Social Security: Debunking the Debunking

When the Social Security Administration released its annual Trustees’ Report last week, I crunched the numbers to show that the fiscal burden of the program is projected to dramatically increase.

Payroll taxes are going to climb rapidly, but spending will grow even faster. As a result, the program’s long-run shortfall is now $61.7 trillion.

That’s a lot of money, even by the standards of our fiscally incontinent masters in Washington.

The good news is that the program’s fiscal problems are getting some attention.

The bad news is that some of the analysis is sloppy.

For instance, Michelle Singletary, who writes about personal finance for the Washington Post, has a column about Social Security.

Social Security is a critical program for millions of Americans, yet there is so much that people don’t understand. …Without any change in current law, the Old-Age, Survivors and Disability Insurance (OASDI) trust funds combined are projected to have enough revenue — including current reserves — to pay 100 percent of scheduled benefits on a timely basis only until 2035. …This news rightly rattles a lot of people. It also leads to fearmongering. …As the retirement program faces a funding shortfall, it’s time to retire…five common myths.

Debunking myths is a good thing.

And what she wrote about two of the myths (dealing with when to retire and whether politicians are in the system) is accurate.

Unfortunately, the other three require elaboration/correction.

Here’s what she wrote, followed by my analysis.

Myth No. 1: Social Security is, or will be, ‘bankrupt’: Social Security will not run out of money. The program is financed by payroll taxes, so as long as workers pay into the system, money will always come in. …It’s the Social Security Trust Funds’ reserves that are projected to become depleted. …The Old-Age and Survivors Insurance (OASI) program, which pays retirement and survivor benefits, will be able to pay 100 percent of benefits until 2033.Even if Congress fails to act, there will be enough projected income coming in to cover 79 percent of scheduled benefits.

Reality: I’m baffled that she wrote that “Social Security will not run out of money” and then a few sentences later admitted that there will only be enough income “to cover 79 percent of scheduled benefits.” Makes me wonder about her definition of bankruptcy. I’ll simply note that if Social Security was a private pension system providing annuities, the government would shut it down and probably arrest the people in charge.

Myth No. 2: Young adults won’t benefit from Social Security: 42 percent of adults ages 18 to 29 are “extremely worried” that Social Security will not be available when they become eligible. …Some proposed changes to the program could affect younger workers, such as raising the age when full benefits kick in. For anyone born in 1960 or later, full retirement benefits are payable at age 67. Because so many Americans rely on Social Security, it’s not going anywhere.

Reality: Once again, the author must be using some strange definitions. Yes, today’s young people will receive money from Social Security, so we can consider that a benefit. But the real issue is whether they receive net benefits. The answer is no when you consider all their payroll taxes. And the answer is a very emphatic no if you compare what they are promised from Social Security compared to what they would get if they instead had private retirement accounts.

Myth No. 4: The federal government has raided the Social Security Trust Funds: Think of the Social Security Trust Funds like your savings account… By law, every dollar of income coming into the Social Security Trust Funds is invested in interest-bearing securities backed by the full faith and credit of the United States… Yes, that money has been spent for other government needs, but that does not mean Social Security gets worthless IOUs… The securities held by the trust funds have always been honored, as have all other Treasury securities.

Reality: Fortunately, I don’t need to debunk her analysis. I can simply cite what the Clinton Administration wrote about the so-called Trust Fund back in 1999 (see page 337).

These balances are available to finance future benefit payments and other trust fund expenditures–but only in a bookkeeping sense. …They do not consist of real economic assets that can be drawn down in the future to fund benefits. Instead, they are claims on the Treasury, that, when redeemed, will have to be financed by raising taxes, borrowing from the public, or reducing benefits or other expenditures.

As I noted back in 2016, “the Trust Fund is like putting IOUs to yourself in a college fund. When it’s time for junior to start his freshman year, you’ll have to find the money to cash those IOUs.”

Since Ms. Singletary writes about personal finance, she presumably understands that’s not a smart strategy for a family. So I’m puzzled why she thinks it’s a good approach for a government.

I’ll close by expressing disappointment that both Biden and Trump favor the status quo on Social Security, which is a recipe for massive future tax increases, massive future debt increases, and/or massive future money printing. Too bad they are unwilling to learn from Australia, Chile, Switzerland, Hong Kong, Netherlands, the Faroe Islands, Denmark, Israel, and Sweden, all of which show that it is possible to fully or partially replace debt-based systems with savings-based systems.

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Fiscal Patriotism

Given what I recently wrote about America’s long-fun fiscal outlook, it is easy to understand why I expressed pessimism as part of a conversation with David McIntosh of the Club for Growth.

The presidential candidates are a big reason for my dour outlook. Joe Biden and Donald Trump have chosen to ignore  the massive long-run fiscal problems with Social Security and other entitlement programs.

Their kick-the-can-down-the-road approach is a recipe for fiscal chaos in the future. The result would be either massive tax increases, massive debt increases, or massive money printing.

Probably all three.

Given the track record (Barack Obama and Hillary Clinton both embraced big tax increases), I’m not surprised that Biden and congressional Democrats are bad on the issue.

And since Trump is a big-government populist rather than a Reaganite, his approach also is predictable.

But I have wondered whether congressional Republicans would take the same head-in-the-sand approach.

Fortunately, it appears many of them have – as I noted in the above interview – a more patriotic perspective. Andrew Biggs of the American Enterprise Institute wrote about a new budget proposal from the House Republican Study Committee. Here are some excerpts.

To the RSC’s credit – and, honestly, to my own surprise – the RSC took on the dangerous issue of reforming Social Security, standing up not only to Democrats looking to demagogue the issue but to former President Trump’s efforts to duck the issue. The RSC’s proposals “include modest and delayed changes to the Primary Insurance Amount PIA) benefit formula, the retirement age, auxiliary benefits for high income earners, and gradually moving towards a flat benefit.” If you don’t want the biggest tax increase in history, those are the sorts of things you have to do. …cheers for the RSC: They’ve stood up to Congressional Democrats by at least putting a plan on the table. And, more importantly, they’ve stood up to Donald Trump’s position that Social Security reform can be ignored or hand-waved away.

If you want to learn more about the Republican Study Committee’s plan, click here and here.

It also includes Medicaid reform and Medicare reform.

So kudos to the RSC members. They want to do what’s best for the nation, even if it means exposing themselves to demagoguery.

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Beware Bad Budget Deals, Part III

I’ve already written two columns (here and here) about why a “bipartisan” budget deal would be a recipe for higher taxes and bigger government.

To start our third installment in this series, here’s a clip from my recent appearance on Vance Ginn’s Let People Prosper.

Simply stated, America’s long-run fiscal problems are entirely the result of government being too big and growing too fast.

So there is no need to make our bad tax system even worse with tax increases. Especially since (as I explained in the above video clip) politicians almost surely would spend any extra revenue.

By the way, my opposition to “putting taxes on the table” is practical rather than ideological. Back in 2012, I wrote that I would accept a big tax increase, but only if the other side would accept various changes to control the burden of government spending.

Needless to say, none of those options are acceptable to the big spenders in Washington. Not in 2012 and not today.

Since I’m focusing on practicality, I’ll share two additional pieces of evidence against having a pro-tax increase fiscal commission.

1. In 2011, a reporter from the New York Times inadvertently showed that the only budget deal that actually led to a balanced budget was the 1997 agreement that cut taxes. All the other budget deals raised taxes and the net result was more spending and continued red ink.
2. Tax burdens in Europe have dramatically increased over the past 50-plus years, usually because politicians claimed people needed to surrender more money in order to reduce red ink. But over that same time period, government debt more than doubled because politicians spent all the new revenue.

Given all this data, you might think I’m happy about this tweet from a Bloomberg reporter.

But I’m only half-happy. I’m glad the Speaker of the House is ruling out tax increases.

However, his anti-tax position is not credible when he also says that entitlement programs can’t be touched.

That’s the Biden–Trump view and it’s a recipe for fiscal chaos and – sooner or later – huge tax increases on lower-income and middle-class Americans.

The bottom line is that there’s an unavoidable choice to be made in the United States. We either reform the entitlement programs or we agree to let politicians take more of our money.

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The Case for Entitlement Reform, Part II

I periodically explain why and how to fix entitlements.

Here’s my latest attempt, as part of a conversation with David McIntosh of the Club for Growth.

A few months ago, I shared some alarming CBO data about the ever-growing burden of  government.

But rather than regurgitate that data, let’s look at the most-recent Financial Report of the United States Government, published each year by the Treasury Department.

There are dozens of tables and graphs in the report, but this excerpt from the executive summary captures the magnitude of America’s fiscal challenge.

At the risk of understatement, $79 trillion is a lot of money.

That number should be scary, but it’s probably not scary enough, because “PV” refers to “present value.”

So what the report is really saying is that we would need to set aside an extra $79 trillion of revenue today to cover the entitlement promises of politicians over the next 75 years.

And that’s far more than twice the size of the entire economy.

This is why I keep pointing out there we face an unavoidable choice of doing something good (entitlement reform) or doing something bad (massive tax increases).

By the way, the report also contains this table, which basically shows the cost of kicking the can down the road.

It shows that the Biden-Trump policy will increase future pain.

Do they not care because they are very old? Do they not care because of “public choice.” Do they not care because of limited cognitive ability?

I don’t know. But I know that both Trump and Biden are doing something that will cause America to become a European-style welfare state. And that won’t be good for national prosperity.

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Why Is Someone at AEI Proposing a Massive Tax Increase to Finance Ever-Growing Government, Part I?

Serious and responsible people (in other words, not Trump or Biden) know that Social Security has a massive long-run problem.

A fast-growing number of seniors are expecting future benefits but only a slow-growing number of workers will be paying into the system.

But even if this demographic problem didn’t exist, there is the underlying flaw of a retirement system based on tax-and-spend (or debt-and-spend) rather than wealth accumulation.

The solution is obvious.

We need to shift to a system based on personal retirement accounts.

The transition to a modern system will be expensive, to be sure, but not nearly as costly as the $60 trillion-plus burden of propping up the current system.

But some people prefer the more-expensive option.

Andrew Biggs of the American Enterprise Institute and Alicia Munnell of Boston College want to divert a massive amount of money from the private sector to the government, and they want to do it by double-taxing the money Americans have in retirement accounts.

Here are excerpts from their new report.

The U.S. Treasury estimates that the tax preference for employer-sponsored retirement plans and IRAs reduced federal income taxes by about $185-$189 billion in 2020, equal to about 0.9 percent of gross domestic product. …it actually offers policymakers an opportunity to strengthen the nation’s retirement income system. Revenues saved from repealing the retirement saving tax preferences could be reallocated to address the majority of Social Security’s long-term funding gap. …an opportunity to use taxpayer resources more productively. …the case is strong for eliminating the current tax expenditures on retirement plans, and using the increase in tax revenues to address Social Security’s long-term financing shortfall. …Tax expenditures for employer-sponsored retirement plans are expensive – costing about $185 billion in 2020. … reducing tax expenditures for retirement plans could be an effective way to help address other pressing demands on the federal budget, such as Social Security’s financing shortfall.

By the way, it is no exaggeration to say the authors “want to divert a massive amount of money” to politicians over the next decade. Based on the Congressional Budget Office’s latest 10-year forecast, 0.9 percent of GDP is about $3 trillion.

It’s not just that the authors want to prop up a system that needs reform.

They also want to undo provisions in the tax code (IRAs and 401(k)s) that allow people to protect themselves against two layers of tax on income that is saved and invested.

It’s also laughable that the report states that a huge tax increase will “use taxpayer resources more productively.” If higher taxes to fund bigger government was a good idea, Europe’s welfare states would be richer than the United States rather than way behind.

Even the title of the Biggs-Munnell study is offensive. It implies that taxpayers are getting a handout or favor if politicians don’t impose double taxation. At the risk of understatement, being taxed one time rather than two times is not a subsidy.

P.S. The better option is a shift to retirement systems based on private savings, like the ones in Australia, Chile, Switzerland, Hong Kong, Netherlands, the Faroe Islands, Denmark, Israel, and Sweden.

P.P.S. Biggs and Munnell are misguided for wanting a big tax increase to prop up a bankrupt system. That’s the bad news. The worse news is that some people want to expand the bankrupt system. And they are proposing tax increases that arguably would cause even more economic damage.

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Hopes and Fears for 2024

As usual (2023, 2022, 2021, 2020, 2019, 2018, etc), let’s start the year by listing three things I’m hoping for and three things I worry may happen.

Let’s start with the potential good news. Here are the three things that plausibly could happen in 2024.

Libertarian policy in Argentina – Electing a genuine libertarian in a very statist country was miraculous. But that was the easy part. He can do some pro-market reforms using executive authority, but the biggest reforms will require assent from the legislature. Can he convince those politicians to implement his very good agenda? Will the special interest lobbies mount successful protests? I hope the answers to those two questions are yes and no.

Defeat of anti-school choice Republicans in Texas and Georgia – We have seen many states enact school choice the past few years, but Texas and Georgia did not join the club because some Republican politicians sided with teacher unions rather than students. That also happened a few years ago in Iowa, but Governor Kim Reynolds helped newcomers challenge – and defeat – many of those reprehensible hacks. And then school choice was approved in the Hawkeye State. I’m hoping Governor Abbott in Texas and Government Kemp in Georgia are able to do something similar, thus paving the way to expand the map of states with school choice.

Supreme Court overturns the Chevron Doctrine – Some people fret about the “deep state,” but practically speaking they should be concerned about the “administrative state.” The good news is that the Supreme Court may rule that bureaucrats don’t have leeway to impose more red tape in the absence of a clear legislative mandate.

One final note: Last year, I expressed hop that the Supreme Court would overturn the disgusting policy of civil asset forfeiture. That may still happen, though one year later than I hoped.

Now let’s contemplate potential bad outcomes. Here are the three things I fear will happen this year.

A Biden-Trump rematch – America’s biggest economic problem is entitlement spending and Biden and Trump both say they want to keep the status quo (Biden actually wants to make it worse). That’s a recipe for giant future tax increases on lower-income and middle-class households. So you can easily understand why I’m not excited by the prospect of two big-government politicians competing to see who can lead America into fiscal crisis.

A debt commission rather than a spending commission – Speaking of fiscal crisis, I’m increasingly worried that misguided and gullible Republicans will give their support to a debt commission, which will be a stalking horse for big tax increases. There’s nothing wrong with having a commission, but 100 percent-plus of America’s fiscal problem is excessive spending and any potential budget commission or budget deal should be entirely focused on restraining the growth of government.

Carbon protectionism in rich nations – Imposing higher taxes on imports from developing nations, based on energy use, is a very bad idea. Sadly,  the European Union is moving forward with this scheme to undermine global trade, using global warming as an excuse. To make matters worse, there is growing interest in the United States. This is most unfortunate. I don’t think rich nations have an obligation to give foreign aid to poor nations (especially since that approach backfires), but I also think rich nation shouldn’t adopt big-government policies that hurt poor nations.

One final note: Last year, one of my fears was an Italian fiscal crisis. I’m still afraid that will happen.

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Knowingly Flunking Budget Math

The United States is in fiscal trouble because of over-spending by Washington. And the problem will get worse in the future because of poorly designed entitlement programs.

But it also will get worse because Washington is filled with politicians who knowingly lie and simply don’t care.

To illustrate, here’s a viral tweet from Congressman Ro Khanna of California, which received 4.5 million views, followed by two correcting tweets (here and here) from Brian Riedl of the Manhattan Institute.

Sadly, neither of Brian’s tweets received much attention (less than 10,000 views compared to 4,500,000 views for Khanna’s nonsense).

Yet every honest person (including some honest leftists) knows Brian’s analysis is correct and Congressman Khanna is doing nothing but providing vapid and fraudulent clickbait.

Megan McArdle wrote about this for the Washington Post. Here are some excerpts.

Khanna’s assertions about the debt are simply not true, not even in the low, Washington sense of facially correct, yet wildly misleading. And I assume Khanna knows better. …everyone in Washington is playing the same damned game, a noxious hybrid of “let’s pretend” and “not it.” The budget hawks in the GOP have been effectively vanquished by the Trump faction, and the days when Democrats strove to claim the mantle of fiscal responsibility are long gone. …there is no excuse for failing to balance the books, except that the political trade-offs are hard, and — contra Khanna — almost certainly involve making changes to Social Security and Medicare. Together, these programs account for about one-third of spending, and that share is growing.This is America’s real budget crisis. And yet it pales in comparison with the biggest problem of all: politicians who keep trying to pretend our troubles away, rather than face up to what needs to be done.

Megan is right about Khanna, and she’s also right about Trump pushing aside fiscally rational Republicans.

So we have two parties in Washington controlled and led by people who are doing bad things, probably know they are doing bad things, but they simply don’t care (just in case anyone wonders why I think politicians are disgusting and reprehensible).

P.S. Megan’s column is wrong in that she also wrote that Ronald Reagan was “the most profligate of the bunch” in part because of his “failure to restrain spending.” That’s wildly wrong. A comprehensive study on fiscal history from the Mercatus Center showed LBJ and Nixon were the worst of the worst, while Reagan got the best marks. If you want to understand Reagan’s track record on spending, click here, here, here, and here.

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There Are Not Enough Rich People to Finance European-Sized Government

Mostly because of an aging population, entitlement spending in the United States is projected to become a much bigger burden.

Without reform of those programs, the U.S. within a few decades will have a European-sized level of government spending.

Joe Biden and Donald Trump have both stated that they oppose entitlement reform, so this raises the very important question of how they would finance this massive expansion in the burden of government.

Biden’s answer is “tax the rich” while Trump simply pretends the problem doesn’t exist.

Since there’s no way of dealing logically with Trump’s head-in-the-sand approach, let’s address Biden’s supposed solution of soak-the-rich taxes (and keep in mind Biden wants several trillion dollars of new spending on top of the trillions of dollars of higher spending that’s already in the pipeline for existing entitlements).

I’ve written about this issue before, but this is an opportune time for some new data since Brian Riedl of the Manhattan Institute has a new study on the topic.

Here’s the table he put together of the revenue that might be generated by the various class-warfare tax proposals the left has offered.

As you can see, establishment sources estimate the maximum revenue from all of these soak-the-rich tax increases is 2 percent of GDP.

And the actual revenue collected would be lower because all of these tax hikes would significantly undermine incentives to engage in productive behavior by entrepreneurs, investors, small business owners, and others.

Would 1-2 percent of GDP be enough to finance existing spending promises, as well as Biden’s proposals for more spending?

Not even close. As Brian explains, it doesn’t even deal with current levels of spending.

Budget deficits have risen to nearly 6% of GDP and are projected to rise to 10% of GDP over three decades. …To close these baseline deficits and finance additional expansions, most progressives reject most spending cuts as well as middle-class tax increases. Instead, just “tax the rich” has become an easy and popular answer. However, …the plausible revenue estimates from these proposals fall far short of closing these budget gaps. …America’s federal tax code is already the most progressive in the Organisation for Economic Co-operation and Development (OECD) and has become sharply more progressive over the past 40 years. Much of this tax progressivity is the result of drastic cuts to low- and middle-income taxes while leaving upper-income-tax rates closer to international norms. …Europe’s significantly higher tax revenues are driven overwhelmingly by broad-based consumption and payroll taxes, rather than by notably higher tax rates on the wealthy.

In other words, Brian’s research confirms my Twelfth Theorem of Government.

This is true even in Nordic nations, as Brian explains.

American progressives often hold up Europe—and especially the Scandinavian social democracies of Denmark, Finland, Norway, and Sweden—as successful tax-the-rich utopias that the U.S. should replicate. In reality, European tax systems do not fit the American progressive stereotype, as their higher revenues are overwhelmingly raised through steep income, payroll, and consumption taxes on the middle class.

Here’s a table from the study showing that Denmark, Finland, Norway, and Sweden have slightly higher taxes on income and capital gains, but that’s offset by lower taxes on corporations and lower death taxes.

So what’s the bottom line?

Simply stated, as explained in my Fifteenth Theorem of Government, there is no way to have European-sized government without European-level taxes on lower-income and middle-class households.

As you can see from this table, it’s the only place where there is substantial potential tax revenue.

P.S. There’s one final excerpt from the study I want to share.

I mentioned above that class-warfare taxes would be very detrimental to growth. Well, don’t forget that payroll and consumption taxes are bad for growth as well. And a bigger burden of government spending also is very harmful to prosperity.

So if we go down the wrong path of bigger government and higher taxes, we can expect European-style economic anemia. And Brian explains that also has fiscal consequences.

…a tax package that reduces annual economic growth rates by 1 percentage point would, in turn, reduce tax revenues by $3.3 trillion over the decade—likely canceling all static tax-revenue gains while also costing jobs and reducing incomes. In other words, tax-the-rich advocates cannot afford to ignore economic considerations. Raising every upper-income-tax rate to its revenue-maximizing level—the point at which the economic damage cancels out any additional revenues—is a recipe for economic stagnation, job losses, and declining incomes.

At the risk of understatement, we don’t want to copy Europe.

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Beware Bad Budget Deals, Part I

Even though America’s long-run fiscal outlook is very grim, I wrote a two-part series earlier this year (here and here) to explain why the situation is not hopeless.

First and foremost, I noted that the only good solution is long-run spending restraint. Fortunately, that’s been done before. There have been three periods of good fiscal policy in recent decades.

• Under Reagan.
• In the 1990s.
• The Tea Party.

And I also explained that we already know what specifically needs to be done to fix entitlements (which unambiguously are the cause of our long-run problems).

In other words, we know the problem, we know how to solve it, and history shows that periods of fiscal restraint are possible.

I’m not the only one who is expressing optimism.

Two former Senators, Rob Portman (R-OH) and Kent Conrad (D-ND), have a column in yesterday’s Washington Post about the need to address America’s fiscal problems.

And they also don’t think the situation is hopeless. Here’s their core argument.

The deficit has doubled in the past year, and the national debt — some $33 trillion… — is diminishing our standing in the world. It is immoral to leave this level of debt to our children and grandchildren, and it is already affecting our economy. …But this is not a hopeless situation. …it is time to try an approach that removes some of our divisive politics from the picture: Congress must establish a bipartisan commission to put the country on a sustainable fiscal path. …Democrats will resist many of the necessary spending reductions, Republicans will resist needed revenue increases, and Democrats and Republicans alike will balk at the needed reforms to entitlement programs. But this approach has repeatedly helped move the country out of stalemate in the past. …our near- and long-term fiscal outlook is dangerously unsustainable. A fiscal commission should explain in objective terms the fiscal crisis we face and its consequences, scrutinize the entire federal budget, and make specific recommendations on revenue and spending, including what should be done to rescue our entitlement programs from insolvency. …A bipartisan commission might be our best chance to bestow upon future generations a stable financial future rather than an overwhelming financial burden and an America in decline.

I’m glad that these two former lawmakers are calling attention to our fiscal mess.

That being said, I have two big concerns with their argument.

1. They focus on red ink, which should be viewed as a symptom. The real problem is excessive spending. Real-world evidence shows that if you cure the underlying disease of excessive government, you automatically solve the symptom of deficits and debt.
2. They explicitly – and mistakenly – open the door to tax increases. But once taxes are on the table, we know from history that the result will be a deal filled with (very bad) tax increases and make-believe (and quickly vanishing) spending restraint.

Interestingly, the New York Times accidentally did some research that proves my case.

In an article back in 2011, Catherine Rampell looked at various bipartisan budget deal to measure the ratio of tax increases to (supposed) spending cuts.

What she found was that only one budget deal had zero tax increases, the one in 1997. Indeed, that budget deal actually cut taxes.

And guess what? That was the only budget deal that produced a budget surplus.

The moral of the story should be obvious.

P.S. Senators Portman and Conrad seem to think that Simpson-Bowles budget plan is a good framework, but I explained in 2012 and 2013 why that plan would be an unmitigated disaster.

P.P.S. My opposition to higher taxes is practical rather than ideological. Back in 2012, I listed three big tax increases I would accept assuming politicians would be willing to make some long-overdue spending reforms. Suffice to say nobody on the left has been willing to accept that offer.

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Demographic Doom and the Welfare State

Many nations face a slow-motion fiscal crisis because of demographics.

To be more specific, politicians last century created welfare states and social-insurance systems that take money from workers in order to provide pensions and health care to old people.

Those decisions were misguided (compared to market-based approaches), but the math sort of worked. After all, everyone assumed there would be population growth, meaning there would always be enough future workers to support future retirees.

But the world has changed. Dramatically.

Let’s look at some data from a column in the New York Times by Dean Spears, who teaches at the University of Texas.

We’ll start with this chart showing that the world’s population will peak in 2085 and then dramatically decline.

Why will the world’s population shrink?

Because birthrates have plummeted. Many nations already have reached “below-replacement fertility” and others will reach that level in the near future.

There’s nothing wrong with lower levels of fertility, of course. Families should be as big or small as people want them to be.

But lower levels of fertility have a profound impact on social-insurance systems, as explained in Part I and Part II.

Let’s go to the Population Pyramid website and examine two countries.

We’ll start with the United States, since nearly 80 percent of my readers are American. As you can see, the USA had a population pyramid back in 1964, meaning plenty of working-age people and not that many old people to subsidize.

But that ratio is dramatically different in 2023 and it will change even more by 2050. With very grim fiscal consequences.

Let’s also take a look at Italy, since it is often viewed as a nation facing big demographic challenges.

The most shocking takeaway is that the population pyramid from 1964 is morphing into an upside-down pyramid.

So what can politicians do in response? There are three options.

1. They can try to cajole or bribe people to have more kids (i.e., more future taxpayers), but those policies don’t seem to be very effective – even in place such as Hungary.
2. They can impose massive tax increases on lower-income and middle-class households, which is the approach that is implicitly embraced by Trump and Biden.
3. They can shift to retirement systems based on private savings, like Australia, Chile, Switzerland, Hong Kong, Netherlands, the Faroe Islands, Denmark, Israel, and Sweden.

The right answer should be obvious, though some politicians want to make the crisis worse.

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Great Moments in Human Rights

I’m a strong believer in rights, assuming they are defined properly (i.e., they don’t require trampling on the rights of others).

Unfortunately, many politicians assert people have “rights” that can only be fulfilled by exploiting others (usually taxpayers).

We now have lawmakers asserting that there are “rights” to housing, healthcare, jobs, and countless of other things that should be earned in the private sector rather than financed by other people.

Politicians love this game (at least until they run out of other people’s money).

But some politicians are more creative than others.

Today, we’re going to look at a somewhat unusual “right” that is being provided by Brazilian taxpayers.

Sushma Subramanian, in a column for the New York Times, explains there is a right to beauty in Brazil.

Brazil…prides itself on its huge number of skilled plastic surgeons. The country recognizes a right to beauty, which in practical terms means subsidizing nearly half a million surgeries each year… In the 1950s, a famed plastic surgeon convinced the president that ugliness can cause painful psychological suffering and that treatment should be covered. While at first he was referring to those with congenital deformities and burn victims, most procedures covered today are purely aesthetic. …In a public health system that’s strapped for resources, it’s certainly arguable that this is the wrong kind of spending. Everyday differences in bodies end up being pathologized by the medical establishment, defining attractiveness in a limiting way. Small breasts, for instance, might be diagnosed as hypotrophy of the mammary glands. …what Brazil’s policy creates is an acceptance that beauty is a form of self-care and that there’s nothing embarrassing about wanting to meet society’s standard for how we should look, no matter our social class.

Since I’ve written on the economics of “lookism,” I agree that physical appearance is important for people. Not just for their psychological well being, but also for their economic success.

But does that mean taxpayers should become involuntary participants in the process of beautification?

P.S. You probably won’t be surprised to learn that American taxpayers already are paying for cosmetic surgery. And Buffalo taxpayers are facing the same problem at the local level.

P.P.S. Here’s my list of other “great moments” in human rights.

• Academics in both America and Europe, as well as a committee from the Council of Europe, claim there is a right to other people’s money.
• Across Europe, a satellite dish is now a human right.
• The Department of Housing and Urban Development asserts there is a right to “emotional support animals” in college dorms.
• In Finland, broadband access is a basic right.
• In France, it is against the law to say your husband is under-endowed or that your wife is fat.
• There’s now an entitlement for free soccer broadcasts in Europe.
• In Italy, you have the right to…um…your testicles.
• Both the United Nations and the Obama Administration think there’s a right to taxpayer-financed birth control.
• In the United States, the elderly have the right to taxpayer-financed sex-change operations.
• There’s even a right to a “special accommodation” if you’re a pee-shy worker in America.
• In Scotland, there’s a right to feminine protection products.

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Do-It-Yourself Budgeting

I sometimes disagree with the Committee for a Responsible Federal Budget because they mistakenly focus on reducing deficits and debt, which makes them very vulnerable to supporting counterproductive tax increases (such as Biden’s misnamed Inflation Reduction Act).

But they generally provide useful analysis, so I regularly read CRFB publications.

And when they put together online quizzes (whether well designed or poorly designed), I can’t resist seeing my score.

Which is why I just filled out their online test to see if I could “Fix the National Debt.”

They start with projections of what debt will be in 2033 and 2050 if we leave fiscal policy on autopilot.

If you take the test, you get all sorts of options to increase spending, reduce spending, raise taxes, and/or cut taxes.

When I finished, here are the projections for debt levels in those two years.

The test did not require much time, so that’s good.

But there are three pieces of bad news.

1. There were not nearly enough options to restrain and/or cut spending and zero options for shutting down departments (such as  Education, Energy, HUD, Agriculture, and Transportation).
2. There was no data on what happens to the burden of government spending as a share of GDP, which is a more important indicator of good policy than what happens to debt as a share of GDP).
3. You don’t even get to see whether the budget is balanced or in surplus by 2033 or 2050, which is not that important but nonetheless would be interesting to see (here’s how it can happen).

That being said, the test was fun to take and I recommend others give it a try. Feel free to list your results in the comments.

P.S. Here are the shortest and longest quizzes that I’ve shared.

P.P.S. Here’s the Washington Post‘s budget quiz for those who want to focus on fiscal policy.

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The 2023 Version of America’s Dismal Fiscal Future

The Congressional Budget Office has released its new Long-Term Budget Outlook and I will continue a now-annual tradition (see 2018, 2019, 2020, 2021, 2022) of sharing some very bad news about America’s fiscal future.

Here’s the most important chart. It shows two unfortunate developments. First, we see that the tax burden is gradually increasing as a share of economic output. Second, we see that the burden of federal spending is increasing even faster.

What happens when spending grows even faster than revenue?

We get more government debt. Or, to be more precise, this next chart shows that we get a lot more debt.

Indeed, the debt is going to reach unprecedented levels over the next 30 years.

I normally don’t fret that much about red ink. After all, deficits and debt are largely symptoms of a much bigger problem, which is excessive government spending.

That being said, high levels of debt can trigger a crisis if investors decide (like they did in Greece) that a government can’t be trusted to pay all promised money to bondholders.

Now let’s get back to the underlying problem of too much government.

What’s driving America’s long-run problems? In part, the answer is higher interest payments on the ever-increasing debt.

But the real problem, as CBO shows in Figure 2-5, is entitlement programs.

Looking at the above charts, and at the risk of repeating what I’ve already written (many times), the United States is between a rock and a hard place. The only choices are:

1. Keep fiscal policy on auto-pilot, allowing government to grow until we suffer a Greek-style debt crisis.
2. Impose massive tax increases on the middle class to finance an ever-bigger future government.
3. Reform entitlement programs to restrain the growing burden of government spending.

Unlike Joe Biden and Donald Trump, I think the obvious choice is #3.

P.S. There was some sensible economic analysis in the CBO report.

Here’s what it said about the economic impact of deficits.

Deficits grow in the agency’s budget projections, and as a result, the federal government borrows more each year. That increase in federal borrowing pushes up interest rates and thus reduces private investment in capital, causing output to be lower in the long term than it would be otherwise, especially in the last two decades of the projection period. Less private investment reduces the amount of capital per worker, making workers less productive and leading to lower wages. Those lower wages reduce people’s incentive to work and, consequently, lead to a smaller supply of labor.

And here’s what CBO says about the impact of taxes.

Under current law, tax rates on individual income will rise at the end of 2025 when those provisions are scheduled to expire. Moreover, as income rises faster than inflation, more income is pushed into higher tax brackets over time. That real bracket creep results in higher effective marginal tax rates on labor income and capital income.11 Higher marginal tax rates on labor income would reduce people’s after-tax wages and weaken their incentive to work. Likewise, an increase in the marginal tax rate on capital income would lower people’s incentives to save and invest, thereby reducing the stock of capital and, in turn, labor productivity. That reduction in labor productivity would put downward pressure on wages. All told, less private investment and a smaller labor supply decrease economic output and income in CBO’s extended baseline projections.

Nothing wrong with that analysis. There are negative consequences when governments borrow and there are negative consequences when governments tax. But there was a sin of omission. CBO also should have explained (as it has on other occasions) that there are negative economic consequences when governments spend.

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The Optimistic Case for Spending Restraint, Part II

Earlier this year, speaking at the Acton Institute in Michigan, I presented an optimistic case for spending restraint.

My premise was very simple, summarized in four sentences.

1. Spending restraint is desperately needed.
2. Spending restraint is impossible without entitlement reform.
3. Republicans used to be good on entitlement reform.
4. Republicans can be good once again on the issue.

My left-leaning friends disagree about the first point, as you might expect.

My right-leaning friends, meanwhile, are skeptical about the fourth point. And I understand why since Republicans have a less-than-impressive track record on fiscal policy. Heck, they are often even worse than Democrats.

But as I explained at the Acton Institute, Republicans occasionally decide to push for good policy.

• Under Reagan.
• In the 1990s.
• The Tea Party.

For what it’s worth, I think we may be on the verge of another one of these moments. Let’s look at the Senate, where Rand Paul has a budget plan based on spending restraint.

Here are some excerpts from a report in the Washington Examiner.

Sen. Rand Paul (R-KY) has presented an alternative plan to the recent Fiscal Responsibility Act introduced by President Joe Biden and House Speaker Kevin McCarthy (R-CA). Paul’s proposal comes as the agreement from McCarthy and Biden has drawn discontent among some Republican lawmakers, who are refusing to vote for the deal. Under Paul’s plan, the debt ceiling would be given a $500 billion increase to encourage Congress to take action on the nation’s debt sooner. Paul’s proposal also includes caps on both the sums of discretionary and mandatory spending, which would cut 5% spent every year.

That’s the good news.

The bad news is that only 21 Senators voted for Paul’s proposal.

Nonetheless, that’s a base of support for sensible policy.

Now consider this story from the Hill about a budget plan by some House Republicans.

The Republican Study Committee (RSC), the largest conservative caucus in the House, …would balance the federal budget in seven years, …while also cutting spending by $16.3 trillion and taxes by $5 trillion over a decade. …It does not include any age increases for Medicare eligibility, but does include some “modest adjustments to the retirement age.” …Leaders of the caucus stressed that the proposed entitlement reforms will require bipartisan cooperation, since Social Security is set to be insolvent in 2033 and Medicare is set to be insolvent in 2031.

Does this mean every House Republican is ready to support needed spending reforms? Or that any Democrats will join them to do the right thing?

Of course not.

But, as is the case in the Senate, there is a base of support for good policy.

The bottom line is that there is zero chance of good budget policy happening while Biden is in the White House. As such, I mostly view Senator Paul’s plan, as well as the RSC plan, as opportunities for fiscally sensible lawmakers to lay the groundwork for future reform.

Which means the real issue is whether the next president prefers spending restraint or massive tax increases. And, if the next president wants to do the right thing, then we will see if the base of support in the House and Senate can be expanded to a majority.

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Entitlement Collapse and Demographic Change

In my recent interview with John Stossel, I explained that America’s entitlement programs are unsustainable because of demographic change.

Our population pyramid is turning into a population cylinder, so there will not be enough working-age taxpayers in the future to finance all the benefits promised to the elderly. Not even close.

This inevitably and unavoidably means one or more of the following options.

• Massive tax increases.
• Massive benefits cuts.
• Massive borrowing.
• Massive money printing.
• Genuine entitlement reform.

Given those choices, entitlement reform is the only sensible path. Both for the United States and for other nations.

Some readers may think I’m exaggerating in order to push a libertarian agenda. So let’s look at some analysis from non-libertarian sources.

We’ll start with some excerpts from a recent report by the St Louse Federal Reserve Bank. Authored by Amy Smaldone and Mark L.J. Wright, it warns that the collapse in fertility is going to be a major problem for tax-and-transfer welfare states.

…the era of rapid population growth is coming to an end. …the world’s population will peak at around 10.5 billion people later this century before beginning to decline. …China’s population is expected to rapidly decline, ending the century around 800 million. Europe’s population has plateaued at approximately three-quarters of a billion people and will decline below 600 million by the end of the century, while the U.S. population is expected to level off at around 400 million. …The slowdown in population growth is due to a collapse in childbirth around the world. …the total fertility rate (TFR)—which represents the expected number of births over a woman’s life…for the world as a whole has fallen from about 5 in 1950 to around 2.3 today. Current TFRs are well below the “replacement rate” (or level needed to keep the population constant) of 2.1 in European countries (where they average 1.5), as well as in China (1.2), South Korea (0.9) and Japan (1.3)… Declining fertility and increased lifespans have resulted in a rapidly aging population. The figure below plots the median age of the population—the age at which half of the people are younger and half are older—around the world. As recently as 1973, half of the world’s inhabitants were under age 21. By the end of the 21st century, more than half will be middle-aged or elderly (40 or older). …the world as a whole will need to contend with a declining share of young workers. It is likely that pension and health care benefits will come under pressure with a shrinking tax base to pay for them.

I’ll add an editorial comment. It’s not “likely” that pension and health care benefits will come under pressure. That’s a given.

To understand why it’s a given, here’s a chart from the report.

As you can see, the average age is going to dramatically increase in all parts of the world.

The U.K.-based Economist also wrote about this topic in its latest issue. It also concludes that changing demographics could lead to fiscal crises.

Across much of the world the fertility rate, the average number of births per woman, is collapsing. Although the trend may be familiar, its extent and its consequences are not. …The largest 15 countries by GDP all have a fertility rate below the replacement rate. That includes America and much of the rich world, but also China and India… a shrinking population creates problems. …The obvious one is that it is getting harder to support the world’s pensioners. …whereas the rich world currently has around three people between 20 and 64 years old for everyone over 65, by 2050 it will have less than two. The implications are higher taxes, later retirements, …and, possibly, government budget crises.

Once again, I’ll add an editorial comment. It’s not that budget crises will “possibly” happen. They will happen.

However, I’ll conclude with a bit of optimism for the United States.

Greece’s fiscal crisis (starting in 2009) was a teachable moment. Republicans actually realized it was a warning sign and took a more-serious approach to the entitlement issue, supporting budgets with genuine Medicaid reform and Medicare reform.

Unfortunately, that reformist energy was blunted by Obama and it then largely evaporated under Trump.

But something similar may happen again. Other nations (probably led by Italy) are going to suffer a fiscal crisis in the not-too-distant future. And when that happens, I hope it will be another learning experience for American lawmakers.

Maybe, just maybe, they’ll then decide to do what’s best for the country.

P.S. For more information about the demographic change and entitlement crisis, click here and here.

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Selfish Politicians Are Setting the Stage for Fiscal Crisis

In a just-released interview with John Stossel, I discuss how the United States faces an entitlement crisis that will result in massive tax increases on poor and middle-class households. Or worse.

As explained in the video, there are some unavoidable facts that need to be faced.

The most unavoidable reality is demographic change. Simply stated, we are living longer and having fewer children.

But this clashes with another unavoidable reality, which is that we have pay-as-you-go entitlement programs.

And the combination of these two realities means a ticking fiscal time bomb. Or, to use Stossel’s analogy, the fuse is burning.

Sadly, there is one additional reality, which is that we have irresponsible politicians (both Democrats and Republicans) who lie to voters.

Those politicians claim there is no problem, but what they are really saying is that their short-run political self-interest is more important than the long-run best interests of the nation.

For all intents and purposes, they are setting the stage for massive tax increases on lower-income and middle-class households. Indeed, the honest folks on the left openly admit this is their goal.

Needless to say, I prefer genuine entitlement reform. Call me crazy, but I don’t think it’s a good idea to copy Europe’s anemic welfare states.

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The Biden-Trump Plan for Middle-Class Tax Increases

What do Joe Biden and Donald Trump have in common?

Speaking earlier this year to the Mackinac Center in Michigan, I warned they both implicitly favor massive tax increases on ordinary households.

If you don’t want to spend two minutes watching the video, I explained that the burden of government spending is going to dramatically increase over the next several decades because of demographic change and poorly designed entitlement programs.

This means we will have to make a choice: Either reform entitlements or acquiesce to massive future tax increases.

And because Biden and Trump oppose entitlement reform, that means that they favor tax increases.

Moreover, since there are not nearly enough rich people to finance big government, this means Biden and Trump favor massive tax increases on lower-income and middle-class households.

To be fair, there are alternatives other than entitlement reform or big tax increases.

For instance, politicians could endlessly issue more debt. That might work, at least until the fiscal house of cards collapses.

Another possibility, at least with regards to Social Security, is to do nothing.

How is this an alternative? Well, David McIntosh, President of the Club for Growth, explained last month in the Wall Street Journal that the Biden-Trump position on Social Security could be a recipe for automatic benefit cuts.

Joe Biden and Donald Trump agree on one thing. “I guarantee you I will protect Social Security and Medicare without any change. Guaranteed,” Mr. Biden said in March. Mr. Trump has said: “I will do everything within my power not to touch Social Security, to leave it the way it is.” …The Biden-Trump position may sound like a pledge to protect Social Security, but it isn’t. …the Old Age and Survivors Insurance Trust Fund…will be able to issue payments to retirees only until 2034. …once the trust fund reserve is depleted, beneficiary payouts will be limited to whatever funds come in from Social Security payroll taxes. …Thus consequences of leaving Social Security “without any changes,” as promised by Biden-Trump, are dire. Ten years from now, benefit cuts of 23% will be triggered if there is no change to Social Security…the Biden-Trump strategy has been to play “beat the clock,” leaving their successors to deal with the crisis. Candidates with a record of entitlement reform like Messrs. Pence and DeSantis would do well to point out that doing nothing is the worst Social Security cut.

Technically, McIntosh is 100 percent correct. Under current law, there will be automatic benefit cuts once there no longer are any IOUs in the Social Security Trust Fund.

In reality, future politicians almost surely will change the law to continue full payments. Which is why I feel confident in stating that our real choice is between genuine entitlement reform and massive tax increases.

P.S. My collection of “honest leftists” includes many who openly admit that giant tax increases will be needed if there is no entitlement reform.

P.P.S. The agreement between Biden and Trump on entitlements should not be a surprise. They also agree on many other issues, such as nationalized infrastructure, industrial policy, government spending, and trade protectionism.

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Another Honest Leftist Admits that Middle-Class Taxpayers Are in the Crosshairs

I have repeatedly pointed out that opponents of entitlement reform support big tax increases. And, as I explain in this segment from a recent presentation, they specifically support tax increases on lower-income and middle-class households.

Why do I assert that they support higher taxes on ordinary people? For the simple reason that there are not enough rich people to finance big government.

So this means, inevitably, that they support higher taxes on the rest of us (they probably support lots of debt-financed spending and central bank-financed spending as well).

Depending on where and how I make this argument, some people accuse me of being anti-Trump. Or anti-Biden.

Actually, I’m pro-math.

And there are some folks on the left who also understand this reality.

I’ve disagreed with many of her columns in the Washington Post, but Catherine Rampell deserves credit for honesty because her most-recent piece tells the truth about who will pay higher taxes as the burden of government increases. Here are some excerpts.

Democrats…wish to expand the social safety net, however, which requires — you guessed it! — more tax revenue. Democrats…claim…that all those safety-net expansions can be paid for solely by soaking “the rich.” …Alas, there’s not remotely enough money on those would-be money trees to pay for all the things that Democrats want. Or even the things that past Congresses have already committed to: Recall that the United States already has large fiscal deficits in the years ahead, even without creating new programs. …By all means, raise taxes on the ultrawealthy. …But if we really want a more robust welfare state, or even to sustain the welfare state we’ve already promised, that probably requires higher taxes from most of the rest of us, too.

At this point, I normally would state that Ms. Rampell deserves membership in my club of honest liberals. But she already is a member, thanks to a column she wrote two years ago.

I’ll close with the should-be-obvious point that any tax increases would be a bad idea, whether imposed on upper-income households or anybody else.

Which is why sensible people should resuscitate support for genuine entitlement reform.

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The Optimistic Case for Spending Restraint, Part I

Every president this century – Biden, Trump, Obama, and Bush – has been a big spender. But I told an audience at the Acton Institute that there are still reasons for optimism.

All that is necessary is a modest amount of spending restraint.

More specifically, we can make progress so long as politicians follow my golden rule, which merely requires that the burden of government spending not grow faster than the private sector.

And I gave examples of that happening.

For instance, we had a five-year de facto spending freeze under Obama (including a sequester), thanks to the “Tea Party” spirit that temporarily animated Republicans on Capitol Hill.

I also mentioned the spending restraint that occurred during the Clinton years, which actually led to a budget surplus.

Reagan, of course, had the best track record.

As shown in this chart, the overall burden of domestic spending fell by 2.5 percentage points of economic output during his tenure.

We now know that good things happened in the past.

Let’s close by contemplating whether good things might happen in the future.

I am normally a pessimist, but I pointed out in the video that Republicans on Capitol Hill actually pushed for genuine entitlement reform during the aforementioned Tea Party era early last decade.

That zeal for good policy largely evaporated during the big-government Trump years, but I think it could return if a Reagan-style Republican won the nomination and was elected in 2024.

The bottom line is that we either control spending – including entitlement reform, or we surrender to European-style big government – including massive tax increases on ordinary people.

Those are the only two choices.

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Social Security’s $60 Trillion-Plus Problem

The 2023 Social Security Trustees Report was released yesterday, and just like I did last year (and the year before, and the year before that, etc), let’s look at the fiscal status of the retirement program.

There is a lot of data in the Report. But the most important set of numbers can be found in Table VI.G9.

As you can see from this chart, these numbers show the amount of revenue coming into the program each year, adjusted for inflation, as well as the amount of yearly spending. Both are rising rapidly.

Since the orange line (spending) is climbing faster than the blue line (revenue), the obvious takeaway is that Social Security has a deficit.

But that would be an understatement.

As you can see from the second chart, the cumulative deficit over the next 77 years is more than $60 trillion.

You’ll notice, of course, that I added a bit of editorializing to both charts.

That’s because it is reprehensible that Joe Biden and Donald Trump are opposed to reforms that would modernize the program.

They won’t admit it, but their approach necessarily and unavoidably means huge tax increases on lower-income and middle-class households.

P.S. If you are not Biden or Trump and want to do what’s best for America, I suggest learning about reforms in Australia, Chile, Switzerland, Hong Kong, Netherlands, the Faroe Islands, Denmark, Israel, and Sweden.

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Bad Math Leads to Bad Economics

The combination of demographic change and poorly designed entitlement programs is producing an ever-increasing burden of federal spending.

In my Twelfth Theorem of Government, I pointed out that this inevitably will mean big tax increases on lower-income and middle-class households.

As stated in the Theorem, if there was a way of financing big government by only taxing the rich, other nations already would have made that choice.

Some of them have tried, but there simply are not enough rich people to finance large welfare states.

But I don’t want any tax increases. Class-warfare tax increases are a bad idea, and so are tax increases on regular people.

It would be much better for the country to reform entitlement programs.

But many politicians (both Democrats and Republicans) disagree.

However, that means they want big tax increases on lower-income and middle-class household.

To emphasize this point, I unveiled my Fifteenth Theorem of Government, which drives home the point that you can’t have big government without pillaging ordinary people.

I pontificated on this issue today in a MoneyShow presentation.

There were lots of charts to justify my two theorems, but these six points hopefully are a good summary of my argument.

For what it’s worth, the first five points are basic math.

Indeed, there are some honest folks on the left (including Paul Krugman) who have made similar observations.

My final point is where the honest leftists and I have a big disagreement. They think it would be a good thing to copy Europe. But I think that would be crazy since European living standards are much lower because of bloated welfare states.

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Big-Spending Republicans Are Big-Taxing Republicans

My Fifteenth Theorem of Government points out there is an “unavoidable choice” between entitlement reform and tax policy.

Simply stated, the folks who oppose fixing entitlements – including so-called national conservatives and politicians such as Donald Trump – are in favor of giant tax increases on lower-income and middle-class Americans.

They don’t admit their support for huge tax hikes on regular people, of course, but that’s the inevitable outcome if fiscal policy is left on autopilot. Even Paul Krugman admits that’s what will happen.

This process already is underway in the United Kingdom.

The Conservative Party became recklessly profligate under Boris Johnson, causing a big bump in the country’s (already excessive) spending trajectory.

And bad spending policy is now leading to bad tax policy (the British pound no longer is the world’s reserve currency, so there’s not as much ability to finance ever-expanding spending by endlessly issuing new debt).

As explained in a Wall Street Journal editorial from last November, Prime Minister Rishi Sunak and his Chancellor of the Exchequer Jeremy Hunt have a tax agenda somewhat akin to Joe Biden’s.

The Chancellor and his boss, Prime Minister Rishi Sunak, are making a particular tax grab at highly mobile workers, especially in financial services, by reducing the threshold for the top 45% income-tax rate to £125,000 from £150,000. The Treasury pretends this will rake in an additional £3.8 billion in revenue over six years… Mr. Hunt is increasing the top corporate tax rate to 25% from 19% and imposing a global minimum tax not even the European Union has managed to implement. …Mr. Sunak’s Conservative Party ditched Ms. Truss’s supply-side tax and regulatory reforms in favor of this plan to tax and spend Britain to prosperity. One of those strategies boasts a proven track record of success and the other has a history of failure. The Tories can explain their choice to voters at the next election.

In a column for CapX, Conor Holohan made similar points, while also pointing out the corporate tax hike won’t raise nearly as much money and Sunak and Hunt are hoping to collect.

Hunt is right to want to balance the books and avoid passing on huge levels of debt to future generations. But to raise corporation tax on such a scale risks turning away those businesses which will be central to the growth and investment we need to generate the receipts that will pay the nation’s bills…. But that static approach doesn’t..reflect the fact that businesses are being discouraged from investing in Britain because of the planned increase in corporation tax. …The TaxPayers’ Alliance (TPA) dynamic tax model..suggests the planned corporation tax rise could cost £30.2bn of lost GDP after a decade. This slower growth would see almost two thirds of the expected revenue from the rise to be lost through lower receipts. …By raising corporation tax on this scale, the Government will be eroding that tax base, and we will see more companies like AstraZeneca deciding that there are more competitive places to be investing.

Steve Entin of the Tax Foundation also did some economic analysis and is not impressed with the Sunak-Hunt tax-and-spend agenda.

…the Sunak-Hunt tax plan will raise labor costs and reduce hours worked. It will increase tax hurdles for new corporate investment, discouraging capital formation. With less labor and capital, real output and employment will fall, increasing the economic pain… The system phases out the untaxed personal allowance for incomes between £100,000 and £125,140, at a rate of £1 for every £2 of income over £100,000. This results in a de facto 60 percent tax band in the middle of the 40 percent band. …The Sunak-Hunt plan…leaves the pending rise in the corporation tax in place. It raises the windfall profits tax on oil and gas producers and imposes a new tax on electricity generation, which will drive up the cost of energy, prompting the government to promise more spending on energy grants to consumers. …The Sunak-Hunt tax plan…estimates another 6 million workers will be pushed onto the tax roles due to the freezes. …History is clear. Lowering budget deficits via spending restraint frees resources for additional private output and jobs. …It is folly to think deficit reduction by means of a corporation tax increase would lower interest rates enough to spur investment despite the direct damage from the tax

Let’s close with a few passages from another Wall Street Journal editorial, this one published just yesterday.

U.K. Prime Minister Rishi Sunak promised economic expertise… British businesses think he needs a refresher. Witness the brewing revolt against the mammoth tax increases Mr. Sunak cooked up with Chancellor Jeremy Hunt. …they want to raise the top corporate tax rate to 25% from 19%; reduce the threshold for the top 45% personal income-tax rate to £125,140 from £150,000; and soak the middle class by freezing tax brackets… The ruling Conservatives have convinced themselves that only a balanced budget can induce businesses to invest in Britain. But…James Dyson of vacuum cleaner fame wrote in the Telegraph in January that the Tory policy of tax hikes and overregulation is “short-sighted” and “stupid.” …Pharma giant AstraZeneca last month said it will build a £320 million factory in low-tax Ireland instead of the U.K. “because the [U.K.] tax rate was discouraging.” Shell is reevaluating $25 billion in oil and gas investments after Mr. Hunt cranked up a windfall-profits tax on top of the regular corporate rate. …The business revolt is a warning that the taxes will be fiscal duds. …That may leave the Tories defending a record of slow growth, high taxes and more deficits and debt at the next election. A party of the right that loses its low-tax, pro-growth economic credibility is headed for defeat.

Some readers may not care about fiscal policy in the United Kingdom.

But today’s column is a warning sign about what will happen in the United States if Republicans surrender on spending and entitlement programs are left on autopilot.

I won’t pretend that genuine entitlement reform will be politically easy. But my message to my Republicans friends is that a tax-increase agenda is not just economically destructive, but also politically suicidal.

A GOP that strays from Reagan-style classical liberalism is bad news.

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Biden and Trump Should Learn from Sweden’s Social Security Reform

Some American politicians, such as Joe Biden and Donald Trump, are very much opposed to dealing with Social Security, even though the current system has a massive $56 trillion cash-flow deficit.

For all intents and purposes, both the current president and his predecessor want to kick the can down the road, which surely is a recipe for massive future tax increases and may cause drastic changes to promised benefits.

Given their advanced ages, they probably won’t be around next decade when the you-know-what hits the fan.

But the rest of us will have to deal with a terrible situation thanks to their selfish approach.

Other nations are more fortunate, with leaders who put the national interest above personal political ambition.

Johan Norberg has a new column in the Wall Street Journal about how Swedish lawmakers adopted personal retirement accounts and undertook other reforms to strengthen their pension system.

President Biden refuses to consider any reforms, and so do many Republicans. But that won’t save the program; it’ll doom it. …Sweden faced the same problem in the early 1990s. The old pay-as-you-go pension system had promised too much. With fewer births and longer lives, projections showed the system would be insolvent a decade later. …Its politicians chose not to deceive the voters. …In 1994 the Social Democrats agreed with the four center-right parties to create an entirely new system based on the principle that pensions should correspond to what the beneficiary pays into the system—a system in which the contribution, not the benefits, is defined. …Sweden introduced partial privatization of the kind the American left derides as a Republican plot… The Swedish government withholds roughly 2.3% of wages and puts it into individual pension accounts. Workers are allowed to choose up to five different funds in which to invest this money…the average Swede has made an impressive average return of roughly 10% a year since its inception in 1995, despite the dot-com crash, the financial crisis and the pandemic. …Sweden’s pension system was recently described as the world’s best by the insurance group Allianz, based on a combination of sustainability and adequacy.

Back in 2018, I wrote about Sweden’s pension reforms, and I cited a study I co-authored back in 2000 for the Heritage Foundation.

Readers who want to learn more about the details of the Swedish system should read those publications.

For purposes of today’s column, though, let’s zoom out and see how Sweden’s system compares to other nations.

We’ll start by looking at a report by Mercer and the Chartered Financial Analyst Institute, which compared retirement systems in 43 developed countries. You can click here to view the full report and full rankings, but let’s focus on the United States and Sweden.

As you can see, Sweden beats America in every category, including a giant lead for integrity.

It’s also worth noting that Sweden is above average in every category while the United States is below average in two of the three categories.

Based on the Mercer/CFA report, we know Sweden’s system is good for workers.

But what about taxpayers?

Here’s a table showing the fiscal burden of old-age programs in European nations, taken from a report by the International Monetary Fund.

As you can see for both the present and the future, Swedish taxpayers face one of the lowest burdens, with old-age spending consuming significantly less than 10 percent of economic output.

I’ll close with a couple of very important observations about the international data.

• Sweden is not the top nation in the Mercer/CFA report. It trails Australia, Denmark, Iceland, Israel, Netherlands, and Norway – all of which have systems that are fully or partly based on mandatory private savings.
• Sweden does have the lowest spending burden in the IMF. The Baltic nations all do better – and all of those countries have systems that are partly based on mandatory private savings.

It’s almost as if there’s a lesson to be learned, even if Biden and Trump want to bury their heads in the sand.

P.S. Here’s my short video making the case for personal retirement accounts.

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Joe Biden Supports Massive Tax Increases on Middle-Class Americans

I wrote a two-part series (here and here) about Donald Trump supporting massive middle-class tax increases.

Trump does not admit that is his policy, of course, but that is an unavoidable outcome since he opposes entitlement reform.

In the interest of fairness and bipartisanship, I should explain that Joe Biden also favors huge tax increases on ordinary people.

Like Trump, he does not admit this is his agenda. But, once again, that will be the unavoidable result since he also is against entitlement reform.

But this does not mean Trump and Biden are exactly the same on fiscal policy (like they are on trade policy).

Biden has proposed two additional policies to expand the size and scope (and economic damage) of the federal government.

1. Expanding entitlement programs, including per-child handouts.
2. Class-warfare tax increases, targeting upper-income taxpayers.

Just in case someone thinks I am unfairly characterizing Biden’s policies, let’s look at some excerpts from a report by Jim Tankersley of the New York Times.

There were no economic pivots in President Biden’s first State of the Union address to a Republican House. He did not pare back his push to raise taxes on high earners or to spend big on new government programs. …The president renewed his calls for trillions of dollars of new federal programs, including for child care and community college… He did not name a single federal spending program he was willing to cut. …It was a no-quarter recommitment to a campaign theme…centered on expanding government…he called for raising taxes on corporations and the wealthy… His proposals included an expanded tax on stock buybacks and what would effectively be a sort of wealth tax on billionaires.

Let’s conclude by considering whether it is possible for Biden to impose sufficiently large taxes on rich people so that there would be no need for big middle-class tax increases.

For that to be the case, Biden’s class warfare tax increases would have to raise enough money to achieve two objectives.

• Collect enough money to finance the built-in expansions of current entitlement programs caused by demographic change.
• Collect enough money to finance his proposals for trillions of dollars of spending on new entitlement programs.

The answer is no. Not even close.

Even if you took all of Biden’s taxes and then added some other class-warfare proposals, that would not be enough to finance built-in spending for the next 10 years.

And that means no revenue to finance Biden’s proposals for additional spending.

Not to mention the built-in spending caused by demographic changes over the next 30 years.

The bottom line is that there are not enough rich people to finance big government.

All of which brings me back to where I started, namely that there will be giant tax increases on lower-income and middle-class households if we don’t figure out a way to restrain and reform entitlements.

P.S. In addition to Trump and Biden, the so-called national conservatives also support huge tax increases on American workers.

P.P.S. Even if there were more rich people, higher class-warfare taxes to finance bigger government would be a big mistake, as acknowledged even by generally left-leaning international bureaucracies such as the World Bank, the International Monetary Fund, the Organization for Economic Cooperation and Development, and the European Central Bank.

P.P.P.S. Biden and other folks on the left sometimes are very open about tax increases on ordinary people, though they have different terms for those tax hikes – such as carbon fees and import barriers.

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Donald Trump Supports Massive Tax Increases on Middle-Class Americans, Part II

Regular readers know that I generally don’t get overly agitated about government debt (I get far more upset about counterproductive spending, regardless of how it is financed).

But even I recognize that there is a point where debt becomes excessive.

So let’s start today’s column with the simple observation that America’s current fiscal trajectory is unsustainable.

The burden of federal spending is projected to jump over the next several decades up to 30 percent of GDP while taxes “only” increase to about 19 percent of GDP.

It is inconceivable that all that new spending will be – or can be – financed by borrowing. Simply stated, domestic and international investors will decide that bonds from Uncle Sam are too risky.

So that leaves only two options.

1. Spending restraint, inevitably requiring entitlement reform.
2. Massive tax increases, inevitably targeting middle-class Americans.

Regarding those two choices, Donald Trump supports massive tax increases.

He’s not overtly admitting that agenda, but that’s the unavoidable outcome based on what Joshua Green of Bloomberg recently reported about his opposition to entitlement reform.

Trump is hoping to reverse his fortunes and revive his moribund presidential campaign with a…short video message. …he looks straight to camera and declares, “Under no circumstances should Republicans vote to cut a single penny from Medicare or Social Security.” …In fact, he has been remarkably consistent and outspoken over the years in his attacks on Republican efforts to cut Social Security and Medicare. …he was viewed as the least conservative Republican nominee in decades. He favored lots of infrastructure spending…and he made a big deal about protecting Social Security and Medicare.

The story also explains that Trump was the big-government candidate among Republicans in 2016 (as I noted at the time) and suggests he will hold to that position as the 2024 race develops.

Trump’s position set him apart from the other 16 Republican presidential candidates, who generally shared Ryan’s belief, prevalent among House Republicans, that cutting Social Security and Medicare was a fiscal imperative. That’s where DeSantis comes in. …DeSantis was also one of the founding members of the House Freedom Caucus, which drove the effort to cut entitlements when he was in Congress. DeSantis voted repeatedly — in 2013, 2014, and 2015 — for budgets that slashed spending on Social Security and Medicare

By the way, the article is flat-out wrong on a few points.

It is grossly inaccurate to assert that the Ryan budgets “slashed spending.” Overall spending increased in the budgets that Ryan, DeSantis, and other Tea Party Republicans supported back in 2013, 2014, and 2015.

All that happened is that spending would not have been allowed to grow as fast as previously planned.

Also, while the Ryan budgets included genuine Medicare reform (and much-needed spending restraint), they did not address Social Security reform. So the report was wrong on that as well.

But I’m digressing. The key thing to understand is that Ryan, DeSantis and other Republicans in the House last decade tried to do the right thing.

Donald Trump, by contrast, did the wrong thing. And he wants to do the wrong thing in the future. And that means huge future tax increases on you and me.

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Donald Trump Supports Massive Tax Increases on Middle-Class Americans, Part I

Copying some self-styled national conservatives, Donald Trump this week endorsed major tax increases on lower-income and middle-class Americans.

But he embraced huge tax increases in an indirect fashion.

• He did not say “let’s adopt money-siphoning value-added taxes” like they have in Europe.
• Nor did he say “let’s impose very high income tax rates on ordinary people” like they do in Europe.
• And he didn’t say “let’s have much higher payroll tax rates” like they have in Europe.

Instead, Trump embraced huge tax increases by default. He told congressional Republicans to ignore America’s slow-motion crisis of entitlement spending.

For all intents and purposes, that is the same as embracing huge tax increases.

To be more specific, if you endorse European-style government spending, you are necessarily and unavoidably endorsing European-style tax policy.

And that’s what Trump did. Here are some excerpts from a report in the Hill by Brett Samuels.

Former President Trump on Friday urged Republicans in Congress not to cut “a single penny” from Medicare or Social Security… “Under no circumstances should Republicans vote to cut a single penny from Medicare or Social Security…,” Trump said in a recorded video statement posted to Truth Social. …The former president’s message about protecting Social Security and Medicare is consistent with his previous comments on the issue as a candidate in 2016.

For what it’s worth, I’m not surprised at what Trump said.

He favored big government as a candidate in 2016 and he expanded the burden of spending when he was President.

But some of us don’t want to surrender and doom the United States to European-style economic stagnation.

Which is why I’ve decided to take a sentence I wrote last month and turn it into the 15th Theorem of Government.

Here’s the bottom line: Genuine patriots recognize America has a problem and they have the courage to advocate reforms that will actually solve the problem.

It will be interesting to see how many Republicans fit that definition.

P.S. I’m not a never-Trumper or anti-Trumper. For instance, I praised his tax policy and said nice things about his record on regulation. But I’m loyal to ideas, not to people, so I don’t hesitate to criticize any politician who pushes ideas that are bad for America.

P.P.S. Here are the other 14 Theorems of Government.

• The “First Theorem” explains how Washington really operates.
• The “Second Theorem” explains why it is so important to block the creation of new programs.
• The “Third Theorem” explains why centralized programs inevitably waste money.
• The “Fourth Theorem” explains that good policy can be good politics.
• The “Fifth Theorem” explains how good ideas on paper become bad ideas in reality.
• The “Sixth Theorem” explains an under-appreciated benefit of a flat tax.
• The “Seventh Theorem” explains how bigger governments are less competent.
• The “Eighth Theorem” explains the motives of those who focus on inequality.
• The “Ninth Theorem” explains how politics often trumps principles.
• The “Tenth Theorem” explains how politicians manufacture/exploit crises.
• The “Eleventh Theorem” explains why big business is often anti-free market.
• The “Twelfth Theorem” explains you can’t have European-sized government without pillaging the middle class.
• The “Thirteenth Theorem” explains that people are unwilling to pay for bloated government.
• The “Fourteenth Theorem” explains how poor people are hurt by big government.

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Macron’s Pension Reform Is Necessary (but Inadequate)

It is an understatement to declare that fiscal policy in France is terrible.

• The highest burden of government spending in Europe.
• The third-highest level of pension spending in the OECD.
• One of the biggest long-run fiscal gaps in OECD countries.
• The fourth-highest tax burden on workers in the OECD.
• The sixth-highest top tax rate among developed nations.

In recent years, France has had terrible presidents such as Nicolas Sarkozy and Francois Hollande.

But when Emmanuel Macron took over, I wondered whether he might push the nation in the right direction.

And he has pushed a few good ideas. But his achievements have been so meager that I was only half-joking when I wrote last year that his reelection meant that a socialist beat a socialist.

But maybe I’ll have to apologize for that column because Macron is pushing reforms to the country’s pay-as-you-go pension system.

In a column for CNN, David Andelman summarizes the plan and explains the motives.

…the French government announced plans to raise the official retirement age from 62 to 64 to qualify for a full pension. …The French budget risks floundering on pensions that are siphoning off nearly 14% of the nation’s GDP each year – roughly twice the drain than in the United Sates and behind only Italy and Greece in Europe. …Currently, all men and women in France can retire with full pensions at 62 – tied with Sweden and Norway for the lowest retirement age in western Europe. …there are special exemptions dating back to the time of Louis XIV. After performing on the stage for 10 years, actors of the Comédie Française…are entitled to claim a lifetime pension. This dates to the company’s creation in 1680. Dancers in the Paris Opera can retire with full pension at the age of 42, a custom that dates to 1689… Stagehands at both companies can still take their retirement at 57. Then there are train conductors who can bow out at age 52. …In all, there are at least 42 different pension schemes… “The French can count on our determination to block this unfair reform,” said Marine Le Pen, leader of the far-right National Rally party, who Macron defeated in the presidential elections last April. At the other end of the spectrum, Mathilde Panot, from the far-left France Insoumise (France Unbowed) party tweeted that the plan was “archaic, unfair, brutal, cruel.”

Meanwhile, the Wall Street Journal opined last week in favor of Macron’s reform.

France currently has 42 different government-funded pension programs, which vary in retirement age and payout. Mr. Macron wants to wind down some of these programs and transition more French workers to a general pension scheme. That would make it easier for workers to change jobs, and it would also be a step toward a fairer pension system. This job mobility point is crucial and would benefit most workers and employers. …the French system scored a D grade, or 40.9 out of a possible 100, on financial sustainability on the Global Pension Index 2022, created by the consulting firm Mercer… The French system is a pay-as-you-go model in which current workers fund retiree pensions. Yet today there are only 1.7 workers for each retiree, compared to 3-to-1 in 1970 and headed to 1.4-to-1 by 2050. …Nothing short of French economic vitality is at stake. Mr. Macron twice won the Presidency with a vision of a more energetic, entrepreneurial France with more opportunity for young people. A more rational pension system is an essential part of the project.

The WSJ editorial is correct. Macron’s reform would give France a “more rational pension system.”

But it would not give the country a good pension system.

Macron is basically asking workers to pay more and get less. And it is true that his plan will prop up the government’s tax-and-transfer, pay-as-you-go scheme.

But that’s like patching the roof of a rotten house.

What France really needs is genuine reform so that younger workers can shift to a system of private savings. Which is something that already exists to varying degrees in other European nations such as Switzerland, Sweden, Denmark, and the Netherlands.

But don’t hold your breath waiting for that to happen.

P.S. Back in 2010, France went through political turmoil to raise the retirement age from 60 to 62.

P.P.S. Sadly, most of the flaws of France’s government retirement system are the same as the ones that exist in the United States.

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The Unavoidable Choice: Entitlement Reform or Massive Middle-Class Tax Increases

I worry about big tax increases because of America’s grim long-run fiscal outlook.

The video clip is less than two minutes (taken from this longer discussion with Fergus Hodgson), but I can summarize my key point in just one very important sentence

Anybody who opposes entitlement reform is unavoidably in favor of big tax increases on lower-income and middle-class Americans.

There are three reasons for this bold (and bolded) statement.

1. The burden of spending in the United States is going to dramatically expand in coming decades because of demographic change combined with poorly designed entitlement programs.
2. There presumably is a limit to how much of this future spending burden can be financed by borrowing from the private sector (or with printing money by the Federal Reserve).
3. Many politicians claim that future spending on entitlements (as well spending on new entitlements!) can be financed with class-warfare taxes, but there are not enough rich people.

My left-leaning friends almost surely would agree with the first two points. But some of them (particularly the ones who don’t understand budget numbers) might argue with the third point.

To confirm the accuracy of the argument, let’s look at this chart from Brian Riedl’s famous Chartbook.

As you can see, even confiscatory 100-percent taxes on the rich (which obviously would cripple the economy) would not be nearly enough to eliminate America’s medium-term fiscal gap.

Heck, even if we look at just the next 10 years and include every possible tax hike, it’s obvious that a class-warfare agenda (which also would have negative economic effects) would not be enough to finance all the spending that is currently in the pipeline.

Here’s another Riedl chart (which even includes some proposals that would hit the middle class).

I’ll conclude with two further observations.

• First, there are plenty of honest leftists (the ones who understand budget numbers, including Paul Krugman) who openly admit that big tax increases will be needed if the burden of government spending is allowed to increase.
• Second, there are plenty of disingenuous (or perhaps naive) folks on the right who oppose entitlement reform while not admitting that their approach means massive tax increases on lower-income and middle-class taxpayers.

Needless to say, genuine entitlement reform would be far preferable to any type of tax increase.

P.S. In the absence of entitlement reform, politicians will first choose class warfare taxes, of course, but that simply will be a precursor to higher taxes on the rest of us.

P.P.S. The bottom line is that you can’t have European-sized government without European-style taxes. Including a money-siphoning value-added tax.

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America’s Looming Entitlement Crisis

Back in July, I made the case for the right kind of entitlement reform in a discussion with the folks at Live and Let Live.

Today, I want to underscore why it is important to focus on “the right kind” of reform.

On paper, you can save money with “means testing” of benefits, but that creates an indirect penalty on work, saving, and investment.

You can also, on paper, save money by imposing price controls on health care, but that policy has a long track record of failure.

At the risk of understatement, either of those approaches represents “the wrong kind” of entitlement reform. Indeed, those policies are not really reform. Instead, they are tinkering with systems that are fundamentally broken.

For what it is worth, most politicians do not support good reform or bad reform.

As predicted by “public choice,” their preferred approach is kicking the can down the road.

Which is what Greek politicians did for many years.

But they learned in Greece that ignoring a problem does not make it disappear. Instead, it is a recipe for fiscal crisis (and we will probably have to re-learn that lesson in Italy).

So my other goal today is to show why something needs to be done.

We’ll start with a look at Medicare from Brian Riedl’s chartbook.

That’s a very sobering image, so now I’ll share some very sobering words.

James Capretta of the American Enterprise Institute summarizes America’s grim fiscal future.

In 2001, the Treasury estimated the government’s net unfunded liabilities, in present value terms, at $6.5 trillion, or 61 percent of GDP, with federal debt accounting for $3.3 trillion of the measured obligations. …By 2021, the government’s net position had deteriorated to minus $29.9 trillion, or 128 percent of GDP, with federal debt accounting for $22.3 trillion of the liabilities. The government’s unfunded commitments beyond public debt had grown by $2.9 trillion over ten years. …The financial hole is actually deeper than these numbers reveal because they exclude the dramatic effects of Social Security and Medicare. …with Social Security and Medicare included in the assessment, the federal government’s unfunded liabilities in 2021 are $93.1 trillion, or nearly 400 percent of annual GDP. That compares with $11.1 trillion as calculated in the 2001 Treasury report, which was 105 percent of GDP. …The problem posed by unfunded public liabilities is a relatively new one in U.S. history. It has only been over the past half century that the combination of an aging population and the modern entitlement system has pushed the federal government toward a financial crisis.

Having shared all this depressing data, I’ll now close with a couple of observations.

• First, doing nothing almost surely guarantees massive future tax increases. Including European-style levies like a value-added tax that will be very bad news for lower- income and middle-class taxpayers.
• Second, “funded liabilities” are hardly an improvement over “unfunded liabilities” since that simply means debt-financed spending becomes tax-financed spending. From the frying pan to the fire, or vice-versa.

As I said in the above video, we need the right kind of entitlement reform so that we save money and have better policy for old people and poor people.

P.S. Entitlements are a ubiquitous problem in developed nations.

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The Case for Entitlement Reform, Part I

If Joe Biden’s bungled economic policy is any indication, the GOP may wind up controlling Washington in the not-too-distant future.

If so, I hope Republicans rekindle their interest in the kind of genuine entitlement reform discussed in this interview.

But I’m not sure whether to be optimistic or pessimistic.

On the plus side, the GOP supported pro-growth entitlement reform during the Obama years.

On the minus side, the party largely punted on the issue once Trump took over.

To be sure, punting is the easy route from a “public choice” perspective. Politicians like offering freebies to voters and many voters like getting handouts.

However, that approach means America’s economy is weakened by an ever-growing burden of federal spending and eventually is plunged into fiscal crisis.

And that’s based on the programs that already exist. Joe Biden wants to expand the welfare state with even more entitlements!

The Wall Street Journal editorialized about the downside of making America more like Europe last October.

The result of…expanded entitlements is likely to be reduced incentives to work and invest, slower economic growth, lower living standards, and less fiscal space for essential public goods like national defense. That’s the lesson from Europe’s cradle-to-grave welfare states… Europe’s little-discussed secret is that its cradle-to-grave welfare states are financed by the middle class via value-added and payroll taxes. The combined employer-employee social security tax rate is 36% in Spain, 40% in Italy and 65% in France. Value-added taxes in most European economies are around 20%. There simply aren’t enough rich to finance their entitlements.

Amen. I’ve repeatedly warned that a European-sized welfare state would mean European-sized taxes on lower-income and middle-class Americans.

And what’s remarkable (and discouraging) is that some politicians in the U.S. want to expand entitlements even though many European governments now realize they made big mistakes and need to scale back.

The irony is that some European governments have tried to reform their tax and welfare systems to become more competitive. Germany and Sweden over two decades reformed their welfare and labor policies. …Other European governments are also pushing welfare-state reforms. French President Emmanuel Macron has passed pension reform and cut the corporate tax rate to 26.5% from 33% in 2017… Greece is pulling out of its debt trap with Prime Minister Kyriakos Mitsotakis’s tax, pension and regulatory reforms.

For what it’s worth, I’m happy about these reforms, but I fear many European nations are in the too-little-too-late category.

Why? Because the demographic outlook is deteriorating faster than reform is happening. In other words, most of them are probably destined to suffer Greek-style fiscal crises.

But if (or when) that happens, maybe American politicians will finally wake up and realize we need good reforms to prevent Social Security, Medicare, and Medicaid from causing a similar collapse on this side of the Atlantic Ocean..

Hopefully that epiphany will take place before it is too late for the United States.

P.S. For those who are interested in the history of fiscal policy, John Cogan of the Hoover Institution wrote about pre-20th-century entitlements earlier this year.

Here are excerpts from his column in the Wall Street Journal.

The history of U.S. entitlements is a 230-year record of continuous expansion… The first major entitlement, Revolutionary War disability benefits, was initially restricted to members of the Continental Army and Navy who were injured in battle and survivors of those killed in wartime. Eligibility was then expanded, first to state militia soldiers, then to veterans whose disabilities were unrelated to wartime service, and eventually to virtually all people who served during the war regardless of disability. Civil War disability pensions followed the same…process, except on a far grander scale. Pensions were initially confined to U.S servicemen who suffered wartime injuries and survivors of those killed in battle. Eventually they were extended to virtually all union Civil War veterans regardless of disability. …Congress followed the same liberalizing process with 20th-century entitlements.

If this excerpt doesn’t satisfy your curiosity, here’s Cogan discussing the topic for 46 minutes.

P.P.S. Not all entitlement reform is created equal.

P.P.P.S. Here an informative chart if you want to know whether to blame defense spending or entitlement spending.

P.P.P.P.S. I always argue in favor of a Swiss-style spending cap, which presumably would force politicians to address America’s entitlement problem.

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