Posts Tagged ‘Government Spending’

In early 2013, a reader asked me the best place to go if America suffered a Greek-style economic collapse.

I suggested Australia might be the best option, even if I would be too stubborn to take my own advice.

Perhaps because of an irrational form of patriotism, I’m fairly certain that I will always live in the United States and I will be fighting to preserve (or restore) liberty until my last breath.

But while I intend to stay in America, there is one thing that would make me very pessimistic about my country’s future.

Simply stated, if politicians ever manage to impose a value-added tax on the United States, the statists will have won a giant victory and it will be much harder to restrain big government.

But you don’t have to believe me. Folks on the left openly admit that a VAT is necessary to make America more like Europe.

Check out these excerpts from an article in Foreign Affairs by Professor Lane Kenworthy of the University of Arizona. He explicitly wants bigger government and recognizes the VAT is the only way to finance a European-sized welfare state.

…modern social democracy means a commitment to the extensive use of government…U.S. policymakers will recognize the benefits of a larger government role… Americans will need to pay more in taxes.The first and most important step would be to introduce a national consumption tax in the form of a value-added tax (VAT)… Washington…cannot realistically squeeze an additional ten percent of GDP in tax revenues solely from those at the top.

Pay special attention to the final sentence in that excerpt. Kenworthy is an honest statist. He knows that the Laffer Curve is real and that taxing the rich won’t generate the amount of revenue he wants.

That’s why the VAT is the key to financing bigger government. Heck, even the International Monetary Fund inadvertently provided very powerful evidence that a VAT is the recipe for bigger government.

Want more proof? Well, check out the recent New York Times column by John Harwood (the same guy who was criticized for being a biased moderator of CNBC’s GOP debate).

He starts by pointing out that Senators Cruz and Paul are proposing European-type value-added taxes.

Senator Ted Cruz of Texas and Senator Rand Paul of Kentucky do it most explicitly by proposing variations on “value-added tax” systems used by European countries.

But here’s the part that should grab your attention. He cites some folks on the left who admit that there’s no way to finance big expansions of the welfare state without a VAT.

Democratic economists…say…income trends…complicate their ability to raise enough revenue to finance government programs without increasing burdens on the middle class as well as the affluent. “We’ve come close to maxing out the amount of progressivity we can get from the existing tax system,” said Peter Orszag, President Obama’s first budget director. …as looming baby boomer retirements promise to swell Social Security and Medicare expenses beyond the current tax system’s ability to finance them, is in new thinking that expands the scope of possible solutions. “There’s no way we can keep the promises we’ve made to senior citizens and others without a new revenue source,” said Mr. Burman of the Tax Policy Center.

So if the statists are salivating for a VAT to make government bigger, why on earth are some otherwise sensible people pushing for this pernicious new tax?!?

Some journalists have asked this same question. Here are some passages from a Slate report.

…conservative policy thinkers…worry that it might accidentally set the stage for much, much higher taxes in the future should Democrats ever take back control of Washington. …Cruz would impose a new, roughly 19 percent “business flat tax.” This is his campaign’s creative rebranding of what the rest of the world typically calls a “value-added tax,” or VAT. And…it scares the living hell out of some conservatives.

The article notes that Cruz and Paul have decent intentions.

…for Cruz—and for Rand Paul, who…would similarly like to combine a VAT and flat income tax—the main appeal is that it could theoretically raise a lot of money to finance tax cuts elsewhere.

But good intentions don’t necessarily mean good results.

And just like you don’t give matches to a child, you don’t give a giant new tax to Washington.

How much could Cruz’s proposal net the government? The conservative-leaning Tax Foundation thinks $25.4 trillion over 10 years. … in the hands of a Democratic president, it could become a hidden money-making machine for the government. Passing a national sales tax would be hard, they say. But once it’s in place, slowly ratcheting it up to pay for additional spending would be relatively easy. “To be blunt, unless there’s a magic guarantee that principled conservatives such as Rand Paul and Ted Cruz (and their philosophical clones) would always hold the presidency, a VAT would be a very risky gamble,” Daniel Mitchell, a senior fellow at the libertarian Cato Institute, wrote recently. …The ironic thing here is that Ted Cruz, anti-tax preacher, may be doing his best to craft a tax plan that leaves Americans in the dark about the actual cost of running their government. Simultaneously, he might be making political room for Democrats to start talking about a VAT tax of their own.

By the way, this isn’t the first time that a Republican has broached the idea of a VAT.

One of the worst Presidents in American history, Richard Nixon, wanted a VAT to finance bigger government. Here are some passages from an article in the 1972 archives of Congressional Quarterly.

President Nixon…asked both the Advisory Commission on Intergovernmental Relations and his Commission on School Finance, a group he appointed in 1970, to study and report on a proposal for a value added tax. …The tax had the advantages that…it yielded relatively large amounts of revenue. …Two major reasons were apparent for the Nixon administration’s consideration of a value added tax. The first was the condition of federal finances. …Projected costs of existing and proposed programs were expected to absorb all revenues from existing taxes and other sources. This meant that no new programs could be inaugurated without new taxes to finance them or reduction of existing programs to release funds. Though initially pledged for education, revenues from an expanding value added tax might provide future funding for other programs.

My colleague, Chris Edwards, deserves credit for unearthing this disturbing bit of fiscal history. Here’s some of what he wrote about Nixon’s sinister effort.

Richard Nixon appears to have been the first U.S. leader to push for a VAT, which is not surprising given that he was perhaps the most statist GOP president of the 20th century. …Thankfully, the Nixon proposal went nowhere in Congress, the ACIR came out against it, and it was dropped. America’s economy dodged a bullet. If Nixon had been successful, the rate would probably have soared over time from an initial 3 percent to maybe 20 percent today—just as rates in Europe have risen—and that would have fueled growth in new and expanded entitlement programs. 

Amen. Chris hits the nail on the head.

It doesn’t really matter what the initial rate is. The VAT is an easy tax to raise because it’s so non-transparent.

Moreover adopting a VAT is a sure-fire way of enabling higher income tax rates because the statists will say it’s “unfair” to raise the VAT burden on lower-income and middle-income taxpayers unless there’s a concomitant increase in the income tax burden on the evil rich.

Which is exactly what happens in Europe. Look at how recent VAT hikes have been paired with higher income tax rates.

But here’s the chart that should scare any sensible person.

The bottom line is that the VAT is the Ebola Virus of big government.

P.S. You can enjoy some good VAT cartoons by clicking here, here, and here.

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Since I’m a big fan of the Laffer Curve, I’m always interested in real-world examples showing good results when governments reduce marginal tax rates on productive activity.

Heck, I’m equally interested in real-world results when governments do the wrong thing and increase tax burdens on work, saving, investment, and entrepreneurship (and, sadly, these examples are more common).

My goal, to be sure, isn’t to maximize revenue for politicians. Instead, I prefer the growth-maximizing point on the Laffer Curve.

In any event, my modest hope is that politicians will learn that higher tax rates lead to less taxable income. Whether taxable income falls by a lot or a little obviously depends on the specific circumstance. But in either case, I want policy makers to understand that there are negative economic effects.

Writing for Forbes, Jeremy Scott of Tax Notes analyzes the supply-side policies of Israel’s Benjamin Netanyahu.

Netanyahu…argued that the Laffer curve worked, and that his 2003 tax cuts had transformed Israel into a market economy and an engine of growth. …He pushed through controversial reforms… The top individual tax rate was cut from 64 percent to 44 percent, while corporate taxes were slashed from 36 percent to 18 percent. …Netanyahu credits these reforms for making Israel’s high-tech boom of the last few years possible. …tax receipts did rise after Netanyahu’s tax cuts. In fact, they were sharply higher in 2007 than in 2003, before falling for several years because of the global recession. …His tax cuts did pay for themselves. And he has transformed Israel into more of a market economy…In fact, the prime minister recently announced plans for more cuts to taxes, this time to the VAT and corporate levies.

Pretty impressive.

Though I have to say that rising revenues doesn’t necessarily mean that the tax cuts were completely self-financing. To answer that question, you have to know what would have happened in the absence of the tax cut. And since that information never will be available, all we can do is speculate.

That being said, I have no doubt there was a strong Laffer Curve response in Israel. Simply stated, dropping the top tax rate on personal income by 20 percentage points creates a much more conducive environment for investment and entrepreneurship.

And cutting the corporate tax rate in half is also a sure-fire recipe for improved investment and job creation.

I’m also impressed that there’s been some progress on the spending side of the fiscal ledger.

Netanyahu explained that the public sector had become a fat man resting on a thin man’s back. If Israel were to be successful, it would have to reverse the roles. The private sector would need to become the fat man, something that would be possible only with tax cuts and a trimming of public spending. …Government spending was capped for three years.

The article doesn’t specify the years during which spending was capped, but the IMF data shows a de facto spending freeze between 2002 and 2005. And the same data, along with OECD data, shows that the burden of government spending has dropped by about 10 percentage points of GDP since that period of spending restraint early last decade.

Here’s the big picture from the Fraser Institute’s Economic Freedom of the World. As you can see from the data on Israel, the nation moved dramatically in the right direction after 1980. And there’s also been an upward bump in recent years.

Since I’m not an expert on Israeli economic policy, I don’t know the degree to which Netanyahu deserves a lot of credit or a little credit, but it’s good to see a country actually moving in the right direction.

Let’s close by touching on two other points. First, there was one passage in the Forbes column that rubbed me the wrong way. Mr. Scott claimed that Netanyahu’s tax cuts worked and Reagan’s didn’t.

Netanyahu might have succeeded where President Reagan failed.

I think this is completely wrong. While it’s possible that the tax cuts in Israel has a bigger Laffer-Curve effect than the tax cuts in the United States, the IRS data clearly shows that Reagan’s lower tax rates led to more revenue from the rich.

Second, the U.S. phased out economic aid to Israel last decade. I suspect that step helped encourage better economic policy since Israeli policy makers knew that American taxpayers no longer would subsidize statism. Maybe, just maybe, there’s a lesson there for other nations?

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

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

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

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

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

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

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

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

But what fiscal rules actually work?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Three years ago, I shared a chart about the fiscal burden of the welfare state, calling it the picture that says a thousand word.

It’s astounding, after all, that taxpayers spend so much money on means-tested programs and get such miserable results.

Indeed, if we took all the money spent on various welfare programs and added it up, it would amount to $60,000 for every poor household.

Yet the handouts for poor people generally (but not always) are way below that level, so where does all the money go?

Well, this eye-popping flowchart (click to enlarge) from the House Ways & Means Committee is one way of answering that question. As you can see, there are dozens of programs spread across several agencies and departments.

In other words, a huge chunk of anti-poverty spending gets absorbed by a bloated, jumbled, and overlapping bureaucracy (and this doesn’t even count the various bureaucracies in each state that also administer all these welfare programs).

This is akin to a spider web of dependency. No wonder people get trapped in poverty.

Fortunately, we have a very simple solution to this mess. Just get the federal government out of the business of redistributing income. We already got very good results by reforming one welfare program in the 1990s. So let’s build on that success.

P.S. Leftists generally will oppose good reforms, both because of their ideological belief in redistribution and also because overpaid bureaucrats (who would have to find honest work if we had real change) are a major part of their coalition. But there are some honest statists who admit the current system hurts poor people.

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Yesterday, I shared several stories that exposed the festering corruption of Washington.

Today, let’s look at one issue that symbolizes the pervasive waste of Washington.

Medicare is the federal government’s one-size-fits-all health program for the elderly. Because of its poor design, it bears considerable responsibility for two massive problems.

  1. It contributes to the systemic third-party payer problem in American health care.
  2. It exacerbates America’s long-run challenge of excessive entitlement spending.

But there’s another issue. Medicare also has a very serious problem with fraud. As is so often the case with government programs, the offer of free money encourages unethical behavior.

Well, we have some good news and bad news about Medicare fraud.

As reported by the Wall Street Journal, the good news is that there is a small effort to catch fraudsters who bilk taxpayers.

Recovery audit contractors, as they are known, recouped $2.4 billion in improper payments in 2014, down from $3.7 billion in 2013 before the agency scaled back other audit activities and temporarily suspended the program… Those recoveries represent just a fraction of the total amount Medicare estimates it spends on incorrect payments. The Medicare program made $58 billion in improper payments to medical providers and health plans in 2014, according to PaymentAccuracy.gov, a federal website that tracks agencies’ estimates of waste.

But the bad news is this small program is being curtailed.

The federal Medicare agency is sharply cutting back the work of auditors that review hospital claims and seek to recoup improper payments for the government… Starting in January, the auditors will be able to review only 0.5% of the claims the agency pays to each hospital or provider every 45 days, according to an Oct. 28 letter to the contractors. That is a quarter of the prior threshold: 2% of claims. The contractors say the new directive, in what is known as a “technical direction letter,” will further limit their ability to pursue undue payments.

Readers are probably wondering why this effort is being hamstrung instead of expanded.

Well, you won’t be surprised to learn that the folks who benefit from waste want to keep the gravy train rolling.

The latest step is a sign of how the $600-billion-a-year Medicare program can struggle to effectively rein in improper payments, fraud and waste, sometimes under pressure from medical providers… The Medicare agency “is getting a lot of pressure from the provider community to scale back the [audit] program,” said Kristin Walter… Hospital representatives welcomed further restrictions on the auditors.

Sort of like burglars welcoming “further restrictions” on police officers.

Unfortunately, the interest groups benefiting from waste and fraud have allies in government.

The American Thinker has a nauseating story about the fraudulent actions of a hospital in Houston

The president of Riverside, his son, and five others were arrested on October 4 as part of a nationwide Medicare fraud sweep.  Earnest Gibson III, chief executive officer of Riverside General Hospital for 30 years, has been charged with bilking $158 million out of Medicare over the last seven years. …Friday’s arrests at Riverside came nine months after the arrest of Mohammad Khan, the hospital’s acting administrator, who pled guilty to his role in the Medicare fraud scheme…the Centers for Medicare and Medicaid Services suspended payments to Riverside.

You may be wondering why this is a nauseating story when it appears that some bad guys were nailed for screwing taxpayers.

Well, now we get to the disgusting part. A politician in Washington has been fighting to enable that bad behavior.

Sheila Jackson Lee, congresswoman for Houston’s 18th district…wrote CMS Acting Director Marilyn Tavenner requesting she reconsider the agency’s decision. …Jackson Lee…asks taxpayers who have already been bilked out of hundreds of millions of dollars to pour more money into a…hospital run by alleged crooks…while administrators and politicians rake in more dough.

Sadly, the Congresswoman’s political pressure generated results.

…a month after Jackson Lee appealed to CMS…, 70% of the hospital’s Medicare payments were restored.  CMS lifted the suspension even though federal investigators were only two months away from arresting Gibson and the others.  Jackson Lee’s intervention seems to have caused even more taxpayer monies to be directed toward a hospital brimming with corruption. …This is why Washington, D.C. is broken.  Like Jackson Lee, too many politicians think that redistributing other people’s hard-earned money into the pockets of potential felons is okay as long as they get political benefit.

By the way, it’s not just Democrats. The Daily Surge reports that some Republicans are helping providers rip off taxpayers.

…efforts to rid Medicare of waste, fraud and abuse have been stymied by the power of the hospital lobby that refuses to payback excessive payments made by Medicare and are working with friends and allies in government to ensure the improper payments are never returned to the taxpayers. …at least one GOP members, Rep. Sam Graves (R-MO) has actually introduced legislation further limiting the ability of the auditors to sniff out waste. His bill would block audits of Medicare providers unless their estimated error rate exceeded 40% of total billing. More than one third of all Medicare bills would have fraudulent before an audit could be triggered. So much for good government.

Ugh, makes me want to take a shower.

So what’s the bottom line? Unfortunately, fraud is an inherent part of government. When politicians create redistribution programs, amoral and immoral people will figure out ways to maximize their share of the loot.

In the case of Medicare, it means that providers have huge incentives to over-charge, over-diagnose, over-treat, and over-test.

After all, thanks to third-party payer, the patient doesn’t care.

That’s why I’m in favor of programs to combat fraud. And the RAC program doesn’t even cost taxpayers any money since the auditors are compensated by getting a slice of the improper payments that are recovered.

Imagine that, a policy where the incentives are to save money for taxpayers!

However, the only long-run and permanent solution is to shrink the size of government.

And that’s why it’s time to restructure Medicare. We have 50 years of evidence that the current approach doesn’t work.

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In my speeches, I routinely argue that an aging population is one of the reasons why we need genuine entitlement reform.

A modest-sized welfare state may be feasible if a country has a “population pyramid,” I explain, Welfare State Wagon Cartoonsbut it’s a recipe for fiscal chaos when changing demographics result in fewer and fewer people pulling the wagon and more and more people riding in the wagon.

And if you somehow doubt that’s what is happening in America, check out this very sobering image showing that America’s population pyramid is turning into a population cylinder.

The bottom line is that demographics and entitlements will mean a Greek fiscal future for America and other nations.

To bolster my case (particularly for folks who might be skeptical of a libertarian message), I frequently cite pessimistic long-run fiscal data from international bureaucracies such as the IMF, BIS, and OECD.

I’m not a big fan of these organizations because they routinely endorse statist policies, but I figure skeptics will be more likely to listen to me if I point out that even left-leaning international bureaucracies agree the public sector is getting too large.

And now I have more evidence to cite. A new report from the International Monetary Fund explores “The Fiscal Consequences of Shrinking Populations.” Here’s what you need to know.

Declining fertility and increasing longevity will lead to a slower-growing, older world population. …For the world, the share of the population older than age 65 could increase from 12 percent today to 38 percent by 2100. …These developments would place public finances of countries under pressure, through two channels. First, spending on age-related programs (pensions and health) would rise. Without further reforms, these outlays would increase by 9 percentage points of GDP and 11 percentage points of GDP in more and less developed countries, respectively, between now and 2100. The fiscal consequences are potentially dire…large tax increases that could stymie economic growth.

Let’s now look at a couple of charts from the study.

The one of the left shows that one-third of developed nations already have negative population growth, and that number will jump to about 60 percent by 2050. And because that means fewer workers to support more old people, the chart on the right shows how the dependency ratio will worsen over time.

So what do these demographic changes mean for fiscal policy?

Well, if you live in a sensible jurisdiction such as Hong Kong or Singapore, there’s not much impact, even though birthrates are very low, because government is small and people basically are responsible for setting aside income for their retirement years.

And if live in a semi-sensible jurisdiction such as Australia or Chile, the impact is modest because personal retirement accounts preclude Social Security-type fiscal challenges.

But if you live just about anywhere else, in places where government somehow is supposed to provide pensions and health care, the situation is very grim.

Here’s another chart from the new IMF report. If you look at developed nations, you can see a big increase in the projected burden of government spending, mostly because of rising expenditures for health care.

At this stage, I can’t resist pointing out that this is one reason why the enactment of Obamacare was a spectacularly irresponsible decision.

But let’s not get sidetracked.

Returning to the IMF report, the authors contemplate possible policy responses.

They look at increased migration, but at best that’s a beggar-thy-neighbor approach. They look at increased labor force participation, which would be a very good development, but it’s hard to see that happening when nations have redistribution policies that discourage people from being in the workforce.

And the report is very skeptical about the prospects of government-induced increases in birthrates.

Boosting birth rates could slow down population aging and gradually reduce fiscal pressures. …However, a “birth rate” solution to aging is unlikely to work for most countries. The pronatalist policies seem to have only modest effects on the number of births, although they might affect the timing of births.

So that means the problem will need to be addressed through fiscal policy.

The IMF’s proposed solutions include some misguided policies, but I was surprisingly pleased by the recognition that steps were needed to limit the growth of government.

Regarding pensions, the IMF suggested higher retirement ages, which is a second-best option, while also suggesting private retirement savings, which is the ideal solution.

Reforming public pension systems can help offset the effects of aging. Raising retirement ages is an especially attractive option… For example, raising retirement ages over 2015–2100 by an additional five years (about 7 months per decade) beyond what is already legislated would reduce pension spending by about 2 percentage points of GDP by 2100 (relative to the baseline) in both the more and less developed countries. …increasing the role of private retirement saving schemes could be helpful in offsetting the potential decline in lifetime retirement income.

But if you recall from above, the biggest problem is rising health care costs.

And kudos to the IMF for supporting market-driven competition. Even more important, though, the international bureaucracy recognizes that the key is to limit the government’s health care spending to the growth of the private economy (sort of a a healthcare version of Mitchell’s Golden Rule).

…health care reform can be effective in containing the growth of public health spending. …There is past success in improving health outcomes without raising costs through promoting some degree of competition among insurers and service providers. …Containing the growing costs of health care would help reduce long-term fiscal risks. On average, health care costs are projected to increase faster than economic growth. …Assuming policies are able to keep the growth of health care costs per capita in line with GDP per capita, health care spending will increase at a slower rate, reflecting only demographics. Under this scenario, public health care spending pressures would be greatly subdued: by 2100, health spending would be reduced by 4½ percentage points of GDP in the more developed countries.

Interestingly, of all the options examined by the IMF, capping the growth of health care spending had the biggest positive impact on long-run government spending.

So what lessons can we learn?

Most important, the IMF study underscores the importance of the Medicaid reform and Medicare reform proposals that have been included in recent budgets on Capitol Hill.

In addition to making necessary structural changes, both of these reforms cap the annual growth of health care spending, which is precisely what the IMF report says will generate the largest savings.

So we’re actually in a very unusual situation. Some lawmakers want to do the right thing for the right reason at the right time.

But not all of them. Some politicians, either because of malice or ignorance, think we should do nothing, even though that will mean a very unpleasant future.

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During the 1980 presidential campaign, Ronald Reagan famously said “there you go again” when responding to one of Jimmy Carter’s attacks.

Well, the Gipper’s ghost is probably looking down from Heaven at the new budget deal between congressional leaders and the Obama Administration and saying “there they go again.”

That’s because we basically have a repeat of the distasteful 2013 budget deal.

The new agreement, like the 2013 deal, busts the budget caps. In this case, the politicians in DC have approved $50 billion of additional spending for the 2016 fiscal year (which started on October 1) and $30 billion of additional spending in the 2017 fiscal year (starting October 1, 2016).

Which means that the President gets to further undo his biggest fiscal defeat.

And what do Republicans get in exchange?

Many of them want higher defense spending, of course, and some of them doubtlessly are happy to have more domestic spending as well. Those politicians are presumably happy, at least behind closed doors.

So let’s rephrase the question: What do advocates of fiscal restraint get in exchange?

Well, if you peruse the agreement, it’s apparent they don’t get anything. Sure, there are some promises of future restraint. But if the 2013 deal and the current agreement are any indication, those promises don’t mean much.

The deal has a handful of back-door revenue increases, including an assumption that the IRS will be more aggressive in squeezing money out of taxpayers. And there are some budget gimmicks, along with some tinkering with entitlement programs, especially the fraud-riddled disability program, that ostensibly will lead to some modest savings.

The net result is that we have a pact that leads to guaranteed spending increases over the nest few years, combined with some nickel-and-dime proposals that will probably offset each other in the future.

So the bad news – assuming the goal is enforceable spending restraint – is that policy has moved in the wrong direction.

In other words, I was right to worry that Republicans would fumble away a guaranteed victory.

And this deal probably sets the stage for another bad deal two years in the future since more spending in 2016 and 2017 will make it harder to meet the spending caps for 2018 and beyond.

Now for the good news…

Ooops, there isn’t any good news.

About the only positive thing to say is that this new agreement is not a huge defeat. There will still be budget caps, which is better than no spending caps.

And the new spending, while wasteful and counterproductive, is relatively small in the context of an $18 trillion economy.

Moreover, the deal only partially unwinds the fiscal discipline that already has been achieved thanks to the spending caps.

Last but not least, nothing in this deal precludes a better and more comprehensive spending cap, perhaps modeled after Switzerland’s very successful debt brake, once Obama is out of the White House.

P.S. This new deal also increases the debt limit. Some view this as a defeat, but it more properly should be viewed as a missed opportunity to get some much-needed reforms.

That being said, I can’t resist commenting on the deliberately dishonest scare tactics from our statist friends. They routinely claim that the United States government would have to default on its debt and cause a global crisis unless there is approval for more borrowing.

For instance, exuding an air of faux hysteria, one writer for the Washington Post asserted that, “Failure to raise the debt ceiling would unleash hell on the U.S. economy.” Another Washington Post columnist fanned the flames of fake despair, writing, “The chaos…is about to have some very serious effects on the entire country.” And a third Washington Post reporter falsely fretted that not raising the debt limit by November 3rd, “could plunge the United States into default, an outcome that…could lead to economic catastrophe.”

Oh, please, we’ve heard this song and dance before. But it’s utter nonsense.

Here’s some of what I said as part of my testimony to the Joint Economic Committee in 2013.

…there is zero chance of default. Why? Because…annual interest payments are about $230 billion and annual tax collections are approaching $3 trillion. …there’s no risk of default – unless the Obama Administration deliberately wants that to happen. But that’s simply not a realistic possibility.

But some folks may wonder whether my analysis is accurate. After all, maybe I’m some sort of nihilistic libertarian who fantasizes about laying waste to Washington.

And other than the nihilistic part, that’s actually a good description of my long-run goals.

But that doesn’t mean I’m wrong. So for backup, let’s look at some identical analysis from an ultra-establishment source, as reported in The Hill.

Moody’s Investors Service announced Monday that, despite dire warnings from the Treasury Department, the government would find a way to pay money owed on its debt, regardless of whether lawmakers agree to raise the $18.1 trillion borrowing cap. …”Even if the debt limit is not raised, …the government will order its payment priorities to allow the Treasury to continue servicing its debt obligations,” says Moody’s Senior Vice President Steven Hess.

Gee, maybe all the mouth-breathing partisans at the Washington Post are the ones who are wrong. Along with the partisan and status-quo voices from the political establishment.

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