Feeds:
Posts
Comments

Posts Tagged ‘Government Spending’

When I make speeches about fiscal policy, I oftentimes share a table showing the many nations that have made big progress by enforcing spending restraint over multi-year periods.

I then ask audiences a rhetorical question about a possible list of nations that have prospered by going in the opposite direction. Are there any success stories based on tax hikes or bigger government?

The answer is no, which is why I’ve never received a satisfactory answer to my two-part challenge, even if I limit the focus to fiscal policy.

And nobody will be surprised to learn that the fiscal crisis in Puerto Rico reinforces these lessons.

Writing for the Wall Street Journal, Daniel Hanson explains that the American territory in the Caribbean is on the verge of default.

As Puerto Rico struggles under the weight of more than $70 billion in debt, it has become popular to draw parallels with Greece.

The one theme that is common with the two jurisdictions is that their fiscal crises are the result of too much government spending.

How bad is the problem in Puerto Rico?

It’s hard to answer that question because government budgeting isn’t very transparent and the quality and clarity of the numbers that do exist leaves a lot to be desired.

But I’ve done some digging (along with my colleagues at Cato) and here’s some data that will at least illustrate the scope of the problem.

First, we have numbers from the World Bank showing inflation-adjusted (2005$) government consumption expenditures over the past few decades. As you can see, overall spending in this category increased by 100 percent between 1980 and 2013 (at a time when the population increased only 12 percent).

In other words, Puerto Rico is in trouble because it violated the Golden Rule and let government grow faster than the private sector over a sustained period (just like Greece, just like Alberta, just like the United States, etc, etc).

Here’s another chart and this one purports to show total outlays.

The numbers aren’t adjusted for inflation, so the increase looks more dramatic. But even if you consider the impact of a rising price level (average annual increase of about 4 percent since the mid-1980s), it’s obvious that government spending has climbed far too fast.

To be more specific, Puerto Rico has allowed the burden of government to rise much faster than population plus inflation.

A government can get away with that kind of reckless policy for a few years. But when bad policy is maintained for a long period of time, the end result is never positive.

Now that we’ve established that Puerto Rico got in trouble by violating my Golden Rule, what’s the right way of fixing the mess? Is the government responding to its fiscal crisis in a responsible manner?

Not exactly. Like Greece, it’s too beholden to interest groups, and that’s making (the right kind of) austerity difficult.

Indeed, Mr. Hanson says there haven’t been any cuts in the past few years.

In the past four years, when the fiscal crisis has been most severe, four successively larger budgets have been enacted. The budget proposed for the coming year is $235 million larger than last year’s and $713 million, or 8%, higher than four years ago. Austerity this is not.

What special interest groups standing in the way of reform?

The government workforce would be high on the list. One of the big problems in Puerto Rico is that there are far too many bureaucrats and they get paid far too much (gee, this sounds familiar).

Here are some details from Mr. Hanson’s column.

…more than two-thirds of the territory’s budget is payroll. The proposed budget…contains no plans for head-count reductions. …Median household income in Puerto Rico hovers around $20,000, according to the U.S. Census Bureau, but government workers fare much better. Public agencies pay salaries on average more than twice that amount, a 2014 report from Banco Popular shows. Salaries in the central government in San Juan are more than 90% higher than in the private sector. Even across comparable skill sets, the wage disparity persists.

In other words, life is pretty good for the people riding in the wagon, but Puerto Rico doesn’t have enough productive people to pull the wagon.

So we’re back to where we started. It’s the Greece of the Caribbean.

P.S. This column has focused on fiscal policy, but it’s important to recognize that there are many other bad policies hindering prosperity in Puerto Rico. And some of them are the result of Washington politicians rather than their counterparts in San Juan. Nicole Kaeding and Nick Zaiac have explained that the Jones Act and the minimum wage are particularly destructive to the territory’s economy.

P.P.S. At least Puerto Rico is still a good tax haven for American citizens.

Read Full Post »

I’ve written over and over again that the federal government’s so-called War on Poverty has been a disaster.

It’s been bad news for taxpayers, of course, but it’s also been bad news for poor people since they get trapped in dependency.

So what’s the alternative? Well, we actually can learn a lot from history.

Let’s start on the other side of the Atlantic. Professor Tyler Cowen of George Mason University has a fascinating video (which is part of a must-watch series) looking at the English debate in the 1830s on how best to deal with poverty.

Now let’s cross the ocean and look at the American experience.

Professor Thomas West of Hillsdale College has researched welfare policies in the early days of the United States.

Here are some of his key findings.

…government-funded welfare, not to mention generous private charity, has existed throughout American history. …The real difference between the Founders’ welfare policies and today’s is over how, not whether, government should help those in need.

Government was involved, but only at the local level, and assistance was a two-way street.

From the earliest colonial days, local governments took responsibility for their poor. However, able-bodied men and women generally were not supported by the taxpayers unless they worked. They would sometimes be placed in group homes that provided them with food and shelter in exchange for labor. Only those who were too young, old, weak, or sick and who had no friends or family to help them were taken care of in idleness.

Here’s more.

Welfare is kept local so that the administrators of the program will know the actual situations of the persons who ask for help. This will prevent abuses and freeloading. …A distinction between the deserving and undeserving poor is carefully observed. Able-bodied vagabonds get help, but they are required to work in institutions where they will be disciplined. Children and the disabled, on the other hand, are provided for, not lavishly but without public shame. …Poor laws to support individual cases of urgent need were not intended to go beyond a minimal safety net. Benefit levels were low.

Interestingly, Professor West writes about Benjamin Franklin’s low opinion of England’s welfare system (as it existed before the 1830s, obviously), which was much more generous.

Here’s some of what Franklin wrote, as cited by West.

I am for doing good to the poor, but I differ in opinion of the means. I think the best way of doing good to the poor, is not making them easy in poverty, but leading or driving them out of it. In my youth I travelled much, and I observed in different countries, that the more public provisions were made for the poor, the less they provided for themselves, and of course became poorer. And, on the contrary, the less was done for them, the more they did for themselves, and became richer.

This was not an unusual perspective.

Franklin’s understanding of the welfare paradox—that aid to the poor must be managed carefully lest it promote indolence and therefore poverty—was shared by most Americans who wrote about and administered poverty programs until the end of the 19th century. …policies were intended to help the poor in ways that did not violate the rights of taxpayers or promote irresponsible behavior.

Thomas Jefferson definitely agreed, as seen in this quote included in Professor West’s analysis.

To take from one, because it is thought his own industry and that of his fathers has acquired too much, in order to spare to others, who, or whose fathers, have not exercised equal industry and skill, is to violate arbitrarily the first principle of association, the guarantee to everyone the free exercise of his industry and the fruits acquired by it.

If you remember the discussion of “indoor” and “outdoor” relief from the video about the English welfare system, you won’t be surprised to learn similar issues were present in the United States.

As the poor population grew, many concluded that “outdoor relief” was leading people to look on welfare as an entitlement and creating a class of permanent dependents. Consequently, the emphasis soon shifted to “indoor relief”—almshouses and workhouses.

Professor West also cites the strong role of private charity, which also was based on tough-love compassion.

After the Revolution and throughout the 19th century, hospitals for the poor, educational institutions, YMCAs, and Salvation Army branches were established in growing numbers all over America by public-spirited citizens. Like the public workhouses, these private charities distinguished between deserving and undeserving poor. Good character, it was thought, would enable most people to become self-sufficient. These agencies tried to build the character of their recipients through education, moral suasion, religious instruction, and work.

Now let’s see what West says about the effectiveness of the tough-love approach from America’s past with the entitlement approach used today.

If we rank poverty and welfare policies in terms of quantity of money and material goods given to people who are poor, then today’s policies are far more effective than the Founders’. Benefit levels are much higher, and far more people are eligible for support. …However, if poverty and welfare policies are judged by their effectiveness in providing for the minimal needs of the poor while dramatically reducing poverty in a society over time, then America before 1965 could be said to have had the most successful welfare policy in world history. By the same benchmark, post-1965 poverty programs have failed.

In other words, if the goal is to make people comfortable in dependency, the current system is a big success.

But if the goal is self reliance and reduced poverty, than the current system is a terrible failure.

Professor West has some great data on how a combination of long-run growth and a sensible welfare system combined to dramatically reduce destitution between the nation’s founding and the 1960s.

Two centuries ago, most Americans—at least 90 percent—were desperately poor by today’s standards. Most houses were small, ill-constructed, and poorly heated and insulated. Based on federal family income estimates, 59 percent of Americans lived in poverty as late as 1929, before the Great Depression. In 1947, the government reported that 32 percent of Americans were poor. 

This is fascinating and valuable information. At least for those of us with a wonky interest in public policy.

Back in 2010, I shared a chart based on far more limited data to show the poverty rate consistently falling after World War II.

But only up to a point. Once the federal government declared War on Poverty in the mid-1960s, we stopped making progress.

Now, based on Professor West’s data, I can create a chart going back to 1815.

I arbitrarily connected the data points with straight lines for lack of any other obvious alternative, but that’s not important. The key point of the graph is to see that the level of poverty dramatically before Washington got involved.

Professor West puts 2 and 2 together and gets 4.

…before the huge growth in government spending on poverty programs, poverty was declining rapidly in America. After the new programs were fully implemented, the poverty rate stopped declining.

Let’s begin to wrap up our discussion.

West points out that Benjamin Franklin’s criticisms of the English welfare system apply even more so to the mess we have in America today.

And this is a very costly mistake.

The incentive structure of the modern welfare state is similar to the one that Franklin condemned in old England, except that ours is more generous and more tolerant of single motherhood. Since 1965, when President Lyndon Johnson inaugurated the modern War on Poverty, total annual government welfare spending has grown from less than $9 billion (1.3 percent of gross domestic product) to $324 billion (5 percent of GDP) in 1993 to $927 billion (6 percent of GDP) in 2011. Between 1965 and 2013, the government spent $22 trillion (adjusted for inflation) on means-tested welfare programs—more than three times the costs of all military wars in the history of the United States. …These figures do not take into account state, county, and municipal benefits. Nor do they take into account the massive use of Social Security Disability as a de facto welfare program (as of 2005, 4.1 percent of Americans between the ages of 25 and 64 were enrolled).

We had successful welfare reform in the 1990s, to be sure, but it dealt with just one program.

The overall trend, as discussed two days ago, is ever-growing levels of dependency.

The basic problem—that government makes it affordable for women to bear and raise children without husbands while living independently in households of their own—is still there. …High benefit levels and irresponsible attitudes toward sex and marriage create a world in which many children have few or no ties to their fathers; in which mothers, increasingly unmarried, are more often abused and exploited; and in which many men join gangs and take up crime as a way of life. …The contemporary outlook on welfare has both propelled the family’s disintegration and promoted vast dependence. …antipoverty programs can easily have a corrupting effect if they are not set up in a way that promotes rather than breaks down the morality of self-restraint and self-assertion that is a necessary foundation of what Jefferson called “temperate liberty.”

I guess what we have now in America is intemperate dependence.

Hmmm, maybe the solution is to go back to the system that worked. And that means getting Washington out of the business of income redistribution.

Read Full Post »

Based on a new report from the Congressional Budget Office, I wrote two weeks ago about America’s dismal long-run fiscal outlook. Simply stated, we face a Greek-style fiscal future because of changing demographics and poorly designed entitlement programs.

But I was just looking at big-picture fiscal aggregates.

And while that was discouraging, it gets downright depressing when you look behind the numbers and consider how a growing share of Americans are getting lured into government dependency.

Nicholas Eberstadt of the American Enterprise Institute has a very grim analysis on the growth of entitlement dependency in the United States.

The American welfare state today transfers over 14% of the nation’s GDP to the recipients of its many programs, and over a third of the population now accepts “need-based” benefits from the government. This is not the America that Tocqueville encountered.

It wasn’t always this way.

The article looks at the history of the welfare state in America.

 In 1961, at the start of the Kennedy Administration, total government entitlement transfers to individual recipients accounted for a little less than 5% of GDP, as opposed to 2.5% of GDP in 1931 just before the New Deal. In 1963 — the year of Kennedy’s assassination — these entitlement transfers accounted for about 6% of total personal income.

But things began to deteriorate under LBJ.

During the 1960s, …President Johnson’s “War on Poverty” (declared in 1964) and his “Great Society” pledge of the same year ushered in a new era for America, in which Washington finally commenced in earnest the construction of a massive welfare state. … Americans could claim, and obtain, an increasing trove of economic benefits from the government simply by dint of being a citizen; they were now incontestably entitled under law to some measure of transferred public bounty, thanks to our new “entitlement state.”

And guess what? Once we started rewarding dependency, more and more people decided they were entitled.

Over the half-century between 1963 and 2013, entitlement transfers were the fastest growing source of personal income in America — expanding at twice the rate for real per capita personal income from all other sources, in fact. Relentless, exponential growth of entitlement payments recast the American family budget over the course of just two generations. In 1963, these transfers accounted for less than one out of every 15 dollars of overall personal income; by 2013, they accounted for more than one dollar out of every six. The explosive growth of entitlement outlays, of course, was accompanied by a corresponding surge in the number of Americans who would routinely apply for, and accept, such government benefits.

And how many people have been lured into government dependency? A lot, and mostly because of welfare spending rather than age-related social insurance programs such as Social Security and Medicare.

…the government did not actually begin systematically tracking the demographics of America’s “program participation” until a generation ago. Such data as are available, however, depict a sea change over the past 30 years. …By 2012, the most recent year for such figures at this writing, Census Bureau estimates indicated that more than 150 million Americans, or a little more than 49% of the population, lived in households that received at least one entitlement benefit….Between 1983 and 2012, by Census Bureau estimates, the percentage of Americans “participating” in entitlement programs jumped by nearly 20 percentage points….Less than one-fifth of that 20-percentage-point jump can be attributed to increased reliance on these two “old age” programs. Overwhelmingly, the growth in claimants of entitlement benefits has stemmed from an extraordinary rise in “means-tested” entitlements.

Ugh. I’ve previously written that getting something from the government doesn’t automatically turn somebody into a moocher or a deadbeat.

Nonetheless, it can’t be good news that 49 percent of U.S. households are on the receiving end for goodies from Uncle Sam.

Here’s a table from his article that should frighten anyone who thinks work and self-reliance are worthwhile values.

There’s lot of information, so I recommend just focusing on the numbers in parentheses in the first two columns. Those show how dependency is increasing by significant amounts for many programs.

Eberstadt highlights some of the worst numbers, most notably the huge growth in food stamps and Medicaid dependency.

…the rolls of claimants receiving food stamps (a program that was officially rebranded the Supplemental Nutrition Assistance Program, or SNAP, in 2008 because of the stigma the phrase had acquired) jumped from 19 million to 51 million. By 2012 almost one American in six lived in a home enrolled in the SNAP program. The ranks of Medicaid, the means-tested national health-care program, increased by over 65 million between 1983 and 2012, and now include over one in four Americans. …Between 1983 and 2012, the number of Americans in households receiving Federal SSI more than sextupled; by 2012, over 20 million people were counted as dependents of the program.

As bad as these numbers are, the most worrisome part of the article is when Eberstadt writes about the erosion of America’s cultural capital.

Asking for, and accepting, purportedly need-based government welfare benefits has become a fact of life for a significant and still growing minority of our population: Every decade, a higher proportion of Americans appear to be habituated to the practice. … nearly half of all children under 18 years of age received means-tested benefits (or lived in homes that did). For this rising cohort of young Americans, reliance on public, need-based entitlement programs is already the norm — here and now. It risks belaboring the obvious to observe that today’s real existing American entitlement state, and the habits — including habits of mind — that it engenders, do not coexist easily with the values and principles, or with the traditions, culture, and styles of life, subsumed under the shorthand of “American exceptionalism.”

And the erosion of cultural capital is very difficult to reverse, thanks in large part to the welfare-aided erosion of traditional families and falling levels of work among males.

The corrosive nature of mass dependence on entitlements is evident from the nature of the pathologies so closely associated with its spread. Two of the most pernicious of them are so tightly intertwined as to be inseparable: the breakdown of the pre-existing American family structure and the dramatic decrease in participation in work among working-age men. …the rise of long-term entitlement dependence — with the concomitant “mainstreaming” of inter-generational welfare dependence — self-evidently delivers a heavy blow.

Since this has been an utterly depressing analysis so far, let’s close with a vaguely optimistic look at the future.

While it may not be easy to reverse the erosion of cultural capital, it is simple (at least in theory) to reverse bad policies.

All we need to do is enact genuine entitlement reform and devolve all means-tested redistribution spending to the states.

P.S. This is some great work by AEI, which follows on the stellar analysis that organization recently produced on income inequality. Makes me almost want to forgot that AEI put together a somewhat disappointing fiscal plan.

Read Full Post »

Back in 2010, I described the “Butterfield Effect,” which is a term used to mock clueless journalists for being blind to the real story.

A former reporter for the New York Times, Fox Butterfield, became a bit of a laughingstock in the 1990s for publishing a series of articles addressing the supposed quandary of how crime rates could be falling during periods when prison populations were expanding. A number of critics sarcastically explained that crimes rates were falling because bad guys were behind bars and invented the term “Butterfield Effect” to describe the failure of leftists to put 2 + 2 together.

Here are some of my favorite examples, all of which presumably are caused by some combination of media bias and economic ignorance.

  • A newspaper article that was so blind to the Laffer Curve that it actually included a passage saying, “receipts are falling dramatically short of targets, even though taxes have increased.”
  • Another article was entitled, “Few Places to Hide as Taxes Trend Higher Worldwide,” because the reporter apparently was clueless that tax havens were attacked precisely so governments could raise tax burdens.
  • In another example of laughable Laffer Curve ignorance, the Washington Post had a story about tax revenues dropping in Detroit “despite some of the highest tax rates in the state.”
  • Likewise, another news report had a surprised tone when reporting on the fully predictable news that rich people reported more taxable income when their tax rates were lower.

Now we have a new example for our collection.

Here are some passages from a very strange economics report in the New York Times.

There are some problems that not even $10 trillion can solve. That gargantuan sum of money is what central banks around the world have spent in recent years as they have tried to stimulate their economies and fight financial crises. …But it has not been able to do away with days like Monday, when fear again coursed through global financial markets.

I’m tempted to immediately ask why the reporter assumed any problem might be solved by having governments spend $10 trillion, but let’s instead ask a more specific question. Why is there unease in financial markets?

The story actually provides the answer, but the reporter apparently isn’t aware that debt is part of the problem instead of the solution.

Stifling debt loads, for instance, continue to weigh on governments around the world. …high borrowing…by…governments…is also bogging down the globally significant economies of Brazil, Turkey, Italy and China.

So if borrowing and spending doesn’t solve anything, is an easy-money policy the right approach?

…central banks like the Federal Reserve and the European Central Bank have printed trillions of dollars and euros… Central banks can make debt less expensive by pushing down interest rates.

The story once again sort of provides the answer about the efficacy of monetary easing and artificially low interest rates.

…they cannot slash debt levels… In fact, lower interest rates can persuade some borrowers to take on more debt. “Rather than just reflecting the current weakness, low rates may in part have contributed to it by fueling costly financial booms and busts,” the Bank for International Settlements, an organization whose members are the world’s central banks, wrote in a recent analysis of the global economy.

This is remarkable. The reporter seems puzzled that deficit spending and easy money don’t help produce growth, even though the story includes information on how such policies retard growth. It must take willful blindness not to make this connection.

Indeed, the story in the New York Times originally was entitled, “Trillions Spent, but Crises like Greece’s Persist.”

Wow, what an example of upside-down analysis. A better title would have been “Crises like Greece’s Persist Because Trillions Spent.”

The reporter/editor/headline writer definitely deserve the Fox Butterfield prize.

Here’s another example from the story that reveals this intellectual inconsistency.

Debt in China has soared since the financial crisis of 2008, in part the result of government stimulus efforts. Yet the Chinese economy is growing much more slowly than it was, say, 10 years ago.

Hmmm…, maybe the Chinese economy is growing slower because of the so-called stimulus schemes.

At some point one might think people would make the connection between economic stagnation and bad policy. But journalists seem remarkably impervious to insight.

The Economist has a story that also starts with the assumption that Keynesian policies are good. It doesn’t explicitly acknowledge the downsides of debt and easy money, but it implicitly shows the shortcomings of that approach because the story focuses on how governments have less “fiscal space” to engage in another 2008-style orgy of Keynesian monetary and fiscal policy

The analysis is misguided, but the accompanying chart is useful since it shows which nations are probably most vulnerable to a fiscal crisis.

If you’re at the top of the chart, because you have oil like Norway, or because you’re semi-sensible like South Korea, Australia, and Switzerland, that’s a good sign. But if you’re a nation like Japan, Italy, Greece, and Portugal, it’s probably just a matter of time before the chickens of excessive spending come home to roost.

P.S. Related to the Fox Butterfield effect, I’ve also suggested that there should be “some sort of “Wrong Way Corrigan” Award for people like Drum who inadvertently help the cause of economic liberty.”

P.P.S. And in the same spirit, I’ve proposed an “own-goal effect” for “accidentally helping the other side.”

Read Full Post »

I detest writing about Greece. I suggested back in 2010 that the best outcome was default, which would have been the most likely outcome of a no-bailouts approach.

And for the past five years, events have confirmed – over and over again – that this was the right approach.

So you can understand how frustrating it is to comment again on this issue.

But sometimes the policy proposals from national governments and international bureaucracies are so blindly insane that I feel compelled to restate obvious points.

Consider what is happening now. The various members of the Troika (the International Monetary Fund, the European Commission, and the European Central Bank) are pressuring Greece to make reforms in exchange for additional subsidies, handouts, and bailouts.

But since the Greek government is run by lunatics, the net result of “reforms” is more and more bad policy. To be blunt, the Troika crowd is subsidizing and encouraging a process that is resulting in suicidal tax hikes in Greece.

Here are some excerpts from a story in the EU Observer.

Greece edged closer to a last-ditch agreement with her eurozone creditors on Monday (22 June), after Alexis Tsipras’ government promised to raise an extra €8 billion over the next two years. Under the proposal submitted to eurozone ministers, the Greek government would raise just under €2.7 billion in extra revenue this year, followed by a further €5.2 billion in 2016. …Tsipras’ government has proposed to raise €645 million over the next two years by increasing health contributions to 5 percent. …As expected, the remaining proposals are almost exclusively based around new tax increases, the most significant of which is a new 12 percent levy on all corporate profits over €500,000, which the Greek government expects to bring in €1.35 billion in extra revenue. …together with €100 million per year from a new TV advertisements tax. It also wants to widen the scope of a so-called ‘luxury’ tax to cover private swimming pools, planes and boats.

Here’s a look at the breakdown of the new deal, which I got off Twitter from a pro-liberty Greek citizen (i.e., an endangered species).

So the latest deal is 93 percent tax hikes and 7 percent spending cuts. And I’m sure those so-called spending cuts are probably make-believe reductions in previously planned increases instead of genuine reductions.

That’s so imbalanced that it makes President George H.W. Bush’s disastrous 1990 tax-hike deal seem good by comparison.

And just in case you wonder whether there’s no fat in the Greek budget, consider this shocking sentence from the EU Observer story.

Public spending on pensions currently amounts to 16 percent of Greece’s GDP.

To give you an idea of how crazy that number is, Social Security outlays in the United States consume “only” 4.9 percent of GDP.

And don’t forget the Greeks also squander money on a bloated bureaucracy and a preposterous regulatory regime (click here and here to see I’m actually understating the problem).

Yet rather than change any of these anti-growth policies, the government wants more and more revenue to prop up a bloated government.

The bottom line is that Greek politicians and interest groups are trying to impose an upside-down version of my Golden Rule.

But while my Rule says that the private sector should grow faster than the government, their version is that the tax burden should grow faster than the private sector.

Needless to say, that’s an approach that is guaranteed to produce economic ruin.

Productive people leave the country or operate in the underground economy. And many others decide that it’s far more comfortable to climb into the wagon of government dependency.

The situation is utterly ludicrous, as explained by George Will.

…a nation that chooses governments committed to Rumpelstiltskin economics, the belief that the straw of government largesse can be spun into the gold of national wealth? Tsipras…thinks Greek voters, by making delusional promises to themselves, obligate other European taxpayers to fund them.

But George sees a silver lining to the dark cloud of Greece’s economic illiteracy.

Greeks bearing the gift of confirmation that Margaret Thatcher was right about socialist governments: “They always run out of other people’s money.” …This protracted dispute will result in desirable carnage if Greece defaults, thereby becoming a constructively frightening example to all democracies doling out unsustainable, growth-suppressing entitlements.  …It cannot be said too often: There cannot be too many socialist smashups. The best of these punish reckless creditors whose lending enables socialists to live, for a while, off of other people’s money.

I fully agree with this final point. Just like it’s good to have positive examples (think Hong Kong, Switzerland, Texas, or Singapore), it’s also good to have bad examples (such as France, Italy, California, and Illinois).

Though it’s unclear whether politicians even care about learning any lessons.

P.S. Don’t forget that some American politicians want America to be more like Greece, as illustrated by this Henry Payne cartoon.

P.P.S. Also keep in mind that Greece is just the tip of the iceberg. Other European welfare states are making the same mistakes and will soon suffer similar fates.

Read Full Post »

I suggested earlier this year that Denmark’s ratio of private sector workers compared with government dependents produced the world’s most depressing Powerpoint slide.

It’s hard to be optimistic, after all, if a nation has an ever-growing number of people riding in the wagon (or the “party boat“) and a stagnant population of productive people.

But I don’t want to be overly pessimistic. Denmark may have a big welfare state and a punitive tax system (I’ve joked that birthers should accuse Obama of being born there rather than Kenya), but it is very pro-market in other policy areas.

Indeed, it beats the United States in 3 out of the 5 major categories in the Fraser Institute’s Economic Freedom of the World Index.

And while the United States has a higher overall score – ranked #12 compared to #19, Denmark had more overall economic freedom than the United States as recently as 2010 and 2011.

With this introduction, you’re probably guessing that I plan on saying something nice about the Danes. And you’d be right. It turns out that our Nordic friends are slowly but surely adopting my Golden Rule of spending restraint.

Look at this data on government spending from the IMF’s database. As you can see, the burden of spending has been climbing at a much slower rate in recent years, and the forecast shows even more frugality in the near future.

Perhaps most important, the modest fiscal discipline that began in 2009 is paying big dividends.

Government spending that year consumed nearly 58 percent of Denmark’s economic output. Now, the burden of spending is “only” 53 percent of GDP.

Still astronomically high, to be sure, but heading in the right direction. And if Denmark maintains the spending restraint projected by the IMF, the burden of spending will drop to less than 51 percent of GDP in 2017.

And that may actually happen. Just a few days ago, Denmark’s left-wing government was voted out of office and the new center-right government is promising tighter control of the purse strings.

I would like to think I played a very tiny role in this development. My friend Mads Lundby Hansen from Denmark’s free-market think tank (CEPOS) took part in a debate before the election and promoted the Golden Rule.

Here’s a picture from his Facebook page.

Unfortunately, even though I would like to think I played a role, Mads burst my bubble by informing me that the Golden Rule “wasn’t an issue in the election.”

But I don’t care if politicians are overtly cognizant of the Golden Rule. And I certainly don’t care if they know my name. I just want good policy.

So the moment the burden of government spending drops below 50 percent of GDP in Denmark, I’m going to declare victory in the battle.

Though I won’t declare victory in the war until we shrink government to its growth-maximizing level.

P.S. Denmark’s most famous welfare recipient is “Lazy Robert,” who was honored for his lack of contribution to society by being selected to the Moocher Hall of Fame.

P.P.S. One important lesson from Denmark is that a nation can somewhat successfully endure bad fiscal policy by being hyper-free market in other policy fields.

P.P.P.S. Another Nordic nation, Sweden, already enjoyed a big improvement in fiscal policy thanks to a multi-year period of spending restraint.

Read Full Post »

Last September, I wrote about some very disturbing 10-year projections that showed a rising burden of government spending.

Those numbers were rather depressing, but a recently released long-term forecast from the Congressional Budget Office make the 10-year numbers look benign by comparison.

The new report is overly focused on the symptom of deficits and debt rather than the underlying disease of excessive government. But if you dig into the details, you can find the numbers that really matter. Here’s some of what CBO reported about government spending in its forecast.

The long-term outlook for the federal budget has worsened dramatically over the past several years, in the wake of the 2007–2009 recession and slow recovery. …If current law remained generally unchanged…, federal spending rises from 20.5 percent of GDP this year to 25.3 percent of GDP by 2040.

And why is the burden of spending going up?

Well, here’s a chart from CBO’s slideshow presentation. I’ve added some red arrows to draw attention to the most worrisome numbers.

As you can see, entitlement programs are the big problem, especially Social Security, Medicare, Medicaid, and Obamacare.

Even CBO agrees.

…spending for Social Security and the government’s major health care programs—Medicare, Medicaid, the Children’s Health Insurance Program, and subsidies for health insurance purchased through the exchanges created by the Affordable Care Act—would rise sharply, to 14.2 percent of GDP by 2040, if current law remained generally unchanged. That percentage would be more than twice the 6.5 percent average seen over the past 50 years.

By the way, while it’s bad news that the overall burden of federal spending is expected to rise to more than 25 percent of GDP by 2040, I worry that the real number will be worse.

After all, the forecast assumes that other spending will drop by 2.2 percent of GDP between 2015 and 2040. Yet is it really realistic to think that politicians won’t increase – much less hold steady – the amount that’s being spent on non-health welfare programs and discretionary programs?

Another key takeaway from the report is that it is preposterous to argue (like Obama’s former economic adviser) that our long-run fiscal problems are caused by inadequate tax revenue.

Indeed, tax revenues are projected to rise significantly over the next 25 years.

Federal revenues would also increase relative to GDP under current law… Revenues would equal 19.4 percent of GDP by 2040, CBO projects, which would be higher than the 50-year average of 17.4 percent.

Here’s another slide from the CBO. I’ve added a red arrow to show that the increase in taxation is due to a climbing income tax burden.

These CBO numbers are grim, but they could be considered the “rosy scenario.”

The Committee for a Responsible Federal Budget (CRFB) produced their own analysis of the long-run fiscal outlook.

Like the CBO, CRFB is too fixated on deficits and debt, but their report does have some additional projections of government spending.

Here’s the key table from the CRFB report. Not only do they show the CBO numbers  for 2065 and 2090 under the baseline scenario, they also pull out CBO’s “alternative fiscal scenario” projections, which are based on more pessimistic (some would say more realistic) assumptions.

As you can see from my red arrows, federal spending will consume one-third of our economy’s output based on the “extended baseline scenario” as we get close to the end of the century. So if you add state and local spending to the mix, the overall burden of spending will be higher than it is in Greece today.

But if you really want to get depressed, look at the “alternative fiscal scenario.” The burden of federal spending soars to more than 50 percent of output. So when you add state and local government spending, the overall burden would be higher than what currently exists in any of Europe’s welfare states.

In other words, America is destined to become Greece.

Unless, of course, politicians can be convinced to follow my Golden Rule and exercise some much-needed spending restraint.

This would require genuine entitlement reform and discipline in other parts of the budget, steps that would not be popular from the perspective of Washington insiders.

Which is why we need some sort of external tool that mandates spending restraint, such as an American version of Switzerland’s Debt Brake (which you can learn more about by watching a presentation from a representative of the Swiss Embassy).

Heck, even the IMF agrees that spending caps are the only feasible solution.

Read Full Post »

Older Posts »

Follow

Get every new post delivered to your Inbox.

Join 2,816 other followers

%d bloggers like this: