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Archive for the ‘Spending’ Category

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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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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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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Yesterday’s column about “the tax nightmare before Christmas” was based on my fear that politicians will try to impose a value-added tax at some point in the not-too-distant future.

Today’s column is about the spending nightmare that is already happening. The bottom line, as expressed in this clip from a recent interview with Neil Cavuto, is that Republicans are not doing what’s right for the country.

Need some evidence?

How about  what was reported today in the Hill?

Lawmakers are under pressure to get a deal to increase the budget caps and prevent automatic across-the-board spending cuts, known as sequestration. …a deal has remained elusive, with both sides battling over how much to increase both defense and nondefense spending.

Needless to say, they should be battling over how much to cut spending, not how much to increase it.

Unfortunately, the propensity to over-spend is a long-standing pattern. In an uncharacteristic episode of fiscal sanity, Congress enacted the Budget Control Act in 2011, which then led to a much-needed sequestration early in 2013.

But ever since that point, as explained back in 2015 by the New York Times, politicians have been figuring out ways to get out from under this modest bit of fiscal discipline.

They raised the spending caps at the end of 2013.

And raised the spending caps again in 2015.

In other words, GOP fecklessness isn’t anything new.

Here’s another clip from the recent Cavuto interview. I argue for spending caps with sequester enforcement.

But I confess that enacting such caps is just part of the battle. The real challenge is making sure politicians can’t wiggle out from under such fiscal constraints.

In my fantasy world, we avoid that problem by making spending restraint part of the Constitution, an approach that has been very successful for Hong Kong and Switzerland.

That doesn’t seem likely any time soon in America.

And let’s not forget that Republicans also are poised to splurge on a new “emergency” package – and this money would be exempt from spending caps. Here’s another portion of the Hill story.

The $81 billion package provides aid for communities affected by recent hurricanes in Texas, Florida, Puerto Rico and the U.S. Virgin Islands, as well as wildfires in California. The Senate is expected to take the legislation up once they return to Washington.

And the bill is turning into a bidding war, thanks in part to some supposed fiscal conservatives.

…Cornyn and fellow Texas GOP Sen. Ted Cruz want… more funding for their state’s Hurricane Harvey recovery efforts. …Cruz said…his state, which he said had up to $180 billion in hurricane damage, would only be eligible for a small portion of the money in the House bill. But any push to help Texas would likely set off a demand from other delegations for help responding to wildfires in California, as well as additional funding for hurricane relief in Puerto Rico. Rep. Luis Gutiérrez (D-Ill.)…said that Puerto Rico needs an estimated $94 billion to rebuild.

I don’t think the federal government should be in the business of compensating people for losses following natural disasters. That simply rewards those who go without insurance while also creating perverse incentives to build in risky areas.

But if politicians actually think that it’s the federal government’s responsibility, then they should reduce other spending to finance supposed emergencies. Heck, FDR and Truman did this for World War II and the Korean War, and they weren’t exactly fiscal conservatives.

Let’s close with some additional bad news. What’s written above relates to the GOP’s failure to control “discretionary” spending. That’s the part of the budget that funds the Pentagon, as well as providing most of the outlays for departments that shouldn’t even exist (such as Transportation, Housing and Urban Development, Education, Energy, and Agriculture).

If you really want to be depressed, keep in mind that Republicans also are dropping the ball on “entitlements,” which are programs that are designed to automatically increase every year (such as Social Security, Medicare, and Medicaid) and are largely responsible for America’s very grim long-run fiscal outlook.

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The good thing about being a libertarian (above and beyond respecting the rights and liberties of other people) is that you can always say “I told you so” when government intervention leads to bad results. Obamacare is a very good (albeit very painful) example.

The bad thing about being a libertarian is that you don’t win many victories. No matter how much evidence is on your side, politicians usually do the wrong thing. Not because they are necessarily evil. They’re simply responding to “public choice” incentives.

Indeed, the only big victory that I’ve had in recent years was the sequester. And even that victory has been tarnished by the 2013 and 2015 deals that weakened the caps on discretionary outlays.

So I’m delighted to report that Brazil has actually amended its constitution to impose a spending cap. I was somewhat hopeful that this might happen when I wrote about the issue back in October, but never allowed myself to think it would actually happen.

The Wall Street Journal reports on this remarkable development.

Brazil’s Senate approved a measure capping public spending, delivering a victory to embattled President Michel Temer, who is struggling to close a massive budget deficit and revive the nation’s moribund economy. In an unusually rapid session with little discussion, lawmakers on Tuesday voted 53 to 16 to approve a constitutional amendment limiting the country’s annual spending growth to the previous year’s inflation rate. The move was a drastic shot of discipline for Brazil’s government, whose public debt and deficits have expanded at rates so worrisome that three major credit agencies have downgraded the nation’s credit rating to junk status. Several economists and analysts praised the constitutionally enforced limits as the only way for Brazil’s government to live within its means and restore investor confidence.

It’s remarkable that Brazil’s politicians were willing to tie their own hands, but they presumably had no choice because the nation’s finances deteriorated to the point that drastic measures were necessary.

The spending cap applies to the federal budget starting in 2017, except for education and health costs, which will be subject to the limits starting in 2018. It was the centerpiece of austerity measures proposed by Mr. Temer to shore up Brazil’s shaky public finances. Brazil’s budget deficit was a hefty 8.3% of gross domestic product in October, after growing almost steadily from 1.8% of GDP in July 2011. Gross debt was 70.3% of GDP in October, up from its more recent low of 51% of GDP in December 2012.

As you might expect, there was opposition.

..the measure drew the ire of opposition politicians, labor unions and citizens concerned that spending limits could harm Brazil’s troubled health-care and education systems.

So it is impressive that the this constitutional reform received supermajority support for two votes in the Brazilian House, followed by supermajority support for two votes in the Brazilian Senate.

I would like to think I played at least a tiny role in this development. I’ve crunched numbers showing that nations get very good results when spending is restrained for multi-year periods.

I’ve written extensively on the successful spending caps in Switzerland and Hong Kong, both of which are part of those nations’ constitutions.

And I’ve highlighted the fact that international bureaucracies, when they investigate the efficacy of various fiscal rules, always conclude that spending caps are the only effective approach.

I also wrote an article for the Brazilian media back in October.

But even if I had no impact on the debate, I’m still very happy about the outcome.

Assuming, of course, that Brazil doesn’t have a Supreme Court Justice like John Roberts who will somehow make a politicized decision and sabotage the new spending cap!

P.S. I seem to have more success overseas than in the United States. I did help defeat the income tax in the Cayman Islands a few years ago, and I also hope that my recent trip to Vanuatu will lead to a similar outcome.

But since I’m a patriot (in the proper sense) who wants the United States to be a beacon of liberty for the world, it sure would be nice to win a few battles here at home.

P.P.S. Brazil may be on the cusp of other pro-market reforms, in part because of a vibrant libertarian movement in the country.

Here’s a video from Reason on this positive development.

Jeff Tucker of the Foundation for Economic Education has a very upbeat assessment.

I went on a three-city speaking tour in Brazil. …I found an amazingly well-educated crowd of students, young professionals, professors, media personalities, and digital activists, all dedicated to using the upheaval to the advantage of freedom itself. Organizations like Mises Brazil, and many others that have spun off from Students for Liberty and other organizations, have spent years translating and distributing books and articles, holding seminars, and cultivating young people for a life of activism. …The libertarians in Brazil seem to understand that ideological slogans and promises for change mean nothing so long as states are huge, invasive, and offer a bounty to anyone who gains power.

Let’s hope this is right and Brazil becomes a star reformer. Chile (and, in recent years, Peru) have been lonely outposts of good policy in South America.

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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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Back in 2010, I crunched the numbers from the Congressional Budget Office and reported that the budget could be balanced in just 10 years if politicians exercised a modicum of fiscal discipline and limited annual spending increases to about 2 percent yearly.

When CBO issued new numbers early last year, I repeated the exercise and again found that the same modest level of budgetary restraint would eliminate red ink in about 10 years.

And when CBO issued their update last summer, I did the same thing and once again confirmed that deficits would disappear in a decade if politicians didn’t let the overall budget rise by faster than 2 percent each year.

Well, the new CBO 10-year forecast was released this morning. I’m going to give you three guesses about what I discovered when I looked at the numbers, and the first two don’t count.

Yes, you guessed it. As the chart illustrates, balancing the budget doesn’t require any tax increases. Not does it require big spending cuts (though that would be a very good idea).

Even if we assume that the 2001 and 2003 tax cuts are made permanent, all that is needed is for politicians to put government on a modest diet so that overall spending grows by about 2 percent each year. In other words, make sure the budget doesn’t grow faster than inflation.

Tens of millions of households and businesses manage to meet this simple test every year. Surely it’s not asking too much to get the same minimum level of fiscal restraint from the crowd in Washington, right?

At this point, you may be asking yourself whether it’s really this simple. After all, you’ve probably heard politicians and journalists say that deficits are so big that we have no choice but to accept big tax increases and “draconian” spending cuts.

But that’s because politicians use dishonest Washington budget math. They begin each fiscal year by assuming that spending automatically will increase based on factors such as inflation, demographics, and previously legislated program changes.

This creates a “baseline” and if they enact a budget that increases spending be less than the baseline, that increase magically becomes a cut. This is what allowed some politicians to say that last year’s Ryan budget cut spending by trillions of dollars even though spending actually would have increased by an average of 2.8 percent each year.

Needless to say, proponents of big government deliberately use dishonest budget math because it tilts the playing field in favor of bigger government and higher taxes.

There are two important caveats about these calculations.

1. We should be dramatically downsizing the federal government, not just restraining its growth. Even if he’s not your preferred presidential candidate, Ron Paul’s proposal for an immediate $1 trillion reduction in the burden of federal spending is a very good idea. Merely limiting the growth of spending is a tiny and timid step in the right direction.

2. We should be focusing on the underlying problem of excessive government, not the symptom of too much red ink. By pointing out the amount of spending restraint that would balance the budget, some people will incorrectly conclude that getting rid of deficits is the goal.

Last but not least, here is the video I narrated in 2010 showing how red ink would quickly disappear if politicians curtailed their profligacy and restrained spending growth.

Other than updating the numbers, the video is just as accurate today as it was back in 2010. And the concluding message – that there is no good argument for tax increases – also is equally relevant today.

P.S. Some people will argue that it’s impossible to restrain spending because of entitlement programs, but this set of videos shows how to reform Social Security, Medicare, and Medicaid.

P.P.S. Some people will say that the CBO baseline is unrealistic because it assumes the sequester will take place. They may be right if they’re predicting politicians are too irresponsible and profligate to accept about $100 billion of annual reductions from a $4,000 billion-plus budget, but that underscores the core message that there needs to be a cap on total spending so that the crowd in Washington isn’t allowed to turn America into Greece.

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By fighting for freedom in Washington, I’ve condemned myself to a life of frustration and aggravation. One of my many pet peeves is that so many people in DC believe that economic growth depends on consumer spending.

Back in the early days of this blog, I wrote the following.

Many people assume that consumer spending drives growth because it is roughly two thirds of the economy. But this puts the cart before the horse. Higher levels of consumer spending do not cause prosperity. Instead, more consumer spending is best understood as a symptom of prosperity.

So you can imagine how irritating it is for me to see news reports about how Black Friday spending will goose the economy.

This video debunks this notion, while also explaining that Keynesian economics is flawed because it misinterprets the role of consumer spending.

If you like this video, also check out this video on IRS complexity.

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The recent agreement between Obama and Boehner supposedly cuts spending by $38 billion. I’ve already explained that this number is disappointingly small and noted that the effect on spending for the current fiscal year is almost too small to measure.

But my analysis was entirely too kind. My Cato Institute colleagues have put together a clever one-minute video mocking both Obama and Boehner for using the dishonest Washington definition of a spending cut – meaning they claim spending cuts merely because they increase the budget by less than previously planned.

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In the past 10 years, the burden of federal spending has skyrocketed, more than doubling from$1.86 trillion in 2001 to an estimated $3.82 this year.

President Bush deserves a lot of the blame thanks to the no-bureaucrat-left-behind bill that bloated the Department of Education, the corrupt farm bills, the pork-filled transportation bills, the new prescription drug entitlement, and bailouts for banks and auto companies.

Obama then came to office promising hope and change, but he simply grabbed the baton and continued the spending spree, adding more TARP bailouts, and then giving us the boondoggles of a fake stimulus and government-run healthcare.

Taxpayers finally said enough is enough last November and there’s a new Congress with marching orders to stop Washington’s spending orgy.

But Barack Obama and Harry Reid are saying no. They want us to believe that the House spending cuts are too severe.

What does this mean? Are Republicans trying to reduce spending to $2.98 trillion, which is where it was in 2008? That would be a spending cut of nearly $1 trillion and music to my ears. Or are they being even more aggressive, perhaps trying to cut spending to about $2.5 trillion, about halfway between the 2001 and 2008 totals? That would be a spending cut of almost $1.5 trillion, which would be a fantasy for a libertarian wonk like me.

If these were the options being considered, we could understand President Obama and Senator Reid vigorously resisting  spending cuts of that magnitude.

But that’s not what’s happening. Republicans in the House are not trying to reduce spending by a big amount. They’re not even trying to reduce the budget by $500 billion. Heck, they’re not even trying to lower this year’s spending levels by $100 billion.

Instead, the House GOP has put forward a very modest proposal to trim spending by $61 billion – and that tiny bit of nibbling around the edges of the welfare state has Barack Obama and Harry Reid acting as if the safety net is being ripped to shreds.

This video from my colleagues at the Cato Institute puts $61 billion of cuts in context – and indirectly shows that President Obama and Senator Reid have no credibility on fiscal policy.

I can’t resist making one final observation. The burden of government spending has jumped by about $2 trillion in the past 10 years. Does anybody think our economy is stronger as a result? More stable? More competitive? More vigorous? More entrepreneurial?

The answer to all these questions is a resounding no. So if the 10-year Bush-Obama experiment of bigger government has failed, isn’t it time we try a different approach?

To conclude, here’s one of my videos, looking at just a small fraction of the evidence in favor of smaller government.

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President Obama’s proposed budget for fiscal year 2012 has been released and there is lots of rhetoric in Washington about “budget cuts.”

At first glance, this seems warranted. According to the just-released fiscal blueprint, the federal government is spending about $3.8 trillion this year and the President is proposing to spending a bit more than $3.7 trillion next year. In other words, the White House is going beyond a budget freeze and is actually proposing to spend $90 billion less next year than is being spent this year.

That certainly seems consistent with my proposal to solve America’s fiscal problems by restraining the growth of spending.

But you won’t find a smile on my face. This new budget may be better than Obama’s first two fiscal blueprints, but that’s damning with faint praise. The absence of big initiatives such as the so-called stimulus scheme or a government-run healthcare plan simply means that there’s no major new proposal to accelerate America’s fiscal decline.

But neither is there any plan to undo the damage of the past 10 years, which resulted in a doubling in the burden of government spending during a period when inflation was less than 30 percent.

Moreover, many of the supposed budget savings (such as nearly $40 billion of lower jobless benefits) are dependent on better economic performance. I certainly hope the White House is correct about faster growth and more job creation, but they’ve been radically wrong for the past two years and it might not be wise to rely on optimistic assumptions.

Some of the fine print in the budget also is troubling, such as Table 4.1 of OMB’s Historical Tables of the Budget, which shows that some agencies are getting huge increases, including:

o     17 percent more money for International Assistance Programs;

o     24 percent more money for the Executive Office of the President;

o     13 percent for the Department of Transportation; and

o     12 percent more for the Department of State.

But these one-year changes in outlays are dwarfed by the 10-year trend. Since 2001, spending has skyrocketed in almost every part of the budget. Even with the supposed “cuts” in Obama’s budget, there will be:

o     112 percent more spending for the Department of Agriculture;

o     100 percent more spending for the Department of Education;

o     154 percent more spending for the Department of Energy;

o     110 percent more spending for the Department of Health and Human Services;

o     175 percent more spending for the Department of Labor; and

o     82 percent for the Department of Transportation.

And remember that inflation was less than 30 percent during this period.

The budget needs to be dramatically downsized, yet the President has proposed that we tread water.

But even that’s too optimistic. America’s real fiscal challenge is that the burden of government spending will dramatically increase in coming decades, thanks largely to an aging population and poorly designed entitlement programs. Barring some sort of change, the United States will suffer the same problems that are now afflicting failed welfare states such as Greece and Portugal.

On the issue of entitlement reform, however, the President is missing in action. He’s not even willing to embrace the timid proposals of his own Fiscal Commission.

Tomorrow, we’ll look at the tax side of the President’s budget.

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President Obama unveiled his fiscal year 2012 budget today, and there’s good news and bad news. The good news is that there’s no major initiative such as the so-called stimulus scheme or the government-run healthcare proposal. The bad news, though, is that government is far too big and Obama’s budget does nothing to address this problem.

But perhaps the folks on Capitol Hill will be more responsible and actually try to save America from becoming a big-government, European-style welfare state. The solution may not be easy, but it is simple. Lawmakers merely need to restrain the growth of government spending so that it grows slower than the private economy.

Actual spending cuts would be the best option, of course, but limiting the growth of spending is all that’s needed to slowly shrink the burden of government spending relative to gross domestic product.

Fortunately, we have two role models from recent history that show it is possible to control the federal budget. This video from the Center for Freedom and Prosperity uses data from the Historical Tables of the Budget to demonstrate the fiscal policy achievements of both Ronald Reagan and Bill Clinton.

Some people will want to argue about who gets credit for the good fiscal policy of the 1980s and 1990s.

Bill Clinton’s performance, for instance, may not have been so impressive if he had succeeded in pushing through his version of government-run healthcare or if he didn’t have to deal with a Republican Congress after the 1994 elections. But that’s a debate for partisans. All that matters is that the burden of government spending fell during Bill Clinton’s reign, and that was good for the budget and good for the economy. And there’s no question he did a much better job than George W. Bush.

Indeed, a major theme in this new video is that the past 10 years have been a fiscal disaster. Both Bush and Obama have dramatically boosted the burden of government spending – largely because of rapid increases in domestic spending.

This is one of the reasons why the economy is weak. For further information, this video looks at the theoretical case for small government and this video examines the empirical evidence against big government.

Another problem is that many people in Washington are fixated on deficits and debt, but that’s akin to focusing on symptoms and ignoring the underlying disease. To elaborate, this video explains that America’s fiscal problem is too much spending rather than too much debt.

Last but not least, this video reviews the theory and evidence for the “Rahn Curve,” which is the notion that there is a growth-maximizing level of government outlays. The bad news is that government already is far too big in the United States. This is undermining prosperity and reducing competitiveness.

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I’m not a big fan of central banks, and I definitely don’t like multilateral bureaucracies, so I almost feel guilty about publicizing two recent studies published by the European Central Bank. But when such an institution puts out research that unambiguously makes the case for smaller government, it’s time to sit up and take notice. And since these studies largely echo the findings of recent research by the International Monetary Fund, we may have reached a point where even the establishment finally understands that government is too big.

The first study looks at real-world examples of debt reduction in 15 European nations and investigates the fiscal policies that worked and didn’t work. Entitled, “Major Public Debt Reductions: Lessons From The Past, Lessons For The Future,” the report unambiguously concludes that spending restraint is the right way to reduce deficits and debt. Tax increases, by contrast, are not successful. The study doesn’t highlight this result, but the data clearly show that, “revenue increases do not seem to have induced debt reductions, whereas cuts in primary expenditure seem to have contributed significantly in the case of major debt reductions.” Here’s a key excerpt.

…this paper estimates several specifications of a logistic probability model to assess which factors determine the probability of a major debt reduction in the EU-15 during the period 1985-2009. Our results are three-fold. First, major debt reductions are mainly driven by decisive and lasting (rather than timid and short-lived) fiscal consolidation efforts focused on reducing government expenditure, in particular, cuts in social benefits and public wages. Revenue-based consolidations seem to have a tendency to be less successful. Second, robust real GDP growth also increases the likelihood of a major debt reduction because it helps countries to “grow their way out” of indebtedness. Here, the literature also points to a positive feedback effect with decisive expenditure-based fiscal consolidation because this type of consolidation appears to foster growth, in particular in times of severe fiscal imbalances.

The last part of this passage is especially worth highlighting. The authors found that reducing spending promotes faster economic growth. In other words, Obama did exactly the wrong thing with his so-called stimulus. The U.S. economy would have enjoyed much better performance if the burden of spending had been reduced rather than increased. One can only hope the statists at the Congressional Budget Office learn from this research.

Equally interesting, the report notes that reducing social welfare spending and reducing the burden of the bureaucracy are the two most effective ways of lowering red ink.

The estimation results indicate that expenditure-based consolidation which mainly concentrates on cuts in social benefits and government wages is more likely to lead to a major debt reduction. A significant decline in social benefits or public wages vis-a-vis the overall decline in the primary expenditure will increase the probability of a major debt reduction by 31 and 26 percent, respectively.

The other study takes a different approach, looking at the poor fiscal position of European nations and showing what would have happened if governments had imposed some sort of cap on government spending. Entitled, “Towards Expenditure Rules And Fiscal Sanity In The Euro Area,” this report finds that restraining spending (what the study refers to as a “neutral expenditure policy”) would have generated much better results.  Here are the main findings.

…the study assesses the impact of the fiscal stance on primary expenditure ratios and public debt ratios and, thus, provides a measure of prudence or imprudence of past expenditure policies. The study finds that on the basis of real time rules, expenditure and debt ratios in 2009 for the euro area aggregate would not have been much different with neutral expenditure policies than actually experienced. …Primary expenditure ratios would have been 2-3½ pp of GDP lower for the euro area aggregate, 3-5pp of GDP for the euro area without Germany and up to over 10 pp of GDP lower in certain countries if expenditure policies had been neutral.

There’s a bit of academic jargon in that passage, but the authors are basically saying that some sort of annual limit on the growth of government spending is a smart fiscal strategy. And such rules, depending on the country, would have reduced the burden of government spending by as much as 10 percentage points of GDP. To put that figure in context, reducing the burden of government spending by that much in America would balance the budget overnight.

There are several ways of achieving such a goal. The report suggests a rule based on the growth of the overall economy, which is similar to a proposal being developed in the United States by Senator Corker of Tennessee. But it also could mean something akin to the old Gramm-Rudman-Hollings law, but intelligently revised to focus on annual spending rather than annual deficits. Some sort of limit on annual spending, perhaps based on population plus inflation like the old Taxpayer Bill of Rights (TABOR) in Colorado, also could be successful.

There are a couple of ways of skinning this cat. What’s important is that there needs to be a formula that limits how much spending can grow, and this formula should be designed so that the private sector grows faster than the public sector. And to make sure the formula is successful, it should be enforced by automatic spending cuts, similar to the old Gramm-Rudman-Hollings sequester provision.

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The Bureau of Labor Statistics announced this morning that the unemployment rate jumped to 9.8 percent last month. As you can see from the chart, the White House claimed that if we enacted the so-called stimulus, the unemployment rate today would be about 7 percent.

It’s never wise to over-interpret the meaning on a single month’s data, and it’s also a mistake to credit or blame any one policy for the economy’s performance, but it certainly does seem that the combination of bigger government and more intervention is not a recipe for growth.

Maybe the President should reverse course and try free markets and smaller government. Here’s a helpful six-minute tutorial.

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I have many pet peeves, but one that causes me endless frustration is the Washington “spending cut” scam. This happens when politicians increase spending, but claim that they’re cutting spending because they previously had planned to make government even bigger.

The proposal unveiled yesterday by the Co-Chairman of President Obama’s Fiscal Commission is a good example. If you read through their report, it sounds like there are lots of spending cuts. But they never explain that these supposed cuts are really just reductions in previously-planned increases.

Here’s the bottom line. As shown in the graph, it is quite simple to balance the budget (and permanently extend all of the 2001 and 2003 tax cuts) if politicians simply limit spending growth. You can balance the budget within a few years with an overall cap on spending at current-year levels. But if you prefer a more moderate approach, you can let spending increase 2 percent each year and balance the budget by the end of the decade.

The proposal from the Fiscal Commission, incidentally, does not balance the budget – even though they have a big tax increase (which they assume will have zero negative impact on economic performance).

So what does this mean? Well, we know that the budget can be balanced (with the 2001 and 2003 tax cuts) if spending grows two percent each year. And we also know that the Fiscal Commission increases the tax burden, yet still doesn’t achieve fiscal balance. So this means that they must be letting spending grow much faster than 2 percent each year. I’m guessing 4-5 percent annual spending growth.

In other words, the Fiscal Commission is asking us to pay higher taxes so that government spending can grow at twice the rate of inflation. That’s not a good deal.

Moreover, that’s almost certainly a ridiculously naive best-case scenario. If past behavior is any indication (and it is), politicians will spend any additional tax revenue. Whenever there’s a budget summit, the folks who want higher taxes make all sorts of empty promises about spending discipline. And when the other side caves in on taxes, they grab the money and have a party.

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Here’s a chart from Veronique de Rugy’s new article in The American. Amazing how the problem becomes obvious when you look at real numbers and don’t get trapped into using “baseline” math (as I explain in my latest video).

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Keynesian economic theory is the social-science version of a perpetual motion machine. It assumes that you can increase your prosperity by taking money out of your left pocket and putting it in your right pocket. Not surprisingly, nations that adopt this approach do not succeed. Deficit spending did not work for Hoover and Roosevelt is the 1930s. It did not work for Japan in the 1990s. And it hasn’t worked for Bush or Obama.

The Keynesians invariably respond by arguing that these failures simply show that politicians didn’t spend enough money. I don’t know whether to be amused or horrified, but some Keynesians even say that a war would be the best way of boosting economic growth. Here’s a blurb from a story in National Journal.
America’s economic outlook is so grim, and political solutions are so utterly absent, that only another large-scale war might be enough to lift the nation out of chronic high unemployment and slow growth, two prominent economists, a conservative and a liberal, said today. Nobelist Paul Krugman, a New York Times columnist, and Harvard’s Martin Feldstein, the former chairman of President Reagan’s Council of Economic Advisers, achieved an unnerving degree of consensus about the future during an economic forum in Washington. …Krugman and Feldstein, though often on opposite sides of the political fence on fiscal and tax policy, both appeared to share the view that political paralysis in Washington has rendered the necessary fiscal and monetary stimulus out of the question. Only a high-impact “exogenous” shock like a major war — something similar to what Krugman called the “coordinated fiscal expansion known as World War II” — would be enough to break the cycle. …Both reiterated their previously argued views that the Obama administration’s stimulus was far too small to fill the output gap.
Two additional comments. First, if Martin Feldstein’s views on this issue represent what it means to be a conservative, then I’m especially glad I’m a libertarian. Second, Alan Reynolds has a good piece eviscerating Keynesianism, including a section dealing with Krugman’s World-War-II-was-good-for-the-economy assertion.

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I hate taxes more than anyone, but other policies matter as well, so if I had the choice of replacing current government policies with the ones that existed at the end of the Clinton years, I would gladly make that trade. Yes, it would mean higher tax rates, but it also would mean slashing government spending from 24 percent of GDP down to 18 percent of GDP. It would mean no sleazy TARP bailout, no Sarbanes-Oxley red tape, and no added power and authority for the federal government.

This is the argument that I made in this interview on CNBC, though my opponent tried to do his version of the Brezhnev Doctrine (what’s mine is mine, what’s yours is negotiable), so I concluded the interview by stating that in the real world higher taxes are completely unacceptable.

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Our fiscal policy goal should be smaller government, but here’s a video for folks who think that balancing the budget should be the main objective.

The main message is that restraining the growth of government is the right way to get rid of red ink, so there is no conflict between advocates of limited government and supporters of fiscal balance.

More specifically, the video shows that it is possible to quickly balance the budget while also making all the 2001 and 2003 tax cuts permanent and protecting taxpayers from the alternative minimum tax. All these good things can happen if politicians simply limit annual spending growth to 2 percent each year. And they’ll happen even faster if spending grows at an even slower rate.

This debunks the statist argument that there is no choice but to raise taxes.

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Alberto Alesina of Harvard’s economics department summarizes some of his research in a column for today’s Wall Street Journal. He and a colleague looked at fiscal policy changes in developed nations and found very strong evidence that spending reductions boost growth. This, of course, contrasts with the lack of evidence for the Keynesian notion that growth is stimulated by a bigger burden of government spending.

Politicians argue for increased stimulus spending, as opposed to spending cuts, on the grounds that it would speed up economic recovery. This argument might have it exactly backward. Indeed, history shows that cutting spending in order to reduce deficits may be the key to promoting economic recovery. …recent stimulus packages have proven that the “multiplier”—the effect on GDP per one dollar of increased government spending—is small. Stimulus spending also means that tax increases are coming in the future; such increases will further threaten economic growth. Economic history shows that even large adjustments in fiscal policy, if based on well-targeted spending cuts, have often led to expansions, not recessions. Fiscal adjustments based on higher taxes, on the other hand, have generally been recessionary. My colleague Silvia Ardagna and I recently co-authored a paper examining this pattern, as have many studies over the past 20 years. Our paper looks at the 107 large fiscal adjustments—defined as a cyclically adjusted deficit reduction of at least 1.5% in one year—that took place in 21 Organization for Economic Cooperation and Development (OECD) countries between 1970 and 2007. …Our results were striking: Over nearly 40 years, expansionary adjustments were based mostly on spending cuts, while recessionary adjustments were based mostly on tax increases. …In the same paper we also examined years of large fiscal expansions, defined as increases in the cyclically adjusted deficit by at least 1.5% of GDP. Over 91 such cases, we found that tax cuts were much more expansionary than spending increases. How can spending cuts be expansionary? First, they signal that tax increases will not occur in the future, or that if they do they will be smaller. A credible plan to reduce government outlays significantly changes expectations of future tax liabilities. This, in turn, shifts people’s behavior. Consumers and especially investors are more willing to spend if they expect that spending and taxes will remain limited over a sustained period of time. On the other hand, fiscal adjustments based on tax increases reduce consumers’ disposable income and reduce incentives for productivity. …Europe seems to have learned the lessons of the past decades: In fact, all the countries currently adjusting their fiscal policy are focusing on spending cuts, not tax hikes. Yet fiscal policy in the U.S. will sooner or later imply higher taxes if spending is not soon reduced. The evidence from the last 40 years suggests that spending increases meant to stimulate the economy and tax increases meant to reduce deficits are unlikely to achieve their goals. The opposite combination might.

Alesina’s research echoes the findings in dozens of other studies, a few of which are cited in this Center for Freedom and Prosperity video I narrated.

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In a very predictable editorial this morning, the New York Times pontificated in favor of higher taxes. Compared to Paul Krugman’s rant earlier in the week, which featured the laughable assertion that letting people keep more of the money they earn is akin to sending them a check from the government, the piece seemed rational. But that is damning with faint praise. There are several points in the editorial that deserve some unfriendly commentary.

First, let’s give the editors credit for being somewhat honest about their bad intentions. Unlike other statists, they openly admit that they want higher taxes on the middle class, stating that “more Americans — and not just the rich — are going to have to pay more taxes.” This is a noteworthy admission, though it doesn’t reveal the real strategy on the left.

Most advocates of big government understand that it will be impossible to turn America into a European-style welfare state without a value-added tax, but they don’t want to publicly associate themselves with that view until the political environment is more conducive to success. Most important, they realize that it will be very difficult to impose a VAT without seducing some gullible Republicans into giving them political cover. And one way of getting GOPers to sign up for a VAT is by convincing them that they have to choose a VAT if they don’t want a return to the confiscatory 70 percent tax rates of the 1960s and 1970s. Any moves in that direction, such as raising the top tax rate from 35 percent to 39.6 percent next January, are part of this long-term strategy to pressure Republicans (as well as naive members of the business community) into a VAT trap.

Shifting to other assertions, the editorial claims that “more revenue will be needed in years to come to keep rebuilding the economy.”  That’s obviously a novel assertion, and the editors never bother to explain how and why more tax revenue will lead to a stronger economy. Are the folks at the New York Times not aware that both economic growth and living standards are lower in European nations that have imposed higher tax burdens? Heck, even the Keynesians agree (albeit for flawed reasons) that higher taxes stunt growth.

The editorial also asserts that, “Since 2002, the federal budget has been chronically short of revenue.” I suppose if revenues are compared to the spending desires of politicians, then tax collections are – and always will be – inadequate. The same is true in Greece, France, and Sweden. It doesn’t matter whether revenues are 20 percent of GDP or 50 percent of GDP. The political class always wants more.

But let’s actually use an objective measure to determine whether revenues are “chronically short.” The Democrat-controlled Congressional Budget Office stated in its newly-released update to the Economic and Budget Outlook that federal tax revenues historically have averaged 18 percent of GDP. They are below that level now because of the economic downturn, but CBO projects that revenues will climb above that level in a few years – even if all of the 2001 and 2003 tax cuts are made permanent. Moreover, OMB’s historical data shows that revenues were actually above the long-run average in 2006 and 2007, so even the “since 2002” part of the assertion in the editorial is incorrect.

On the issue of temporary tax relief for the non-rich, the editorial is right but for the wrong reason. The editors rely on the Keynesian rationale, writing that, “low-, middle- and upper-middle-income taxpayers…tend to spend most of their income and the economy needs consumer spending” whereas “Tax cuts for the rich can safely be allowed to expire because wealthy taxpayers tend to save rather than spend their tax savings.”

I’ve debunked Keynesian analysis so often that I feel that I deserve some sort of lifetime exemption from dealing with this nonsense, but I’ll give it another try. Borrowing money from some people in the economy and giving it to some other people in the economy is not a recipe for better economic performance. Economic growth means we are increasing national income. Keynesian policy simply changes who is spending national income, guided by a myopic belief that consumer spending somehow is better than investment spending. The Keynesian approach didn’t work for Hoover and Roosevelt in the 1930s, it didn’t work for Japan in the 1990s, and it hasn’t worked for Obama.

And it doesn’t matter if the Keynesian stimulus is in the form of tax rebates. Gerald Ford’s rebate in the 1970s was a flop, and George W. Bush’s 2001 rebate also failed to boost growth. Tax cuts can lead to more national income, but only if marginal tax rates on productive behavior are reduced so that people have more incentive to work, save, and invest. This is an argument for extending the lower tax rates for all income classes, but it’s important to point out that the economic benefits will be much greater if the lower tax rates are made permanent.

Last but not least, the editorial asserts that, “The revenue from letting [tax cuts for the rich] expire — nearly $40 billion next year — would be better spent on job-creating measures.” Not surprisingly, there is no effort to justify this claim. They could have cited the infamous White House study claiming that the so-called stimulus would keep unemployment under 8 percent, but even people at the New York Times presumably understand that might not be very convincing since the actual unemployment rate is two percentage points higher than what the Obama Administration claimed it would be at this point.

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If you have municipal bonds issued by the city of Los Angeles, you may want to dump them while there’s still time. The LA Times reports that one-third of the city’s budget in 2015 will get consumed by pensions and benefits for retired bureaucrats. 
The cost of retirement benefits for Los Angeles city employees will grow by $800 million over the next five years, dramatically eroding the amount of money available for public services to taxpayers, according to a report issued Tuesday. In a bleak assessment delivered to members of the City Council, City Administrative Officer Miguel Santana said pensions and health benefits for current and future retirees would jump from $1.4 billion next year to at least $2.2 billion in 2015. …By 2015, nearly 20% of the city’s general fund budget is expected to go toward the retirement costs of police officers and firefighters, who now have an average retirement age of 51. The figure was 8% last year. Once civilian employees are factored in, nearly a third of the city’s general fund could be consumed by retirement costs by 2015, Santana said.

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The federal government is capable of enormous waste, which obviously is bad news, but the worst forms of government spending are those that actually leverage bad things. In a previous video on the economics of government spending, I call this the “negative multiplier” effect, and one of the worst examples is the $100 million that taxpayers spend each year to subsidize the Paris-based Organization for Economic Cooperation and Development.

There are many other examples of the negative multiplier effect.

The old welfare system, for instance, paid people not to work and have babies out of wedlock (this still happens, but it’s not as bad as it used to be). Paying exorbitant salaries to federal bureaucrats is bad, but it’s even worse if they take their jobs seriously and promulgate new regulations and otherwise harass people in the productive sector of the economy.

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Like the swallows returning to Capistrano, the Congressional Budget Office follows a predictable pattern of endorsing policies that result in bigger government. During the debate about the so-called stimulus, for instance, CBO said more spending and higher deficits would be good for the economy. It then followed up that analysis by claiming that the faux stimulus worked even though millions of jobs were lost. Then, during the Obamacare debate, CBO actually claimed that a giant new entitlement program would reduce deficits. Now that tax increases are the main topic (because of the looming expiration of the 2001 and 2003 tax bills), CBO has done a 180-degree turn and has published a document discussing the negative consequences of too much deficits and debt.
…persistent deficits and continually mounting debt would have several negative economic consequences for the United States. Some of those consequences would arise gradually: A growing portion of people’s savings would go to purchase government debt rather than toward investments in productive capital goods such as factories and computers; that “crowding out” of investment would lead to lower output and incomes than would otherwise occur. …a growing level of federal debt would also increase the probability of a sudden fiscal crisis, during which investors would lose confidence in the government’s ability to manage its budget, and the government would thereby lose its ability to borrow at affordable rates. …If the United States encountered a fiscal crisis, the abrupt rise in interest rates would reflect investors’ fears that the government would renege on the terms of its existing debt or that it would increase the supply of money to finance its activities or pay creditors and thereby boost inflation.
At some point, even Republicans should be smart enough to figure out that this game is rigged. Then again, the GOP controlled Congress for a dozen years and failed to reform either CBO or its counterpart on the revenue side, the Joint Committee on Taxation (which is infamous for its assumption that tax policy has no impact on overall economic performance).

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