Tag: Canada

If You Want Good Fiscal Policy, Forget the Balanced Budget Amendment and Pursue Spending Caps

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.

Paul Martin: The Bill Clinton of Canada, Only Much Better

Imagine how weird it would be if the Cato Institute and Americans for Tax Reform praised Barack Obama for fiscal responsibility. And think how inconceivable it would be for the Heritage Foundation and the National Taxpayers Union to applaud Tim Geithner for economic stewardship.

The Canadian version of that happened while I was at the conference of the World Taxpayers Association in Vancouver two weeks ago.

The event was organized by the Canadian Taxpayers Federation and the main speaker was Paul Martin of the Liberal Party, who served as finance minister from 1993 to 2002, and then as prime minister from 2003 to 2006. I should add, for context, that the Liberal Party in Canada is not a classical liberal party with a track record of free markets and small government.

But Paul Martin was honored because he was responsible, while finance minister, for one of the best records of fiscal restraint of any policymaker in recent history (click here for international comparisons).

I’ve pointed out that the burden of spending fell under Bill Clinton, and I’ve even acknowledged that the federal budget hasn’t grown much under Obama, at least once you get past his first couple of years. But Paul Martin was far more frugal. And since Canada has a parliamentary system, there’s no ambiguity about who deserves credit. He restrained spending when his party had control.

What happened to generate the good results? For all intents and purposes, he imposed a spending freeze. And I’m talking a nominal spending freeze, not the kind of fake fiscal discipline you get when politicians make “cuts” off an inflated baseline. Because the budget was successfully restrained, that addressed both the problem of too much spending and the symptom of red ink.

Mirror, Mirror, on the Wall, Which Nation Has Increased Welfare Spending the Fastest of All?

There’s an old joke about two guys camping in the woods, when suddenly they see a hungry bear charging over a hill in their direction. One of the guys starts lacing up his sneakers and his friend says, “What are you doing? You can’t outrun a bear.” The other guys says, I don’t have to outrun the bear, I just need to outrun you.”

That’s reasonably amusing, but it also provides some insight into national competitiveness. In the battle for jobs and investments, nations can change policy to impact their attractiveness, but they also can gain ground or lose ground because of what happens in other nations.

The corporate tax rate in the United States hasn’t been changed in decades, for instance, but the United States has fallen further and further behind the rest of the world because other nations have lowered their rates.

Courtesy of a report in the UK-based Telegraph, here’s another example of how relative policy changes can impact growth and competitiveness.

Challenge for Keynesian Anti-Sequester Hysterics, Part I: Why Did Canada’s Economy Boom When the Burden of Spending Was Sharply Reduced?

In this appearance on Canadian TV, I  debunk anti-sequester hysteria, pointing out that “automatic budget cuts” merely restrain government so that it grows $2.4 trillion over the next 10 years rather than $2.5 trillion.

I also point out that we shouldn’t worry about government employees getting a slight haircut since federal bureaucrats are overcompensated. Moreover, I warn that some agencies may deliberately try to inconvenience people in an attempt to extort more tax revenue.

But I think the most important point in the interview was the discussion of what happened in Canada in the 1990s.

This example is important because the Obama White House is making the Keynesian argument that a smaller burden of government spending somehow will translate into less growth and fewer jobs.

Nobody should believe them, of course, since they used this same discredited theory to justify the so-called stimulus and all their predictions were wildly wrong.

But the failed 2009 stimulus showed the bad things that happen when government spending rises, and maybe the big spenders want us to think the relationship doesn’t hold when government gets put on a diet?

Well, here’s some data from the International Monetary Fund showing that the Canadian economy enjoyed very strong growth when policymakers imposed a near-freeze on government outlays between 1992 and 1997. 


For more information on this remarkable period of fiscal restraint, as well as evidence of what happened in other nations that curtailed government spending, here’s a video with lots of additional information.

By the way, we also have a more recent example of successful budget reductions. Estonia and the other Baltic nations ignored Keynesian snake-oil when the financial crisis hit and instead imposed genuine spending cuts.

The result? Growth has recovered and these nations are doing much better than the European countries that decided that big tax hikes and/or Keynesian spending binges were the right approach.

Paul Krugman, not surprisingly, got this wrong.

Creating a Human Freedom Index

Until now, no global index measuring human freedom consistent with a classical liberal approach has existed. Today, as part of the Human Freedom project sponsored by Cato, the Fraser Institute, and the Liberales Institut, we are releasing the first such attempt (.pdf) devised by my colleague Tanja Stumberger and by me. The index is a chapter in Towards a Worldwide Index of Human Freedom (.pdf) (published by Fraser and Liberales).

Using indicators consistent with the concept of negative liberty—the absence of coercive constraint—we have tried to capture the degree to which people are free to enjoy classic liberties in each country: freedom of speech, religion, individual economic choice, and association and assembly. The freedom index is composed of 76 distinct variables including measures of safety and security, freedom of movement, and relationship freedoms such as assembly or legal discrimination against gays.

In this preliminary index New Zealand ranks as the most free country in the world, followed by the Netherlands and then Hong Kong. Australia, Canada, and Ireland follow, with the United States ranking in 7th place.

As we mention in our essay, “The purpose for engaging in this exercise is to more carefully explore what we mean by freedom, and to better understand its relationship to any number of social and economic phenomena. Just as important, this research could improve our appreciation of the way in which various freedoms relate to one another.”

The index thus allows us to look at which freedoms are most under threat in which parts of the world, the relationship between economic freedom and personal freedom at different stages of development, and the relationship between human freedom and democracy, to name a few examples.

We have benefited from the input of numerous scholars around the world who have participated in several seminars as part of this project, many of whom have also contributed chapters to the book published today. Fred McMahon provides a nice survey (.pdf) of the literature on defining freedom that serves as a good introduction to the topic. Our index is being updated and revised along the lines of recommendations we have received since this version was drafted. We also thank Bob Lawson and Josh Hall for providing critiques (published in the book) on the index, the bulk of which we agree with. Further recommendations and criticisms are also most welcome as we continue to refine this work in progress.

From the Bank of Canada to Threadneedle Street – Finally

On July 1st 2013, Bank of Canada Governor Mark Carney will assume the position of Governor of the Bank of England . Will Carney’s hat-switching be good for the UK? At present, one thing is certain; Carney has delivered to Canada the one thing that matters – money .

A quick comparison of the money supply in Canada to that of the UK shows the stark differences in the health of their respective money supplies  (and thus, of their respective economies).



The Canadian money supply has managed to stay near trend throughout the post-Lehman era. In fact, the Canadian total money supply is currently 0.5% above trend, while the UK’s money supply is a dismal 12.1% below trend – no wonder the UK keeps flirting with recession. Although Canada’s GDP growth rates are less than stellar, they are above the average of the 34 OECD nations . Indeed, Canada’s overall economic outlook is much stronger than that of the UK .

In his new position, Carney will face the formidable challenge of turning around the UK’s slumping money supply. Regardless of Carney’s success in Canada, we will have to wait and see if he’ll be able to pull it off on the other side of the pond.

Study from German Economists Shows that Tax Competition and Fiscal Decentralization Limit Income Redistribution

If we want to avoid the kind of Greek-style fiscal collapse implied by this BIS and OECD data, we need some external force to limit the tendency of politicians to over-tax and over-spend.

That’s why I’m a big advocate of tax competition, fiscal sovereignty, and financial privacy (read Pierre Bessard and Allister Heath to understand why these issues are critical).

Simply stated, I want people to have the freedom to benefit from better tax policy in other jurisdictions, especially since that penalizes governments that get too greedy.

I’m currently surrounded by hundreds of people who share my views since I’m in Prague at a meeting of the Mont Pelerin Society. And I’m particularly happy since Professor Lars Feld of the University of Freiburg presented a paper yesterday on “Redistribution through public budgets: Who pays, who receives, and what effects do political institutions have?”

His research produced all sorts of interesting results, but I was drawn to his estimates on how tax competition and fiscal decentralization are an effective means of restraining bad fiscal policy.

Here are some findings from the study, which was co-authored with Jan Schnellenbach of the University of Heidelberg.

In line with the previous subsections, we find that countries with a higher GDP per employee, i.e. a higher overall labor productivity, have a more unequal primary income distribution. …fiscal competition within a country or trade openness as an indicator of globalization do not exacerbate, but reduce the gap between income classes. …expenditure and revenue decentralization restrict the government’s ability to redistribute income when fiscal decentralization also involves fiscal competition. …fiscal decentralization, when accompanied by high fiscal autonomy, involves significantly less fiscal redistribution. Please also note that fiscal competition induces a more equal distribution of primary income and, even though the distribution of disposable income is more unequal, it is open how the effect of fiscal competition on income distribution should be evaluated. Because measures of income redistribution usu-ally have adverse incentive effects which consequently affect economic growth negatively, fiscal competition might be favorable for countries which have strong egalitarian preferences. A rising tide lifts all boats and might in the long-run outperform countries with more moderate income redistribution even in distributional terms.

The paper includes a bunch of empirical results that are too arcane to reproduce here, but they basically show that the welfare state is difficult to maintain if taxpayers have the ability to vote with their feet.

Or perhaps the better way to interpret the data is that fiscal competition makes it difficult for governments to expand the welfare state to dangerous levels. In other words, it is a way of protecting governments from the worst impulses of their politicians.

I can’t resist sharing one additional bit of information from the Feld-Schnellenbach paper. They compare redistribution in several nations. As you can see in the table reproduced below, the United States and Switzerland benefit from having the lowest levels of overall redistribution (circled in red).

It’s no coincidence that the United States and Switzerland are also the two nations with the most decentralization (some argue that Canada may be more decentralized that the United States, but Canada also scores very well in this measure, so the point is strong regardless).

Interestingly, Switzerland definitely has significantly more genuine federalism than any other nation, so you won’t be surprised to see that Switzerland is far and away the nation with the lowest level of tax redistribution (circled in blue).

One clear example of Switzerland’s sensible approach is that voters overwhelmingly rejected a 2010 referendum that would have imposed a minimum federal tax rate of 22 percent on incomes above 250,000 Swiss Francs (about $262,000 U.S. dollars). And the Swiss also have a spending cap that has reduced the burden of government spending while most other nations have moved in the wrong direction.

While there are some things about Switzerland I don’t like, its political institutions are a good role model. And since good institutions promote good policy (one of the hypotheses in the Feld-Schnellenbach paper) and good policy leads to more prosperity, you won’t be surprised to learn that Swiss living standards now exceed those in the United States. And they’re the highest-ranked nation in the World Economic Forum’s Global Competitiveness Report.