Archive for the ‘Spending’ Category

I’m not a big fan of the Paris-based Organization for Economic Cooperation and Development.

That international bureaucracy is controlled by high-tax nations that want to export bad policy to the rest of the world. As such, the OECD frequently advocates policies that are contrary to sound economic principles.

Here are just a few examples of statist policies that are directly contrary to the interests of the American people.

With a list like that, you can understand why I’m so upset that American taxpayers subsidize this pernicious bureaucracy. Heck, I’m so opposed to the OECD that I was almost thrown in a Mexican jail for fighting against their anti-tax competition project.

But the point of today’s column isn’t to bash the OECD. The above list is simply to make clear that nobody could accuse the Paris-based bureaucracy of being in favor of small government and free markets.

So if the OECD actually admits that the spending cap in the Swiss Debt Brake is a very effective fiscal rule, that’s a remarkable development. Sort of like criminals admitting that a certain alarm system is effective.

And that’s exactly the message in a report on The State of Public Finances 2015, which was just released by the OECD. Here are some key findings from the preface.

It is understandable that citizens ask why public financial management processes did not guard, in a more effective way, against the vagaries of the economic cycle…the OECD’s recent Recommendation on Budgetary Governance…spells out a number of simple, clear yet ambitious principles for how countries should manage their budgets and fiscal policy processes. …the most salient lesson…is not to seek to avoid altogether the fiscal shocks and cyclical downturns, to which our economies are subject from time to time. The real challenge is to build resilience into our national framework…to mitigate these fiscal shocks. …As to fiscal resilience, this report underpins the wisdom of…fiscal rules.

But what fiscal rules actually work?

This is where the OECD bureaucrats deserve credit for acknowledging an approach with a proven track record, even though the organization often advocates for bigger government. Here are some excerpts from the report’s executive summary.

The European Union’s Stability and Growth Pact…proved largely ineffective in protecting countries from the effects of the fiscal crisis. …Simple and clear fiscal anchors – e.g., the Swiss and German debt brake rules – appear to have been more effective in influencing effective fiscal management.

And here is some additional analysis from the body of the report.

Switzerland’s “debt brake” constitutional rule has proven a model for some OECD countries, notably Germany. …Germany adopted a debt brake rule in 2009… In addition, the United Kingdom recently announced (June 2015) its plan… Furthermore,…it is preferable to combine a budget balance rule with an expenditure rule.

And here are some of the findings from a separate OECD study published earlier this year. Switzerland’s debt brake isn’t explicitly mentioned, but the key feature of the Swiss approach – a spending cap – is warmly embraced.

A combination of a budget balance rule and an expenditure rule seems to suit most countries well. …well-designed expenditure rules appear decisive to ensure the effectiveness of a budget balance rule and can foster long-term growth. …Spending rules entail no trade-off between minimising recession risks and minimising debt uncertainties. They can boost potential growth and hence reduce the recession risk without any adverse effect on debt. Indeed, estimations show that public spending restraint is associated with higher potential growth.

Let me now add my two cents. The research from the OECD on spending caps is good, but incomplete. The main omission is that both the report and the study don’t explain that spending caps primarily are effective because they prevent excessive spending increases when the economy is strong.

As I’ve explained before, citing examples such as Greece, Alberta, Puerto Rico, California, and Alaska, politicians have a compulsive tendency to create new spending commitments during periods when a robust economy is generating lots of tax revenue. But when the economy stumbles and revenues go flat, these spending commitments become unsustainable.

And, all too often, politicians respond with higher taxes.

Speaking of which, the more recent OECD report also has some interesting data on how countries have dealt with fiscal policy in recent years.

Here are two charts showing fiscal changes from 2012-2014 and projected fiscal changes from 2015-2017.

I’m not sure why the United States isn’t on the list. After all, we actually had some very good changes in 2012-2014 period (though we’ve recently regressed).

But let’s look at some of the other nations (keeping in mind “expenditure reductions” are mostly just reductions in planned increases, just like in the U.S.).

Kudos to New Zealand (NZL), Switzerland (CHE), and the United Kingdom (GBR), all of which took steps to constrain spending over the past three years and all of which intend to be similarly prudent over the next three years.

Cautious applause to France (FRA), Spain (ESP), Denmark (DNK), and Sweden (SWE), all of which at least claim they’ll be prudent in the future.

And jeers to Mexico (MEX) for bad policy in the past and Turkey (TUR) for bad policy in the future, while both the Czech Republic (CZE) and Finland (FIN) deserve scorn for pursuing lots of tax increases in both periods.

Let’s take a moment to elaborate on the nations that have made responsible choices. I’ve already written about fiscal restraint in Switzerland, and I’ve also noted that the United Kingdom has moved in the right direction (even though the current government made some tax mistakes that led me to be very pessimistic when it first took control).

So let’s focus on New Zealand, which is yet another case study showing the value of Mitchell’s Golden Rule.

During the 2012-2014 period, government spending grew by less than 1 percent annually according to IMF data. The government doesn’t intend to be as prudent for the 2015-2017 period, which spending projected to grow by 3 percent annually. But in both cases, nominal spending is growing slower than nominal GDP, and that’s the key to fiscal progress.

Indeed, if you check the OECD data on the overall burden of government spending, the public sector in New Zealand today is consuming 40.5 percent of economic output, which is far too high, but still lower than 44.7 percent of GDP, which was the amount of GDP consumed by government in 2011.

And don’t forget that New Zealand has the world’s freest economy for non-fiscal factors, ranking even above Hong Kong and Singapore.

Let’s conclude by circling back to the issue of spending caps.

It is a noteworthy development that even the OECD has embraced expenditure limits. Especially since the IMF also has endorsed spending caps.

And since spending caps also have widespread support among fiscal experts from think thanks, maybe, just maybe, there’s a chance for real reform.

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I’m pleasantly surprised by the tax plans proposed by Marco Rubio, Rand Paul, Jeb Bush, and Donald Trump.

In varying ways, all these candidate have put forth relatively detailed proposals that address high tax rates, punitive double taxation, and distorting tax preferences.

But saying the right thing and doing the right thing are not the same. I just did an interview focused on Donald Trump’s tax proposal, and one of my first points was that candidates may come up with good plans, but those proposals are only worthwhile if the candidates are sincere and if they intend to do the heavy lifting necessary to push reform through Congress.

Today, though, I want to focus on another point, which I raised starting about the 0:55 mark of the interview.

For the plans to be credible, candidates also need to have concomitant proposals to restrain the growth of federal spending.

I don’t necessarily care whether they balance the budget, but I do think proposals to reform and lower taxes won’t have any chance of success unless there are also reasonable plans to gradually shrink government spending as a share of economic output.

As part of recent speeches in New Hampshire and Nevada, I shared my simple plan to impose enough spending restraint to balance the budget in less than 10 years.

But those speeches were based on politicians collecting all the revenue projected under current law.

By contrast, the GOP candidates are proposing to reduce tax burdens. On a static basis, the cuts are significant. According to the Tax Foundation, the 10-year savings for taxpayers would be $2.97 trillion with Rand Paul’s plan, $3.67 trillion under Jeb Bush’s plan, $4.14 trillion with Marco Rubio’s plan, all the way up to $11.98 trillion for Donald Trump’s plan.

Those sound like very large tax cuts (and Trump’s plan actually is a very large tax cut), but keep in mind that those are 10-year savings. And since the Congressional Budget Office is projecting that the federal government will collect $41.58 trillion over the next decade, the bottom line, as seen in this chart, is that all of the plans (other than Trump’s) would still allow the IRS to collect more than 90 percent of projected revenues.

Now let’s make the analysis more realistic by considering that tax cuts and tax reforms will generate faster growth, which will lead to more taxable income.

And the experts at the Tax Foundation made precisely those calculations based on their sophisticated model.

Here’s an updated chart showing 10-year revenue estimates based on “dynamic scoring.”

The Trump plan is an obvious outlier, but the proposals from Jeb Bush, Rand Paul, and Marco Rubio all would generate at least 96 percent of the revenues that are projected under current law.

Returning to the original point of this exercise, all we have to do is figure out what level of spending restraint is necessary to put the budget on a glide path to balance (remembering, of course, that the real goal should be to shrink the burden of spending relative to GDP).

But before answering this question, it’s important to understand that the aforementioned 10-year numbers are a bit misleading since we can’t see yearly changes. In the real world, pro-growth tax cuts presumably lose a lot of revenue when first enacted. But as the economy begins to respond (because of improved incentives for work, saving, investment, and entrepreneurship), taxable income starts climbing.

Here’s an example from the Tax Foundation’s analysis of the Rubio plan. As you can see, the proposal leads to a lot more red ink when it’s first implemented. But as the economy starts growing faster and generating more income, there’s a growing amount of “revenue feedback.” And by the end of the 10-year period, the plan is actually projected to increase revenue compared to current law.

So does this mean some tax cuts are a “free lunch” and pay for themselves? Sound like a controversial proposition, but that’s exactly what happened with some of the tax rate reductions of the Reagan years.

To be sure, that doesn’t guarantee what will happen if any of the aforementioned tax plans are enacted. Moreover, one can quibble with the structure and specifications of the Tax Foundation’s model. Economists, after all, aren’t exactly famous for their forecasting prowess.

But none of this matters because the Tax Foundation isn’t in charge of making official revenue estimates. That’s the job of the Joint Committee on Taxation, and that bureaucracy largely relies on static scoring.

Which brings me back to today’s topic. The good tax reform plans of certain candidates need to be matched by credible plans to restrain the growth of federal spending.

Fortunately, that shouldn’t be that difficult. I explained last month that big tax cuts were possible with modest spending restraint. If spending grows by 2 percent instead of 3 percent, for instance, the 10-year savings would be about $1.4 trillion.

And since it’s good to reduce tax burdens and also good to restrain spending, it’s a win-win situation to combine those two policies. Sort of the fiscal equivalent of mixing peanut butter and chocolate in the famous commercial for Reese’s Peanut Butter Cups.

P.S. Returning to my interview embedded above, I suppose it’s worthwhile to emphasize a couple of other points.

P.P.S. Writing about the prospect of tax reform back in April, I warned that “…regardless of what happens with elections, I’m not overly optimistic about making progress.”

Today, I still think it’s an uphill battle. But if candidates begin to put forth good plans to restrain spending, the odds will improve.

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When I first came to Washington back in the 1980s, there was near-universal support and enthusiasm for a balanced budget amendment among advocates of limited government.

The support is still there, I’m guessing, but the enthusiasm is not nearly as intense.

There are three reasons for this drop.

  1. Political reality – There is zero chance that a balanced budget amendment would get the necessary two-thirds vote in both the House and Senate. And if that happened, by some miracle, it’s highly unlikely that it would get the necessary support for ratification in three-fourths of state legislatures.
  2. Unfavorable evidence from the statesAccording to the National Conference of State Legislatures, every state other than Vermont has some sort of balanced budget requirement. Yet those rules don’t prevent states like California, Illinois, Connecticut, and New York from adopting bad fiscal policy.
  3. Favorable evidence for the alternative approach of spending restraint – While balanced budget rules don’t seem to work very well, policies that explicitly restrain spending work very well. The data from Switzerland, Hong Kong, and Colorado is particularly persuasive.

Advocates of a balanced budget amendment have some good responses to these points. They explain that it’s right to push good policy, regardless of the political situation. Since I’m a strong advocate for a flat tax even though it isn’t likely to happen, I can’t argue with this logic.

Regarding the last two points, advocates explain that older versions of a balanced budget requirement simply required a supermajority for more debt, but newer versions also include a supermajority requirement to raise taxes. This means – at least indirectly – that the amendment actually is a vehicle for spending restraint.

This doesn’t solve the political challenge, but it’s why advocates of limited government need to be completely unified in favor of tax-limitation language in a balanced budget amendment. And they may want to consider being more explicit that the real goal is to restrain spending so that government grows slower than the productive sector of the economy.

Interestingly, even the International Monetary Fund (which is normally a source of bad analysis) understands that spending limits work better than rules that focus on deficits and debt.

Here are some of the findings from a new IMF study that looks at the dismal performance of the European Union’s Stability and Growth Pact. The SGP supposedly limited deficits to 3 percent of GDP and debt to 60 percent of GDP, but the requirement failed largely because politicians couldn’t resist the temptation to spend more in years when revenue grew rapidly.

An analysis of stability programs during 1999–2007 suggests that actual expenditure growth in euro area countries often exceeded the planned pace, in particular when there were unanticipated revenue increases. Countries were simply unable to save the extra revenues and build up fiscal buffers. …This reveals an important asymmetry: governments were often unable to preserve revenue windfalls and faced difficulties in restraining their expenditure in response to revenue shortfalls when consolidation was needed. …The 3 percent of GDP nominal deficit ceiling did not prevent countries from spending their revenue windfalls in the mid-2000s. … Under the SGP, noncompliance has been the rule rather than the exception. …The drawbacks of the nominal deficit ceiling are particularly apparent when the economy is booming, as it is compatible with very large structural deficits.

The good news is that the SGP has been modified and now (at least theoretically) requires spending restraint.

The initial Pact only included three supranational rules… As of 2014, fiscal aggregates are tied by an intricate set of constraints…government spending (net of new revenue measures) is constrained to grow in line with trend GDP. …the expenditure growth ceiling may seem the most appealing. This indicator is tractable (directly constraining the budget), easy to communicate to the public, and conceptually sound… Based on simulations, Debrun and others (2008) show that an expenditure growth rule with a debt feedback ensures a better convergence towards the debt objective, while allowing greater flexibility in response to shocks. IMF (2012) demonstrates the good performance of the expenditure growth ceiling

This modified system presumably will lead to better (or less worse) policy in the future, though it’s unclear whether various nations will abide by the new EU rules.

One problem is that the overall system of fiscal rules has become rather complicated, as illustrated by this image from the IMF study.

Which brings us back to the third point above. If the goal is to restrain spending (and it should be), then why set up a complicated system that first and foremost is focused on red ink?

That’s why the Swiss Debt Brake is the right model for how to get spending under control. And this video explains why the objective should be spending restraint rather than deficit reduction.

And for those who fixate on red ink, it’s worth noting that if you deal with the underlying disease of too much government, you quickly solve the symptom of deficits.

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If you include all the appendices, there are thousands of pages in the President’s new budget.

But the first thing I do every year is find the table showing how fast the burden of government spending will increase.

That’s Table S-1 of the budget, and it shows that the President is proposing $41 trillion of spending over the next 10 years.

But perhaps most relevant, he wants the federal budget to be $2 trillion higher in 2023 than it is today.

Obama FY2014 Budget

And this is based on the White House’s dodgy assumptions. The numbers almost certainly will look a bit worse when the Congressional Budget Office re-estimates the President’s budget.

By the way, there’s a reason the above chart looks familiar. It almost identical to the ones I put together last year and the year before. So give Obama points for consistency. Rain or shine, year in and year out, he proposes that government spending should rise by $2 trillion every time he proposes a budget.

He’s also consistent in that he demands higher taxes. Americans for Tax Reform has a list of the “Top 10” tax hikes in the President’s budget. Most of them are based on the President’s class-warfare ideology, though he also wants to hit lower-income people with a big hike in the tobacco tax.

Another example of unfortunate consistency is that the President whiffs on entitlement reform. Unlike the House of Representatives, there’s no proposal to fix Medicare or Medicaid.

He does have a “chained CPI” proposal that would slightly reduce cost-of-living adjustments for Social Security, but that would be a substitute for the reforms that are needed to both control costs and give workers the option to boost retirement income with personal accounts.

Moreover, chained CPI is a huge tax hike, as explained by my colleague Chris Edwards.

So what’s the bottom line? Well, there isn’t one. We’re going to have gridlock for the foreseeable future. The House has passed a decent budget with some modest entitlement reform, but there’s no way that the Senate will accept that plan.

Similarly, there’s no way (knock on wood!) that the House will acquiesce to the President’s raise-taxes-but-leave-spending-on-autopilot proposal. Or the big-government plan from Senate Democrats.

So neither side will move the ball.

We’ll have some fiscal skirmishes, to be sure, with the debt limit and the FY2014 appropriations bills being obvious examples.

But nothing big will happen until either 2015 (if the Democrats win control of the House) or 2017 (if Republicans win the White House and control of the Senate).

By then, we’ll be two or fours years closer to being the next Greece.

P.S. Actually, I think many other nations are in a position to be the next Greece, though it’s discouraging that some estimates indicate that our long-run fiscal status is worse than basket cases such as Italy and France.

P.P.S. As these cartoons suggest, maybe our real fiscal problem is that the President refuses to admit there’s a problem?

P.P.P.S. But I think this cartoon more accurately shows our real challenge.

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A couple of weeks ago, I offered some guarded praise for Paul Ryan’s budget, pointing out that it satisfies the most important requirement of fiscal policy by restraining spending – to an average of 3.1 percent per year over the next 10 years – so that government grows slower than the productive sector of the economy (I call this my Golden Rule).

I was more effusive in my comments about Senator Rand Paul’s budget, which limited the growth of the federal budget over the next 10 years to an average of 2.2 percent each year.

Now the Republican Study Committee from the House of Representatives has put forth a plan that also deserves considerable applause. Like Senator Paul, the RSC plan would impose immediate significant fiscal discipline such that spending in 2017 would be about the same level as it is this year.

Think of this as being similar to the very successful fiscal reforms of New Zealand and Canada in the 1990s.

After the initial period of spending restraint, the budget would be allowed to grow, but only about as fast as the private economy. This chart shows spending levels for the Obama budget, the Paul Ryan budget, the Rand Paul budget, and the RSC budget.

A couple of final points.

1. For all the whining and complaining from the pro-spending lobbies, the RSC budget is hardly draconian. Federal spending, measured as a share of GDP, would only drop to where it was when Bill Clinton left office.

2. One preferable feature of the Rand Paul budget is that the Kentucky Senator eliminates four needless and wasteful federal departments – Commerce, Education, Energy, and Housing and Urban Development. As far as I can tell, no departments are eliminated in the RSC plan. Also, Senator Paul’s plan is bolder on tax reform, scrapping the corrupt internal revenue code and replacing it with a simple and fair flat tax.

3. The RSC comes perilously close to winning a Bob Dole Award. The first chapter of their proposal fixates on symptoms of debt and deficits rather than the real problem of excessive government spending. Indeed, the first six charts all relate to deficits and debt, creating an easy opening for leftists to say they can solve the mis-defined problem with higher taxes.

There are lots of other details worth exploring, but the main lesson is that restraining spending is the key to good fiscal policy.

And that’s what’s happening.  Indeed, the good news is that policymakers have proposed several budget plans that would shrink the burden of spending as a share of GDP. It’s refreshing to debate the features of several good plans (rather than comparing the warts in the competing plans during the big-government Bush years).

The bad news is that Harry Reid and Barack Obama will succeed in blocking any progress this year, so America will move ever closer to becoming another Greece.

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President Obama’s budget proposal was unveiled today, generating all sorts of conflicting statements from both parties.

Some of the assertions wrongly focus on red ink rather than the size of government. Others rely on dishonest Washington budget math, which means spending increases magically become budget cuts simply because outlays are growing at a slower rate than previously planned.

When you strip away all the misleading and inaccurate rhetoric, here’s the one set of numbers that really matters. If we believe the President’s forecasts (which may be a best-case scenario), the burden of federal spending will grow by $2 trillion between this year and 2022.

In all likelihood, the actual numbers will be worse than this forecast.

The President’s budget, for instance, projects that the burden of federal spending will expand by less than 1 percent next year. That sounds like good news since it would satisfy Mitchell’s Golden Rule.

But don’t believe it. If we look at the budget Obama proposed last year, federal spending was supposed to fall this year. Yet the Obama Administration now projects that outlays in 2012 will be more than 5 percent higher than they were in 2011.

The most honest assessment of the budget came from the President’s Chief of Staff, who openly stated that, “the time for austerity is not today.”

With $2 trillion of additional spending (and probably more), that’s the understatement of the century.

What makes this such a debacle is that other nations have managed to impose real restraints on government budgets. The Baltic nations have made actual cuts to spending. And governments in Canada, New Zealand, Slovakia, and Ireland generated big improvements by either freezing budgets or letting them grow very slowly.

I’ve already pointed out that the budget could be balanced in about 10 years if the Congress and the President displayed a modest bit of fiscal discipline and allowed spending to grow by no more than 2 percent annually.

But the goal shouldn’t be to balance the budget. We want faster growth, more freedom, and constitutional government. All of these goals (as well as balancing the budget) are made possible by reducing the burden of federal spending.

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It’s not often that I get to use the word “penis” on a public policy blog. But with my juvenile sense of humor, I exploit such opportunities whenever they arise.

And I also managed to produce a couple of posts with the word “penile.”

These are such good examples that you may be wondering what I could do for an encore.

Well, when the federal government spends about $4 trillion per year, much of it pissed away (pun intended) on useless and counterproductive programs, it’s just a matter of time before we find another example.

In this instance, we return to the world of taxpayer-financed penis pumps. Here are the relevant parts of an AP report.

An Illinois man was sentenced Friday by a federal judge in Rhode Island to more than three years in prison for shipping unwanted penis enlargers to diabetes patients as part of a larger fraud scheme that prosecutors say bilked $2.2 million from Medicare over four years. …Winner purchased penis enlargers for an average of $26 each from online sex shops and then repackaged and shipped them to patients… Winner targeted Medicare beneficiaries…and persuaded patients to provide their Medicare information by offering free medical equipment and supplies, prosecutors said. …Winner then charged Medicare an average of $284 each for a total of $370,305, authorities said.

I cite this story not because I’m shocked that somebody bilked the government, but rather because it should irritate all taxpayers that it takes so long for the bureaucrats to figure out what’s happening.

My credit card company periodically will block my account, especially when I’m traveling, because of unusual transactions. But the federal government will blindly reimburse fraudsters for years.

The most powerful part of the story, though, is the way that Mr. Winner justified his crimes.

When employees confronted Winner about sending out supplies regardless of need, authorities allege he responded: “It doesn’t cost the client anything as the government is paying for it, and that the government would just print more money, so order more.”

He managed to combine the ills of third-party payer, government dependency, fiscal profligacy, and irresponsible monetary policy in one sentence.

This guy belongs in Washington. Heck, he’s qualified to be a member of the Obama cabinet!

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