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Archive for the ‘Spending Cap’ Category

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Let’s learn from a real-world example.

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

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

So why is a spending cap now an important issue?

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

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

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

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

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

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

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

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

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

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

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

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

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Back in 2012, when America had a budget deficit above $1 trillion, Investor’s Business Daily opined that America’s fiscal mess could have been avoided if politicians had simply adopted a TABOR-style spending cap starting in 1998.

As illustrated by the accompanying chart, IBD showed how a giant deficit would have become very manageable if politicians simply limited spending so it grew no faster than population plus inflation.

What makes this alternative history so bittersweet is that there are places – such as Switzerland and Hong Kong – that already have successful spending caps that deliver positive results.

Indeed, spending caps have such a good track record that even left-leaning international bureaucracies like the International Monetary Fund and the Organization for Economic Cooperation and Development have acknowledged that they are the most effective fiscal rule.

To understand the benefits of spending caps, especially since we’re now back in an environment of $1 trillion-plus deficits, let’s replicate the IBD exercise.

Here’s a chart showing actual spending (orange line) and revenue (blue line) over the past 20 years, along with what would have happened to spending with a 3-percent cap on annual spending increases (grey line).

The net result is that today’s $1 trillion surplus would be a budget surplus of nearly $500 billion.

More important, the burden of spending today would be much lower, which means more resources being allocated by the productive sector of the economy. And that would mean more jobs and more prosperity.

P.S. While a spending cap is simple and effective, that doesn’t mean it’s easy. Abiding by a cap would force politicians to set priorities, which is a constraint they don’t like. In the long run, complying with a cap also would require some much-need entitlement reform, which also won’t be popular with the interest groups that control Washington.

P.P.S. We would need a spending cap of 1.7 percent to balance the budget over the next 10 years.

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When the Congressional Budget Office released its Budget and Economic Outlook yesterday, almost everyone in Washington foolishly fixated on the estimate of $1 trillion-plus annual deficits.

What’s far more important – and much more worrisome – is that the burden of government spending is projected to relentlessly increase, violating the Golden Rule of fiscal policy.

More specifically, the federal budget currently is consuming 21 percent of gross domestic product, but will consume 23.4 percent of economic output in 2030 if fiscal policy is left on autopilot.

Here is a chart, based on CBO’s new data, that shows why we should be very concerned.

By the way, last year’s long-run forecast from CBO shows the problem will get even worse in the following decades, especially if there isn’t genuine entitlement reform.

We’re in trouble today because government has been growing too fast, and we’ll be in bigger trouble in the future for the same reason.

But the situation is not hopeless. The problem can be fixed with some long-overdue and much-needed spending restraint.

We don’t even need to cut spending, though that would be very desirable.

As this next chart illustrates, our budgetary problems can be solved if there’s some sort of spending cap.

The grey line shows the current projection for federal spending and the orange line shows how much tax revenue Washington expects to collect (assuming the Trump tax cut is made permanent). There’s a big gap between those two lines (the $1 trillion-plus deficits everyone else is worried about).

My contribution to the discussion is to show we can have a budget surplus by 2028 if spending only grows by 1 percent annually and we can balance the budget by 2030 if spending grows by 1.7 percent per year.

Needless to say, I’m not fixated on balancing the budget and eliminating red ink.

The real goal is to change budgetary trend lines with a spending cap so that the fiscal burden of government begins to shrink as a share of the nation’s economy.

The bottom line is that modest spending restraint (government growing at 1.7 percent annually, nearly as fast as projected inflation) would slowly but surely achieve that goal by gradually reversing the big-government policies of Bush, Obama, and Trump.

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I gave a speech this past weekend about the economy and fiscal policy, and I made my usual points about government being too big and warned that the problem would get much worse in the future because of demographic change and poorly designed entitlement programs.

Which is probably what the audience expected me to say.

But then I told the crowd that a balanced budget requirement is neither necessary nor sufficient for good fiscal policy.

Which may have been a surprise.

To bolster my argument, I pointed to 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. I also explained that there are also anti-deficit rules in nations such as GreeceFrance, and Italy, yet those countries are not exactly paragons of fiscal discipline.

To help explain why balanced budget requirements are not effective, I shared this chart showing annual changes in revenue over the past two decades for the federal government (Table 1.1 of OMB’s Historical Tables).

It shows that receipts are very volatile, primarily because they grow rapidly when the economy is expanding and they contract – sometimes sharply – when there’s an economic downturn.

I pointed out that volatile revenue flows make it very difficult to enforce a balanced budget requirement.

Most important, it’s extremely difficult to convince politicians to reduce spending during a recession since that’s when they feel extra pressure to spend more money (whether for Keynesian reasons of public-choice reasons).

Moreover, a balanced budget requirement doesn’t impose any discipline when the economy is growing. If revenues are growing by 8%, 10%, or 12% per year, politicians use that as an excuse for big increases in the spending burden.

Needless to say, those new spending commitments then create an even bigger fiscal problem when there’s a future downturn (as I’ve noted when writing about budgetary problems in jurisdictions such as Cyprus, Alaska, Ireland, Alberta, Greece, Puerto Rico, California, etc).

So what, then, is the right way of encouraging or enforcing prudent fiscal policy?

I told the audience we need a federal spending cap, akin to what exists in Switzerland, Hong Kong, and Colorado. Allow politicians to increase spending each year, preferably at a modest rate so that there’s a gradual reduction in the fiscal burden relative to economic output.

I’ve modified the above chart to show how a 2% spending cap would work. Politicians could increase spending when revenues are falling, but they wouldn’t be allowed to embark on a spending spree when revenues are rising.

Spending caps create a predictable fiscal environment. And limiting spending growth produces good outcomes.

If you’re still not convinced, this video hopefully will make a difference.

P.S. Spending caps work so well that even left-leaning international bureaucracies such as the OECD and IMF have acknowledged that they are the only effective fiscal rule.

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Last November, voters in some states had the opportunity to accept or reject some very important initiatives, including votes on Colorado’s flat tax, Arizona’s school choice system, and a carbon tax in the state of Washington.

Since 2019 is an off-year election, there aren’t as many initiatives and referendums. But one of them is vitally important. Politicians in Colorado are hoping voters will approve Proposition CC, which would gut the Taxpayer Bill of Rights (TABOR) and thus allow more government spending.

Why is TABOR worth defending? Because it’s far and away the most effective and well-designed fiscal rule in the United States.

It’s basically a spending cap, which is the ideal fiscal policy, and here’s a description of how it works that I shared last year.

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.

Proposition CC doesn’t fully repeal TABOR, but it allows politicians to keep – and spend – excess tax revenues.

Thomas Aiello of the National Taxpayers Union wrote last month for the Colorado Springs Gazette about TABOR. He explains why it has been successful.

By guaranteeing refunds of excessive taxes, restricting spending to sensible growth rates, and giving Coloradans the ability to vote on tax increases, TABOR has been instrumental in the state’s booming economy. …Since TABOR limits the amount of money the state is allowed to spend, surplus revenue in excess of the cap must be refunded to Colorado taxpayers. Generally, the revenue cap on the state level grows with inflation plus population increases. …TABOR is working as designed: limiting the growth of government, protecting taxpayers, and ensuring working Coloradans keep more of their hard-earned money. …since 1992 more than $3 billion has been refunded back to taxpayers in the form of lower property, sales, and income taxes.

And he warns about the adverse consequences of Proposition CC.

…in the 2019 legislative session, the Democratic-controlled legislature agreed to place Proposition CC onto the November ballot. If approved by voters, TABOR’s provision for refunds would be gutted, thereby allowing the treasury to retain all excess revenue it is required to return to taxpayers. That means taxpayers would forfeit future refunds from 2019 on. Just put that into perspective: taxpayers will send an extra $1.3 billion to the treasury than what would normally be spent. Instead of giving that money back to you as required by TABOR, lawmakers want Coloradans to forget about overpayments so they can just spend it on other things in the budget.

Writing for the Grand Junction Daily Sentinel, Jay Stooksbury also opines against Proposition CC.

They lied to us in 2005, and they are doubling down on this lie in 2019. Colorado voters were sold a bill of goods with Referendum C in 2005, and it is of the utmost importance that we aren’t fooled again with Proposition CC in 2019. Proponents of Referendum C originally claimed that their measure was “temporary.” The measure was supposed to offer a five-year reprieve from the constitutional limitations created by the Taxpayer’s Bill of Rights (TABOR)… Referendum C proved to be anything but “temporary.” The referendum allowed Colorado’s spendthrift government to permanently augment its spending cap, shortchanging taxpayers on their potential refund year after year since its passing.

He explains that Proposition CC would be far worse.

If passed, this 2019 ballot measure would permanently abolish the state government’s obligation to refund taxpayers. I repeat: permanently. At least this time around, legislators have dropped the pretense that they are bluffing with “temporary” half-measures; when it comes to keeping all of your hard-earned income, these legislators are going all-in, baby. …TABOR is, unfortunately, a shell of its former self. Its effectiveness has been chipped away by a decades-long rebranding campaign that laundered tax revenue by using terms like “fees” and “enterprises.” …Regardless, TABOR is still a vital, one-of-a-kind safeguard that empowers Coloradans against the wastefulness of government. Come November, let’s be certain to keep it that way. Fool us once with C, shame on you; fool us twice with CC, shame on all of us.

I don’t have much to add to these analyses. The real gold standard for good fiscal policy is to make sure government doesn’t grow faster than the private sector, and that’s what TABOR is designed to achieve.

It’s basically the closest thing we have in America to Switzerland’s “debt brake” and Hong Kong’s Article 107.

My only contribution to the discussion is this chart, based on data from the St. Louis Federal Reserve, showing how Coloradans now enjoy more than $4,000 of additional personal income compared to the national average – up from just $526 when TABOR was enacted.

While it’s impossible to precisely explain why income has grown faster in Colorado, I don’t think it is a coincidence that the state gets high scores for economic liberty.

P.S. To see the real-world impact of TABOR, look at what happened after pot legalization produced additional tax revenue.

P.P.S. I’m also paying close attention to Proposition 4 in Texas, which would amend the state constitution to prohibit consideration of a personal income tax.

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Spending caps are the most effective way of fulfilling my Golden Rule for fiscal policy.

And we have good evidence for this approach, as I explain in this FreedomWorks discussion.

I also discuss tax competition in the interview, as well as other topics. You can watch the entire discussion by clicking here.

But I’m sharing the part about spending caps because it fits perfectly with some new research from Veronique de Rugy and Jack Salmon of the Mercatus Center.

They point out that America faces a grim fiscal future, but suggest that fiscal rules may be part of the solution.

…the federal budget process as it exists today has proven inadequate…it is a great way to enable politicians to do what they want to do (cater to interest groups) while avoiding what they don’t want to do (living within their means). …The negative consequence emerging from this chaos and the resulting failure to follow budget rules is an unremitting expansion of the size and scope of government… With countries around the world experiencing growing debt-to-GDP ratios, resultant stagnation in economic growth, and, in extreme cases, default on debts, academics have been paying an increasing amount of attention to the potential of rules toward restraining unsustainable deficit spending. …The good news is that the evidence suggests that these fiscal rules are broadly effective at restraining deficit spending. …The bad news is that not all fiscal rules are effective in restraining government profligacy and curtailing debt growth.

The authors are right. Some fiscal rules don’t work very well.

As I stated in the interview, balanced budget requirements tend to be ineffective.

Spending caps, by contrast, have a decent track record.

The Mercatus study looks at Hong Kong.

Hong Kong…might actually represent the gold standard of good fiscal policy. …Hong Kong’s Financial Secretary, Mr. John Tsang, explained, “Our commitment to small government demands strong fiscal discipline. . . . It is my responsibility to keep expenditure growth commensurate with growth in our GDP.” …in Hong Kong it’s actually a constitutional requirement: Article 107 requires that the government should strive to achieve a fiscal balance, avoid deficit, and more importantly, make sure government spending doesn’t grow faster than the growth of the economy. …Hong Kong’s spending-to-GDP ratio has fluctuated between 14 and 20 percent since the 1990s, its debt as a share of GDP is zero, social welfare spending remains steady at less than 3 percent of GDP.

Amen.

I’ve also praised Hong Kong’s fiscal policy.

Now let’s look at what the authors wrote about Switzerland.

Swiss politicians are not allowed to increase spending faster than average revenue growth over a multiyear period (as calculated by the Swiss Federal Department of Finance), which confines spending growth to a rate no higher than the rate of inflation plus population growth. The Swiss debt brake rule is significant in that it appeals to economists and policymakers on both sides of the aisle. Advocates for fiscal restraint support this rule because it is effectively a spending cap, while social democrats support the rule as it allows for deficit spending during recessionary periods. …There’s no arguing with the results: Annual spending growth fell from an average of 4.3 percent to 2.5 percent since the rule was implemented. Also, in 10 out of the past 14 years, Switzerland has had budget surpluses, while deficits have remained rare and small… At the same time, the Swiss debt-to-GDP ratio has fallen from almost 60 percent in 2003 to around 42 percent in 2017.

Once again, I say amen.

Switzerland’s spending cap is a big success.

Here’s Figure 1 from the study, which shows a big drop in Swiss government debt. I’ve augmented the chart with OECD data to focus on something even more important – which is that the burden of spending (which started very low by European standards) has declined since the debt brake was implemented.

Last but not least, let’s look at the Danish example.

In 2014 Denmark implemented The Budget Act to ensure more efficient management of public expenditures. The act is aimed at ensuring a balance or surplus on the general government balance sheet, as well as appropriate expenditure management at all levels of government. In practice, the rule sets a limit of 0.5 percent of GDP on the structural budget deficit. Policymakers decided that managing fiscal policy on the basis of a balanced structural budget would lead to an appropriate fiscal position in the long term. They also designed the system to take discretion out of their own hands by making the cuts automatic. In addition to structural deficit rules, the Budget Act introduces four-year rolling expenditure ceilings. These ceilings set legally binding limits for spending at all levels of government and for each program. If one program spends under its cap, any money not spent cannot be reallocated to another program.

I guess this is time for a triple-amen.

Here’s Figure 2 from the study, which I’ve also augmented to highlight the most important success of Denmark’s policy of spending restraint.

The economic case for spending caps is ironclad.

The problem is that it’s an uphill climb from a political perspective.

Politicians prefer legislative spending caps. After all (as we saw in 2013, 2015, 2018, and this year), those can be evaded with a simple majority, so long as there’s a profligate president who approves higher spending levels.

And those caps have never applied to entitlements, which are the part of the budget that eventually will bankrupt the nation.

So why would public choice-motivated lawmakers actually allow a serious and comprehensive spending cap to become part of the Constitution?

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I point out in this interview that the 2011 Budget Control Act (BCA) was the only big victory for taxpayers this century. It imposed spending caps on discretionary spending and led to a sequester in early 2013, which was Barack Obama’s biggest defeat.

The bad news is that the BCA is merely legislation. That means politicians can conspire to bust the spending caps – which is what they did at the end of 2013, as well as in 2015, 2018, and again this year.

This most recent deal may be the worst of the worst. The Committee for a Responsible Federal Budget (CRFB) shows that it brings discretionary spending almost up to the level we reached during Obama’s pork-filled stimulus.

By the way, the chart also shows that Bush was a big spender and that we actually had a bit of spending restraint after the Tea Party-themed 2010 mid-term elections.

But let’s focus on today.

Here’s one more chart from CRFB. It shows that Trump is doing a good job of impersonating Obama with huge, across-the-board spending increases.

These charts show why I’m so depressed. And let’s not forget that they are only measures of discretionary spending. The outlook for entitlement spending is even worse!

In other words, we’re on the path to fiscal crisis. Is there a solution?

Yes, we could adopt constitutional restraints on the growth of government. I mentioned Colorado’s Taxpayer Bill of Rights in the interview, as well as the “debt brake” in Switzerland.

But there’s zero chance that today’s crop of politicians will enact this kind of sensible reform. We’ll probably have to wait until a crisis occurs. At which point it may be too late.

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There are two things everyone should understand about the federal budget.

Sadly, the politicians in Washington generally aren’t interested in sensible fiscal policy. They have a “public choice” incentive to spend more money in hopes of buying more votes.

Congressman Chip Roy, a freshman from Texas, is one of the few lawmakers who objects to the spend-like-there’s-no-tomorrow mentality in Washington.

Here’s some of what he wrote for the Hill.

…both parties appear to have reached a consensus on one major issue: busting spending caps is their solution to disagreements over spending. …Members of my party would be happy to agree with Democrats’ demands to spend outside our means, so long as they get all the money they want for defense. …The truth is Washington is all about power rather than solving the problem. It’s politically easier for Republicans to press for defense spending and Democrats to push for non-defense spending… Years of out-of-control spending and poor decision making is catching up with us.

He specifically wants to maintain the spending caps that apply to annually appropriated outlays.

Instead of wringing our hands and finding political convenient reasons to spend outside our means, Congress should stick to the caps. Doing so will force us – Republicans and Democrats – to sit at the table and negotiate—a lost art in Washington… allowing an across-the-board sequester to kick-in is more responsible than what Congress appears on track to do. …we must act now to do our job. We must stick to the budget caps.

He’s right about the desirability of a sequester.

Indeed, the sequester that took place in 2013 was the biggest victory for fiscal discipline during Obama’s presidency.

Sadly, politicians since then have been jumping through all sorts of hoops to avoid a second sequester. And the Democrats in the House of Representatives are proposing to bust the spending caps once again.

Here’s a chart prepared by Republicans on the House Budget Committee.

By the way, I’m not citing material from Republicans because they deserve praise.

So even though House Democrats are now proposing something that’s “absurdly terrible,” Republicans don’t have much credibility on the issue.

I’ll close with an observation about Greece’s fiscal tragedy.

There was no single decision that caused that country’s economic crisis. Instead, it was hundreds of short-sighted choices to spend more on Program A, Initiative B, Plan C, and Project D, along with every kind of tax increase under the sun.

And when some people warned that the fiscal orgy eventually would produce bad consequences, they were dismissed or ignored.

Sadly, American is heading down the same path. We know the solution, but politicians are more interested in buying votes than doing what’s right for America.

That includes the President. Trump has the power to force a sequester. All he has to do is veto any spending bill that busts the caps. But don’t hold your breath waiting for that to happen.

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In the absence of genuine entitlement reform, the United States at some point is going to suffer from a debt crisis.

But red ink is merely a symptom. I used numbers from Greece in this interview to underscore the fact that the real problem is government spending.

The discussion was triggered by comments from the Chairman of the Federal Reserve.

Federal Reserve Chairman Jerome Powell said Wednesday that reducing the federal debt needs to return to the forefront of the agenda, warning that the government’s finances are unsustainable. “I do think that deficits matter and do think it’s not really controversial to say our debt can’t grow faster than our economy indefinitely — and that’s what it’s doing right now,” Powell said.

As I noted in my comments, Powell is right, but he’s focusing on the wrong variable.

The real crisis is that spending is growing faster than the private sector (Powell needs to learn the six principles to guide spending policy).

To be more specific, politicians are violating my Golden Rule.

Spending grew too fast under Bush. It grew too fast under Obama (except for a few years when the “Tea Party” was in the ascendancy). And it’s growing too fast under Trump.

Most worrisome, the burden of spending is expected to grow faster than the private sector far into the future according to the long-run forecast from the Congressional Budget Office.

That doesn’t mean we’ll have a crisis this year or next year. We probably won’t even have a crisis in the next 10 years or 20 years.

But I cited Greek data in the interview to point out that excessive spending eventually does create a major problem.

Here’s the data from International Monetary Fund’s World Economic Outlook database. To make matters simple (I should have done this for the interview as well), I adjusted the numbers for inflation.

So how can America avoid a Greek-style fiscal nightmare?

Simple, just impose a spending cap. At the end of the interview, I added a plug for the very successful system in Switzerland, but I’d also be happy if we copied Hong Kong’s spending cap. Or the Taxpayer Bill of Rights from Colorado.

The bottom line is that spending restraint works and a constitutional spending cap is the best way to achieve permanent fiscal discipline.

P.S. By contrast, proponents of “Modern Monetary Theory” argue governments can finance ever-growing government by printing money. For what it’s worth, nations that have used central banks to finance big government (most recently, Venezuela and Zimbabwe) are not exactly good role models.

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I wrote yesterday about the continuing success of Switzerland’s spending cap.

Before voters changed the Swiss constitution, overall expenditures were growing by an average of 4.6 percent annually. Ever since the “debt brake” took effect, though, government spending has increased by an average of just 2.1 percent.

For all intents and purposes, Switzerland is getting good results because it is now complying with fiscal policy’s Golden Rule.

Unfortunately, the same cannot be said for the United States. The Congressional Budget Office just released its new long-run forecast of the federal budget.

The most worrisome factoid in the report is that the overall burden of federal spending is going to expand significantly over the next three decades, jumping from 20.6 percent of the economy this year to 29.3 percent of economic output in 2048.

And why will the federal budget consume an ever-larger share of economic output? The chart tells you everything you need to know. Our fiscal situation is deteriorating because government is growing faster than the private sector.

Actually, the chart doesn’t tell you everything you need to know. It doesn’t tell us, for instances, that tax increases simply make a bad situation worse since politicians then have an excuse to avoid much-need reforms.

And the chart also doesn’t reveal that entitlement programs are the main cause of ever-expanding government.

But the chart does a great job of showing that our fundamental problem is growth of government. Which presumably makes it obvious that the only logical solution is a spending cap.

The good news is that there already is a spending cap in Washington.

But the bad news is that it only applies to “appropriations,” which are a small share of the overall federal budget.

And the worse news is that politicians voted to bust that spending cap in 2013, 2015, and earlier this year.

The bottom line is that we know spending restraint works, but the challenge is figuring out a system that actually ties the hands of politicians. Switzerland and Hong Kong solved that problem by making their spending caps part of their national constitutions.

Sadly, there’s little immediate hope of that kind of reform in the United States.

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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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