spending increases for the rest of the next decade. …Paul’s proposal never really had a chance of passing, coming as it did just months after Congress approved enormous spending hikes that busted Obama-era caps once championed by Republicans as necessary for fiscal restraint. …Paul’s plan would have balanced the budget by 2023, as long as revenue met current CBO projections. By 2028, his proposal envisioned a $700 billion surplus instead of the $1.5 trillion deficit currently projected by the CBO.

A Lifezette column by Brendan Kirby was even more critical of big-government Republicans.

Sen. Rand Paul (R-Ky.) was hoping his Republican colleagues would be embarrassed by their vote to jack up federal spending earlier this year and support his plan to phase in a balanced budget. Few were. Paul got 20 other Republican senators on Thursday — less than half of the Senate GOP caucus — to vote for his “penny plan,” which would balance the federal budget over five years… No Democrats back the proposal. …Even though Paul’s bid failed, it did pick up the support of some senators who voted for the spending bill in February, including Senate Majority Whip John Cornyn (R-Texas). The others were Sens. Marco Rubio (R-Fla.), John Barrasso (R-Wyo.), Joni Ernst (R-Iowa), Deb Fischer (R-Neb.) and Jerry Moran (R-Kan.). …Paul also got more votes than he did for a similar proposal last year.

Kirby’s article ended on an upbeat note based on voting patterns.

I also want to close on an upbeat note, but for an entirely different reason. Here are the annual numbers from the CBO baseline (what will happen to spending and revenue if government continues on its current path) and the numbers for Senator Paul’s proposal.

And why do these depressing numbers leave me with a feeling of optimism?

For the simple reason that they show how simple it is to make progress with some modest spending restraint. The lower set of number show that Senator Paul quickly gets to a balanced budget by imposing an overall reduction of about 2 percent on spending in 2019, followed by annual increases of about 1 percent until 2025.

I think that’s a great plan, but I’d also be happy with a plan that allows spending to grow by 1 percent each year. Or even 2 percent each year.

My bottom line is that we need some sort of spending cap so that the burden of government spending grows slower than the productive sector of the economy. In other words, comply with the Golden Rule.

And what’s especially remarkable is that solving our fiscal problems is still quite feasible notwithstanding the reckless spending bill that was recently approved (Paul’s proposal, incidentally, leaves in place the small – and temporary – tax cut from the recent reform legislation).

P.S. Senator Paul would achieve a balanced budget in just five years by letting spending grow during that period by a bit less than 4/10ths of 1 percent per year. Does that sound impossibly radical? Well, it’s what Republicans managed to achieve during the heyday of the Tea Party revolution, when they actually produced a five-year nominal spending freeze. In other words, zero spending growth! If they could impose that level of discipline with Obama in the White House, why not do the same with Trump (who quasi-endorsed the Penny Plan) at the other end of Pennsylvania Avenue?

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The Congressional Budget Office just released its annual Economic and Budget Outlook, and almost everyone in Washington is agitated (or pretending to be agitated) about annual deficits exceeding $1 trillion starting in the 2020 fiscal year.

All that red ink isn’t good news, but I’m much more concerned (and genuinely so) about this line from CBO’s forecast. In just 10 years, the burden of federal spending is going to jump from 20.6 percent of GDP to 23.6 percent!

Simply stated, we’ve entered the era of baby boomer retirement. And because we have some very poorly designed entitlement programs, that means the federal budget – assuming we leave it on autopilot – is going to consume an ever-growing share of our national economic output.

The bottom line is that Washington is violating my Golden Rule.

Let’s look at the underlying numbers. Federal spending is projected by CBO to grow by an average of about 5.5 percent per year over the next decade while nominal GDP is estimated to grow by just 4.0  percent annually.

And that unfortunate trend isn’t limited to the nest 10 years. CBO’s latest long-run forecast, which I discussed last year, shows a never-ending deterioration of America’s fiscal position.

Hello Greece.

Fortunately, there is a solution to this mess.

A modest amount of spending restraint can quickly reverse our fiscal troubles and put us on a path to a balanced budget. More importantly, limits on the growth of spending can slowly reduce the size of the federal government relative to the private sector.

Here’s a chart, based on CBO’s numbers, that shows how much Uncle Sam is spending this year (a bit over $4.1 trillion), along with a blue line showing projected tax revenues over the next 10 years (blue line). And I’ve shown what happens if spending is “only” allowed to increase by either 2 percent annually (orange line) or 3 percent annually (grey line) over the next decade.

This chart is basically everything you need to know. It shows that our fiscal situation is not hopeless. All we have to do is make sure government is growing slower than the productive sector of the economy.

A good rule of thumb, as suggested in the chart title, is that government shouldn’t grow faster than the rate of inflation.

And we’ve done it before.

  • During the Clinton years, the United States enjoyed a multi-year period of spending restraint. We got a balanced budget because of that frugality. More important, spending fell as a share of GDP.
  • During the Obama years, we benefited from a five-year de facto spending freeze. Deficits dropped dramatically and the nation experienced the biggest drop in the relative burden of spending since the end of World War II.

And many other nations also have also managed multi-year periods of spending restraint.

Let’s close with a video I narrated which illustrates how modest spending discipline generates good outcomes.

It’s from 2010, so the numbers are no longer relevant, but otherwise the analysis applies just as strongly today.

P.S. I’m not overly optimistic that President Trump is serious about solving this problem. His proposed a semi-decent amount of spending restraint in last year’s budget, but then he signed into law a grotesque budget-busting appropriations bill.

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It’s both amusing and frustrating to observe the reaction to President Trump’s budget.

I’m amused that it is generating wild-eyed hysterics from interest groups who want us to believe the world is about to end.

But I’m frustrated because I’m reminded of the terribly dishonest way that budgets are debated and discussed in Washington. Simply stated, almost everyone starts with a “baseline” of big, pre-determined annual spending increases and they whine and wail about “cuts” if spending doesn’t climb as fast as previously assumed.

Here are the three most important things to understand about what the President has proposed.

First, the budget isn’t being cut. Indeed, Trump is proposing that federal spending increase from $4.06 trillion this year to $5.71 trillion in 2027.

Second, government spending will grow by an average of almost 3.5 percent per year over the next 10 years.

Third, because the private economy is projected to grow by an average of about 5 percent per year (in nominal terms), Trump’s budget complies with the Golden Rule of fiscal policy.

Now that we’ve established a few basic facts, let’s shift to analysis.

From a libertarian perspective, you can argue that Trump’s budget is a big disappointment. Why isn’t he proposing to get rid of the Department of Housing and Urban Development? What about shutting down the Department of Education? Or the Department of Energy? How about the Department of Agriculture, or Department of Transportation?

And why is he leaving Social Security basically untouched when taxpayers and retirees would both be better off with a system of personal retirement accounts? And why is Medicare not being fundamentally reformed when the program is an ever-expanding budgetary burden?

In other words, if you want the federal government to reflect the vision of America’s Founders, the Trump budget is rather disappointing. It’s far from a Liberland-style dream.

But for those who prefer to see the glass as half-full, here are a couple of additional takeaways from the budget.

Fourth, as I wrote yesterday, there is real Medicaid reform that will restore federalism and save money.

Fifth, domestic discretionary spending will be curtailed.

But not just curtailed. Spending in the future for this category will actually be lower if Trump’s budget is approved. In other words, a genuine rather than fake budget cut.

I’ll close with my standard caveat that it’s easy to put good ideas (or bad ideas) in a budget. The real test is whether an Administration will devote the energy necessary to move fiscal reforms through Congress.

Based on how Trump was defeated in the battle over the final spending bill for the current fiscal year, there are good reasons to be worried that good reforms in his budget won’t be implemented. Simply stated, if Trump isn’t willing to use his veto power, Congress will probably ignore his proposals.

P.S. You may have noticed that I didn’t include any discussion of deficits and debt. And I also didn’t address the Administration’s assertion that the budget will be balanced in 10 years if Trump’s budget is approved. That’s because a fixation on red ink is a distraction. What really matters is whether the burden of spending is falling relative to the private sector’s output. In other words, the entire focus should be on policies that generate spending restraint and policies that facilitate private sector growth. If those two goals are achieved, the burden of red ink is sure to fall. Whether it happens fast enough to balance the budget in 2027 is of little concern.

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When I debate one of my leftist friends about deficits, it’s often a strange experience because none of us actually care that much about red ink.

I’m motivated instead by a desire to shrink the burden of government spending, so I argue for spending restraint rather than tax hikes that would “feed the beast.”

And folks on the left want bigger government, so they argue for tax hikes to enable more spending and redistribution.

I feel that I have an advantage in these debates, though, because I share my table of nations that have achieved great results when nominal spending grows by less than 2 percent per year.

The table shows that nations practicing spending restraint for multi-year periods reduce the problem of excessive government and also address the symptom of red ink.

I then ask my leftist buddies to please share their table showing nations that got good results from tax increases. And the response is…awkward silence, followed by attempts to change the subject. I often think you can even hear crickets chirping in the background.

I point this out because I now have another nation to add to my collection.

From the start of last decade up through the 2009-2010 fiscal year, government spending in the United Kingdom grew by 7.1 percent annually, far faster than the growth of the economy’s productive sector. As a result, an ever-greater share of the private economy was being diverted to politicians and bureaucrats.

Beginning with the 2010-2011 fiscal year, however, officials started complying with my Golden Rule and outlays since then have grown by an average of 1.6 percent per year.

And as you can see from this chart prepared by the Institute for Fiscal Studies, this modest level of fiscal restraint has paid big dividends. The burden of government spending has significantly declined, falling from 45 percent of national income to 40 percent of national income.

This means more resources in private hands, which means better economic performance.

Though allow me to now share some caveats. Fiscal policy is only a small piece of what determines good policy, just 20 percent of a nation’s grade according to Economic Freedom of the World.

So spending restraint should be accompanied by free trade, sound money, a sensible regulatory structure, and good governance. Moreover, as we see from the tragedy of Greece, spending restraint doesn’t even lead to good fiscal policy if it’s accompanied by huge tax increases.

Fortunately, the United Kingdom is reasonably sensible, which explains why the country is ranked #10 by EFW. Though it’s worth noting that it gets its lowest score for “size of government,” so the recent bit of good news about spending restraint needs to be the start of a long journey.

P.S. The United States got great results thanks to spending restraint between 2009-2014. It will be interesting to see whether Republicans get better results with Trump in the White House.

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