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Posts Tagged ‘Fiscal Policy’

Trump’s new budget was released yesterday and almost every media outlet wrote about supposed multi-trillion dollar spending cuts when, in reality, the President’s budget actually calls for nearly $2 trillion of additional spending over the next 10 years.

The bottom line is that Trump is more akin to a big-government Republican rather than a Reagan-style conservative.

Today, let’s take a look at Table 3.2 of the Historical Tables of the Budget to assess how Trump’s record on spending compares to other modern presidents.

I’ve done this exercise in the past, starting in 2012 and most recently in 2017, but this is the first year we have enough data to include Trump’s performance.

And if we simply look at overall spending numbers (adjusted for inflation, of course), we get the shocking result that Obama increased spending at the slowest rate.

This surprising outcome is due in part to factors such as falling interest rates, a slowdown in military expenditures, and the fiscal impact of the 2010 elections (in other words, gridlock can be beneficial).

Trump, meanwhile, is near the bottom of the list (though not as bad as George W. Bush and LBJ).

What happens, though, if we remove interest payments from the data? After all, those outlays truly are uncontrollable (barring a default) and they mostly reflect spending decisions of prior administrations.

So if we want to judge a president’s fiscal policy, we should look at “primary spending,” which is the term used by budget geeks when looking at non-interest spending.

This measure doesn’t radically alter the results, but some presidents wind up looking better and others fall.

Another way of looking at the numbers is to remove the fiscal impact of bailouts, such as TARP (and also the savings & loan bailouts of the late 1980s).

The reason for this alteration is that the bailouts cause a big spike in spending when they occur, and then cause a drop afterwards because repayments actually are considered “negative spending,” as are the premiums that banks pay each year (I’m not kidding).

So presidents who are in office when the bailouts occur wind up looking worse, even though their policies may not have contributed to the problem. And the presidents who are in office when the repayments occur (remember, those count as negative spending) wind up looking better than they really are.

Here are the adjusted rankings (calculated by subtracting rows 46, 50, and 51 of Table 3.2). As you can see, Obama takes a bit of a tumble and Reagan is now the most fiscally prudent president.

Last but not least, now let’s also remove defense spending so we can see which presidents did the best (and the worst) when it comes to social welfare spending.

This is the most important category for those of us who believe the federal government should get out of the business of income redistribution and social insurance.

Reagan easily tops the list, limiting outlays to 0.5 percent annual growth. The other thing that’s remarkable is that every other Republican was worse than Bill Clinton, Jimmy Carter, and Barack Obama.

For what it’s worth, Trump is the best of the non-Reagan Republicans, though that is damning with very faint praise.

The first President Bush was awful on spending, and Nixon was catastrophically terrible.

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I would prefer not to write about President Trump’s new budget, largely because I know it’s not a serious proposal.

Even before he was elected, I pointed out that Trump was a big-government Republican who had no intention of dealing with serious fiscal issues such as the rising burden of entitlement spending.

So I wasn’t surprised that he capitulated to swamp-friendly budget deals in 2017, 2018, and 2019. And I’m depressingly confident that the same thing will happen this year.

That being said, I want to comment on how the media is covering his latest budget.

Take a look at some of the headlines that are dominating the news this morning.

From Reuters.

From New York magazine.

From the Washington Times.

From NBC.

From the Associated Press.

From Bloomberg.

From International Business Times.

From Fox.

From the Wall Street Journal.

All of these headlines make is seem like Trump is proposing a Reagan-style budget with lots of cuts, especially with regards to domestic programs.

All of that would be great news…if it was true.

In reality, here’s what Trump is projecting for total spending over the next 10 years.

Can you find the spending cuts?

And here’s what’s happening with domestic spending (mandatory outlays plus domestic discretionary) according to Trump’s budget.

Can you find the spending cuts?

Last but not least, here’s Trump’s plan for domestic discretionary spending.

Can you find the spending cuts?

So why is there such a big disconnect in the media? Why are there headlines about cutting and slashing when government is growing by every possible measure?

For the simple reason that the budget process in Washington is pervasively dishonest, as I’ve explained in interviews with John Stossel and Judge Napolitano. Here are the three things you need to know.

  1. The politicians created a system that automatically assumes big increases in annual spending, called a baseline.
  2. When there’s a proposal to have spending grow slower than the baseline, the gap between the proposal and the baseline is called a cut.
  3. It’s like being on a diet and claiming progress because you’re gaining two pounds each month rather than five pounds.

Defenders of this system argue that programs should get built-in increases because of things such as inflation, or because of more old people, which leads to more spending for programs such as Social Security and Medicare.

It’s certainly reasonable for them to argue that budgets should increase for these reasons.

But they should be honest. Be forthright and assert that “Spending should climb X percent because…”

Needless to say, that won’t happen. The pro-spending politicians and interest groups like the current approach because it allows them to scare voters by warning about “savage” and “draconian” spending cuts.

Remember how Obama said the sequester would wreak havoc because of massive cuts? Except there weren’t any cuts, massive or otherwise. As Thomas Sowell pointed out, Obama was trying to deceive voters.

P.S. The British also use dishonest budgeting.

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One of the most significant developments in 2020 politics is how Democratic presidential candidates have embraced hard-left economic policies.

Prominent analysts on the left have noted that even Joe Biden, ostensibly the most moderate of the candidates, has a very statist economic platform when compared to Barack Obama.

And “Crazy Bernie” and “Looney Liz” have made radicalism a central tenet of their campaigns.

So where does Michael Bloomberg, the former mayor of New York City, fit on the spectrum?

The New York Times has a report on Bloomberg’s tax plan. Here are some of the key provisions, all of which target investors, entrepreneurs, small business owners, and other high-income taxpayers.

Former Mayor Michael R. Bloomberg of New York unveiled a plan on Saturday that would raise an estimated $5 trillion in new tax revenue… The proposal includes a repeal of President Trump’s 2017 tax cuts for high earners, along with a new 5 percent “surcharge” on incomes above $5 million per year. It would raise capital gains taxes for Americans earning more than $1 million a year and…it would partially repeal Mr. Trump’s income tax cuts for corporations, raising their rate to 28 percent from 21 percent. …Mr. Bloomberg’s advisers estimate his increases would add up to $5 trillion of new taxes spread over the course of a decade, in order to finance new spending on health care, housing, infrastructure and other initiatives. That amount is nearly 50 percent larger than the tax increases proposed by the most fiscally moderate front-runner in the race, former Vice President Joseph R. Biden Jr. …Mr. Bloomberg’s advisers said it was possible that he would propose additional measures to raise even more revenue, depending on how his other domestic spending plans develop.

These are all terrible proposals. And you can see even more grim details at Bloomberg’s campaign website.

Every provision will penalize productive behavior.

But there is a bit of good news.

Though it would be more accurate to say that there’s a partial absence of additional bad news.

Bloomberg hasn’t embraced some of the additional bad ideas being pushed by other Democratic candidates.

It would…maintain a limit on federal deductions of state and local tax payments set under the 2017 law, which some Democrats have pushed to eliminate. …the plan notably does not endorse the so-called wealth tax favored by several of the more liberal candidates in the race, like Senators Elizabeth Warren and Bernie Sanders.

I’m definitely happy he hasn’t embraced a wealth tax, and it’s also good news that he doesn’t want to restore the state and local tax deduction, which encouraged profligacy in states such as California, New Jersey, and Illinois.

It also appears he doesn’t want to tax unrealized capital gains, which is another awful idea embraced by many of the other candidates.

But an absence of some bad policies isn’t the same as a good policy.

And if you peruse his website, you’ll notice there isn’t a single tax cut or pro-growth proposal. It’s a taxapalooza, what you expect from a France-based bureaucracy, not from an American businessman.

To add insult to injury, Bloomberg wants all these taxes to finance an expansion in the burden of government spending.

For what it’s worth, this is my estimate of what will happen to America’s tax burden (based on the latest government data) if Bloomberg is elected and he successfully imposes all his proposed tax increases. We’ll have a more punitive tax system that extracts a much greater share of people’s money.

P.S Take these numbers with a grain of salt because they assume that Bloomberg’s tax increases will actually collect $5 trillion of revenue (which won’t happen because of the Laffer Curve) and that GDP won’t be adversely affected (which isn’t true because there will be much higher penalties on productive behavior).

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Is Greece the international version of New Jersey or is New Jersey the American version of Greece?

Is New Jersey the national version of Chicago, or is Chicago the the local version of New Jersey?

The answer is yes, regardless of how the question is phrased because – in all cases – we’re talking about examples of how politicians (and short-sighted voters) create “Goldfish Government.”

Let’s examine Chicago to see how this process works.

The Washington Post noted early last year that the new mayor was going to face an enormous fiscal challenge because of the reckless choices made by previous generations of politicians.

The city has been underfunding its pensions for decades, with dire results. Chicago’s pension plans collectively have only about a quarter of the assets they’ll need to pay benefits, one of the worst funding ratios in the nation. To put that hole in dollar terms, Chicago is about $28 billion short of what it needs, even under relatively favorable assumptions about future returns, or about $10,000 for every man, woman and child living in the city. …radical surgery still needed. Within a few years, pension contributions are projected to suck up more than 20 percent of the city’s budget. And Chicago can’t count on much help from the state, which is dealing with its own, equally severe case of pension underfunding. …what’s happening in Illinois is merely the earliest and most extreme manifestation of a quandary that will soon be dominating the public conversation in many states: how to pay for retirement promises to public employees without entering a fiscal death spiral. …shoddy accounting allowed generations of politicians all over the country to curry favor with public-sector workers by offering them ever-fatter pension packages, gaining immediate benefit while deferring the political cost of paying for all those benefits until much later. Later is now arriving. …Chicago has been losing lower- and middle-class residents for years, in part because of its heavily regressive tax burden. And when Chicago and Illinois both start raising the rates on upper earners — as they will have to, and soon — they run the risk that those people ,too, will start trickling away, either to smaller cities without the burdensome pension-legacy costs.

Megan McArdle pointed out that Chicago is a mess because of “public choice” – i.e., politicians make short-sighted and irresponsible decisions in order to maximize votes and power.

Throw in a recession sometime in the next couple of years, and Chicago is going to be in a full-blown crisis. …it’s the fault of generations of politicians before them who promised an ever-richer array of benefits to government workers. Particularly, they liked to raise the retirement benefits. …The whole point of giving workers pension benefits instead of cash was that you didn’t have to pay for them; you could promise the benefits now and gather up the votes that the grateful workers tossed at your feet, all without costing current taxpayers a single dime. …Future taxpayers mostly weren’t voting in 1982 municipal elections. …Chicagoans, welcome to “later.” The municipal pensions only have about 25 percent of the assets they’ll need to cover projected benefits, a shortfall of roughly $28 billion. …If you use a more cautious method, you come up with a shortfall of more than $40 billion. …Moody’s Investors Service rates the city’s general obligation debt as junk bonds. …Chicago is now approaching the point where the growth of its obligations will outpace the growth of any possible revenue stream it might use to cover them. It’s a few steps from there to municipal bankruptcy.

Unsurprisingly, Chicago’s relatively new mayor wants to keep the scam going.

As reported by the Chicago Tribune, she wants to extract more money from taxpayers.

Chicago Mayor Lori Lightfoot…said there’s “no question” residents will need to pay more in taxes or fees to plug a looming city budget shortfall… “There’s no question we’re going to have to come to the taxpayers and ask for additional revenue.” …Lightfoot did not specify what sort of revenue she expects to raise — whether it would come in the form of new taxes, a property tax hike or increased fees. …referring to her campaign promise to seek cuts before asking taxpayers for more money, Lightfoot added, “I meant what I said on the course of the campaign: We have a lot of hard choices we’re going to have to make regarding city finances.”

Like previous mayors, she’s buying votes with other people’s money.

The Wall Street Journal opined last year about her surrender to the teacher unions (a Chicago tradition, as illustrated by the adjacent cartoon by Lisa Benson).

Except it wasn’t really a surrender since she was already on their side (as perfectly captured by this Ramirez cartoon).

So the net result is a combination of bad fiscal policy and bad education policy.

Chicago Mayor Lori Lightfoot and the Chicago Teachers Union on Thursday struck an agreement to end an 11-day strike, and by the looks of it the union was bargaining with itself. The mayor is touting the new contract as the most generous in Chicago history, and she’s right. …The new contract includes a 16% raise over five years (not including raises based on longevity), a three-year freeze on health insurance premiums, lower copays, …and more than 450 new social workers and nurses. …you can bet it will be expensive. Last week the mayor proposed a slew of tax increases including levies on ride-hailing services and restaurant meals. This week her staff suggested that property taxes may have to increase . . . again. Michelle Obama the other day complained that white people were leaving the city to escape minorities who are moving in. No, they’re fleeing Chicago’s high taxes and lousy schools—and so are minorities.

This story from Reason is a powerful (and nauseating) example of how a money-hungry city is making life miserable for ordinary people.

Chicago police pulled Spencer Byrd over for a broken turn signal. Byrd says his signal wasn’t broken, but that detail would soon be the least of his worries. …Byrd was giving a client, a man he says he had never met before, a ride… Police pulled both of them out of the car and searched them. Byrd was clean, but in his passenger’s pocket was a bag of heroin… Police released Byrd after a short stint in an interrogation room without charging him with a crime. But when Byrd went to retrieve his car, he found out the Chicago Police Department had seized and impounded it. …The program impounds cars when the owner beats a criminal case or isn’t charged with a crime in the first place. It impounds cars even when the owner isn’t even driving, like when a child is borrowing a parent’s car. …Byrd calls his car his “livelihood,” and he has been fighting for close to two years now to recover it. He says he has $3,500-worth of tools locked in the trunk, and he can’t retrieve them. …Like tens of thousands of other Chicagoans, Byrd was a victim of years of the city’s fiscal negligence. …to try and nickel-and-dime…out of these massive budget gaps. …The result is a uniquely punitive impound system, in which Chicago profits off restricting the ability of its residents to drive.

Amazingly, Chicago’s politicians want to dig an even deeper hole.

The Wall Street Journal has a new editorial examining a scheme to borrow even more money in hopes of keeping the gravy train rolling.

Chicago has been seeking to take advantage of historically low interest rates by refinancing debt—even as its credit rating has deteriorated amid swelling budget deficits and pension payments. …In 2017 state and city politicians contrived a shell scheme to lower the city’s borrowing costs. The city essentially sold off sales-tax revenue that it receives from the state to a corporation specially created to pay creditors. …Voila, Chicago’s financial magicians spun junk into gold. …Chicago’s budget woes are mounting, and financial alchemists are diluting the claims of existing creditors. If the city were to renege on its $8 billion in GO debt, those bondholders would surely demand a slice of the sales-tax revenue now pledged to other creditors. This is what happened in Puerto Rico. …Chicago’s population has declined for each of the past four years, and taxpayers are getting tapped out. On top of a $50 million increase in property taxes this year, Mayor Lori Lightfoot has imposed a new “congestion” fee on Uber and taxi rides, doubled the tax on restaurant meals, and raised a special personal property tax on computer cloud software. Yet a recession would probably blow a gigantic hole in its budget and could cause its pension funds to run dry. Does anyone think that city politicians wouldn’t prioritize public workers over bondholders?

So when will this house of cards collapse?

I have no idea. There’s a famous quote from the late economist Rudiger Dornbusch, who observed that, “In economics, things take longer to happen than you think they will, and then they happen faster than you thought they could.”

The people buying bonds from Chicago are betting that the collapse won’t happen in the near future.

But that was the same mentality of the people who bought Greek bonds in, say, 2005.

I’ll simply observe that what’s happening in Chicago is confirmation of my “First Theorem of Government.”

And I’ll also make an easy prediction that the people buying Chicago bonds will want a bailout when the you-know-what hits the fan.

Needless to say, the answer should be a resounding no.

P.S. If you want to know all my Theorems of Government, click here.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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About 10 years ago, the Center for Freedom and Prosperity released this video to explain that America’s real fiscal problem is too much spending and that red ink is best viewed as a symptom of that problem.

I wrote a primer on this issue two years ago, but I want to revisit the topic because I’m increasingly irked when I see people – over and over again – mistakenly assume that “deficit neutrality” or “budget neutrality” is the same thing as good fiscal policy.

  • For instance, advocates of a carbon tax want to use the new revenues to finance bigger government. Their approach (at least in theory) would not increase the deficit. Regardless, that’s a plan to increase to overall burden of government, which is not sound fiscal policy.
  • Just two days ago, I noted that Mayor Buttigieg wants the federal government to spend more money on health programs and is proposing an even-greater amount of new taxes. That’s a plan to increase the overall burden of government, which is not sound fiscal policy.
  • Back in 2016, a columnist for the Washington Post argued Hillary Clinton was a fiscal conservative because her proposals for new taxes were larger than her proposals for new spending. That was a plan to increase the overall burden of government, which is not sound fiscal policy.
  • And in 2011, Bruce Bartlett argued that Obama was a “moderate conservative” because his didn’t raises taxes and spending as much as some on the left wanted him to. Regardless, he still increased the overall burden of government, which is not sound fiscal policy.

To help make this point clear, I’ve created a simple 2×2 matrix and inserted some examples for purposes of illustration.

At the risk of stating the obvious, good fiscal policy is in the top-left quadrant and bad fiscal policy is in the bottom-two quadrants.

Because of “public choice,” there are no real-world examples in the top-right quadrant. Why would politicians collect extra taxes, after all, if they weren’t planning to use the money to buy votes?

P.S. In 2012, I created a table showing the differences on fiscal policy between supply-siders, Keynesians, the IMF, and libertarians.

P.P.S. I also recommend Milton Friedman’s 2×2 matrix on spending and incentives.

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I’m part of the small minority that thinks the big news from the United Kingdom is that “Brexit” will finally happen, thanks to Boris Johnson’s landslide victory last month.

Most everyone else seems more focused on the latest development with the royal family. The Duke and Duchess of Sussex, better known as Harry and Meghan, have decided to partially extricate themselves from the cloistered world of the monarchy – in part so they can take advantage of “the freedom to make a professional income.”

More power to them, I guess, if they can monetize their celebrity status.

The U.K.-based Economist expects that they’ll rake in lots of money.

In stepping down as “senior royals” while pronouncing that they “value the freedom to make a professional income” the Duke and Duchess threaten to unleash the spirit of capitalism on the very core of the monarchy. …The Sussexes are determined to turn themselves into a global brand. Their first move after they announced that they were stepping down from many of their royal duties was to unveil the name of their brand, Sussex Royal… Various branding experts have pronounced that Harry and Meghan have “a ready-made brand” that could earn them as much as £500m in their first year. InfluencerMarketingHub, a website, points out that, with 10m Instagram followers, they could expect $34,000 for a sponsored post. …They will need more than Prince Harry’s inheritance, which is estimated at £20m-30m, to keep up with the global super-rich.

I don’t have a rooting interest in their financial success. Indeed, I suspect they’ll wind up being annoying hypocrites like Harry’s dim-bulb father, lecturing us peasants about our carbon footprints while they fly around the world in private jets.

That being said, I am interested in the intricacies of international taxation.

And that will be a big issue for the couple according to Town and Country.

Now that Meghan and Harry intend to retreat from their royal roles, attain “financial independence,” and live part-time in North America, Meghan and Archie’s tax and citizenship plans are a little up in the air. …Meghan is still a US citizen, and therefore required to pay US taxes on her worldwide income. Prince Harry could technically elect to be treated as a US tax payer and file jointly with Meghan, but “he would never do that,” explains Dianne Mehany, a lawyer specializing in international tax planning. …When Meghan and Harry announced their engagement back in 2017, Harry’s communications team confirmed to the BBC that Meghan “intends to become a UK citizen and will go through the process of that.” …Once gaining UK citizenship, Meghan could elect to relinquish her US citizenship, and save herself the trouble and expense of filing US tax returns. “The only problem there is, she would have to pay the exit tax,” Mehany notes…regardless of what type of employment or contract work Meghan pursues, it will be taxable in the US. …”The real tricky thing,” Mehany notes, “is to make sure they don’t spend too much time in the United States, so that Harry becomes a resident of the United States, at which point his entire worldwide wealth would become subject to US taxation, which I know they want to avoid.”

For all intents and purposes, Meghan and Harry will face the same challenges as a multinational company.

  • Multinational companies have to figure out where to be “domiciled” just as Meghan and Harry have to figure out the best place to reside.
  • Multinational companies have to figure out where to conduct business, just as Meghan and Harry have to figure out where they will work.
  • Multinational companies have to figure out how to protect their income from taxes, just as Meghan and Harry will try to protect their income.

For what it’s worth, the Royal couple already is being smart.

As reported by the U.K.-based Telegraph, they’re minimizing their exposure to the rapacious California tax system.

The Duchess of Sussex has moved her business to a US state used by the super-rich to protect their interests from scrutiny. The Duchess’s company Frim Fram Inc was moved out of California in December and incorporated in Delaware, which tax experts suggest could be done to avoid being hit with tax liabilities in California. …the move was made on New Year’s Eve…”You would want to do it on New Year’s Eve simply because if you go one minute into the next year you would owe some taxes to California for the year of 2020,” said Alan Stachura, from financial services firm Wolters Kluwer. …Mr Stachura, who helps companies incorporate in Delaware, added that the state offers “a tax benefit for items like trademarks and royalties”. …Experts say there are several benefits in moving a corporation to Delaware, including the state’s flexible business laws and its low personal income tax rates. …A source said that as the Duchess is no longer resident in California it was appropriate for the registration to be moved.

I can’t resist commenting on the last line of the excerpt. The fact that Meghan is no longer a resident of California is irrelevant.

After all, she’s not becoming a resident of Delaware.

Instead, she and her husband are being rational by seeking to minimize the amount of their money that will be diverted to politicians (the same is true of everyone with any sense in the United Kingdom, whether they are on the right or on the left).

It’s a shame Meghan and Harry feel too insecure to acknowledge that reality.

P.S. The Town and Country article noted that Prince Harry “would never” allow himself to become a tax resident of the United States because he wants “to avoid” America’s worldwide tax system. That’s completely understandable. He probably learned about the nightmare of FATCA after marrying Meghan and wants to make sure he’s never ensnared by America’s awful internal revenue code.

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