Tag: deficit

Obama the Born-again Budget Cutter?!?

Chalk up another victory – at least on the rhetorical level – for the Tea Party.

President Obama will release his fiscal year 2012 budget tomorrow and he’s apparently become a born-again fiscal conservative. Here are some excerpts from a Washington Post story:

President Obama will respond to a Republican push for a drastic reduction in government spending by proposing sharp cuts of his own in a fiscal 2012 budget blueprint that aims to trim record federal deficits by $1.1 trillion over the next decade. …two-thirds of the savings would come from spending cuts that are draconian by Democratic standards… When it lands Monday on Capitol Hill, Obama’s plan will launch a bidding war with Republicans over how deeply and swiftly to cut, as the two parties seek a path to fiscal stability for a nation awash in red ink.

I’m skeptical of battlefield conversions, particularly when politicians utilize the dishonest Washington definition of a budget cutincreasing spending by less than previously planned. So the first thing I’ll do when the budget is released is to visit the Historical Tables of the Budget website and see what spending is projected to be in 2011 and what Obama is asking for in 2012.

Those numbers probably won’t be accurate since the Obama administration (like previous ones) will use best-case assumptions, but at least we’ll get a sense of whether:

a) spending actually is being cut (I’m not holding my breath for this miracle), or

b) spending is frozen at current levels (this approach would balance the budget by 2017, but it’s almost as unlikely at the first option), or

c) spending is being restrained (perhaps 2 percent growth, enough to keep pace with inflation), or

d) spending is growing far too fast (say 4 percent growth, pushing America quickly in the wrong direction), or

e) spending is continuing to explode (5 percent growth, 6 percent growth, or even more, meaning we’ll be Greece sooner than we think).

My guess, for what it’s worth, is that the Obama administration will claim (d) but will actually be proposing (e) if more realistic assumptions are used.

Needless to say, I hope I’m wrong. But other parts of the Washington Post story give me little reason for hope. The White House apparently is ignoring entitlements. Heck, the administration apparently isn’t even planning on meeting the President’s own deficit goal.

The blueprint ducks the harder task of tackling the biggest drivers of future deficits: Social Security, Medicare and Medicaid… Obama’s blueprint does not even hit the short-term goal he set for his commission - reducing deficits to 3 percent of the economy by 2015.

The White House also plans to play a shell game with certain parts of the budget. Supposed spending cuts in health care won’t generate taxpayer savings. Instead, they’ll be used to finance more spending on Medicare, enabling the President to cancel savings that were promised as part of Obamacare. The interest groups win and the taxpayers lose.

The Obama blueprint also seeks to eliminate two budget gimmicks that Congress has long used to mask the true depth of the red ink: His proposal would offset higher Medicare payments to doctors by cutting $62 billion from other areas of federal health spending. And it would adjust the alternative minimum tax through 2014 to prevent it from hitting middle-class taxpayers, covering the cost by limiting the value of itemized deductions such as charitable contributions and mortgage interest for wealthy households.

The same shell game takes place on the tax side of the fiscal ledger. The White House plans to cancel one future tax increase and “pay” for that change by imposing another future tax increase. Once again, taxpayers get the short end of the stick.

Unless the Washington Post story is completely inaccurate, the Obama administration is not changing course. There may not be any major initiatives to expand the burden of government, like the failed stimulus or the budget busting government-run healthcare scheme, but it certainly does not seem like there are any plans to reverse direction and shrink the burden of government.

The 1993 Clinton Tax Increase Did Not Lead to the Budget Surpluses of the Late 1990s

Proponents of higher taxes are fond of claiming that Bill Clinton’s 1993 tax increase was a big success because of budget surpluses that began in 1998.

That’s certainly a plausible hypothesis, and I’m already on record arguing that Clinton’s economic record was much better than Bush’s performance.

But this specific assertion it is not supported by the data. In February of 1995, 18 months after the tax increase was signed into law, President Clinton’s Office of Management and Budget issued projections of deficits for the next five years if existing policy was maintained (a “baseline” forecast). As the chart illustrates, OMB estimated that future deficits would be about $200 billion and would slightly increase over the five-year period.

In other words, even the Clinton Administration, which presumably had a big incentive to claim that the tax increase would be successful, admitted 18 months after the law was approved that there was no expectation of a budget surplus. For what it’s worth, the Congressional Budget Office forecast, issued about the same time, showed very similar numbers.

Since the Clinton Administration’s own numbers reveal that the 1993 tax increase was a failure, we have to find a different reason to explain why the budget shifted to surplus in the late 1990s.

Fortunately, there’s no need for an exhaustive investigation. The Historical Tables on OMB’s website reveal that good budget numbers were the result of genuine fiscal restraint. Total government spending increased by an average of just 2.9 percent over a four-year period in the mid-1990s. This is the reason why projections of $200 billion-plus deficits turned into the reality of big budget surpluses.

Republicans say the credit belongs to the GOP Congress that took charge in early 1995. Democrats say it was because of Bill Clinton. But all that really matters is that the burden of federal spending grew very slowly. Not only was there spending restraint, but Congress and the White House agreed on a fairly substantial tax cut in 1997.

To sum things up, it turns out that spending restraint and lower taxes are a recipe for good fiscal policy. This second chart modifies the first chart, showing actual deficits under this small-government approach compared to the OMB and CBO forecasts of what would have happened under Clinton’s tax-and-spend baseline.

New CBO Numbers Re-Confirm that Balancing the Budget Is Simple with Modest Fiscal Restraint

Many of the politicians in Washington, including President Obama during his State of the Union address, piously tell us that there is no way to balance the budget without tax increases. Trying to get rid of red ink without higher taxes, they tell us, would require “savage” and “draconian” budget cuts.

I would like to slash the budget and free up resources for private-sector growth, so that sounds good to me. But what’s the truth?

The Congressional Budget Office has just released its 10-year projections for the budget, so I crunched the numbers to determine what it would take to balance the budget without tax hikes. Much to nobody’s surprise, the politicians are not telling the truth.

The chart below shows that revenues are expected to grow (because of factors such as inflation, more population, and economic expansion) by more than 7 percent each year. Balancing the budget is simple so long as politicians increase spending at a slower rate. If they freeze the budget, we almost balance the budget by 2017. If federal spending is capped so it grows 1 percent each year, the budget is balanced in 2019. And if the crowd in Washington can limit spending growth to about 2 percent each year, red ink almost disappears in just 10 years.

These numbers, incidentally, assume that the 2001 and 2003 tax cuts are made permanent (they are now scheduled to expire in two years). They also assume that the AMT is adjusted for inflation, so the chart shows that we can balance the budget without any increase in the tax burden.

I did these calculations last year, and found the same results. And I also examined how we balanced the budget in the 1990s and found that spending restraint was the key. The combination of a GOP Congress and Bill Clinton in the White House led to a four-year period of government spending growing by an average of just 2.9 percent each year.

We also have international evidence showing that spending restraint - not higher taxes - is the key to balancing the budget. New Zealand got rid of a big budget deficit in the 1990s with a five-year spending freeze. Canada also got rid of red ink that decade with a five-year period where spending grew by an average of only 1 percent per year. And Ireland slashed its deficit in the late 1980s by 10 percentage points of GDP with a four-year spending freeze.

No wonder international bureaucracies such as the International Monetary fund and European Central Bank are producing research showing that spending discipline is the right approach.

This video provides all the details.

Surprise, Surprise

Last year I wrote about the intriguing proposal by the North Dakota Farm Bureau to do away with federal farm subsidies. I expressed at the time my doubt that the proposal would find much traction with the national American Farm Bureau Federation and, indeed, the group voted yesterday (at their annual conference in Atlanta) against the milder proposition to cut direct payments – the approximately $5.2 billion per year of your money that flows to farmers regardless of what, or even whether, they farm. Those payments are becoming increasingly politically contentious at a time of growing unease about record deficits, and some farm groups had said defending (let alone receiving) them was a threat to farmers’ broader interests.

Well, despite some discord among the group, the AFBF – you’ll be shocked, shocked to hear – voted largely for the status quo. From Brownfield (in an article that contains interesting analysis of how support for various programs breaks down on state/regional lines):

By a comfortable margin, the delegates passed a resolution calling for ‘a strong and effective safety net that consists of direct payments, crop insurance and a simplified Average Crop Revenue Election (ACRE) program.

Hopefully Congress can prove me wrong and cut farm subsidies when the farm bill comes up for renewal in 2012.

Privatizing Roads

A major shortcoming of the deficit reduction plan concocted by the president’s Fiscal Commission is that it assumed that the federal government should continue doing everything it currently does. For example, the plan proposed a 15 cent per gallon increase in the federal gasoline tax to fund infrastructure projects. But why not allow the private sector to play a greater role in financing and maintaining infrastructure like roads?

That’s the topic of a new Reason TV video:

In the video, Bruce Benson explains that America has a strong history of privately-provided roads. Unfortunately, because government has come to dominate road construction, most citizens probably don’t stop to consider that the private sector can provide superior alternatives.

As Benson points out, a chief problem with government roads is that they foster armies of lobbyists and special-interests who agitate for more and more taxpayer money. Policymakers try to steer transportation dollars to their districts and states, which inevitably results in money going to projects that make little economic sense. With a private road, it has to make economic sense or it won’t get built.

Another problem is that the federal government places costly burdens on the state and local recipients of the funds. ABC News recently had story on a new federal regulation – contained in an 800 page book – that requires local governments to change the fonts on their street signs to make them easier to read. The article says that the requirement will cost Milwaukee $2 million alone, or twice the city’s annual traffic control budget.

Not surprisingly, special-interest groups had a hand in getting the federal government to implement the regulation:

The American Traffic Safety Services Association – which represents companies that make signs and the reflective material used on them – lobbied hard for the new rules.  And at least one key study used to justify the changes was funded by the 3M Corporation, one of the few companies that make the reflective material now required on street signs.

See this Cato essay for more on why federal highway funding should be abolished.

Deficit Reduction Commission Says Military Spending Can and Must be Cut

President Obama’s Fiscal Commission’s report is out and they have wisely kept military spending on the table. Having not seen the accompanying list of specific cuts, it seems that rather than micromanage DoD’s decisions with respect to which weapons systems to cut or keep, the commissioners have laid down a different marker: find the cuts that make sense, but understand that the business-as-usual of the past decade is over.

The report fixes on a number of spending cuts and reforms that Benjamin Friedman and I call for in the Cato Policy Analysis “Budgetary Savings from Military Restraint” including cuts to the civilian workforce (see recommendation 1.10.4). They also hold fast to the proposition that all spending must be on the table, and reject out of hand the notion that military spending must be held sacrosanct. This is bad news for the “defending defense” crowd.

I am not going to comment on the Commission’s other proposals with respect to taxes, social security, health care, etc.  As for specific military spending cuts, this report is less detailed than the preliminary report issued a few weeks ago by Co-chairs Bowles and Simpson. It is appropriate, however, to task the Department of Defense with identifying additional savings (as they do in recommendation 1.11). Responsible cuts can be made if the Pentagon and the White House adopt a strategy of restraint, one that husbands American resources, focuses on a few core missions vital to U.S. national security, and requires other countries to take primary responsibility for their defense.

Mirror, Mirror, on the Wall, Which Nation Has the Most Debt of All?

The Economist has a fascinating webpage that allows readers to look at all the world’s nations and compare them based on various measures of government debt (and for various years).

The most economically relevant measure is public debt as a share of GDP, and you can see that the United States is not in great shape, though many nations have more accumulated red ink (especially Japan, where debt is much higher than it is even in Greece).  As faithful readers of this blog already understand, the real issue is the size of government, but this site is a good indicator of nations that finance their spending in a risky fashion.

By the way, keep in mind that these figures do not include unfunded liabilities. For those who worry about debt, those are the truly shocking numbers (at least for the United States and other nations with government-run pension and health schemes).