Tag: debt

Switzerland’s ‘Debt Brake’ Is a Role Model for Spending Control and Fiscal Restraint

I’ve argued, ad nauseam, that the single most important goal of fiscal policy is (or should be) to make sure the private sector grows faster than the government. This “golden rule” is the best way of enabling growth and avoiding fiscal crises, and I’ve cited nations that have made progress by restraining government spending.

But what’s the best way of actually imposing such a rule, particularly since politicians like using taxpayer money as a slush fund?

Well, the Swiss voters took matters into their own hands, as I describe in today’s Wall Street Journal.

Americans looking for a way to tame government profligacy should look to Switzerland. In 2001, 85% of its voters approved an initiative that effectively requires its central government spending to grow no faster than trendline revenue. The reform, called a “debt brake” in Switzerland, has been very successful. Before the law went into effect in 2003, government spending was expanding by an average of 4.3% per year. Since then it’s increased by only 2.6% annually.

So how does this system work?

Switzerland’s debt brake limits spending growth to average revenue increases over a multiyear period (as calculated by the Swiss Federal Department of Finance). This feature appeals to Keynesians, who like deficit spending when the economy stumbles and tax revenues dip. But it appeals to proponents of good fiscal policy, because politicians aren’t able to boost spending when the economy is doing well and the Treasury is flush with cash. Equally important, it is very difficult for politicians to increase the spending cap by raising taxes. Maximum rates for most national taxes in Switzerland are constitutionally set (such as by an 11.5% income tax, an 8% value-added tax and an 8.5% corporate tax). The rates can only be changed by a double-majority referendum, which means a majority of voters in a majority of cantons would have to agree.

In other words, the debt brake isn’t a de jure spending cap, but it is a de facto spending cap. And capping the growth of spending (which is the underlying disease) is the best way of controlling red ink (the symptom of excessive government).

Switzerland’s spending cap has helped the country avoid the fiscal crisis affecting so many other European nations. Annual central government spending today is less than 20% of gross domestic product, and total spending by all levels of government is about 34% of GDP. That’s a decline from 36% when the debt brake took effect. This may not sound impressive, but it’s remarkable considering how the burden of government has jumped in most other developed nations. In the U.S., total government spending has jumped to 41% of GDP from 36% during the same time period.

Switzerland is moving in the right direction and the United States is going in the wrong direction. The obvious lesson (to normal people) is that America should copy the Swiss. Congressman Kevin Brady has a proposal to do something similar to the debt brake.

Rep. Kevin Brady (R., Texas), vice chairman of the Joint Economic Committee, has introduced legislation that is akin to the Swiss debt brake. Called the Maximizing America’s Prosperity Act, his bill would impose direct spending caps, but tied to “potential GDP.” … Since potential GDP is a reasonably stable variable (like average revenue growth in the Swiss system), this approach creates a sustainable glide path for spending restraint.

In some sense, Brady’s MAP Act is akin to Sen. Corker’s CAP Act, but the use of “potential GDP” makes the reform more sustainable because economic fluctuations don’t enable big deviations in the amount of allowable spending.

To conclude, we know the right policy. It is spending restraint. We also know a policy that will achieve spending restraint. A binding spending cap. The problem, as I note in my op-ed, is that “politicians don’t want any type of constraint on their ability to buy votes with other people’s money.”

Overcoming that obstacle is the real challenge.

P.S. A special thanks to Pierre Bessard, the President of Switzerland’s Liberales Institut. He is a superb public intellectual and his willingness to share his knowledge of the Swiss debt brake was invaluable in helping me write my column.

Sometimes, Governments Lie (6th Anniversary Ed.)

(This blog post first appeared at Cato@Liberty following the release of the 2006 Medicare and Social Security trustees’ reports. I repost it, with updated links and “exhaustion dates” because sadly nothing else has changed.)

Sometimes, Governments Lie

Year after year, federal officials speak of the Social Security and Medicare trust funds as if they were real.  Yesterday Today, the government announced that the Social Security trust fund will be exhausted in 2040 2033 and that the Medicare hospital insurance trust fund will be exhausted in 2018 2024— projections that the media dutifully reported.

But those dates are meaningless, because there are no assets for these “trust funds” to exhaust.  The Bush administration wrote in its FY2007 budget proposal:

These balances are available to finance future benefit payments and other trust fund expenditures—but only in a bookkeeping sense. These funds…are not assets…that can be drawn down in the future to fund benefits…When trust fund holdings are redeemed to pay benefits, Treasury will have to finance the expenditure in the same way as any other Federal expenditure: out of current receipts, by borrowing from the public, or by reducing benefits or other expenditures. The existence of large trust fund balances, therefore, does not, by itself, increase the Government’s ability to pay benefits.

This is similar to language in the Clinton administration’s FY2000 budget, which noted that the size of the trust fund “does not…have any impact on the Government’s ability to pay benefits” (emphasis added).

I offer the following proposition:

If the government knows that there are no assets in the Social Security and Medicare “trust funds,” and yet projects the interest earned on those non-assets and the date on which those non-assets will be exhausted, then the government is lying.

If that’s the case, then these annual trustees reports constitute an institutionalized, ritualistic lie.  Also ritualistic is the media’s uncritical repetition of the lie.

Paul Ryan’s Budget: It’s Still Big Government

Chris Edwards provided an ample overview of Rep. Paul Ryan’s (R-WI) budget proposal, so I won’t rehash the numbers. Instead, I’ll just add a few comments.

Democrats and the left will squeal that Paul Ryan’s budget proposal is a massive threat to the poor, the sick, the elderly, etc, etc. It’s baloney, but a part of me thinks that he might deserve it. Why? Because the excessive rhetoric employed by the left to criticize lower spending levels for domestic welfare programs isn’t much different than the excessive rhetoric Ryan uses to argue against sequestration-induced reductions in military spending. For instance, Ryan speaks of the “devastation to America’s national security” that sequestration would allegedly cause. (See Christopher Preble’s The Pentagon Budget: Myth vs. Reality).

Now I’m sure that I’ll receive emails admonishing me for failing to recognize that the Constitution explicitly gives the federal government the responsibility to defend the nation while the constitutionality of domestic welfare programs isn’t quite so clear. Okay, but what are Ryan’s views on the constitutionality of domestic welfare programs?

At the outset of Ryan’s introduction to his plan, he quotes James Madison and says that the Founders designed a “Constitution of enumerated powers, giving the federal government broad authority over only those matters that must have a single national response, while sharply restricting its authority to intrude on those spheres of activity better left to the states and the people.” That’s nice, but then he proceeds to make statements like this:

But when government mismanagement and political cowardice turn this element of the social contract into an empty promise, seniors are threatened with denied access to care and the next generation is threatened with a debt that destroys its hard earned prosperity. Both consequences would violate President Lyndon B. Johnson’s pledge upon signing the Medicare law: ‘No longer will older Americans be denied the healing miracle of modern medicine…No longer will young families see their own incomes, and their own hopes, eaten away simply because they are carrying out their deep moral obligations to their parents, and to their uncles, and their aunts.’ To fulfill Johnson’s pledge in the 21st century, America’s generations-old health and retirement security programs must be saved and strengthened.

Social contract? Well, so much for those enumerated limits on federal power.

Ryan’s “Statement of Constitutional and Legal Authority” only cites Congress’s general power to tax and spend. Based on the contents of his proposal, which would do little to rein in the federal government’s scope, one could conclude that Ryan’s view of federal power is almost as expansive as that of his Democratic colleagues. Yes, Ryan would reduce the size of government by reducing federal spending as a percentage of GDP. But as I often point out, promises to reduce spending in the future don’t mean a lot when you have a federal government that has the ability to spend money on pretty much any activity that it wants. And under Ryan’s plan, the federal government would be able to continue spending money on pretty much any activity that it wants.

According to Obama’s Budget, Burden of Federal Spending Will Be $2 Trillion Higher in 10 Years

President Obama’s budget proposal was unveiled today, generating all sorts of conflicting statements from both parties.

Some of the assertions wrongly focus on red ink rather than the size of government. Others rely on dishonest Washington budget math, which means spending increases magically become budget cuts simply because outlays are growing at a slower rate than previously planned.

When you strip away all the misleading and inaccurate rhetoric, here’s the one set of numbers that really matters. If we believe the President’s forecasts (which may be a best-case scenario), the burden of federal spending will grow by $2 trillion between this year and 2022.

In all likelihood, the actual numbers will be worse than this forecast.

The President’s budget, for instance, projects that the burden of federal spending will expand by less than 1 percent next year. That sounds like good news since it would satisfy Mitchell’s Golden Rule.

But don’t believe it. If we look at the budget Obama proposed last year, federal spending was supposed to fall this year. Yet the Obama Administration now projects that outlays in 2012 will be more than 5 percent higher than they were in 2011.

The most honest assessment of the budget came from the President’s Chief of Staff, who openly stated that, “the time for austerity is not today.”

With $2 trillion of additional spending (and probably more), that’s the understatement of the century.

What makes this such a debacle is that other nations have managed to impose real restraints on government budgets. The Baltic nations have made actual cuts to spending. And governments in Canada, New Zealand, Slovakia, and Ireland generated big improvements by either freezing budgets or letting them grow very slowly.

I’ve already pointed out that the budget could be balanced in about 10 years if the Congress and the President displayed a modest bit of fiscal discipline and allowed spending to grow by no more than 2 percent annually.

But the goal shouldn’t be to balance the budget. We want faster growth, more freedom, and constitutional government. All of these goals (as well as balancing the budget) are made possible by reducing the burden of federal spending.

Cutting the Government—Greek Style

After much wrangling and consternation, the Greek government has agreed to the latest round of “drastic austerity measures,” the most significant of which is the promise to cut 15,000 government jobs. In return, the Greeks will receive 130 billion euros ($170 billion) of European bailout money to keep the Greek state afloat and, crucially, in the eurozone. That, anyway, is the plan.

The leaders of the political parties that “support” the Greek technocratic (i.e. unelected) government still have to approve the cuts, which they might not do because the unions threaten a general strike. But, there are additional problems as well. First, many of those 15,000 government workers will likely come from the ranks of those who are close to retirement. While the number of government workers will thus shrink, the government’s unsustainable social security burden will worsen. Second, the government workforce (i.e. public servants and employees of the Greek parastatals) account for over 22 percent of the Greek labor force of 4.4 million. That means that the number of people working for the government will decline from 968,000 to 953,000—a reduction of 1.6 percent. And that is what amounts to a “drastic austerity measure” in Greece!

Illinois Downgrade: More Evidence that Higher Taxes Make Fiscal Problems Worse

I don’t blame Democrats for wanting to seduce Republicans into a tax-increase trap. Indeed, I completely understand why some Democrats said their top political goal was getting the GOP to surrender the no-tax-hike position.

I’m mystified, though, why some Republicans are willing to walk into such a trap. If you were playing chess against someone, and that person kept pleading with you to make a certain move, wouldn’t you be a tad bit suspicious that your opponent really wasn’t trying to help you win?

When I talk to the Republicans who are open to tax hikes, they sometimes admit that their party will suffer at the polls for agreeing to the hikes, but they say it’s the right thing to do because of all the government red ink.

I suppose that’s a noble sentiment, though I find that most GOPers who are open to tax hikes also tend to be big spenders, so I question their sincerity (with Senator Coburn being an obvious exception).

But even if we assume that all of them are genuinely motivated by a desire to control deficits and debt, shouldn’t they be asked to provide some evidence that higher taxes are an effective way of fixing the fiscal policy mess?

I’m not trying to score debating points. This is a serious question.

European nations, for instance, have been raising taxes for decades, almost always saying the higher taxes were necessary to balance budgets and control red ink. Yet that obviously hasn’t worked. Europe’s now in the middle of a fiscal crisis.

So why do some people think we should mimic the French and the Greeks?

But we don’t need to look overseas for examples. Look at what’s happened in Illinois, where politicians recently imposed a giant tax hike.

The Wall Street Journal opined this morning on the results. Here are the key passages:

Run up spending and debt, raise taxes in the naming of balancing the budget, but then watch as deficits rise and your credit-rating falls anyway. That’s been the sad pattern in Europe, and now it’s hitting that mecca of tax-and-spend government known as Illinois.

…Moody’s downgraded Illinois state debt to A2 from A1, the lowest among the 50 states. That’s worse even than California.

…This wasn’t supposed to happen. Only a year ago, Governor Pat Quinn and his fellow Democrats raised individual income taxes by 67% and the corporate tax rate by 46%. They did it to raise $7 billion in revenue, as the Governor put it, to “get Illinois back on fiscal sound footing” and improve the state’s credit rating. So much for that.

…And—no surprise—in part because the tax increases have caused companies to leave Illinois, the state budget office confesses that as of this month the state still has $6.8 billion in unpaid bills and unaddressed obligations.

In other words, higher taxes led to fiscal deterioration in Illinois, just as tax increases in Europe have been followed by bad outcomes.

Whenever any politician argues in favor of a higher tax burden, just keep these two points in mind:

1. Higher taxes encourage more government spending.

2. Higher taxes don’t raise as much money as politicians claim.

The combination of these two factors explains why higher taxes make things worse rather than better. And they explain why Europe is in trouble and why Illinois is in trouble.

The relevant issue is whether the crowd in Washington should copy those failed examples. As this video explains, higher taxes are not the solution.

Heck, I’ve already explained that more than 100 percent of America’s long-fun fiscal challenge is government spending. So why reward politicians for overspending by letting them confiscate more of our income?