Tag Archives: Keynesian

Are We About To Throw The Baby Out With The Bath Water?

Tom Kite is PGA Tour player whose low Major total belies his resume as a player….He only led the Tour in earnings twice, but he was the second Tour player to crack $1 million in a season (1989, a year after Curtis Strange did it), he finished in the Top 20 in money 17 times, and he was the first player to accumulate $6 million, $7 million, $8 million, and $9 million in career earnings.1 Tom, although an excellent player was not Greg Norman, Ben Crenshaw, Arnold Palmer or Jack Nicklaus; names one might expect to head that list. How? He did it by having a considerably higher finishing average than other players and naturally earned more prize money as a result.

In 1960, the New York Yankees lost to the Pittsburgh Pirates, 3 games to 4. Amongst the Yankees’ roster were future Hall of Fame Players Berra, Maris and Mantle. Still the Yankees lost despite having scored a total of 55 runs to the Pirates’ 27 runs.

These stories seem relevant to today’s political campaign rhetoric. We are told our system is corrupt. It may be; but wouldn’t it be a good thing to look at where and how? In light of the twisted language of our politically correct consciousness, which makes honest substantive discussions on issues difficult at best, it would likely be prudent to ensure my words here are clear.

Ever since our nation’s founding, we, the average citizen, have had a say in our national elections and discourse. But, aside from our votes, it has never been direct. Our votes, other than on state and local initiatives, nearly always involve our selection of someone to represent us. We delegate our political desires to someone who, hopefully, will reflect our views when they cast their votes on specific legislation.

We are not, as a political structure, a pure democracy. Never have been, although it could be argued that we have moved more in that direction. Our founders did not trust a pure democracy: structurally, we are a representative republic.

“what is government itself, but the greatest of all reflections on human nature? If men were angels, no government would be necessary. If angels were to govern men, neither external nor internal controls on government would be necessary. In framing a government which is to be administered by men over men, the great difficulty lies in this: you must first enable the government to control the governed; and in the next place oblige it to control itself. A dependence on the people is, no doubt, the primary control on the government; but experience has taught mankind the necessity of auxiliary precautions.”

– Federalist No. 51, James Madison

As Franklin, replying to a woman who asked as he left the Constitutional Convention, “Well Doctor what have we got, a republic or a monarchy?,” stated, “A republic . . . if you can keep it.”

Note Madison states the obvious: government is necessary due to the flaws of humanity generally. Not that people are evil per se (though some most certainly are – Hitler & Stalin come to mind), but that self interest is a universal human characteristic. Yet, government, established to prevent individual self interest from becoming anarchy or rule of the jungle, is an organization run by people. So how do you prevent the very self interest government is set up to protect against from becoming a tool of those who work in government?

A republic. A pure democracy is essentially mob rule: 50%, plus one negates the 50% less 1 in all matters. That is law of the jungle, lynch mob governance. A republic on the other hand is a layered form of democracy that attempts to mitigate the aggregation of political power. This form is still imperfect because people are still people.

I’ve recounted all of this because we’re being told nearly every day how corrupt the delegate system is. When, in truth, if any one cared to go beyond the railings and look into the process, it is actually a full demonstration of the principles of our founders’ efforts to keep us from being our own worst enemy. How?

First, the delegate selection is NOT controlled, at least in one political party’s structure1, by one centralized entity or small group of elites. Each state has it own rules, means and methods. This means that no one person or small group can control the outcome. A successful candidate must be able to navigate many different process rules, from state to state. It is much the same as a business in one state seeking to expand its offices to another state – they have to look at how the laws, taxes, etc., impact how they conduct business in order to successfully operate there.

This multi-faceted, variable process is accidentally brilliant. Accidentally because the states themselves and the state party structures were set up independently, over a period of decades, and through their own localized self interest developed whatever delegate process they thought would serve their own constituents best. Each of these statewide party representatives are individuals who got involved in the process because they wanted to influence the outcome however they could.

Perfect? Not at all. But it does keep political power less concentrated and more diverse. And that benefits us all.

Confusing? Yes. Corrupt? Not likely; it is just too diversified, too disconnected for full centralized control. Those who argue for pure democracy would do well to recognize the dangers of mob rule. Is that what you really want? How long would our society survive if that were how we decided things?

Don’t like the outcomes? Get involved. But regurgitating easy and disingenuous slogans which tend only to stoke emotional fervor is destructive. It is the very thing that lead to the rise of some of history’s most wretched atrocities. One only need look to 1789 France to appreciate the horror of the mob. Our elected officials, particularly in the last three election cycles, have not been as representative as many had hoped they would be as to the direction of the country, the size, scale and scope of government’s influence in our daily lives. But to allow that disappointment and frustration to literally blow up the layered system meant to protect us from ourselves is precisely what some advocate for – an utter collapse of the system allowing for who knows what.

It should be noted that what makes government necessary is at the same time the very thing that requires government be restrained and limited in size, scale and scope. Otherwise, we cease being even the imperfect representative republic.  The Constitution acknowledges the imperfections of humanity and attempts to allow each of us to enjoy individual liberty to pursue life as we envision it. It seeks to protect our God-given, unalienable rights by preventing each of us from using political power to our own advantage over one another. And while, we’ve done considerable damage to that bulwark, it is not yet fully lost.

But, if the tone and language, accompanied by blind, emotional outrage and verbal assaults are any indication, we could inadvertently usher in that which disassembles the very thing that ensures each and everyone of us are able to continue being a free people, to enjoy life as we would pursue it.

“Those who would give up essential Liberty, to purchase a little temporary Safety, deserve neither Liberty nor Safety.”

– Benjamin Franklin

  1.  PGA Tour Career Money Leaders History
  2. The Democratic Party delegate process has what are known as “super delegates”. These delegates are solely controlled and assigned by the DNC directly to the candidate the Party decides, not the voters. CNN interview DNC Chair Debbie Wasserman Schultz explaining this: https://youtu.be/w5llLIKM9Yc

Lex Rex
April 20, 2016

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No one can give you what is already yours

This is the first of “How Big a Life Do You Want” articles.

No One Can Give You What is Already Yours.

Rights. A lot is said about rights. Not all everything called rights have anything to do with what essential rights are. If one were to get down to the root of the matter – rights are first and foremost unalienable, inherent, part and parcel of your very being. If at any moment the idea is accepted that rights are anything but unalienable, part of your very existence, then what you think you have is no longer a right but a decree, edict, endowment or some specific benefit bestowed by some higher authority, usually some form of government or ruler.

In the first case, your rights are the basis of law; in the latter, laws define your rights. Further, if rights are inherent, unalienable then no person, entity or governing body can be said to have jurisdiction over your rights. This is because the rights of every individual emanate from each and every individual’s very existence; this bundle of rights exist a priori, proceeding any law or government.

This is precisely what was meant by that portion of the Declaration of Independence which reads:

“We hold these truths to be self-evident, that all men are created equal, that they are endowed, by their Creator, with certain unalienable Rights, that among these are Life, Liberty, and the pursuit of Happiness.”

Frédéric Bastiat in “The Law” says it this way:

We hold from God the gift which includes all others. This gift is life—physical, intellectual, and moral life.

But life cannot maintain itself alone. The Creator of life has entrusted us with the responsibility of preserving, developing, and perfecting it. In order that we may accomplish this, He has provided us with a collection of marvelous faculties. And He has put us in the midst of a variety of natural resources. By the application of our faculties to these natural resources we convert them into products, and use them. This process is necessary in order that life may run its appointed course.

Life, faculties, production–in other words, individuality, liberty, property—this is man. And in spite of the cunning of artful political leaders, these three gifts from God precede all human legislation, and are superior to it.

Life, liberty, and property do not exist because men have made laws. On the contrary, it was the fact that life, liberty, and property existed beforehand that caused men to make laws in the first place.¹

This cannot be understated: whether you believe in a God or not, if your rights begin and end with a governing entity, then you do not possess unalterable, unalienable, inherent rights. What you would have were little more than someone giving you at their discretion what they deem you should have. Their presumption is that they have the right and therefore the authority to decree as they see fit. How do they have such authority? Did you give it to them? By what right do they claim such power? Birth? Privilege? A superior intellect? Some high moral character that sets them apart and above the rest of humanity? Or is it mere political power?

Surely the ridiculousness of this notion can be see for what it is. If what you cling to as “rights” under this scenario can be dismissed at the whim and leisure of a ruling individual or group, then rights do not exist; only authority and political power. If rights are believed to be endowed by authority, and not inherent, unalienable, political structure doesn’t matter – it can be a true dictatorship, an oligarchy or a democracy (which is little more than soft tyranny of the majority).

Are you comfortable with the idea that what you believe you have as a right is nothing more than what another deems it to be? Or does it make more sense that rights are truly part and parcel of your being and the being of every individual? If these essential rights are inherently yours, then they are not and cannot be given to you.

No one can give you what is already yours: Life, Liberty, Property. Everything else grows out of this basic concept. Rights either are inherent and unalienable or law is based upon who rules at the time. The choice should be obvious.
Life, Liberty, Property – these are the essential rights each of us possess. You cannot have one without the other two. The existence of these carries with it your right to hold and enjoy these and to defend them, to keep them from being take from you.

This right of defense (to hold and enjoy one’s basic rights freely) is the foundation of all law. So, the purpose of Law is to protect the inherent and unalienable rights of every individual. Laws or legislation that violate anyone’s essential rights would then be contrary to the purpose of Law Theft and fraud are the taking of your property by force or coercion. Murder is the taking of another’s life. Slavery is the taking of one’s freedom and property. It is lawful to prevent theft, fraud, murder and slavery precisely because they take or attempt to destroy the essential rights of an individual or another group of individuals by another individual or group of individuals.

A characteristic of rights is that one’s possession and exercise of that right does not take from another. Your thinking, your speaking, your breathing, your own efforts do not directly cause the loss of the things in anyone else. Your Property, which begins initially with your own body, is not another person’s, nor does your mere existence, put an end to another individual’s having a body. Your right to maintain and improve your own existence does not preclude another person’s right to do so.

This may seem ridiculous to cover, but over the years so many assumptions have glossed over the basic concepts and observations of our own humanity and our relationships, they have to be mentioned. These are what make a truly free society possible,. Precisely because these are presumptive they are often overlooked and forgotten.

So what happens when the co-equal and inalienable rights of two individuals cross paths? Shall one merely use force to take what they want or need from the other? Or shall a mutually agreeable exchange be made to the basic satisfaction of both parties? Which of these choices would be the more civil and respectful? Which action represents freedom and tolerance?

I ask then, just how big a life do you want?

“The Law” by Frédéric Bastiat can be found in several places (it’s a mere 75 pages):

https://mises.org/library/law

http://bastiat.org/en/the_law.html

http://www.constitution.org/cmt/bastiat/the_law.html

http://www.econlib.org/library/Bastiat/basEss2.html

Senator Rand Paul’s Very Good Tax Plan Needs One Important Tweak

Senator Rand Paul’s Very Good Tax Plan Needs One Important Tweak

Our nation very much needs fundamental tax reform, so it’s welcome news that major public figures – including presidential candidates – are proposing to gut the internal revenue code and replace it with plans that collect revenue in less-destructive ways.

A few months ago, I wrote about a sweeping proposal by Senator Marco Rubio of Florida.

Today, let’s look at the plan that Senator Rand Paul has put forward in a Wall Street Journal column.

He has some great info on why the current tax system is a corrupt mess.

From 2001 until 2010, there were at least 4,430 changes to tax laws—an average of one “fix” a day—always promising more fairness, more simplicity or more growth stimulants. And every year the Internal Revenue Code grows absurdly more incomprehensible, as if it were designed as a jobs program for accountants, IRS agents and tax attorneys.

And he explains that punitive tax policy helps explain why our economy has been under-performing.

…redistribution policies have led to rising income inequality and negative income gains for families. …We are already at least $2 trillion behind where we should be with a normal recovery; the growth gap widens every month.

So what’s his proposal?

…repeal the entire IRS tax code—more than 70,000 pages—and replace it with a low, broad-based tax of 14.5% on individuals and businesses. I would eliminate nearly every special-interest loophole. The plan also eliminates the payroll tax on workers and several federal taxes outright, including gift and estate taxes, telephone taxes, and all duties and tariffs. I call this “The Fair and Flat Tax.” …establish a 14.5% flat-rate tax applied equally to all personal income, including wages, salaries, dividends, capital gains, rents and interest. All deductions except for a mortgage and charities would be eliminated. The first $50,000 of income for a family of four would not be taxed. For low-income working families, the plan would retain the earned-income tax credit.

Kudos to Senator Paul. This type of tax system would be far less destructive than the current system.

That being said, it’s not perfect. Here are three things I don’t like.

  1. The Social Security payroll tax already is a flat tax, so it’s unclear why it should be wrapped into reform of the income tax, particularly if that change complicates the possibility of shifting to a system of personal retirement accounts.
  2. There would still be some double taxation of dividends, capital gains, and interest, though the destructive impact of that policy would be mitigated because of the low 14.5 percent rate.
  3. The earned-income credit (a spending program embedded in the tax code) should be eliminated as part of a plan to shift all means-tested programs back to the states.

But it’s important not to make the perfect the enemy of the good, particularly since the debate in Washington so often is about bad ideas and worse ideas.

So the aforementioned three complaints don’t cause me much heartburn.

But there’s another part of the Paul plan that does give me gastro-intestinal discomfort. Here’s a final excerpt from his column.

I would also apply this uniform 14.5% business-activity tax on all companies…. This tax would be levied on revenues minus allowable expenses, such as the purchase of parts, computers and office equipment. All capital purchases would be immediately expensed, ending complicated depreciation schedules.

You may be wondering why this passage is worrisome. After all, it’s great news that the very high corporate tax rate is being replaced by a low-rate system. Replacing depreciation with expensing also is a huge step in the right direction.

So what’s not to like?

The answer is that Senator Paul’s “business-activity tax” doesn’t allow a deduction for wages and salaries. This means, for all intents and purposes, that he is turning the corporate income tax into a value-added tax (VAT).

In theory, this is a good step. After all, the VAT is a consumption-based tax which does far less damage to the economy, on a per-dollar-collected basis, than the corporate income tax.

But theoretical appeal isn’t the same as real-world impact.

Simply stated, the VAT is a money machine for big government.

All of which helps to explain why it would be a big mistake to give politicians this new source of revenue.

Indeed, this is why I was critical of Herman Cain’s 9-9-9 plan four years ago.

It’s why I’ve been leery of Congressman Paul Ryan’s otherwise very admirable Roadmap plan.

And it’s one of the reasons why I feared Mitt Romney’s policies would have facilitated a larger burden of government.

These politicians may have had their hearts in the right place and wanted to use the VAT to finance pro-growth tax reforms. But I can’t stop worrying about what happens when politicians with bad motives get control.

Particularly when there are safer ways of achieving the same objectives.

Here’s some of what I wrote last year on this exact topic.

…the corporate income tax is a self-inflicted wound to American prosperity, but allow me to point out that incremental reform is a far simpler – and far safer – way of dealing with the biggest warts plaguing the current system.

Lower the corporate tax rate.

Replace depreciation with expensing.

Replace worldwide taxation with territorial taxation.

So here’s the bottom line. If there’s enough support in Congress to get rid of the corporate income tax and impose a VAT, that means there’s also enough support to implement these incremental reforms.

There’s a risk, to be sure, that future politicians will undo these reforms. But the adverse consequences of that outcome are far lower than the catastrophic consequences of future politicians using a VAT to turn America into France.

To wrap things up, there’s no doubt that Senator Paul has a very good proposal. And I know his heart is in the right place.

But watch this video to understand why his proposal has a very big wart that needs to be excised.

 

 

For what it’s worth, I’m mystified why pro-growth policy makers don’t simply latch onto an unadulterated flat tax.

That plan has all the good features needed for tax reform without any of the dangers associated with a VAT.

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

Reposted from International Liberty.

Does “Freedom” Mean an Entitlement to Other People’s Money?

Does “Freedom” Mean an Entitlement to Other People’s Money?

Maybe the warm weather is affecting my judgement, but I’m finding myself in the odd position of admiring some folks on the left for their honesty.

A few days ago, for instance, I (sort of) applauded Matthew Yglesias for openly admitting that punitive tax rates would put us on the downward-sloping portion of the Laffer Curve.

He still favors such a policy, which is very bizarre, but at least his approach is much more honest than other statists who want us to believe that very high tax rates generate more revenue.

Today, I’m going to indirectly give kudos to another leftist.

Writing for the Washington Post, Katrina vanden Heuvel openly argues that the meaning of freedom should be changed. Here’s some of her argument, and we’ll start with her reasonably fair description of how freedom currently is interpreted.

For conservatives, freedom is centered in markets, free from government interference. …Government is the threat; the best thing it can do is to get out of the way. …freedom entails privatization, deregulation, limiting government’s reach and capacity.

Needless to say, I agree with this definition. After all, isn’t freedom just another way of saying “the absence of coercive constraint on the individual?

Heck, this is why I’m a libertarian. Sure, I like the fact that liberty produces more prosperity, but my main goal it to eliminate needless government coercion.

But I’m digressing. Let’s get back to her column. She complains that folks on the left have acquiesced to this traditional conception of freedom.

Democrats chose to tack to these conservative winds. Bill Clinton’s New Democrats echoed the themes rather than challenge them. “The era of big government is over,” he told Americans, while celebrating “ending welfare as we know it,” deregulation of Wall Street… Obama chose consciously not to challenge the conservative limits on what freedom means.

Then she gets to her main argument. She wants Hillary Clinton to lead an effort to redefine the meaning of freedom.

This is Hillary Clinton’s historic opportunity. …She would do a great service for the country — and for her own political prospects — by offering a far more expansive American view of what freedom requires, and what threatens it. …expanding freedom from want by lifting the floor under workers, insuring every child a healthy start, providing free public education from pre-k to college, rebuilding the United States and putting people to work… Will she favor fair taxes on the rich and corporations to rebuild the United States and put people to work? Will she make the case for vital public investments — in new energy, in infrastructure, in education and training — that have been starved for too long? Will she call for breaking up banks…? Will she favor expanding social security…? …to offer Americans a bolder conception of freedom…and set up the debate that America must decide.

Needless to say, I strongly disagree with such policies. How can “freedom” be based on having entitlements to other people’s money?!?

Heck, it’s almost like slavery since it presupposes that a “right” to live off the labor of others. But that’s not technically true since presumably there wouldn’t be any requirement to work. So what would really happen in such a society is that people would conclude it’s better to ride in the wagon of government dependency, as illustrated by these cartoons.

Which means, sooner or later, a Greek-style collapse because a shrinking population of producers can’t keep pace with an ever-expanding population of moochers and looters.

Nonetheless, I give Ms. vanden Heuvel credit for acknowledging that her preferred policies are contrary to the traditional definition of freedom.

To be sure, I’d admire her even more if she simply admitted that she favors government coercion over freedom. That would be true honesty, but I can understand that folks on the left would prefer to change the meaning of words rather than admit what their agenda really implies.

P.S. Some of you may recognize that the issues discussed above are basically a rehash of the debate between advocates of “negative liberty” and supporters of “positive liberty.” The former is focused on protecting people from the predations of government while the latter is about somehow guaranteeing goodies from the government.

P.P.S. As mentioned in Ms. vanden Heuvel’s column, today’s effort to redefine freedom is similar to the so-called economic bill of rights peddled in the 1940s by FDR.

Reposted from International Liberty.

The Ticking Fiscal Time Bomb of Social Security

The Ticking Fiscal Time Bomb of Social Security

America has a giant long-run problem largely caused by poorly designed entitlement programs such as Social Security, Medicare, and Medicaid.

So when I wrote last month about proposals by some Democrats to expand Social Security, I was less than enthusiastic.

…demographic changes and ill-designed programs will combine to dramatically expand the size of the public sector over the next few decades. So it’s really amazing that some politicians, led by the clownish Elizabeth Warren, want to dig the hole deeper. …I’m surprised demagogues such as Elizabeth Warren haven’t rallied behind a plan to simply add a bunch of zeroes to the IOUs already sitting in the so-called Social Security Trust Fund. …If Hillary winds up endorsing Warren’s reckless plan, it will give us another data point for our I-can’t-believe-she-said-that collection.

But it turns out I may have been too nice in my analysis.

As reported by USA Today, independent researchers have discovered that Social Security is even more bankrupt than suggested by official estimates.

New studies from Harvard and Dartmouth researchers find that the SSA’s actuarial forecasts have been consistently overstating the financial health of the program’s trust funds since 2000. “These biases are getting bigger and they are substantial,” said Gary King, co-author of the studies and director of Harvard’s Institute for Quantitative Social Science. “[Social Security] is going to be insolvent before everyone thinks.” …Once the trust funds are drained, annual revenues from payroll tax would be projected to cover only three-quarters of scheduled Social Security benefits through 2088.

By the way, I’m not overly enamored with this analysis since it is based on the assumption that the Social Security Trust Fund is real when it’s really nothing but a collection of IOUs.

But if you don’t believe me, perhaps you’ll believe the Clinton Administration, which admitted back in 1999 (see page 337) that the Trust Fund is just a bookkeeping gimmick.

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

In other words, what really matters is that Social Security spending is climbing too fast and consuming an ever-larger share of economic output.

That means – in the absence of reform – that more and more money will be diverted from the economy’s productive sector, in the form of taxes or borrowing, to finance benefits.

And when I write “more and more money,” that’s not a throwaway statement.

Returning to the USA Today report, academic experts warn that the long-term shortfall in the program is understated because it is based on 75-year estimates even though the program doesn’t have an expiration date.

The bigger problem with the Social Security Administration is not disclosure, it’s accounting, said Laurence Kotlikoff, a Boston University professor of economics… Kotlikoff…wants the agency to calculate its liabilities using fiscal gap accounting, which considers the difference between the government’s projected financial obligations and the present value of all projected future tax and other revenue. …Under this accounting system, SSA’s projected unfunded liabilities would be $24.9 trillion (instead of the $10.6 trillion projected in 2088). …17 Nobel Prize-winning economists have endorsed Kotlikoff’s push for the SSA and other government agencies to use the fiscal gap accounting method more broadly. “We have a situation that is like Enron accounting,” Kotlikoff said. “And the public doesn’t want to hear about it.”

At the risk of being pedantic, I’m also not enamored with either approach mentioned in the above passage.

Sure, we should acknowledge all expenses and not arbitrarily assume the program disappears after 75 years, but the approach used to calculate “unfunded liabilities” is artificial since it is based on how much money would need to be invested today to finance future promised benefits (whether for 75 years or forever).

Needless to say, governments don’t budget by setting aside trillions of dollars to meet future expenses. Social Security, like other programs, is funded on a pay-as-you-go basis.

That’s why the most appropriate way to measure the shortfall is to take all projected future deficits, adjust them for inflation, and calculate the total. When you do that, the Social Security shortfall is a staggering $40 trillion.

And that’s based on just a 75-year estimate, so the real number is much higher.

Though keep in mind that this is just an estimate of the fiscal shortfall. What really matters is the total level of spending, not how much is financed with red ink.

Which is why the only real answer is genuine reform.

For further information, here’s the video I narrated for the Center for Freedom and Prosperity on the need to modernize the system with personal retirement accounts.

But if you prefer to trust politicians, you can always support the left’s favored solution.

P.S. You can enjoy some previous Social Security cartoons here, here, and here. And we also have a Social Security joke if you appreciate grim humor.

P.P.S. The “Trust Fund” is real only in the sense that the government’s legal authority to pay benefits will be constrained when the IOUs are used up. That’s why the USA Today article says that the government at that point would be able to pay only about 3/4ths of promised benefits (though one imagines that future politicians will simply override that technical provision and require full payments).

P.P.P.S. Many nations have adopted genuine reform based on private retirement savings, including Australia, Sweden, the Faroe Islands, Chile, and The Netherlands.

P.P.P.P.S. Because of lower life expectancies, African-Americans are very disadvantaged by the Social Security system. A system of personal accounts presumably wouldn’t help them live longer, but at least they would have a nest egg to pass on to their kids.

P.P.P.P.P.S. And don’t fall for the false argument that financial markets are too unstable for personal retirement accounts

Reposted from International Liberty.

For additional information regarding Social Security: http://www.justfacts.com/socialsecurity.asp
Definition of a Ponzi scheme

Spending Caps Are the Way to Prevent Unsustainable Fiscal Binges During Growth Years

The Alberta Example: Spending Caps Are the Way to Prevent Unsustainable Fiscal Binges During Growth Years

Back in 2012, I shared some superb analysis from Investor’s Business Daily showing that the United States never would have suffered $1 trillion-plus deficits during Obama’s first term if lawmakers had simply exercised a modest bit of spending restraint beginning back in 1998.

And the IBD research didn’t assume anything onerous. Indeed, the author specifically showed what would have happened if spending grew by an average of 3.3 percent, equal to the combined growth of inflation plus population.

Remarkably, we would now have a budget surplus of about $300 billion if that level of spending restraint continued to the current fiscal year.

This is a great argument for some sort of spending cap, such as the Swiss Debt Brake or Colorado’s Taxpayer Bill of Rights.

But let’s look beyond the headlines to understand precisely why a spending cap is so valuable.

If you look at the IBD chart, you’ll notice that revenues are not very stable. This is because they are very dependent on the economy’s performance. During years of good growth, revenues tend to rise very rapidly. But when there’s a downturn, such as we had at the beginning and end of last decade, revenues tend to fall.

But you don’t have to believe me or IBD. Just look at federal tax revenues over the past 30 years. There have been seven years during which nominal tax revenues have increased by more than 10 percent. But there also have been five years during which nominal tax revenue declined.

This instability means that it doesn’t make much sense to focus on a balanced budget rule. All that means is that politicians can splurge during the growth years. But when there’s a downturn, they’re in a position where they have to cut spending or (as we see far too often) raise taxes.

But if there’s a spending cap, then there is a constraint on the behavior of politicians. And assuming the spending cap is set at a proper level, it means that – over time – there will be shrinking levels of red ink because the burden of government spending will grow by less than the average growth rate of the private economy.

In other words, compliance with my Golden Rule!

Let’s look at other examples.

Why did Greece get in fiscal trouble? The long answer has to do with ever-growing government and ever-increasing dependency. But the short answer, at least in part, is that a growing economy last decade generated plenty of tax revenue, but rather than cut taxes and/or pay down debt, Greek politicians went on a spending binge, which then proved to be unsustainable when there was an economic slowdown.*

This is also why California periodically gets in fiscal trouble. During years when the economy is growing and generating tax revenue, the politicians can’t resist the temptation to spend the money, oftentimes creating long-run spending obligations based on the assumption of perpetually rapid revenue growth. These spending commitments then prove to be unaffordable when there’s a downturn and revenues stop growing.

And as you can see from the accompanying graph, this creates a very unstable fiscal situation for the Golden State. Revenue spikes lead to spending spikes. During a downturn, by contrast, revenues are flat or declining, and this puts politicians in a position of either enacting serious spending restraint or (as you might predict with California) imposing anti-growth tax hikes.

And, in the long run, the burden of spending rises faster than the private sector.

We have another example to add to our list, thanks to some superb research from Canada’s Fraser Institute.

They recently released a study examining fiscal policy in the energy-rich province of Alberta. In particular, the authors (Mark Milke and Milagros Palacios) look at the rapid growth of spending between the fiscal years 2004/05 and 2013/14.

By the mid-2000s, even though the province was again spending at a level that contributed to deficits in the early 1990s, after 2004/05 the province allowed program spending to escalate even further and beyond inflation and population growth. The result was that by 2013/14, the province spent $10,967 per person on government programs. That was $2,002 higher per person than in 2004/05.

Why did the burden of spending climb so quickly? The simple answer is that bigger government was enabled by tax revenue generated by a prospering energy industry.

Over a nine-year period, politicians spent money based on an assumption that high energy prices were permanent and that tax revenues would always be surging.

But now that energy prices have fallen, politicians are suddenly facing a fiscal shortfall. Simply stated, there’s no longer enough revenue for their spending promises.

This fiscal mess easily could have been avoided if the fecklessness of Alberta politicians had been constrained by some sort of spending cap.

The experts at the Fraser Institute explain how such a limit would have precluded today’s dismal situation.

Had the province increased program spending after 2004/05 but within population growth plus inflation, by 2013/14 the province would have spent $35.9 billion on programs. Instead, the province spent $43.9 billion, an $8 billion difference in that year alone. That $8 billion difference is significant. In recent interviews, Alberta Premier Jim Prentice has warned that the drop in oil prices has drained $7 billion from expected provincial government revenues. Thus, past decisions to ramp up program spending mean that additional provincial spending (beyond inflation and population growth) is at least as responsible for current budget gap as the decline in revenues.

And here’s a chart from the study showing how much money would have been saved with modest fiscal restraint.

Unfortunately, that’s not what happened. So now today’s politicians have to deal with a mess that is a consequence of profligate politicians during prior years.**

…the decision by the province to spend (on programs) above the combined effect of population growth and inflation between 2005/06 and 2013/14 inclusive built in higher annual spending obligations, that, once revenues declined, would open up a fiscal gap in the province’s budget. As of 2013/14, the result of spending more on programs than inflation plus population growth combined would warrant meant program expenses were $8 billion higher in that year alone. The province’s past fiscal choices have now severely constricted present choices on everything from balanced budgets to tax relief to additional capital spending. If the province wishes to have a better menu of choices in the future, it must, obviously, control expenditures more carefully.

Since I’ve shared all sorts of bad examples of how nations get in trouble by letting spending grow too fast over time, let’s look at a real-world example of a spending cap in action.

As you can see from the chart, Switzerland has enjoyed great success ever since voters imposed the debt brake.

Indeed, while many other European nations are in fiscal crisis because of big increases in the burden of government spending, the Swiss have experienced economic tranquility in part because the size of the public sector has gradually declined.

The key lesson isn’t that spending restraint is good, though that obviously is important. The most important takeaway is that spending restraint appears to be sustainable only if there is some sort of permanent external constraint on politicians. Like the debt brake. Or like Article 107 of Hong Kong’s Basic Law.

Remember, there are many nations that have enjoyed good results because of multi-year periods of spending restraint. But many of those countries saw their gains evaporate because policies then moved in the wrong direction.

*Greek politicians also took advantage of low interest rates last decade (a result of joining the euro currency) to engage in plenty of debt-financed government spending, which meant the economy was even more vulnerable to a crisis when revenues stopped growing.

**Some of today’s politicians in Alberta are probably long-term incumbents who helped create the mess by over-spending between 2004/05 and today, so I wouldn’t be surprised if they opted for destructive tax hikes instead of long-overdue spending restraint.

P.S. On a totally separate topic, it appears some towns in New York are listening to the sage advice of Walter Williams on the topic of secession.

Here are some excerpts from an editorial published by the Wall Street Journal.

Some 15 towns have announced they want to secede from New York and become part of neighboring Pennsylvania. …The towns occupy four counties in New York State’s “Southern Tier,” just across the Pennsylvania state line. Pennsylvania allows fracking for natural gas… That part of Pennsylvania is booming. Upstate New York, as anyone who drives through it can attest, is an economic bummer. …Governor Cuomo has created an American version of the Cold War’s East Berlin—with economic life booming on one side of the divide, while an anti-economic ideology stifles it on the other.

Unfortunately, New York’s East Berliners will have to pick up and move if they want to benefit from better policy in the Keystone State.

There is no chance the secessionists will succeed, needing approval from the legislatures of New York, Pennsylvania and the U.S.

Another option, of course, is to decentralize decision making so that local communities can decide policy rather than faraway politicians in a state capitol.

That’s the approach that perhaps would have averted the catastrophe we now see in Ukraine, so why not try it in places where the stakes are simply jobs rather than life and death?

Reposted from International Liberty.

The Empirical Case for a Much Smaller Public Sector

The Empirical Case for a Much Smaller Public Sector

As a fiscal policy economist who believes in individual liberty and personal responsibility, I have two goals.

1. Replace the corrupt and punitive internal revenue code with a simple and fair flat tax that raises necessary revenue in the least-destructive and least-intrusive manner possible.

2. Shrink the size of the federal government so that it only funds the core public goods, such as national defense and rule of law, envisioned by America’s Founding Fathers.

Needless to say, I haven’t been doing a great job. The tax code seems to get worse every year, and even though we’ve made some progress in recent years on spending, the long-run outlook is still very grim because there’s hasn’t been genuine entitlement reform.

But I continue with my Sisyphean task. And part of my efforts include educating people about the Rahn Curve, which is sort of the spending version of the Laffer Curve. it shows the non-linear relationship between the size of government and economic performance.

Simply stated, some government spending presumably enables growth by creating the conditions (such as rule of law and property rights) for commerce.

But as politicians learn to buy votes and enhance their power by engaging in redistribution, then government spending is associated with weaker economic performance because of perverse incentives and widespread misallocation of resources.

I’ve even shared a number of videos on the topic.

The video I narrated explaining the basics of the Rahn Curve, which was produced by the Center for Freedom and Prosperity.

A video from the Fraser Institute in Canada that reviews the evidence about the growth-maximizing size of government.

A video from the Centre for Policy Studies in the United Kingdom that explores the relationship between prosperity and the size of the public sector.

Even a video on the Rahn Curve from a critic who seems to think that I’m a closeted apologist for big government.

Now we have another video to add to the collection.

Narrated by Svetla Kostadinova of Bulgaria’s Institute for Market Economics, it discusses research from a few years ago about the “optimal size of government.”


If you want to read the research study that is cited in the video, click here. The article was written by Dimitar Chobanov and Adriana Mladenova of the IME

The evidence indicates that the optimum size of government, e.g. the share of overall government spending that maximizes economic growth, is no greater than 25% of GDP (at a 95% confidence level) based on data from the OECD countries. In addition, the evidence indicates that the optimum level of government consumption on final goods and services as a share of GDP is 10.4% based on a panel data of 81 countries. However, due to model and data limitations, it is probable that the results are biased upwards, and the “true” optimum government level is even smaller than the existing empirical study indicates.

Two points in that excerpt are worth additional attention.

First, they understand that not all forms of government spending have equal effects.

Spending on core public goods (rule of law, courts, etc) generally are associated with better economic performance.

Spending on physical and human capital (infrastructure and education) can be productive, though governments often do a poor job based on a money-to-outcomes basis.

Most government spending, though, is for transfers and consumption, and these are areas where the economic effects are overwhelmingly negative.

So kudos to the Bulgarians for recognizing that it’s particularly important to restrain some types of outlays.

The other point that merits additional emphasis is that the growth-maximizing size of government is probably far lower than 25 percent of economic output.

Here’s what they wrote, citing yours truly.

…the results from the above mentioned models should not be taken as the “true” optimal level of government due to limitations of the models, and lack of data as already discussed. As Dan Mitchell commented, government spending was about 10% of GDP in the West from the end of the Napoleonic wars to World War I. And we do not have any data to think that growth would have been higher if government was doubled or tripled. However, what the empirical results do show is that the government spending should be much less than is the average of most countries at the moment. Thus, we can confidentially say the optimum size of general government is no bigger than 25% but is likely to be considerably smaller because of the above-mentioned reasons.

And here’s their version of the Rahn Curve, though I’m not a big fan since it seems to imply that government should consume about one-third of economic output.

I much prefer the curve to show the growth-maximizing level under 20 percent of GDP.

Though I often use a dashed line to emphasize that we don’t really know the actual peak because there unfortunately are no developed nations with modest-sized public sectors.

Even Singapore and Hong Kong have governments that consume about 20 percent of economic output.

But maybe if I someday achieve my goal, we’ll have better data.

And maybe some day I’ll go back to college and play quarterback for my beloved Georgia Bulldogs.

P.S. Since I shared one video, I can’t resist also including this snippet featuring Ronald Reagan talking about libertarianism.


What impresses me most about this clip is not that Reagan endorses libertarianism.

Instead, notice how he also explains the link between modern statism and fascism.

He had a much greater depth of knowledge than even supporters realize. Which also can be seen in this clip of Reagan explaining why the Keynesians were wrong about a return to Depression after World War II.

And click here if you simply want to enjoy some classic Reagan clips. For what it’s worth, this clip from his first inauguration is my favorite.

Given my man crush on the Gipper, you also won’t be surprised to learn that this is the most encouraging poll I’ve ever seen.

Reposted by International Liberty.