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Posts Tagged ‘Government Spending’

I’m glad that Boris Johnson is Prime Minister for the simple reason that “Brexit” is far and away the most important issue for the United Kingdom.

Whether it’s called a Clean Brexit or Hard Brexit, leaving the European Union is vital. It means escaping the transfer union that inevitably will be imposed as more EU nations suffer Greek-style fiscal chaos. And a real Brexit gives the UK leeway to adopt market-friendly policies that currently are impossible under the dirigiste rules imposed by Brussels.

But just because Johnson appears to be good on Brexit, this doesn’t mean he deserves good grades in other areas. For instance, the UK-based Times reports that the Prime Minister is on a spending spree.

Boris Johnson is planning to spend as much on public services as Jeremy Corbyn promised at the last election and cannot afford the tax cuts he pledged in the Tory leadership campaign, a think tank has warned. The prime minister’s proposed spending spree would mean Sajid Javid, the chancellor, overshooting the government’s borrowing limit by £5 billion in 2020-21, according to the Institute for Fiscal Studies, which said that the government was “adrift without any fiscal anchor”.

Ugh, sounds like he may be the British version of Trump. Or Bush, or Nixon.

In a column for CapX, Ben Ramanauskas warns that more spending is bad policy.

…with Sajid Javid making a raft of spending announcements, it would seem as though the age of austerity really is over. …So it would be useful to look back over the past decade and answer a few questions. Does austerity work? …As explained in the excellent new book Austerity: When it Works and When it Doesn’t  by Alberto Alesina, Carlo Favero, and Francesco Giavazzi, it depends what you mean by austerity. …The authors analyse thousands of fiscal measures adopted by sixteen advanced economies since the late 1970s, and assess the relative effectiveness of tax increases and spending cuts at reducing debt. They show that…spending cuts are much more successful than tax increases at reducing the growth of debt, and can sometimes even result in output gains, such as in the case of expansionary austerity. …Which brings us onto our next question: did the UK actually experience austerity? …the government’s programme was a mild form of austerity. …Then there is the politics of it all. It’s important to remember that fiscal conservatism can be popular with the electorate and it worked well in 2015 and to a lesser extent in 2010. The Conservatives should not expect to win the next election by promising massive increases in public spending.

Moreover, good spending policy facilitates better tax policy.

Or, in this case, the issue is that bad spending policy makes good tax policy far more difficult.

And that isn’t good news since the U.K. needs to improve its tax system, as John Ashmore explains in another CapX article.

…the Tax Foundation…released its annual International Tax Competitiveness Index. The UK came 25th out of 36 major industrialised nations. For a country that aims to have one of the world’s most dynamic economies, that simply will not do. …Conservatives…should produce a comprehensive plan for a simpler, unashamedly pro-growth tax system. And it should be steeped in a political narrative about freedom… Rates are important, but so is overall structure and efficiency. …a more generous set of allowances for investment, coupled with a reform of business rates would be a great place to start. We know the UK has a productivity problem, so it seems perverse that we actively discourages investment. …As for simplicity, …it’s possible to drastically reduce the number of taxes paid by small businesses without having any effect on revenue. Accountants PwC estimate it takes 105 hours for the average UK business to file their taxes… Another area the UK falls down is property taxes, of which Stamp Duty Land Tax is the most egregious example. It’s hard to find anyone who thinks charging a tax on people moving house is a good idea…in the longer term there’s no substitute for good, old-fashioned economic growth – creating the world’s most competitive tax system would be a fine way to help deliver it.

To elaborate, a “more generous set of allowances for investment” is the British way of saying that the tax code should shift from depreciation to expensing, which is very good for growth.

And simplicity is also a good goal (we could use some of that on this side of the Atlantic).

The problem, of course, is that good reforms won’t be easy to achieve if there’s no plan to limit the burden of government spending.

It’s too early to know if Boris Johnson is genuinely weak on fiscal issues. Indeed, friends in the UK have tried to put my mind at ease by asserting that he’s simply throwing around money to facilitate Brexit.

Given the importance of that issue, even I’m willing to forgive a bit of profligacy if that’s the price of escaping the European Union.

But, if that’s the case, Johnson needs to get serious as soon as Brexit is delivered.

Let’s close by looking at recent fiscal history in the UK. Here’s a chart, based on numbers from the IMF, showing the burden of spending relative to economic output.

Margaret Thatcher did a good job, unsurprisingly.

And it’s not a shock to see that Tony Blair and Gordon Brown frittered away that progress.

But what is surprising is to see how David Cameron was very prudent.

Indeed, if you compared spending growth during the Blair-Brown era with spending growth in the Cameron-May era, you can see a huge difference.

Cameron may not have been very good on tax issues, but he definitely complied with fiscal policy’s golden rule for spending.

Let’s hope Boris Johnson is similarly prudent with other people’s money.

P.S. If you want some Brexit-themed humor, click here and here.

P.P.S. If you want some unintentional Brexit-themed humor, check out the IMF’s laughably biased and inaccurate analysis.

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The International Monetary Fund is infamous for its advocacy of higher taxes.

Heck, it’s not merely advocacy. The international bureaucracy uses bailout money as a tool to coerce politicians into approving higher tax burdens.

This is so reprehensible that I’ve referred to the IMF as the “Dumpster Fire of the Global Economy” and called it the “Doctor Kevorkian of Global Economic Policy.”

The bureaucrats also are quite inventive when it comes to rationalizing tax increases.

For instance, a new report from the IMF suggests that a minimum tax level is critical for achieving rapid growth and development.

Is there a minimum tax to GDP ratio associated with a significant acceleration in the process of growth and development? We give an empirical answer to this question by investigating the existence of a tipping point in tax-to-GDP levels. We use two separate databases: a novel contemporary database covering 139 countries from 1965 to 2011 and a historical database for 30 advanced economies from1800 to 1980. We find that the answer to the question is yes. Estimated tipping points are similar at about 12¾ percent of GDP. For the contemporary dataset we find that a country just above the threshold will have GDP per capita 7.5 percent larger, after10 years. The effect is tightly estimated and economically large.

Here’s a depiction of the IMF’s perspective.

At some level, there is a correlation between prosperity and taxation. For instance, some poor nations in the developing world are so corrupt and incompetent that they are incapable of collecting much tax revenue.

But that doesn’t mean higher taxes would somehow make those nations richer. After all, correlation does not imply causation (i.e., crowing roosters don’t cause the sun to rise).

Professor Bryan Caplan of George Mason University points out the methodological shortcomings is the “state capacity” theory.

In recent years, many social scientists…have fallen in love with the concept of “state capacity.” …To my mind, this is scarcely better than saying, “Good government is good; bad government is bad.” Matters would be different, admittedly, if the state capacity literature showed that good government is the crucial ingredient required for success.  But researchers rarely even try to show this.  Instead, they look at various societies and say, “Look at how well-run the governments in successful countries are – and look at how poorly-run the governments in unsuccessful countries are.”  The casual causal insinuation is palpable. …why not just ditch your premature focus on “state capacity” in favor of an open-minded exploration of social capacity?  Good government might be the crucial ingredient for success.  But maybe good government is a byproduct of wealth, trust, intelligence, freedom, or some cocktail thereof. …While good social outcomes all tend to go together, the state capacity literature fails to show that government is the crucial factor that makes all the others possible.

Two other scholars from George Mason University, Professor Peter Boettke and Rosolino Candela, address the issue in an academic study.

This paper reconceptualizes and unbundles the relationship between public predation, state capacity and economic development. …we argue that to the extent that a causal relationship exists between state capacity and economic development, the relationship is proximate rather than fundamental. State capacity emerges from an institutional context in which the state is constrained from preying on its citizenry in violation of predefined rules limiting its discretion. When political constraints are not established to limit political discretion, then state capacity will degenerate from a means of delivering economic development to a means of predation.

They cite Mancur Olson’s work on “political bandits” to understand the limited conditions that would be necessary for there to be a causal relationship between taxes and growth.

Olson’s famous distinction between a “stationary bandit” and a “roving bandit” provides an illustration of our point regarding the emphasis placed on initial conditions. Olson provides a powerful argument for understanding how the self-interest of a revenue-maximizing ruler will align with the political conditions necessary for wealth maximization, not only for himself, but also for his subjects. In a world of roving banditry, a political ruler will have little incentive to invest in fiscal technologies required for regular taxation and judicial technologies that secure property rights and enforce contracts. Only when a bandit has settled down will he or she be incentivized to invest in the provision of public goods that encourage individuals to accumulate wealth, rather than concealing it from predators. However, by Olson’s own admission, his stationary bandit argument is a necessary, though not a sufficient condition for taming public predation.

Their conclusion is that constitutional constants on government are needed to ensure taxes aren’t a tool for additional predation.

In unbundling the relationship between state capacity and economic development, we have distinguished between the protective state, the productive state and the predatory state. To the extent that expansions in state capacity are consistent with economic development, this is because a credible commitment to a set of rules that constrain political discretion have been established. …Fundamentally, economic development requires a protective state from which state capacity emerges as a byproduct. If, however, political constraints are not established to limit political discretion, then state capacity will degenerate from a means of delivering economic development to a means of predation.

Professor Mark Koyama of George Mason University also has written wisely on this topic.

I’m not an academic, so I have a much simpler way of thinking about this issue.

When the IMF (and other bureaucracies) assert that higher taxes are good for growth, I explain that it’s all based on fairy dust or magic beans.

P.S. In a perverse way, I admire the IMF. The bureaucracy’s rationale for existence (dealing with fixed exchange rates) disappeared decades ago, yet the IMF managed to reinvent itself and is now bigger and more bloated than ever.

P.P.S. You won’t be surprised to learn that IMF bureaucrats receive tax-free salaries while pushing for higher taxes on everyone else.

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The Congressional Budget Office (CBO) just released its new 10-year forecast. Unsurprisingly, it shows that Trump’s reckless spending policy is accelerating America’s descent to Greek-style fiscal profligacy.

Most people are focusing on the estimates of additional red ink, but I point out in this interview that the real problem is spending.

Some folks also are highlighting the fact that CBO isn’t projecting a recession, but I don’t think that’s important for the simple fact that all economists are bad at making short-run economic predictions.

That being said, I think CBO’s long-run fiscal forecasts are worthy of close attention (unfortunately, I didn’t state this very clearly in the interview).

And what worries me is that the numbers show that government spending will be consuming an ever-larger share of the nation’s economic output.

However, it’s not time to give up.

Modest spending restraint (i.e., obeying the Golden Rule of fiscal policy) generates very good results in a remarkably short period of time.

What matters most is reducing the burden of spending. But when you address the problem of government spending (as the chart shows), you also solve the symptom of red ink.

The challenge, of course, is convincing politicians that spending should be frozen. Or, at the very least, that it should only grow at a modest pace.

We have enjoyed periods of spending restraint, including a five-year spending freeze under Obama, as well as some fiscal discipline under both Reagan and Clinton.

But if we want long-run spending discipline, we need a comprehensive spending cap, sort of like the very successful systems in Hong Kong and Switzerland.

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Spending caps are the most effective way of fulfilling my Golden Rule for fiscal policy.

And we have good evidence for this approach, as I explain in this FreedomWorks discussion.

I also discuss tax competition in the interview, as well as other topics. You can watch the entire discussion by clicking here.

But I’m sharing the part about spending caps because it fits perfectly with some new research from Veronique de Rugy and Jack Salmon of the Mercatus Center.

They point out that America faces a grim fiscal future, but suggest that fiscal rules may be part of the solution.

…the federal budget process as it exists today has proven inadequate…it is a great way to enable politicians to do what they want to do (cater to interest groups) while avoiding what they don’t want to do (living within their means). …The negative consequence emerging from this chaos and the resulting failure to follow budget rules is an unremitting expansion of the size and scope of government… With countries around the world experiencing growing debt-to-GDP ratios, resultant stagnation in economic growth, and, in extreme cases, default on debts, academics have been paying an increasing amount of attention to the potential of rules toward restraining unsustainable deficit spending. …The good news is that the evidence suggests that these fiscal rules are broadly effective at restraining deficit spending. …The bad news is that not all fiscal rules are effective in restraining government profligacy and curtailing debt growth.

The authors are right. Some fiscal rules don’t work very well.

As I stated in the interview, balanced budget requirements tend to be ineffective.

Spending caps, by contrast, have a decent track record.

The Mercatus study looks at Hong Kong.

Hong Kong…might actually represent the gold standard of good fiscal policy. …Hong Kong’s Financial Secretary, Mr. John Tsang, explained, “Our commitment to small government demands strong fiscal discipline. . . . It is my responsibility to keep expenditure growth commensurate with growth in our GDP.” …in Hong Kong it’s actually a constitutional requirement: Article 107 requires that the government should strive to achieve a fiscal balance, avoid deficit, and more importantly, make sure government spending doesn’t grow faster than the growth of the economy. …Hong Kong’s spending-to-GDP ratio has fluctuated between 14 and 20 percent since the 1990s, its debt as a share of GDP is zero, social welfare spending remains steady at less than 3 percent of GDP.

Amen.

I’ve also praised Hong Kong’s fiscal policy.

Now let’s look at what the authors wrote about Switzerland.

Swiss politicians are not allowed to increase spending faster than average revenue growth over a multiyear period (as calculated by the Swiss Federal Department of Finance), which confines spending growth to a rate no higher than the rate of inflation plus population growth. The Swiss debt brake rule is significant in that it appeals to economists and policymakers on both sides of the aisle. Advocates for fiscal restraint support this rule because it is effectively a spending cap, while social democrats support the rule as it allows for deficit spending during recessionary periods. …There’s no arguing with the results: Annual spending growth fell from an average of 4.3 percent to 2.5 percent since the rule was implemented. Also, in 10 out of the past 14 years, Switzerland has had budget surpluses, while deficits have remained rare and small… At the same time, the Swiss debt-to-GDP ratio has fallen from almost 60 percent in 2003 to around 42 percent in 2017.

Once again, I say amen.

Switzerland’s spending cap is a big success.

Here’s Figure 1 from the study, which shows a big drop in Swiss government debt. I’ve augmented the chart with OECD data to focus on something even more important – which is that the burden of spending (which started very low by European standards) has declined since the debt brake was implemented.

Last but not least, let’s look at the Danish example.

In 2014 Denmark implemented The Budget Act to ensure more efficient management of public expenditures. The act is aimed at ensuring a balance or surplus on the general government balance sheet, as well as appropriate expenditure management at all levels of government. In practice, the rule sets a limit of 0.5 percent of GDP on the structural budget deficit. Policymakers decided that managing fiscal policy on the basis of a balanced structural budget would lead to an appropriate fiscal position in the long term. They also designed the system to take discretion out of their own hands by making the cuts automatic. In addition to structural deficit rules, the Budget Act introduces four-year rolling expenditure ceilings. These ceilings set legally binding limits for spending at all levels of government and for each program. If one program spends under its cap, any money not spent cannot be reallocated to another program.

I guess this is time for a triple-amen.

Here’s Figure 2 from the study, which I’ve also augmented to highlight the most important success of Denmark’s policy of spending restraint.

The economic case for spending caps is ironclad.

The problem is that it’s an uphill climb from a political perspective.

Politicians prefer legislative spending caps. After all (as we saw in 2013, 2015, 2018, and this year), those can be evaded with a simple majority, so long as there’s a profligate president who approves higher spending levels.

And those caps have never applied to entitlements, which are the part of the budget that eventually will bankrupt the nation.

So why would public choice-motivated lawmakers actually allow a serious and comprehensive spending cap to become part of the Constitution?

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The invaluable John Stossel has an entertaining and informative video that estimates how many handouts are being promised by Joe Biden, Pete Buttigieg, Kamala Harris, Bernie Sanders, Donald Trump, and Elizabeth Warren.

Wow, how depressing.

When I wrote about about the “dangerous seduction of free” a month ago, I apparently underestimated the problem. We have politicians completely divorced from fiscal reality (the “Green New Deal” being a frightening example).

But the key question is whether the American people are actually getting seduced.

It’s not looking good on the Democratic side. Joe Biden is presumably part of the Democratic Party’s anti-socialist wing, which is encouraging. But all the other leading candidates are hard-core big spenders.

And it’s not looking good on the Republican side, either. Trump may not have crazy proposals for new spending, but in practice he’s been profligate. Indeed, I’m guessing he will wind up with a worse record on spending than Obama.

The bottom line is that the public sector already is too large in the United States. Yet we have politicians who want it to become an even bigger burden. In some cases, much bigger.

That has very serious economic consequences. Especially if it coincides with an erosion of societal capital.

For instance, I think some European countries have already reached a “tipping point” because of a dependency mindset.

Historically, the United States has been insulated from that problem because of a belief in personal responsibility. But ever-growing levels of dependency suggest that this advantage is dissipating.

I’ll close with a final observation about the candidates – Sanders, Warren, and Harris – who were identified in the video as advocating trillions of dollars of new spending.

How do they plan to finance this orgy?

  • Sanders has a plethora of new taxes, including class-warfare tax increase and middle-class tax increases, so he definitely wants to put our money where his mouth is. In terms of fiscal policy, think of him as Sweden.
  • Warren supports a bunch of new taxes, mostly on the rich, most notably a huge wealth tax, which surely would backfire but theoretically is a big source of money. In terms of fiscal policy, think of her as France.
  • Harris has some class-warfare tax hikes but is mostly promising a free lunch since there’s a huge mismatch between what she wants to spend and the new taxes she has embraced. In terms of fiscal policy, think of her as Greece.

For what it’s worth, I’m waiting for the Hong Kong candidate.

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I point out in this interview that the 2011 Budget Control Act (BCA) was the only big victory for taxpayers this century. It imposed spending caps on discretionary spending and led to a sequester in early 2013, which was Barack Obama’s biggest defeat.

The bad news is that the BCA is merely legislation. That means politicians can conspire to bust the spending caps – which is what they did at the end of 2013, as well as in 2015, 2018, and again this year.

This most recent deal may be the worst of the worst. The Committee for a Responsible Federal Budget (CRFB) shows that it brings discretionary spending almost up to the level we reached during Obama’s pork-filled stimulus.

By the way, the chart also shows that Bush was a big spender and that we actually had a bit of spending restraint after the Tea Party-themed 2010 mid-term elections.

But let’s focus on today.

Here’s one more chart from CRFB. It shows that Trump is doing a good job of impersonating Obama with huge, across-the-board spending increases.

These charts show why I’m so depressed. And let’s not forget that they are only measures of discretionary spending. The outlook for entitlement spending is even worse!

In other words, we’re on the path to fiscal crisis. Is there a solution?

Yes, we could adopt constitutional restraints on the growth of government. I mentioned Colorado’s Taxpayer Bill of Rights in the interview, as well as the “debt brake” in Switzerland.

But there’s zero chance that today’s crop of politicians will enact this kind of sensible reform. We’ll probably have to wait until a crisis occurs. At which point it may be too late.

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Way back in early 2016, I asked whether Donald Trump believed in smaller government.

A few months later, I concluded that the answer was no. Trump – like Bush and Nixon – was a big-government Republican.

I wish that I was wrong.

But if you look at the budget deal he approved last year, there’s no alternative explanation. Especially since there was an approach that would have guaranteed a victory for taxpayers.

Now it appears that he is on the verge of meekly surrendering to another big expansion of the federal budget.

The Washington Post has a story on the new deal to increase spending.

…the final details of a sweeping budget and debt deal are unlikely to include many — if any — actual spending cuts… The agreement appeared likely to mark a retreat for White House officials who had demanded major spending cuts in exchange for a new budget deal. …instead of the $150 billion in new spending cuts recently demanded by White House acting budget director Russell Vought, the agreement would include a significantly lower amount of reductions. And those reductions aren’t expected to represent actual spending cuts, in part because most would take place in future years and likely be reversed by Congress at a later date. …In practical terms, the budget agreement would increase spending by tens of billions of dollars in the next two years, a stark reversal from the White House’s budget request several months ago… Agreeing on new spending levels also avoids onerous budget caps that would otherwise snap into place automatically under an Obama-era deal, and indiscriminately slash $126 billion from domestic and Pentagon budgets.

The establishment-oriented Committee for a Responsible Federal Budget (CRFB) is aghast at the grotesque profligacy of the purported agreement.

…this agreement is a total abdication of fiscal responsibility by Congress and the President. It may end up being the worst budget agreement in our nation’s history, proposed at a time when our fiscal conditions are already precarious. If this deal passes, President Trump will have increased discretionary spending by as much as 22 percent over his first term… There was a time when Republicans insisted on a dollar of spending cuts for every dollar increase in the debt limit. It’s hard to believe they are now considering the opposite – attaching $2 trillion of spending increases to a similar-sized debt limit hike.

I sometimes differ with the folks at the CRFB because they’re too fixated on debt rather than the size of government.

But in this case, we both find this rumored deal to be utterly irresponsible.

From a liberty-minded perspective, the Wall Street Journal opines about the spendthrift agreement.

House Speaker Nancy Pelosi and Treasury Secretary Steve Mnuchin are negotiating another spending blowout as part of a two-year budget deal, and let’s hope the talks break down. The price could be another $2 trillion in deficit spending… The Budget Control Act of 2011 puts caps on spending that both parties have to agree to lift. In 2018 Congress passed a two-year budget deal that blew out domestic spending by more than $130 billion in exchange for a buildup in defense. The bipartisan spending party is hoping to repeat the exercise for fiscal 2020 and 2021… After the last two-year deal Mr. Trump vowed never to sign another one, but here he is again. …The GOP may…underestimate the political cost of campaigning on another spending deal that increases the size of government. It will be harder to run against the spending plans of Elizabeth Warren or Kamala Harris with Mr. Trump’s first-term spending record.

I’ll close with a chart I prepared based on the numbers for domestic discretionary spending from the Mid-Session Review, as well as Table 8.1 from the Historical Tables, both from the Office of Management and Budget.

The numbers show that we had more fiscal restraint under Obama (blue line) than Trump (orange line). And Trump’s numbers will now be even worse with the new deal.

I added the Excel-generated trendline to show what would have happened if Obama-era policies were maintained.

But since that produced an unrealistic assessment, I also showed (green line) what spending would have looked like if politicians had obeyed commitments from the 2011 Budget Control Act (BCA).

Some of these numbers are back-of-the-envelope calculations, but the bottom line is clear. Trump is worse than Obama on spending.

And that means big tax increases inevitably will be the result.

P.S. When I recently issued a report card for Trump’s economic policy, I gave him a “B-” because I decided his good tax policy outweighed his bad spending policy. If this deal gets finalized, he drops to a “C-” because of the big expansion in the burden of spending.

P.P.S. Trump also is weak on entitlement spending, which is the biggest part of the federal spending burden.

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San Francisco used to be famous for cable cars.

Now it’s getting well known for its “poop patrol” and maps that warn people about the ubiquitous presence of human excrement.

Why are people defecating on city sidewalks? Because there’s a major problem with government-created homelessness thanks to rent control and zoning restrictions.

And homelessness gives us our topic for today because we have an astounding example of government waste.

More specifically, a story from the San Francisco Chronicle nicely summarizes the efficiency and competence of the public sector.

An experiment to put a homeless shelter in a San Francisco public school gym has so far been a costly failure, …costing taxpayers about $700 for each person who spends the night. …only five families have used the facility at 23rd and Valencia streets in the Mission, with an average occupancy of less than two people per night… The facility is completely empty several nights each month, Kositsky said, although shelter workers are on-site seven nights a week and through holidays, whether anyone shows up or not.

I’ve been to San Francisco many times. Hotels are not cheap.

But I’ve never had to pay anywhere close to $700 per night.

Though maybe this San Francisco program is a bargain since it costs the state $1.3 million per year to house a homeless person.

So why did the city create this boondoggle? For the same reason that many programs are created. Politicians and bureaucrats exaggerated about a problem.

Supervisor Hillary Ronen and the school’s administrators…advocated for the shelter, saying there were dozens of families facing homelessness at Buena Vista Horace Mann who needed someplace to sleep. The principal at the time, Richard Zapien, said he had identified 60 families in unstable housing.

But here’s a passage that captures the real story.

This program was created to funnel money to a non-profit group and I wouldn’t be surprised to learn that officers of this group are supporters (campaign cash, get-out-the-vote, etc) of the politicians who created the program.

The city has been paying the nonprofit Dolores Street Community Services $40,000 per month to manage the shelter, and if it were to be successful, would spend up to $900,000 per year to serve up to 20 families at a time with all-night staffing, food and support services to help them find permanent housing.

In other words, we have another example of how government is a racket.

No matter how flawed and foolish a program may be, never forget that it’s putting unearned money in the pockets of some group of people. And that group of people know how to play the game, since they then recycle some of the loot back to the politicians.

Politicians don’t care if the money is wasted. They don’t care if there’s rampant fraud.

They’re simply buying votes. With our money.

P.S. There is a sure-fire way of reducing this kind of corrupt behavior, but don’t hold your breath expecting it to happen.

P.P.S. Though you may want to hold your breath if you visit the city.

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The Congressional Budget Office just released its new long-run fiscal forecast.

Most observers immediately looked at the estimates for deficits and debt. Those numbers are important, especially since America has an aging population, but they should be viewed as secondary.

What really matters are the trends for both taxes and spending.

Here are the three things that you need to know.

First, America’s tax burden is increasing. Immediately below are two charts. The first one shows that revenues will consume an addition three percentage points of GDP over the next three decades. As I’ve repeatedly pointed out, our long-run problem is not caused by inadequate revenue.

The second of the two charts shows that most of the increase is due to “real bracket creep,” which is what happens when people earn more income and wind up having to pay higher tax rates.

So even if Congress extends the “Cadillac tax” on health premiums and extends all the temporary provisions of the 2017 Tax Act, the aggregate tax burden will increase.

Second, the spending burden is growing even faster than the tax burden.

And if you look closely at the top section of Figure 1-7, you’ll see that the big problems are the entitlements for health care (i.e., Medicare, Medicaid, and Obamacare).

By the way, the lower section of Figure 1-7 shows that corporate tax revenues are projected to average about 1.3 percent of GDP, which is not that much lower than what CBO projected (about 1.7 percent of GDP) before the rate was reduced by 40 percent.

Interesting.

Third, we have our most important chart.

It shows that the United States is on a very bad trajectory because the burden of government spending is growing faster than the private economy.

In other words, Washington is violating my Golden Rule.

And this leads to all sorts of negative consequences.

  • Government consumes a greater share of the economy over time.
  • Politicians will want to respond by raising taxes.
  • Politicians will allow red ink to increase.

The key thing to understand is that more taxes and more debt are the natural and inevitable symptoms of the underlying disease of too much spending.

We know the solution, and we have real world evidence that it works (especially when part of a nation’s constitution), but don’t hold your breath waiting for Washington to do the right thing.

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I wrote yesterday about the leadership race for the Conservative Party in the United Kingdom.

The most important goal is to find a leader who will deliver a “clean Brexit,” but I also pointed out that it would be very desirable to select a Prime Minister who will support much-needed supply-side reforms to make the U.K. more attractive for jobs and investment.

Today, let’s turn our attention to the spending side of the fiscal ledger.

The accompanying table of data (from page 65 of HM Treasury’s Statistical Analyses of Public Expenditure) shows annual spending in nominal and inflation-adjusted terms, as well as the burden of spending as a share of economic output.

If you look at trends, you’ll notice a bit of progress in the 1980s under Margaret Thatcher and then some backsliding last decade when Tony Blair and Gordon Brown were in charge.

But the most surprising results can be found this decade.

Starting in 2011, there’s been some impressive spending restraint. Nominal outlays have increased by an average of 1.7 percent annually.

And since the private sector has grown at a faster pace, that means the overall burden of government spending – measured as a share of gross domestic product – has declined.

I’ve never thought of David Cameron (Prime Minister from 2010-2016) or Theresa May (Prime Minister since 2016) as fiscal conservatives, but they deserve credit for keeping spending under control.

(Too bad we can’t say the same thing about Donald Trump!)

In any event, the new leader of the Conservative Party should maintain this approach. Or, better yet, go one step further by institutionalizing some sort of Swiss-style spending cap.

There’s also a lesson for the rest of us.

What’s happened in the United Kingdom is additional confirmation that my Golden Rule is the right approach to fiscal policy.

Nations with multi-year periods of spending restraint always get good fiscal results.

We even had such an experience in the United States (back when Republicans pretended to care about spending).

Let’s close with this chart, based on IMF data, showing what’s happened this decade in the United Kingdom.

P.S. Unsurprisingly, Paul Krugman got everything backwards when he examined U.K. fiscal policy earlier this decade.

P.P.S. While they did a surprisingly good job on spending restraint, that doesn’t change the fact that Cameron was bad on tax policy and May was a failure on Brexit.

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The Conservative Party in the United Kingdom is in the process of selecting a new leader to replace the disastrous Theresa May as Prime Minister.

The most important goal for the Tories is to find someone who will deliver a clean Brexit and thereby extricate the country from a decrepit and declining European Union.

But once Brexit does happen, adopting pro-growth policies will be very important – especially if the European Union petulantly tries to make the transition painful by rejecting a free trade agreement.

The good news is that the United Kingdom is ranked #9 for overall economic liberty according to the latest edition of Economic Freedom of the World, so it has a strong foundation for competitiveness.

The bad news is that the U.K. is only ranked #120 for fiscal policy.

Since that’s the weak spot, let’s see what can be done to move in the right direction.

Let’s look at the tax side of the fiscal equation. According to the Tax Foundation’s International Tax Competitiveness Index, the U.K. is in the bottom half (almost in the bottom third). And I’ve circled the country’s dismal ranking for individual taxes.

By the way, I don’t think this Index is a perfect measure. As I pointed out back in 2016, it needs to include a size-of-government variable.

Nonetheless, it’s a great place to start.

Now let’s consider the fiscal plans of various candidates for Tory leader.

The U.K.-based Mirror has a helpful summary.

Frontrunner Boris Johnson has promised a massive income tax cut for Britain’s richest people – by raising the 40p threshold from £50,000 to £80,000. …Meanwhile Home Secretary Sajid Javid has said he would partially reverse swingeing Tory cuts to the police and recruit 20,000 police officers. He also planned a tax cut for the richest 1% of taxpayers in the UK by removing the 45p rate of income tax, if it pays off overall. …Michael Gove has pledged to scrap VAT replacing it with a simpler sales tax. …Meanwhile Esther McVey has vowed to cut taxes – without saying which – and slash £7billion from the foreign aid budget and spend it on school and police. …Former Brexit Secretary Dominic Raab…promised to shrink the state and slash public spending by reducing the basic rate of income tax from 20p to 15p over time – including a 1p drop “straight away”. …Foreign Secretary Jeremy Hunt wants to cut corporation tax further to 12.5%. That would make the UK’s tax rate by far the lowest in the G20 and turn the country into a tax haven. …Rory Stewart has himself already said he would double spending on climate change and the environment as he warned the UK must do more in the face of an “environmental cataclysm”. Former Leader of the House Andrea Leadsom…is committed to “low taxes, incentives for enterprise and strong employment opportunities”.

A mixed bag.

Rory Stewart seems to have the most statist mindset (he’s also very weak on Brexit), but it’s not clear who has the best fiscal plan.

Let’s look at more data. The Wall Street Journal opined this morning on this topic.

The editorial starts with an indictment of the current system.

Britain’s Byzantine tax system still drags on investment, productivity and growth despite important recent improvements. The top corporate rate has fallen to 19% from 30% since 2007 and is due to hit 17% next year. But the top personal rate, paid on incomes above £150,000, has fallen only to 45% from 50%. Coupled with abrupt income cutoffs in eligibility for allowances and credits, British taxpayers in practice can experience a marginal rate as high as 60% for each additional pound of income between £100,000 and £124,000, and 65% for families with three children earning between £50,000 and £60,000, according to the Institute for Fiscal Studies. Add taxes on pension contributions at higher incomes and some workers pay marginal rates above 100% on parts of their income—paying more than a pound in tax for each additional pound they earn. …Social-insurance and property taxes add more burdens.

And this doesn’t even include the fact that the U.K. has above-average death taxes and higher-than average levels of double taxation.

How do Tory candidates propose to deal with these problems?

The best Conservative leadership proposals so far come from Foreign Secretary Jeremy Hunt and Home Secretary Sajid Javid.Mr. Hunt pledges to reduce the corporate rate to 12.5% to match Ireland’s low rate… Mr. Javid would cut the top individual rate to 40%. …Frontrunner Boris Johnson promises to increase the threshold at which the 40% rate kicks in, to £80,000 from £50,000. The 4.2 million people estimated to see their taxes reduced won’t complain. But tweaking brackets does nothing to fix the current tax code’s bad rate incentives for top earners—the entrepreneurs and investors post-Brexit Britain needs to attract. …Brexit hardliner Dominic Raab would cut the lower personal rate for earners between £12,500 and £50,000 to 15% from 20%. Any rate cut is welcome, but this would help many households that already receive more in benefits than they pay in tax. Environment Secretary Michael Gove would replace the 20% value-added tax with a lower-rate U.S.-style sales tax, which would be a boon to low-income households. But neither would fix broken incentives to work and invest as incomes rise.

As you can see, it’s a mix of mediocre-to-good ideas.

Much like when Republicans generated a bunch of plans when competing for the nomination in 2016.

Of course, let’s also keep in mind that Jeremy Corbyn of the Labour Party also has a tax plan, which is a poisonous collection of class-warfare provisions that would make the U.K. less attractive for jobs and investment.

Which means it is especially important, as the WSJ concludes, to have a compelling case for growth instead of redistribution.

…the only way Britain can prosper post-Brexit is by becoming a magnet for investment and human talent. If voters want the party of income redistribution, they’ll choose Labour. Tories have to be the credible party of growth, with a leader willing and able to make the reform case.

In other words, is there another Margaret Thatcher somewhere in the mix?

P.S. If you want to enjoy some Brexit-themed humor, click here and here.

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As part of today’s sessions at the Friedman conference in Australia, I got to listen to Professor Tony Makin talk about the burden of government spending in Australia.

I want to share several of his slides since he made some very cogent points.

First, he pointed out that debt-financed government spending is bad.

But he also pointed out that tax-financed government spending is equally bad.

In other words, the fiscal burden of government is the total level of spending. How that spending is financed is a secondary concern.

I’ve made similar arguments, so perhaps this won’t be new information for regular readers.

However, Professor Makin augmented the theory with some statistical analysis.

This is how he structured his model.

And here are his results.

His numbers shouldn’t be a surprise. I narrated an entire video that listed study after study showing the same thing.

And even the OECD has, on multiple occasions, produced research showing that bigger public sectors are associated with weaker economic performance. Same thing with economists at the IMF (the political leadership at the international bureaucracies is terrible, but the economists sometimes produce solid research).

By the way, Professor Makin shared some fascinating Australia-specific data looking at spending increases (or decreases) by year. And also broke down the data by who controlled the government.

As you can see (echoing what I wrote two days ago), the supposedly left-wing Hawke and Keating governments were reasonably frugal.

John Howard, by contrast, was supposed to be a right-of-center leader. Yet he fell off the wagon after a strong start (and also set the stage for a very bad Labor government).

In recent years, the right-of-center Liberal-National coalition has done a decent job. It will interesting to see what happens when newly reelected Prime Minister Scott Morrison unveils the next budget.

My two cents (in addition to lowering the top tax rate) is that he should propose some sort of spending cap, like the ones in Switzerland and Hong Kong.

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Every so often, I’ll see a story (or sometimes even just a photo, a court decision, or a phrase) that sums up the essence of government – a unseemly combination of venality and incompetence.

Today, we’re going to review three examples that make my point.

We’ll lead with a story that is a perfect case study of Washington.

It starts with Trump imposing tax increases on imports. That’s bad.

Then Trump says we have to subsidize sectors of the economy hurt by retaliatory tariffs. That’s one bad policy leading to another bad policy (hmmm…., there’s a name for that).

And that second bad policy leads to something else bad, at least according to the New York Daily News.

The Department of Agriculture cut a contract in January to purchase $22.3 million worth of pork from plants operated by JBS USA, a Colorado-based subsidiary of Brazil’s JBS SA, which ranks as the largest meatpacker in the world. …The bailout raised eyebrows from industry insiders at the time, as it was sourced from a $12 billion program meant for American farmers harmed by President Trump’s escalating trade war with China and other countries. …previously undisclosed purchase reports…reveal the administration has since issued at least two more bailouts to JBS, even as Trump’s own Justice Department began investigating the meatpacker, whose owners are Joesley and Wesley Batista — two wealthy brothers who have confessed to bribing hundreds of top officials in Brazil. Both brothers have spent time in jail over the sweeping corruption scandal. …Nonetheless, Trump’s Agriculture Department issued $14.5 million in bailout cash for pork products from JBS in February and another $25.6 million earlier this month, totaling more than $62.4 million, according to the purchase reports. …Including the JBS bailouts, the administration doled out $11 billion in relief payments to farmers hurt in the trade war last year.

Wow. I don’t know if this is better or worse than the Administration spending $13.6 million to hire two agents for the border patrol.

And I don’t know whether it’s better or worse than this next example of government foolishness.

A report published by Quartz estimates the amount of many Washington has wasted on abstinence programs.

Between 1982 and 2017, Congress spent over $2 billion on programs which teach teens that the best way to address their desire to have sex is to wait until they get married, according to a new study… Called abstinence only until marriage (AOUM), these programs accurately explain that the best way to avoid pregnancy and sexually transmitted diseases is to not have sex. …From 1995 to 2011–2013, the share of US adolescents who received instruction on abstinence but no instruction about birth control methods, increased from 8% to 28% of females and from 9% to 35% of males, according to the report. …Scientific evidence shows the approach doesn’t actually delay teens having sex, or engaging in risky sexual behaviors.

Just like the money spent to encourage marriage is a waste.

By the way, I’m also sure that the money spent on regular sex education and birth control education hasn’t worked, either.

Indeed, I wonder if such spending actually makes things worse (such as the Indiana driver education program that turned kids into worse drivers).

For our third example, here’s some of what the New York Times wrote about refrigerators on Air Force One.

…two of the refrigerators on the president’s plane need to be upgraded, and these specially designed “chillers” aren’t cheap. The Boeing Company was awarded a nearly $24 million contract in December to engineer the refrigerators for Air Force One, the Defense Department said. …Perhaps in anticipation of taxpayer sticker shock, the Air Force also said “the engineering required to design, manufacture, conduct environmental testing and obtain Federal Aviation Administration certification” were all included in the cost. …Air Force One must be able to feed passengers and crew for weeks without resupplying, according to the news website Defense One. …Two galleys can provide up to 100 meals at one sitting, according to the Air Force.

This story presumably involves two common features of government contracting.

First, pay too much for what is ordered (and this doesn’t even count the seemingly inevitable cost overruns).

Second, ask for something excessive in the first place. What’s the point, for instance, of storing several weeks of food when the longest-possible trips are maybe 20 hours? Yes, I watched Independence Day and I realize that Air Force One may become the mobile White House in an emergency, but wouldn’t MREs be acceptable for our pampered politicians and senior staff if there was a real crisis?

I’ll conclude by observing that these three stories reminded me of this satirical version of The Candyman.

P.S. There’s also an Obamaman version of Candyman.

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Earlier this year, I reviewed new fiscal projections from the Congressional Budget Office (CBO) and showed that balancing the budget would be relatively easy if politicians simply limited spending so that it didn’t grow faster than inflation.

Though I made sure to point out that the primary goal should be to limit the burden of spending. That’s because government spending, regardless of whether it’s financed by taxes or financed by borrowing, undermines prosperity by diverting resources from the productive sector of the economy.

We now have some new numbers from CBO. The number-crunching bureaucrats have put together their estimates of the latest Trump budget and that’s generated some predictable squabbling between Republicans and Democrats.

Most of the finger-pointing has focused on the (relatively trivial) fiscal impact of the Trump tax cuts.

The Wall Street Journal wisely put the focus instead on the growth of government.

You wouldn’t know it from the press coverage, but there’s some modest good news about the federal budget. The deficit is rising, but not as much as feared because tax revenues are increasing due to faster economic growth. …So why has the federal deficit increased by $145 billion this fiscal year to $531 billion? Because federal spending continued to rise rapidly—7% in the first seven months to $2.571 trillion. That’s $178 billion more than in the same period a year ago. …The media blame deficits on tax reform, but the facts show the main culprit is spending. No one in the political class wants to talk about entitlements but that’s where the money is.

The WSJ’s editorial focused on short-run data.

I want to augment that analysis by looking at medium-run and long-run numbers.

We’ll start with this chart looking at what will happen over the next 10 years. As you can see, Washington is violating my Golden Rule by allowing spending to grow faster than the private economy.

As a result, the burden of federal spending, measured as a share of gross domestic product, is projected to climb over the next decade.

That’s not good news.

(For what it’s worth, since tax revenues will be growing at the same pace as spending, there won’t be any meaningful change in the deficit as a share of GDP.)

Now let’s look at the most-recent long-run data from CBO. These numbers are even more depressing because the spending burden continues to grow faster than the private sector. A lot faster.

Which is why the burden of federal spending is projected to increase from less than 21 percent of GDP today to nearly 29 percent of GDP by 2049.

That’s terrible news.

And if you include spending by state and local governments (which currently consumes more than 11 percent of economic output and also is projected to increase), the terrible news gets even worse.

Moreover, the tax burden is projected to climb as well, and that doesn’t even include any estimate of what will happen if politicians manage to impose a value-added tax, an energy tax, a wealth tax, a financial transactions tax, or any of the other revenue-raising schemes under consideration in Washington.

In other words, the U.S. is on track to become just like GreeceFrance, and Italy.

P.S. There is an alternative to this dismal future. But can we convince politicians to adopt a spending cap and then make it work with genuine entitlement reform? I’m not holding my breath for any of that to happen.

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Back in April, I observed that, “If you would have loudly condemned a policy under Obama but support a similar policy under Trump, you’re the problem.”

We now have a good test case.

The President already has demonstrated – repeatedly – that he likes to spend other people’s money.

But now he’s unleashing his inner Obama, having reached a tentative deal with Chuck Schumer and Nancy Pelosi for a $2 trillion infrastructure blowout.

Notwithstanding the GOP’s supposed belief in the Constitution and limits on the role of the federal government, there are plenty of Republicans on Capitol Hill (especially on the committees that will get to direct this money to various campaign contributors) who will gladly join this spending orgy.

The relevant question, though, is whether there are some good GOPers to stop this boondoggle.

The Washington Post reports that there are some holdouts.

A $2 trillion infrastructure deal outlined this week by President Trump and top Democrats is already losing momentum, as the president’s own chief of staff is telling people inside and outside the administration that the effort is too expensive… Democratic leaders in Congress…said they were pleasantly surprised by the president’s willingness to back a large-scale spending effort. …But the initiative has run into immediate opposition from Republicans who balk at the hefty price tag and from conservative allies who are pushing lawmakers to block it. …Earlier in the administration, Trump praised Sen. Elizabeth Warren (D-Mass.) — a potential 2020 foe — for her ideas because, in his view, she was determined to spend more than Republicans. He would tell aides to get a list of projects and “let’s just spend it,” in the words of one former administration official. …Trump always wanted to spend more. …raising fuel tax rates by 35 cents and pegging them to rise with inflation would generate only about a quarter of the necessary revenue over 10 years. …Getting the remaining $1.5 trillion would involve much more significant tax increases… But even fully reversing the corporate income tax cut, which dropped the rate from 35 percent to 21 percent, would not close the gap

One obvious takeaway from this article is that taxes eventually will increase if Republicans don’t get serious about spending restraint.

Indeed, I’ve already warned that Trump’s profligacy is making tax increases more likely.

And another takeaway is that a blank-check approach would violate my rules for sensible infrastructure policy.

The editors at National Review share my concern about the plan for a bipartisan budget-busting package.

Some time ago, President Trump’s team produced a $1.5 trillion infrastructure plan, which was really a $200 billion infrastructure plan with some wishful thinking attached. …now the president has joined forced with Nancy Pelosi and Chuck Schumer on something new: a $2 trillion infrastructure plan, which also is composed mainly of wishful thinking. …What could possibly go wrong? You can tell this is backward by the fact that the triumvirate has settled on a price tag — an incomprehensibly large one — but is remarkably fuzzy on what’s to be bought with that $2 trillion. …We have been here before, with Barack Obama and his “shovel-ready” projects. The lesson of Obama’s failed stimulus bill — which was in considerable part an infrastructure program — is that doing things backwards does not work. …figuring out how to pay for this is at the bottom of the current agenda. …This is not a sane way to proceed. …The infrastructure scheme deserves to die an early and unlamented legislative death.

It should just “die an early an unlamented legislative death.” It never should have been born in the first place.

I’m not surprised that Trump is supporting a pork-filled budget plan for infrastructure. As I warned back before the 2016 election, he’s a big-government Republican.

What’s not clear, though, is how many GOP lawmakers will support his Greek-style approach to the transportation budget.

Suffice to say that I’m worried. It seems that many Republicans are Bushies rather than Reaganites.

I’ve updated a previous set of images to highlight the problem.

P.S. The correct infrastructure policy for Washington is to have no infrastructure policy. That’s because transportation should be handled by state and local government. Or, even better, the private sector. In my fantasy world, we’d shut down the Department of Transportation and repeal the federal gas tax.

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I explained yesterday that Denmark is not a good role model for American leftists.

Simply stated, Otto Brøns-Petersen’s video shows that the admirable outcomes in that country are the result of laissez-faire markets and the bad outcomes are the result of the welfare state imposed beginning in the 1960s.

In any event, Denmark is not a socialist country. As I wrote, “There’s plenty of bad policy, but no government ownership, no central planning, and no price controls.”

But to make matters clear, here’s a comparison of Denmark and the United States from Economic Freedom of the World.

The bottom line is that if folks on the left want to claim Denmark is socialist, then America also is socialist. Alternatively, if Denmark is an example of Democratic Socialism, then so is the United States.

And if that’s the case, we’ve already reached Collectivist Nirvana and my leftist friends can shelve some of their crazy ideas such as 70 percent tax rates and the Green New Deal.

Needless to say, I won’t hold my breath.

Today, I want to focus on another aspect of Danish public policy that warms my heart. Back in 2015, I applauded the government for imposing some spending restraint and I expressed hope that plans for future fiscal discipline would be fulfilled.

Well, based on IMF and OECD data, policy makers in Denmark deserve a gold star. They followed my Golden Rule and limited the growth of government spending. As a result, there’s been a meaningful decline in the burden of spending (measured as a share of economic output).

Too bad American politicians weren’t similarly prudent. If federal spending in the U.S. grew at the same rate since 2012, the burden of spending today would be more than $700 billion lower.

And since spending is the problem and red ink is the symptom, it naturally follows that the United States would have a deficit this year of about $370 billion instead of nearly $1.1 trillion.

It’s a shame we can’t go back in time and trade profligate Obama and profligate Trump for Denmark’s leaders.

P.S. Here’s a list of other nations with successful periods of spending restraint, and here’s a video highlighting four of those episodes.

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There are two things everyone should understand about the federal budget.

Sadly, the politicians in Washington generally aren’t interested in sensible fiscal policy. They have a “public choice” incentive to spend more money in hopes of buying more votes.

Congressman Chip Roy, a freshman from Texas, is one of the few lawmakers who objects to the spend-like-there’s-no-tomorrow mentality in Washington.

Here’s some of what he wrote for the Hill.

…both parties appear to have reached a consensus on one major issue: busting spending caps is their solution to disagreements over spending. …Members of my party would be happy to agree with Democrats’ demands to spend outside our means, so long as they get all the money they want for defense. …The truth is Washington is all about power rather than solving the problem. It’s politically easier for Republicans to press for defense spending and Democrats to push for non-defense spending… Years of out-of-control spending and poor decision making is catching up with us.

He specifically wants to maintain the spending caps that apply to annually appropriated outlays.

Instead of wringing our hands and finding political convenient reasons to spend outside our means, Congress should stick to the caps. Doing so will force us – Republicans and Democrats – to sit at the table and negotiate—a lost art in Washington… allowing an across-the-board sequester to kick-in is more responsible than what Congress appears on track to do. …we must act now to do our job. We must stick to the budget caps.

He’s right about the desirability of a sequester.

Indeed, the sequester that took place in 2013 was the biggest victory for fiscal discipline during Obama’s presidency.

Sadly, politicians since then have been jumping through all sorts of hoops to avoid a second sequester. And the Democrats in the House of Representatives are proposing to bust the spending caps once again.

Here’s a chart prepared by Republicans on the House Budget Committee.

By the way, I’m not citing material from Republicans because they deserve praise.

So even though House Democrats are now proposing something that’s “absurdly terrible,” Republicans don’t have much credibility on the issue.

I’ll close with an observation about Greece’s fiscal tragedy.

There was no single decision that caused that country’s economic crisis. Instead, it was hundreds of short-sighted choices to spend more on Program A, Initiative B, Plan C, and Project D, along with every kind of tax increase under the sun.

And when some people warned that the fiscal orgy eventually would produce bad consequences, they were dismissed or ignored.

Sadly, American is heading down the same path. We know the solution, but politicians are more interested in buying votes than doing what’s right for America.

That includes the President. Trump has the power to force a sequester. All he has to do is veto any spending bill that busts the caps. But don’t hold your breath waiting for that to happen.

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Today is the 10th anniversary of International Liberty, and I was initially tempted to commemorate the day with another introspective column.

But I decided on a different focus because I just read a story that combines two things – wasteful spending and Washington dishonesty – that I don’t like.

Let’s look at the article, which was published in The Hill.

The Senate Budget Committee on Thursday approved a GOP-backed budget resolution that would allow for draconian spending cuts by reducing both defense and nondefense spending for 2020. …The Senate’s budget sticks to the legal caps for defense — falling from $716 billion to $643 billion, including off-book funds — and nondefense, which would drop from $640 billion to $542 billion. …The spending blueprint also would decrease spending on Medicaid, children’s health insurance and Affordable Care Act subsidies by $281 billion, and on Medicare by $77 billion. “…this is a disastrous budget for the middle class and working families of this country,” said Sen. Bernie Sanders (I-Vt.), the panel’s ranking member.

I was initially semi-excited when I read the story.

After all, we desperately need “draconian spending cuts” in Washington.

But I was only “semi-excited” because I feared – based on past experience – that these supposed reduction were fake.

So I decided to look at the actual numbers in the Senate’s proposed budget.

Lo and behold, my skepticism was warranted. There are zero genuine cuts. Instead, spending increases by an average of 3.5 percent annually under the Senate’s “draconian” budget plan.

Politicians claim there are “cuts” because spending levels in the Senate plan (orange line) don’t rise as fast as what would happen if spending was left on autopilot (blue line).

But this simply means that the burden of government spending won’t grow as fast as previously planned. I’ve exposed this scam in discussions with John Stossel and Judge Napolitano.

And I’ve condemned the Washington Post for playing this dishonest game as well. You also won’t be surprised that Obama used this dodgy approach.

The political elite like this dodgy game because they can pretend they are fiscally responsible while simultaneously making government bigger.

The bottom line is that politicians should be honest. If they want to argue that spending should grow 3.5 percent yearly (or even more), they should explain why Washington deserves more money.

But don’t lie to us about supposed spending cuts when the budget is expanding.

P.S. Remember the “sequester”? Politicians and interest groups squealed that the world was going to end because of an automatic spending cut that wasn’t even a cut.

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Iceland is a tiny little country with just 338,000 people (about the population of Santa Ana, CA), but that doesn’t mean it can’t teach us lessons about public policy.

I wrote about the nation’s approach to fisheries in 2016, and explained that the property rights-based system is the best way of protecting fish stocks from over-harvesting.

And in 2013, I wrote about how modest spending restraint was helping to solve fiscal problems created by the financial crisis.

Today, I want to further explore Iceland’s fiscal policy, largely because of this remarkable chart that accompanied a Bloomberg report on the country’s budget strategy.

As you can see, debt skyrocketed during the financial crisis and has since plummeted at a very rapid rate.

This shows debt reduction is possible. Indeed, there can be huge reductions in a very short period of time.

So there may be hope for nations that are in the midst of fiscal crisis (such as Greece), nations that are about to suffer fiscal crisis (Italy is a prime candidate), and nations that will suffer a crisis if there isn’t reform (most developed nations, including the United States).

But what are the specific policy lessons?

Here are some excerpts from the accompanying article, which basically tells us that the government is focused on spending restraint.

Iceland will continue to reduce public debt and sustain a budget surplus even as it lowers taxes in the next five years, Finance Minister Bjarni Benediktsson said. The plan is part of a financial road map… The balancing act between austerity and the proposed fiscal concessions means less room for the government to…step up other spending… “We will need to impose certain measures of restriction,” Benediktsson said. The government may have to seek cost savings of as much as 5 billion kronur ($42 million), he said. …The financial plan projects a decrease in taxes as well as the Treasury’s debt levels and interest burden. It also expects the bank tax to be lowered in four steps.

But the article didn’t tell us why Iceland’s debt fell so quickly.

So I dug into the IMF’s World Economic Outlook database and crunched some numbers. I specifically wanted to find out why debt fell, both before and after the 2008 crisis.

And I focused on three sets of numbers.

  • Annual inflation rate
  • Annual growth of government spending burden
  • Annual increase in nominal gross domestic product

Here are those numbers, both for the years leading up to the 2008 crisis, as well as what happened starting in 2009.

For both the 2001-07 period and 2009-19 period, Iceland followed my Golden Rule. Government spending (the orange bars) grew slower than the economy (the grey bars).

So it shouldn’t be a surprise that debt fell during both eras.

But debt fell much faster starting in 2009 for the simple reason that the gap between spending growth and GDP growth was very significant over the past 10 years. This is the reason for the big reduction in debt.

And this spending restraint also generated some data that’s even more important – the burden of government spending has dropped from more than 48 percent of economic output in 2009 to less than 41 percent of GDP this year.

During the 2001-2007 period, by contrast, Iceland only barely satisfied the Golden Rule. Indeed, one could argue that spending was growing much too fast since the economy was in an unsustainable boom (Ireland was similarly profligate during the same period).

P.S. I recently shared an excellent IMF study showing three examples of big debt reductions in the pre-World War I era.

P.P.S. Unsurprisingly, the OECD has been pushing for higher taxes in Iceland.

P.P.P.S. If you want to read about all of Iceland’s pro-market economic, Prof. Hannes Gissurarson has a must-read article in Econ Journal Watch.

P.P.P.P.S. Voters in Iceland had an opportunity to vote on bank bailouts and 93 percent said no.

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In the absence of genuine entitlement reform, the United States at some point is going to suffer from a debt crisis.

But red ink is merely a symptom. I used numbers from Greece in this interview to underscore the fact that the real problem is government spending.

The discussion was triggered by comments from the Chairman of the Federal Reserve.

Federal Reserve Chairman Jerome Powell said Wednesday that reducing the federal debt needs to return to the forefront of the agenda, warning that the government’s finances are unsustainable. “I do think that deficits matter and do think it’s not really controversial to say our debt can’t grow faster than our economy indefinitely — and that’s what it’s doing right now,” Powell said.

As I noted in my comments, Powell is right, but he’s focusing on the wrong variable.

The real crisis is that spending is growing faster than the private sector (Powell needs to learn the six principles to guide spending policy).

To be more specific, politicians are violating my Golden Rule.

Spending grew too fast under Bush. It grew too fast under Obama (except for a few years when the “Tea Party” was in the ascendancy). And it’s growing too fast under Trump.

Most worrisome, the burden of spending is expected to grow faster than the private sector far into the future according to the long-run forecast from the Congressional Budget Office.

That doesn’t mean we’ll have a crisis this year or next year. We probably won’t even have a crisis in the next 10 years or 20 years.

But I cited Greek data in the interview to point out that excessive spending eventually does create a major problem.

Here’s the data from International Monetary Fund’s World Economic Outlook database. To make matters simple (I should have done this for the interview as well), I adjusted the numbers for inflation.

So how can America avoid a Greek-style fiscal nightmare?

Simple, just impose a spending cap. At the end of the interview, I added a plug for the very successful system in Switzerland, but I’d also be happy if we copied Hong Kong’s spending cap. Or the Taxpayer Bill of Rights from Colorado.

The bottom line is that spending restraint works and a constitutional spending cap is the best way to achieve permanent fiscal discipline.

P.S. By contrast, proponents of “Modern Monetary Theory” argue governments can finance ever-growing government by printing money. For what it’s worth, nations that have used central banks to finance big government (most recently, Venezuela and Zimbabwe) are not exactly good role models.

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The long-run fiscal outlook for most developed nations is very grim thanks to demographic change and poorly designed entitlement programs.

For all intents and purposes, we’re all destined to become Greece according to long-run projections from the International Monetary Fund, Bank for International Settlements, and Organization for Economic Cooperation and Development.

Are there any solutions to this “most predictable crisis“?

Politicians such as Alexandria Ocasio-Cortez and Bernie Sanders would like us to believe the answer involves never-ending tax increases. But such an approach is a recipe for more debt because the economy will weaken and governments will spend more money (look at what’s been happening in Europe, for instance).

A more sensible approach is a spending cap. I’ve pointed out, for instance, how Swiss government debt has plummeted ever since voters imposed annual limits on budgetary growth.

We also can learn lessons from history according to new research from the International Monetary Fund.

The report contains some very interesting economic history and the evolution of government finance, including the Bank of England being created and given a monopoly so the government would have a vehicle for borrowing money (as I observed in my video on central banking).

But it mostly tells the story of how governments and public finance simultaneously evolved.

Although the written record points to instances of public borrowing as long as two thousand years ago, recent scholarship points to 1000-1400 A.D. as when borrowing agreements with states were concluded with regularity and debt contracts entered into by sovereigns were standardized. …The supply of loans from city-states and territorial monarchies was driven by the need to finance military campaigns and secure borders. …From the 16th century, Europe’s political geography coalesced into the nation states recognized at the Peace of Westphalia in 1648. In parallel, many European states evolved from absolutist regimes to more limited government. …Fiscal states thus evolved in response to the efforts of rulers to secure borders, expand territory and survive. After 1650, larger, more centralized states increasingly possessed the fiscal machinery to raise revenue in uniform ways and had a veto player, such as a parliament, to monitor and discipline public expenditure.

There’s also lots of information in the report about how some governments, primarily outside of Europe, began to borrow money.

In many cases, this produced bad results, with defaults and economic crisis. As the authors wrote, “Debasement and restructuring also have a long history.”

But the part of the report that caught my eye was the description of how three advanced nations – the United Kingdom, the United States, and France – successfully dealt with large debt burdens before World War I.

…we describe three notable debt consolidation episodes before World War I: Great Britain after the Napoleonic Wars, the United States in the last third of the 19th century, and France in the decades leading up to 1913. While the colorful debt crises and defaults of the first era of globalization have been much discussed, less attention has been paid to these successful consolidation episodes. We focus on these three cases because they involved three of the largest economies of the period, but also because their debt burdens were among the heaviest. British public debt as a share of GDP was higher in the aftermath of the Napoleonic Wars, for example, than Greek public debt in 2018. But in all three cases, high public debts were successfully reduced relative to GDP.

In each case, war-time spending was the cause of the debt buildup.

The Napoleonic Wars, Franco-Prussian War and U.S. Civil War were the three most expensive conflicts of the 19th century. …debt accounted for the single largest share of wartime financing.

Here’s a table showing that these nations dramatically reduced their debt burdens.

To be sure, there were differences in the three nations.

The reduction in the British debt-GDP ratio was by far the largest and longest: the debt ratio fell from 194 percent in 1822 to 28 percent nine decades later. …The French public-debt-GDP ratio fell from 96 percent in 1896 to 51 percent in 1913… This case ranks second in size but first in pace. U.S. (federal or union) government debt was not as high at the end of the Civil War, and the subsequent consolidation was more leisurely; however, the process is notable for having reduced the debt-GDP ratio to virtually zero by World War I.

When the authors investigated how these nations reduced their debt burdens, they found that limited government was a common answer.

This was true in the United Kingdom.

Britain achieved the impressive feat of maintaining an average primary surplus of 1.6 percent of GDP for nearly a century (the only deficit in Figure 2 is at the time of the Boer War). One of the political legacies of Peel and Gladstone was a fiscal theory or philosophy of “sound finance” emphasizing budget surpluses, low taxes and minimal government expenditure. …demands for spending on welfare relief from the disenfranchised masses were kept in check. In exchange, the self-taxing class of income-tax-paying electors relieved the non-electors from the burden of direct taxation… Budget surpluses then made feasible further reductions in tariffs and taxes, which reduced the cost of living for the working class

It was true in the United States.

In the U.S., primary surpluses were consistently achieved… Southern states opposed an expansive role for the federal government, while entitlements limited to Civil War pensions contained pressure for public spending.

And it was true even in France.

In France, debt reduction was entirely accounted for by primary surpluses. Those surpluses exceeded British levels, reaching 2.5 percent of GDP on average, albeit over a shorter period.

Remember, this was a period when total government spending only consumed about 10 percent of economic output.

And this was a period when there was no welfare state. Redistribution was virtually nonexistent. Not even in France.

So it shouldn’t be a surprise that debt quickly fell in all three countries.

The common thread was small government.

…in all three of these large-scale debt consolidations, governments and societies went to great lengths to service and repay heavy debts. …it reflected prevailing conceptions of the limited functions of government, and limited popular pressure for public programs, entitlements and transfers.

What’s equally important is to note what didn’t happen.

No default. No inflation. No indirect confiscation.

…there was no restructuring or renegotiation of official or privately-held debts in these cases. Nor was there financial repression, i.e., measures artificially depressing interest rates. …Governments for their part did little to bottle up savings at home or to otherwise use regulation and legislation to artificially depress yields. …None of these three governments undertook involuntary restructurings despite the inheritance of heavy debt.

Now let’s shift from the past to the future

The authors point out how debt is rising today because of the welfare state rather than war.

The end of the last century also saw, for the first time, a secular increase in public-debt-to-GDP ratios in a variety of countries in conjunction not with wars and crises but in response to popular demands on governments for pensions, health care, and other often unfunded social services.

Given the demographic changes I mentioned at the beginning of the column, this does not bode well.

So what are the likely implications? As the authors note, there are two ways of dealing with high debt levels.

Countries have pursued two broad approaches to debt reduction. The orthodox approach relies on growth, primary surpluses, and the privatization of government assets. In turn this encourages long debt duration and non-resident holdings. Heterodox approaches, in contrast, include restructuring debt contracts, generating inflation, taxing wealth and repressing private finance.

At the risk of understatement, I fear Robert Higgs is right and that today’s politicians (and today’s voters!) will choose the latter approach.

Given that those policies will make a bad situation even worse, I’m not overflowing with confidence about the future.

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Back in January, I wrote about the $42 trillion price tag of Alexandria Ocasio-Cortez’s Green New Deal.

To pay for this massive expansion in the burden of government spending, some advocates have embraced “Modern Monetary Theory,” which basically assumes the Federal Reserve can finance new boondoggles by printing money.

I debated this issue yesterday on CNBC. Here’s a clip from that interview.

Wow, this Modern Monetary Theory (MMT) reminds me of the old joke about “I can’t be out of money. I still have checks in my checkbook.”

I don’t know how far Ms. Kelton would go with this approach. I know from previous encounters that she’s a genuine Keynesian and thus willing to borrow lots of money to finance a larger public sector. But her answer at 2:45 of the interview also suggests she’s okay with using the Federal Reserve to finance bigger government.

In either case, our debate is really about the size of government.

And anybody who wants a bigger burden of government is at least semi-obliged to say how it would be financed. The MMT crowd stands out because they basically say the Federal Reserve can print money.

To help understand the various options, I’ve created a helpful flowchart.

It’s possible, of course, for my statist friends to say “all of the above,” so these are not mutually exclusive categories.

Though the MMT people who select “Print money!” are probably the craziest.

And I hope that they are not successful. After all, nations that have used the printing press to finance big government (most recently, Venezuela and Zimbabwe) are not exactly good role models.

I noted in the interview that MMT is so radical that it is opposed by conventional economists on the right and left.

For instance, Michael Strain of the right-leaning American Enterprise Institute opines that the theory is preposterous and nonsensical.

…modern monetary theory…freshman Democratic Representative Alexandria Ocasio-Cortez spoke favorably about it earlier this month. …MMT is…sometimes a theory of money. MMT is also being discussed in the context of a political program to justify huge increases in social spending. Finally, there is its role as a prescription for macroeconomic policy. …The bedrock observation of MMT is correct: Any government that issues its own currency can always pay its bills. …this is about all that can be said favorably regarding modern monetary theory. …it is in its ideas about macroeconomic policy that MMT fully earns its place on the fringe. …what does MMT have to say about inflation when it does materialize? …it falls to the institution with authority over tax and budget policy — the U.S. Congress — to make sure prices are stable by raising taxes… MMT seems to call for tax increases in order to restrain inflation. …Modern monetary theory…if enacted it could cause great harm to the U.S. economy.

From the left side of the spectrum, here’s some of what Joseph Minarik wrote on the topic.

MMT rests on simplistic observations that have just enough truth to take in those who need to believe. Believers in MMT see crying societal needs… By common reckoning, government lacks the resources to address all of those needs immediately. MMT solves that problem with a simple and (literally) true observation: The federal government can just print the money. …And that is what willing policymakers choose to hear: Anything. Without limit. It is so convenient —  “too good to check.” …to MMT adherents, the Federal Reserve and all other inflation “Chicken Littles” are and forever have been totally wrong. There has not been rapid inflation for 20 years or so. Therefore, there never will be inflation again. …Yes, inflation is low. But it always is before it rises. And once inflation begins, slowing it is hard and painful. MMT is the perfect theory for the video game generation, which never saw the 1960s economic miscalculations so much like what MMT advocates today, and apparently believes that such mistakes can be reversed painlessly by just hitting the reset button. …the consequences could be catastrophic.

Catastrophic indeed.

Letting the inflation genie out of the bottle is not a good idea. And the policies of the MMT crowd presumably would lead to something far worse than what America experienced in the 1970s.

Rescuing the economy from that inflation was painful, so it’s not pleasant to imagine what would be needed to salvage the country if the MMT people ever got their hands on the levers of power.

Let’s wrap this up. Earlier this week, I presented a guide to fiscal policy based on six core principles.

If Modern Monetary Theory gains more traction, I may have to add a postscript.

P.S. If ever imposed, I suspect MMT would be very good news for people with a lot of gold and/or a lot of Bitcoin.

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When I’m asked for a basic tutorial on fiscal policy, I normally share my four videos on the economics of government spending and my primer on fundamental tax reform.

But this six-minute interview may be a quicker introduction to spending issues since I had the opportunity to touch on almost every key principle.

Culled from the discussion, here is what everyone should understand about the spending side of the fiscal ledger.

Principle #1 – America’s fiscal problem is a government that is too big and growing too fast. Government spending diverts resources from the productive sector of the economy, regardless of how it is financed. There is real-world evidence that large public sectors sap the private sector’s vitality, augmented by lots of academic research on the negative relationship between government spending and economic performance.

Principle #2 – Entitlements programs are the main drivers of excessive spending. All the long-run forecasts show that the burden of spending is rising because of the so-called mandatory spending programs. Social Security, Medicare, and Medicaid were not designed to keep pace with demographic changes (falling birthrates, increasing longevity), so spending for these program will consume ever-larger shares of economic output.

Principle #3 – Deficits and debt are symptoms of the underlying problem. Government borrowing is not a good idea, but it’s primarily bad because it is a way of financing a larger burden of spending. The appropriate analogy is that, just as a person with a brain tumor shouldn’t fixate on the accompanying headache, taxpayers paying for a bloated government should pay excessive attention to the portion financed by red ink.

Principle #4 – Existing red ink is small compared to the federal government’s unfunded liabilities. People fixate on current levels of deficits and debt, which are a measure of all the additional spending financed by red ink. But today’s amount of red ink is relatively small compared to unfunded liabilities (i.e., measures of how much future spending will exceed projected revenues).

Principle #5 – A spending cap is the best way to solve America’s fiscal problems. Balanced budget rules are better than nothing, but they have a don’t control the size and growth of government. Spending caps are the only fiscal rules that have a strong track record, even confirmed by research from the International Monetary Fund and Organization for Economic Cooperation and Development.

Here’s one final principle, though I didn’t mention it in the interview.

Principle #6 – Increasing taxes will make a bad situation worse. Since government spending is the real fiscal problem, higher taxes, at best, replace debt-financed spending with tax-financed spending. In reality, higher taxes loosen political constraints on policy makers and “feed the beast,” so the most likely outcome – as seen in Europe – is that overall spending levels increase and long-term debt actually increases.

In an ideal world, these six principles would be put in a frame and nailed above the desk of every politician, government official, and bureaucrat who deals with fiscal policy.

Not that it would make much difference since their decisions are guided by “public choice” no matter what principles they see at their desk, but it’s nice to fantasize.

Here are a few other observations from the interview.

P.S. Needless to say, I wish limits on enumerated powers were still a guiding principle for fiscal policy. Sadly, the days of Madisonian constitutionalism are long gone.

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The Congressional Budget Office just released it’s annual Budget and Economic Outlook, and that means I’m going to do something that I first did in 2010 and most recently did last year.

I’m going to show that it’s actually rather simple to balance the budget with modest spending restraint.

This statement shocks many people because they’ve read about out-of-control entitlement spending, pork-filled appropriations bills, big tax cuts, and trillion-dollar deficits.

But  the first thing to understand when contemplating how to fix America’s fiscal problems is that tax revenues, according to the new CBO numbers, are going to increase by an average of nearly 5 percent annually over the next 10 years. And that means receipts will be more than $2.1 trillion higher in 2029 than they are in 2019.

And since this year’s deficit is projected to be “only” $897 billion, that presumably means that it shouldn’t be that difficult to balance the budget.

By the way, I don’t even think balance should be the goal. It’s far more important to focus on reducing the burden of government spending. After all, the economy is adversely affected if wasteful outlays are financed by taxes, just as the economy is hurt when wasteful outlays are financed by borrowing.

In other words, too much government spending is the disease. Deficits are best understood as a symptom of the disease.

But I’m digressing. The point for today is simply that the symptom of borrowing can be addressed if a good chunk of that additional $2.1 trillion of new revenue is used to get rid of the $897 billion of red ink.

Unfortunately, the CBO report projects that the burden of government spending also is on an upward trajectory. As you can see from our next chart, outlays will jump by about $2.6 trillion by 2029 if the budget is left on autopilot.

The solution to this problem is very straightforward.

All that’s needed is a bit of spending restraint to put the budget on a glide path to balance.

I’m a big fan of spending caps, so this next chart shows the 10-year fiscal outlook if annual spending increases are limited to 1% growth, 2% growth, or 2.5% growth.

As you can see, modest spending discipline is a very good recipe for fiscal balance.

Our final chart adds a bit of commentary to illustrate how quickly we could move from deficit to surplus based on different spending trajectories.

I’ll close with a video from 2010 that explains why spending restraint is the best way to achieve fiscal balance. Especially when compared to tax increases.

The numbers are different today, but the analysis hasn’t changed.

As I noted at the end of the video, balancing the budget with spending restraint may be simple, but it won’t be easy.

If we want spending to grow, say, 2% annually rather than 5% annually, that will require some degree of genuine entitlement reform. And it means finally enforcing some limits on annual appropriations.

Those policies will cause lots of squealing in Washington. But we saw during the Reagan and Carter years, as well as more recently, that spending discipline is possible.

P.S. The video also exposed the dishonest way that budgets are presented in Washington.

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Maybe I’m just old-fashioned, but I don’t believe in using dodgy numbers or nonsensical analysis – even if that would help my side in a policy debate.

And it goes without saying that I also don’t like when the other side is dishonest. But I’m not talking about my left-leaning friends who have genuine (albeit misguided) views on things such as Keynesian economics or the minimum wage.

I’m talking about people who deliberately dissemble and prevaricate in hopes of advancing their policy agenda.

Consider, for instance, the new carbon tax that has been introduced by Congressmen Ted Deutch (D-FL) and Patrick Rooney (R-FL). The core features of the bill are:

  • A $15-per-ton carbon tax that increases $10 each subsequent year until it reaches $100.
  • A new entitlement program giving money to all legal American residents, including children.
  • A new tax on consumers who buy imports from nations without similar taxes on energy usage.
  • A supposed adjustment and easing of existing regulations governing carbon emissions.

There’s obviously a serious policy debate to have about both the general concept as well of the individual components of this type of legislation, and I’ve periodically added my two cents to the discussion.

But what irks me is that the sponsoring lawmakers are openly and deliberately lying about a key part of their plan. Here’s the relevant section from their talking points.

The claim about “revenue neutrality” is a stunning level of dishonesty, even by Washington standards.

At the risk of stating the obvious, if the government imposes a tax and then also creates a program to give money to people, that’s not revenue neutrality.

Was Obamacare “revenue neutral” because all the new taxes were balanced out by the handouts and subsidies that the law created for the big insurance companies?

Of course not.

And a new carbon tax doesn’t magically become “revenue neutral” because new revenues are matched by new spending.

To be sure, supporters can argue that their plan is “deficit neutral,” and that would be legitimate (even though I would argue that this wouldn’t be the case in the long run because of the adverse economic impact of new taxes and new spending).

But “revenue neutral” is a bald-faced lie.

The Daily Caller reported on this amazing example of deceptive advertising, citing the good work of Paul Blair of Americans for Tax Reform.

The bipartisan House Climate Solutions Caucus claims it is pushing a “revenue-neutral” carbon tax, but legislation proposed Thursday would hike taxes by at least $1 trillion over the next decade… Florida Reps. Ted Deutch, a Democrat, and Francis Rooney, a Republican, reintroduced a bill Thursday that would place a $15-per-ton tax on carbon emissions in 2019. The tax would rise by $10-a-year increments until it hits nearly $100 per ton. …Though Rooney claims the tax is “revenue-neutral,” the plain text of the bill does not include any reciprocal tax cuts to balance out the burden of the added tax on emissions… “Historically and for anyone engaged in tax policy, the definition of ‘revenue-neutral’ is and always has been if you increase a tax, the amount of revenue it generates must be offset by an equal tax cut elsewhere,” Blair said. …Blair said…that the “apology checks” sent as carbon dividends will be treated as new spending and do not negate a new tax burden.

By the way, just in case anyone thinks I’m imposing some weird, libertarian-ish, meaning to “revenue neutral,” you may want to look at how the left-leaning Tax Policy Center defines the term.

Revenue-neutral. A term applied to tax proposals in which provisions that raise revenues offset provisions that lose revenues so the proposal in total has no net revenue cost or increase.

I often disagree with the folks at the Tax Policy Center, but I’ve never questioned their honesty.

So when we both agree on the definition of ‘revenue neutral,” this is slam-dunk confirmation that it’s preposterously dishonest to count new spending as an offset to a tax increase.

P.S. Some of my friends and allies who supported the Fair Tax sometimes played fast and loose with the truth. That plan would have required the government to send “prebate” checks to households to partly compensate people for the new tax, yet supporters would argue that this expenditure shouldn’t count as a new entitlement program. While my first choice for tax reform is the flat tax, I certainly think a national sales tax would be a far better way to tax than the mess we have today, but that did not justify mischaracterizing the plan.

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I don’t care about the current shutdown battle, but I still feel compelled to add my two cents when people make silly arguments about the economy suffering because government is temporarily spending less money.

This is actually a two-part debate.

From a microeconomic perspective, there is some genuine disruption for affected federal bureaucrats, even if they eventually will get full – and lavish – compensation for their involuntary vacations. And some federal contractors are being hit as well.

There’s also a debate about the macroeconomic impact, with some making the Keynesian argument that government spending is somehow a stimulant for the economy.

I’ve endlessly explained why Keynesian argument is bad in theory and a joke in reality.

In this interview, I tried to make a more nuanced point, explaining that we should focus more on gross domestic income (GDI), which measures how we earn our national income, rather than gross domestic product (GDP), which measures how we allocate national income.

I’m not sure I got my point across effectively in a 30-second sound bite, but it’s a point worth making since people who understand GDI are much less susceptible to the Keynesian perpetual-motion-machine argument.

But enough from me.

Harold Furchtgott-Roth, in a column for the Wall Street Journal, analyzes the potential macroeconomic consequences of the shutdown.

Does the U.S. government shutdown endanger economic growth? It has led to missed paychecks… Yet these employees represent approximately 0.5% of all American workers… The effect of the furloughs on gross domestic product is likely small. …U.S. GDP is more than $20 trillion annually, or approximately $55 billion daily. The daily compensation of furloughed federal workers is about $52.5 million, or less than 0.1% of GDP. This figure does not include affected government contractors, but even doubling or tripling this figure yields only a small share of GDP. …The net effect of the partial shutdown on direct salaries and wages will primarily be to delay, but not reduce, income for the affected families. …Maybe that’s one reason the stock market, a barometer of expectations of future economic growth, has been unperturbed by the budget impasse. The Dow and the S&P 500 are up nearly 9% since the shutdown began Dec. 22. Experience also gives reason for optimism. The last major government shutdown occurred in 1995-96. It affected the entire federal government, not only part of it. Yet U.S. GDP growth increased from 2.7% in 1995 to 3.8% in 1996.

That final sentence is key.

The Keynesians are always predicting bad consequences when there’s some sort of policy that limits government spending.

But the real-world outcome is always different, as we saw with the sequester.

Steve Malanga, writing for the City Journal, takes a microeconomic perspective on the shutdown.

I’ve seen no evidence that the shutdown will affect me and my family. I’ve heard no friend, neighbor, or relative even mention it. Virtually everyone I know outside of my professional life seems to be going about their business. Still, I’ve taken a thorough look at press coverage over the past two weeks and found nearly 500 stories on how the closure is supposed to affect our lives. …The press seems intent on convincing the rest of us that we’re at risk… Many headlines stoking fear contradict the articles they introduce. A story in the Guardian, for instance, was pitched as a tale of the shocking impact that the shutdown would have on a small rural town. Though the paper tells us the town is “in the grip of a partial government shutdown,” readers find little evidence of it. “We really haven’t noticed anything,” City Manager Mike Deal confesses. …a story in the Bangor Daily News noted that the Small Business Administration, which hands out government-subsidized loans to firms, won’t be making them during the shutdown. Still, the story notes, that’s not going to make much of a hit on the local economy, since the SBA has made just 2,687 loans in Maine since 2010, for an average of just 27 a month. …a story in the Lafayette Daily Advertiser entitled, “How the shutdown is affecting local breweries in Louisiana.” The problem, the owner of Bayou Teche Brewing explains, is that the Alcohol and Tobacco Tax and Trade Bureau is responsible for approving labels for new beers, and the agency’s not working right now. “With every government shutdown that’s happened since we opened, we’ve had a beer needing label approval,” said Karlos Knott of Bayou. “And that results in beer we’re just having to sit on.”

Steve’s column reminds me of a piece I wrote back in 2013.

Which is why I wish one of the lessons we learned from the shutdown fight is that much of what government does is either pointless or counterproductive.

I’m not holding my breath waiting for that to happen.

Anyhow, no column on a government shutdown would be complete without some satire.

We’ll start with a sarcastic observation from Libertarian Reddit. Though it actually raises a serious point. I want to downsize Washington, but I don’t want any needless pain for bureaucrats. Yet shouldn’t we be similarly sensitive to the plight of folks in the private sector who suffer because of D.C.’s bad policies?

And it appears that government bureaucrats have figured out what to do with their hands now that they have extra time on their hands.

For what it’s worth, some bureaucrats engage in such recreation even when the government is open.

If you enjoy shutdown humor, you can find older examples here and here, and a new example here.

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If nothing else, Alexandria Ocasio-Cortez gives me a lot to write about…and to laugh about.

I recently pontificated about her crazy idea to impose a top tax rate of 70 percent, which would reverse the very successful experiment we had in the 1980s (and presumably have a reverse effect on revenue as well).

Today, let’s look at the spending side of the fiscal equation.

AOC, as she is known, wants a dramatic increase in the burden of federal spending for her so-called “green new deal.”

Let’s examine the implications.

We’ll start with a supporter. Thomas Friedman of the New York Times has a giant carbon footprint compared to the average person, but that naturally doesn’t stop him from endorsing policies that would put AOC’s onerous burdens on the less fortunate.

Barack Obama picked up the theme and made a Green New Deal part of his 2008 platform, but the idea just never took off. So I’m excited that the new Democratic Congresswoman Alexandria Ocasio-Cortez and others have put forward their own takes on a Green New Deal… The goal is a ‘detailed national, industrial, economic mobilization plan’ to rapidly transition the country away from fossil fuels and toward clean energy, such as a solar, wind, and electric cars.” The Green New Deal that Ocasio-Cortez has laid out aspires to power the U.S. economy with 100 percent renewable energy within 12 years and calls for “a job guarantee program to assure a living wage job to every person who wants one,” “basic income programs” and “universal health care,” financed, at least in part, by higher taxes on the wealthy. …it is time for the green movement to think big and make big demands…a portion of every dollar raised by a carbon tax in a Green New Deal would be invested in two new community colleges and high-speed broadband in rural areas of every state.

Now let’s look at the implications of such policies.

But before looking at fiscal and economic considerations, let’s briefly detour to ideology.

Jonah Goldberg of National Review has some fun examining the philosophical forerunners of Ocasio-Cortez’s plan.

…the Green New Deal…is a triumph of recycling. Not of plastic bags or soda cans, but of ideas. Specifically, Franklin D. Roosevelt’s New Deal and the impulses behind it. To her credit, Ocasio-Cortez (D., N.Y.) is fairly honest about her ideological recycling. …the New Deal itself was largely about war mobilization — without war. Roosevelt campaigned for president promising to adapt Woodrow Wilson’s wartime industrial policies to fight the Great Depression. …Nearly the entire structure of the New Deal was copied from Wilson’s “war socialism.” The National Recovery Administration was modeled on the War Industries Board. The Reconstruction Finance Corporation was an update of Wilson’s War Finance Corporation. …breaking discipline was a punishable offense, which is why a tailor, Jacob Maged, was sentenced to 30 days in jail for charging too little to press a suit. …American liberalism has been recycling the same basic idea: The country needs to be unified and organized as if we are at war… The attraction stems from what John Dewey called “the social possibilities of war” — the ability to reorganize and unify society according to the schemes of planners and experts.

Gee, another New Deal. What could possibly go wrong?

Now let’s contemplate the practical implications.

We’ll start with Warren Henry’s article in the Federalist.

…the darling of democratic socialism proposed eliminating carbon emissions within 12 years. …The “Frequently Asked Questions” section accompanying her draft resolution claims it could be funded in the “same ways that we paid for the 2008 bank bailout and extended quantitative easing programs, the same ways we paid for World War II and many other wars. The Federal Reserve can extend credit to power these projects and investments, new public banks can be created (as in WWII) to extend credit and a combination of various taxation tools (including taxes on carbon and other emissions and progressive wealth taxes) can be employed.” …Ocasio-Cortez now falls back on the comforting myth that everything is affordable by soaking the rich with higher income taxes. …Ocasio-Cortez half-concedes her plan is a fantasy… For an idea of how detached Ocasio-Cortez is from reality, consider that we get only 17 percent of our energy from renewables. …even if the golden geese of capitalism were to continue laying eggs in Ocasio-Cortez’s command-and-control economy, there will not be enough to make her statist omelet. Even if Ocasio-Cortez’s fever dream were technologically feasible, the burden of funding it would land on the middle class as well as the uber-wealthy. …This is not the first time Ocasio-Cortez has tried to pass off a fairy tale as a white paper. She recently claimed the $32 trillion cost of a Medicare-for-all plan could be funded by curbing fraud at the Pentagon. Not even PolitiFact could make that math work, given that our nation has not spent $32 trillion on defense since its founding.

In an article for FEE, Jarrett Stepman looks at the economics of AOC’s plan.

It shouldn’t be a surprise that the avowed “democratic socialist” went with the predictable “tax the rich” formula in order to pay for a massive government program to combat climate change. …such a scheme would mean that her constituents in New York City would pay a max income tax rate of 82.6 percent… Perhaps New Yorkers deserve what they voted for, but does the country? …the tax hikes on the rich would be one of the least radical parts of the agenda. …moving the economy away from fossil fuels to 100 percent renewable energy will come “at a cost of about $5.2 trillion over 20 years.” …this deal would instead rely on the ruthless bludgeoning of private industry and citizens through the levers of the state. …the plan calls for direct government intervention to be its “prime driver.” …The Green New Deal doesn’t just include environmentalist proposals… Among the liberal wish list items included, the Green New Deal contains a proposal for universal health care and a basic minimum income program to make up for all the jobs lost…this will all come with an immense cost. …How do Green New Deal proponents propose to pay for this extreme growth in government? …by massively hiking taxes and then borrowing and ultimately printing money. Then it would use public banks run by unaccountable bureaucrats to carry the whole thing out. …an American version of a Soviet-style five-year plan focused on command-and-control economic solutions that have proven to fail the world over. …The agony of a collapsing Venezuela…is a stark example of how badly this can end.

Milton Ezrati’s column in the City Journal further debunks AOC’s numbers.

…specific goals…include, among other things, expanding renewable-energy sources until they provide 100 percent of the nation’s power…upgrading every residence and industrial building in the U.S. for energy efficiency…eliminating greenhouse-gas emissions for industry and agriculture; funding “massive” investments… Ocasio-Cortez adds a long list of social objectives: providing training and education for the energy transition, including “job guarantees at a living wage for everyone who wants one”; …mitigating racial, regional, and gender-based inequalities; developing universal health-care and income-support programs… there were some 136 million housing units in the United States. Upgrading each unit to high standards of energy efficiency would cost, conservatively, at least $10,000 per home, adding up to a total cost of $1.3 trillion. Doing the same for industrial structures would easily exceed that amount. The single-payer health-care part would cost another $3 trillion or more, annually. Stabilizing carbon dioxide in the atmosphere would add another $1 trillion to $2 trillion to the price tag—and all these still only account for three items on AOC’s list. …she would rely on debt, “printing money,” and government willingness to take an equity stake in some of the enterprises involved.

The bottom line is Ocasio-Cortez wants to dramatically expand the size and scope of government.

Some of her ideas would involve big increases in red tape, especially for the green parts of the Green New Deal (thus underscoring why it is rather naive for anyone to think the left would accept less regulation in exchange for a carbon tax).

But since I’m a fiscal policy person, I’m naturally concerned about what her grandiose plan would mean for the tax and spending burden.

Brian Riedl of the Manhattan Institute has used public sources to estimate the price tag. Here’s the new spending that AOC and her fellow travelers want to impose on the economy.

And below we have a menu of potential tax increases.

There are two things to realize.

  • First, even if every single one of the tax increases is adopted, it doesn’t come close to paying for AOC’s wish list for new spending.
  • Second, the big revenue sources (payroll taxes, VAT, income tax) are largely taxes on lower-income and middle-class taxpayers.

In other words, politicians talk big about screwing the rich, but the rest of us will be picking up the tab.

By the way, I can’t resist commenting on this second table. I realize Brian is merely following the tradition of budget scorekeepers at the JCT and CBO, but new revenues should not be categorized as “savings.” I would go with “grabbings” or “takings” instead.

Brian’s rhetorical sin doesn’t qualify him for the Bob Dole Award or the Charlie Brown Award, but surely there should be some consequences. Maybe we’ll create a Libertarian Re-education Camp and miscreants will be forced to listen to lectures from Dork 1, Dork 2, and Dork 3?

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One of my annual traditions is to share the “best and worst news” for each year. I started in 2013, and continued in 2014, 2015, 2016, and 2017.

Looking back, 2016 clearly was the best year, though entirely because of things that happened overseas (the Brits vote for Brexit, Brazil adopting spending caps, abolition of the income tax in Antigua, and Switzerland’s rejection of a basic income).

What about this year?

Sadly, there’s not much to cheer about. Here’s the meager list.

Amendment 73 rejected in Colorado – As part of a plan to expand the burden of government (for the children!), the left wanted to gut the state’s flat tax and replace it with a so-called progressive tax. Fortunately, voters realized that giving politicians the power to tax the rich at higher rates would also mean giving them the power to tax everyone at higher rates. The proposal was defeated by 11 percentage points.

Deregulation – The Administration’s record is certainly far from perfect on regulatory issues. But big-picture measures of the regulatory burden indicate that the overall trend is positive. Easing dangerous Obama-era car mileage rules may be the best step that’s been taken.

Positive trends – I’m having to scrape the bottom of the barrel, but I suppose a drop in support for bad ideas has to count as good news, right? On that basis, I’m encouraged that the notion of universal government handouts became less popular in 2018. Likewise, I’m glad that there’s so much opposition to the carbon tax that some supporters of that new levy are willing to throw in the towel.

Now let’s look at the bad news.

Here are the worst developments of 2018.

Aggressive protectionism – It’s no secret that Trump is a protectionist, but he was mostly noise and bluster in 2017. Sadly, bad rhetoric became bad policy in 2018. And, just as many predicted, Trump’s trade taxes on American consumers are leading other nations to impose taxes on American exporters.

The Zimbabwe-ization of South Africa – My trip to South Africa was organized to help educate people about the danger of Zimbabwe-style land confiscation. Sadly, lawmakers in that country ignore me just as much as politicians in the United States ignore me. The government is moving forward with uncompensated land seizures, a policy that will lead to very grim results for all South Africans.

More government spending – Ever since the brief period of fiscal discipline that occurred when the Tea Party had some influence, the budget news has been bad. Trump is totally unserious about controlling the burden of government spending and even routinely rolls over for new increases on top of all the previously legislated increases.

The good news is that this bad news is not as bad as it was in 2015 when we got a bunch of bad policies, including resuscitation of the corrupt Export-Import Bank, another Supreme Court Obamacare farce, expanded IMF bailout authority, and busted spending caps.

I’ll close by sharing my most-read (or, to be technically accurate, most-clicked on) columns of 2018.

  1. In first place is my piece explaining why restricting the state and local tax deduction was an important victory.
  2. Second place is my column (and accompanying poll) asking which state will be the first to suffer a fiscal collapse.
  3. And the third place article is my analysis of how rich nations can become poor nations with bad policy.
For what it’s worth, my fourth-most read column in 2018 was a piece from 2015 about political and philosophical quizzes. And the fifth-most read article was some 2012 satire about using two cows to describe systems of government.

I guess those two pieces are oldies but goodies.

Now for the columns that didn’t generate many clicks.

  1. My worst-performing column was about how DC insiders manipulate so-called tax extenders to line their own pockets.
  2. Next on the least-popular list was a piece that looked at proposals to make taxpayers subsidize wages.
  3. And the next-to-next-to-last article explained how expanding the IMF would increase the risk of bailouts and bad policy.

I’m chagrined to admit that none of these columns reached 1,000 views.  Though I try to salve my ego by assuming that many (some? most?) of the 4,000-plus subscribers eagerly devoured those pieces.

The other noteworthy thing about 2018 is that I posted my 5,000th column back in July.

And I also shared data indicating that I’m relatively popular (or, to be more accurate, I get a lot of clicks) in places like the Cayman Islands, the Vatican, Monaco, Bermuda, Jersey, and Anguilla.

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In this interview yesterday, I noted that there are “external” risks to the economy, most notably the spillover effect of a potential economic implosion in China or a fiscal crisis in Italy.

But many of the risks are homegrown, such as Trump’s self-destructive protectionism and the Federal Reserve’s easy money.

Regarding trade, Trump is hurting himself as well as the economy. He simply doesn’t understand that trade is good for prosperity and that trade deficits are largely irrelevant.

Regarding monetary policy, I obviously don’t blame Trump for the Fed’s easy money policy during the Obama years, though I wish that he wouldn’t bash the central bank and instead displayed Reagan’s fortitude about accepting the need to unwind such mistakes.

The interview wasn’t that long, but I had a chance to pontificate on additional topics.

The bottom line is that Trump has a very mixed record on the economy. But I fear the good policies are becoming less important and the bad policies are becoming more prominent.

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I often write about the failure of government.

In other words, there’s lots of evidence that government spending makes things worse.

Needless to say, this puts a lot of pressure on folks who favor bigger government. They desperately want to find any type of success story so they can argue that increasing the size and scope of the public sector generates some sort of payoff.

And they got their wish. Check out the ostensibly good news in a story from the San Fransisco Chronicle.

Investing billions of dollars in affordable housing and homeless programs in recent years has apparently put the brakes on what had been a surge in California’s homeless population, causing it to dip by 1 percent this year, a federal report released Monday showed. …The report put California’s homeless population this year at 129,972, a drop of 1,560 in the number of people on the streets in 2017. …“I think San Francisco has shown that when targeted investments are made, we see reductions in homelessness here,” Kositsky said. He pointed out that family, youth and chronic veterans homelessness dropped in the city’s last full count — although the number of chronically homeless people went up.

Maybe I’m not in the Christmas spirit, but I don’t see this as a feel-good story.

Are we really supposed to celebrate the fact that the government spent “billions of dollars” and the net effect is that the homeless population dropped just 1 percent?

The story doesn’t contain enough details for precise measurements, but even if we assume “billions” is merely $2 billion, then it cost taxpayers close to $1.3 million to get one person off the street. For that amount of money, taxpayers could have bought each of them a mansion!

In other words, the program has been a rotten investment. Heck, it makes Social Security seem like a good deal by comparison.

To be sure, maybe the number isn’t quite so bad because we’re comparing multi-year outlays with a one-year change in the homeless population. Though maybe the number is even worse because taxpayers actually coughed up far more than $2 billion.

The bottom line is that if my friends on the left see this as an example of success, I’d hate to see their definition of failure.

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