Tag: deficit

And the King of the Fiscal Squeeze Is…Bill Clinton?

When Congressman Paul Ryan takes the stage at CPAC Friday morning, he will, of course, tout his new budget as a solution to America’s spending problem. The 2014 Ryan plan does aim to balance the budget in 10 years. That said, it would leave government spending, as a percent of GDP, at a hefty 19% – as my colleague, Daniel J. Mitchell, points out in his recent blog.  

Proposals like the Ryan budget are all well and good, but they are ultimately just that – proposals. If Congressman Ryan really wants to get serious about cutting spending, he should look to the one U.S. President who has squeezed the federal budget, and squeezed hard.

So, who can Congressman Ryan look to for inspiration on how to actually cut spending? None other than President Bill Clinton.

How can this be? To even say such a thing verges on CPAC blasphemy. Well, as usual, the data don’t lie. Let’s see how Clinton stacks up against Presidents Barack Obama and George W. Bush. As the accompanying chart shows, Clinton was the king of the fiscal squeeze.

Yes, Bill Clinton cut government’s share of GDP by a whopping 3.9 percentage points over his eight years in office. But, what about President Ronald Reagan? Surely the great champion of small government took a bite out of spending during his two terms, right? Well, yes, he did. But let’s put Reagan and Clinton head to head – a little fiscal discipline show-down, if you will (see the accompanying chart).

And the winner is….Bill Clinton. While Reagan did lop off four-tenths of a percentage point of government spending, as a percent of GDP, it simply does not match up to the Clinton fiscal squeeze. When President Clinton took office in 1993, government expenditures accounted for 22.1% of GDP. At the end of his second term, President Clinton’s big squeeze left the size of government, as a percent of GDP, at 18.2%. Since 1952, no other president has even come close.

Some might argue that Clinton was the beneficiary of the so-called “peace dividend,” whereby the post-Cold-War military drawdown led to a reduction in defense expenditures. The problem with this explanation is that the majority of Clinton’s cuts came from non-defense expenditures (see the accompanying table).

Admittedly, Clinton did benefit from the peace dividend, but the defense drawdown simply doesn’t match up to the cuts in non-defense expenditures that we saw under Clinton. Of course, it should be noted that the driving force behind many of these non-defense cuts came from the other side of the aisle, under the leadership of Speaker Gingrich.

The jury is still out on whether Ryan (or Boehner) will prove to be a Gingrich – or Obama, a Clinton. But, at the end of the day, the presidential scoreboard is clear – Clinton is the king of the fiscal squeeze.

So, when Congressman Ryan rallies the troops at CPAC with a call for cutting government spending, perhaps the crowd ought to accompany a standing ovation for the Congressman with a chant of “Bring Back Bill!”

You can follow Prof. Hanke on Twitter at: @Steve_Hanke

Sequestration Is a Small Victory for Budget Hawks

The budget battles in Washington, D.C., are far from over. President Obama’s attempt to break the stalemate by reaching across the aisle and dining with GOP members two days in a row seems more about show than substance. 

The apparent lack of urgency to undo the cuts underscores what we knew all along: the world did not end under sequestration. Most of the cuts will be phased in over the next few months. The defense cuts amount to just 6.5 percent of total spending on national security (Pentagon base budget plus war costs). This is a pittance, and spending will still dwarf what we spent before 9/11. Those who claim that the cuts will undermine American security should explain how we managed to win the Cold War while spending much less, on average. (To learn more about proposals that would maintain a highly capable, but less costly, military, attend our event on March 14th.) 

There is still the possibility that most of this year’s cuts, or the caps on planned spending over the next decade, may not materialize. Congress could reverse the cuts in the future as part of a grand bargain. Or they could simply punt without one. Meanwhile, legislation is moving along that would allow the Pentagon and other agencies to implement the cuts with greater discretion across department programs. This is a good thing, potentially. Smarter cuts are desirable, but we should be on the lookout to ensure that Congress doesn’t simply legislate away any cuts, dumb or otherwise. 

Nonetheless, the fact that military spending actually declined is a small victory. But how will future battles play out? Are the neocons and their supporters in retreat? In a piece running today at Foreign Policy, I offer a cautionary note. Just because the fiscal hawks won this time doesn’t mean that they’ll win the next one, or the one after that: 

The defense contractors and special interests still have enormous firepower in Washington, and they’ve turned their attention to the “continuing resolution” that will fund the government for the remainder of the year. Meanwhile, the neoconservatives are single-minded and relentless. Their tenacity paid off in their bid to launch a war in Iraq and depose Saddam Hussein, but failed to stop Chuck Hagel’s nomination and eventual confirmation as secretary of defense.

The budget fight matters even more. A $470 billion military is more than sufficient to fight the wars the United States truly needs to fight, but not the wars that the neocons want to fight. The next phase in the fight over the Pentagon’s budget should focus less on how much the United States spends on defense, but rather why it spends so much. If we are going to give our military less than it expected to have three or four years ago, we need to think about asking it to do less.

Read the full article here.

The Sequester May Not Be ‘Fair,’ but It’s Real and It Would Slow the Growth of Government

Much to the horror of various interest groups, it appears that there will be a “sequester” on March 1.

This means an automatic reduction in spending authority for selected programs (interest payments are exempt, as are most entitlement outlays).

Just about everybody in Washington is frantic about the sequester, which supposedly will mean “savage” and “draconian” budget cuts.

http://danieljmitchell.wordpress.com/2011/11/01/sequestration-is-a-small-step-in-right-direction-not-something-to-be-feared/If only. That would be like porn for libertarians.

In reality, the sequester merely means a reduction in the growth of federal spending. Even if we have the sequester, the burden of government spending will still be about $2 trillion higher in 10 years.

The other common argument against the sequester is that it represents an unthinking “meat-ax” approach to the federal budget.

But a former congressional staffer and White House appointee says this is much better than doing nothing.

Here’s some of what Professor Jeff Bergner wrote for today’s Wall Street Journal:

You know the cliché: America’s fiscal condition might be grim, but lawmakers should avoid the “meat ax” of across-the-board spending cuts and instead use the “scalpel” of targeted reductions. …Targeted reductions would be welcome, but the current federal budget didn’t drop from the sky. Every program in the budget—from defense to food stamps, agriculture, Medicare and beyond—is in place for a reason: It has advocates in Congress and a constituency in the country. These advocates won’t sit idly by while their programs are targeted, whether by a scalpel or any other instrument. That is why targeted spending cuts have historically been both rare and small.

Bergner explains that small across-the-board cuts are very reasonable:

The most likely way to achieve significant reductions in spending is by across-the-board cuts. Each reduction of 1% in the $3.6 trillion federal budget would yield roughly $36 billion the first year and would reduce the budget baseline in future years. Even with modest reductions, this is real money. …let’s give up the politically pointless effort to pick and choose among programs, accept the political reality of current allocations, and reduce everything proportionately. No one program would be very much disadvantaged. In many cases, a 1% or 3% reduction would scarcely be noticed. Are we really to believe that a government that spent $2.7 trillion five years ago couldn’t survive a 3% cut that would bring spending to “only” $3.5 trillion today? Every household, company and nonprofit organization across America can do this, as can state and local governments. So could Washington.

And he turns the fairness argument back on critics, explaining that it is a virtue to treat all programs similarly:

Across-the-board federal cuts would have to include all programs—no last-minute reprieves for alternative-energy programs, filmmakers or any other cause. All parties would know that they are being treated equally. Defense programs, food-stamp recipients, retired federal employees, the judiciary, Social-Security recipients, veterans and members of Congress—each would join to make a minor sacrifice. It would be a narrative of civic virtue.

It’s worth noting, however, that the sequester would not treat all programs equally. Defense spending is only about 20 percent of the budget, for instance, yet the Pentagon will absorb 50 percent of the savings (though defense spending still increases over the next 10 years).

http://danieljmitchell.wordpress.com/2011/10/10/will-republicans-choose-sequester-savings-or-a-supercommittee-surrenderAt the risk of oversimplifying, the sequester basically applies to so-called discretionary spending. So-called mandatory spending accounts for a majority of federal spending, but it is largely exempt, so entitlement reform will still be necessary if we want to address the nation’s long-run fiscal challenges.

‘Unthinkable, Draconian’ Spending Cuts

It’s my job to advocate for spending cuts. It’s a job I’ve been doing in one form or another for over a decade. If I’ve ever experienced a victory, it must have been a pretty small one, because I can’t recall any.

So why do I persist?

For one, I’m a naturally optimistic person. And fueling that optimism is the press. I’m constantly reading about the possibility of spending cuts, and those articles usually say that the cuts would be major … or massive … or severe … or even draconian! The possibility sends a thrill up my leg.

Alas, the “draconian” spending cuts invariably turn out to be not-so-draconian after all. In fact, it’s often the case that reporters are talking about smaller spending increases rather than real spending cuts. Other times, the cuts are likely to only be temporary or come after years and years of increases.

In today’s example, a National Journal article reports that the “unthinkable” could happen: the fiscal 2013 sequestration cuts–just reduced and postponed by the fiscal cliff deal–might actually go into effect March 1st as scheduled:

Republicans and Democrats in the Senate appear to be coming to the same conclusion on spending, namely that once unthinkable, draconian cuts designed to force a more reasonable compromise may be much harder to undo than anyone ever imagined.

How “draconian” would these “unthinkable” cuts be? About $85 billion. To put that in context, the federal government will spend around $3,500 billion ($3.5 trillion) this year. The deficit alone is likely to approach or exceed $1 trillion (the federal government has run a deficit in excess of $1 trillion for four straight years).

If that’s draconian, what would the press call cutting enough spending just to balance the budget?

As we’ve been trying to demonstrate at DownsizingGovernment.org, spending cuts would be good for the country. I encourage journalists who cover federal policy to check out the site to see what real spending cuts are all about. It might cause you to have to find new adjectives to use to describe what Republicans and Democrats are really doing, but your readers would be better served–especially the wild-eyed optimists like me.

Why ‘Obamacare’s Critics Refuse to Give Up’

Jonathan Adler and I have a paper titled, “Taxation Without Representation: The Illegal IRS Rule to Expand Tax Credits Under the PPACA.” Our central claims are:

  1. The Patient Protection and Affordable Care Act explicitly restricts its “premium-assistance tax credits” (and thus the “cost-sharing subsidies” and employer- and individual-mandate penalties those tax credits trigger) to health insurance “exchanges” established by states;
  2. The IRS has no authority to offer those entitlements or impose those taxes in states that opt not to create Exchanges; and
  3. The IRS’s ongoing attempt to impose those taxes and issue those entitlements through Exchanges established by the federal government is contrary to congressional intent and the clear language of the Act.

Over at The New Republic’s blog The Plank, my friend Jonathan Cohn says this is “preposterous”:

No sentient being following the health care debate could argue, in good faith, that Obamacare’s architects intended for the federal government to set up exchanges without subsidies. It would completely subvert the law’s intent.

It appears my friend does not know the statute, the legislative history, or what Congress’ intent was.

Cohn writes that the statute is “a little fuzzy” on this issue. Quite the contrary: the statute is crystal clear. It explicitly and laboriously restricts tax credits to those who buy health insurance in Exchanges “established by the State under section 1311.” There is no parallel language – none whatsoever – granting eligibility through Exchanges established by the federal government (section 1321). The tax-credit eligibility rules are so tightly worded, they seem designed to prevent precisely what the IRS is trying to do.

ObamaCare supporters just know that can’t be right. It must have been an oversight. Congress could not have written the law that way. It doesn’t make any sense. Those provisions must take effect in federal Exchanges for the law to work. Why would Congress give states the power to blow the whole thing up??

The answer is that Congress didn’t have any choice. Congress intended for ObamaCare to work this way because this was the only way that ObamaCare could become law.

  • The Senate bill had to have state-run Exchanges in order to win the essential votes of moderate Democrats. Without state-run Exchanges, it would not have passed.
  • In order to have state-run Exchanges, the bill needed some way to encourage states to create them without “commandeering” the states. In early 2009, well before House and Senate Democrats introduced their bills, an influential law professor named Timothy Jost advised congressional Democrats of one way to get around the commandeering problem: “Congress could invite state participation…by offering tax subsidies for insurance only in states that complied with federal requirements…”. Both the Finance bill and the HELP bill made premium assistance conditional on state compliance. Senate Democrats settled on the Finance language, which passed without a vote to spare. (Emphasis added.)
  • The Finance Committee had even more reason to condition tax credits on state compliance: it doesn’t have direct jurisdiction over health insurance. Conditioning the tax credits on state compliance was the only way the Committee could even consider legislation directing states to establish Exchanges. Committee chairman Max Baucus admitted this during mark-up.
  • Then something funny happened. Massachusetts voters sent Republican Scott Brown to the Senate, partly due to his pledge to prevent any compromise between the House and Senate bills from passing the Senate. With no other options, House Democrats swallowed hard and passed Senate bill. (They made limited amendments through the reconciliation process. These amendments did not touch the tax-credit eligibility rules, and indeed strengthen the case against the IRS.)

A law limiting tax credits to state-created Exchanges, therefore, is exactly what Congress intended, because Congress had no other choice. On the day Scott Brown took office, any and all other approaches to Exchanges ceased to embody congressional intent. If Congress had intended for some other approach to become law, there would be no law. What made it all palatable was that it never occurred to ObamaCare supporters that states would refuse to comply. The New York Times reports, “Mr. Obama and lawmakers assumed that every state would set up its own exchange.”

Oops.

The only preposterous parts of this debate are the legal theories that the IRS and its defenders have offered to support the Obama administration’s unlawful attempt to create entitlements and impose taxes that Congress clearly and intentionally did not authorize. (But don’t take my word for it. Read the statute. Read our paper. Read this, and this. Watch this video and our debate with Jost. Click on our links to all the stuff the IRS and Treasury and Jost have written.) I wonder if Cohn would tolerate such lawlessness from a Republican administration.

Cohn further claims the many states that are refusing to create Exchanges are “totally sticking it to their own citizens” and people who encourage them “are essentially calling upon states to block their citizens from receiving federal tax breaks, worth as much as several thousand dollars per person. Aren’t conservatives and libertarians supposed to be the party that likes giving tax money back to the people?” Seriously?

  • Fourteen states have enacted statutes or constitutional amendments – often by referendum, often by huge margins – that prohibit state employees from directly or indirectly participating in an essential Exchange function: implementing employer or individual mandates. In those instances, the voters have spoken.
  • Only 22 percent of the budgetary impact of these credits and subsidies is actual tax reduction, and the employer- and individual-mandate penalties triggered by those tax “credits” wipe out most of that. The other 78 percent is new deficit spending. So what we’re really talking about here is $700 billion of new deficit spending.
  • When states refuse to establish Exchanges, they block that new spending, which reduces the deficit and the overall burden of government.
  • In addition, those states exempt their employers from the employer mandate (a tax of $2,000 per worker) and exempt millions of taxpayers from the individual mandate (a tax of $2,085 on families of four earning as little as $24,000).

Who’s for tax cuts now?

Here’s what I think is really bothering Cohn and other ObamaCare supporters. The purpose of those credits and subsidies is to shift the cost of ObamaCare’s community-rating price controls and individual mandate to taxpayers, so that consumers don’t notice them. When states prevent such cost-shifting, they’re not increasing the cost of ObamaCare – they’re revealing it.

And that’s what worries Cohn. If the full cost of ObamaCare appears in people’s health insurance premiums, people will rise up and demand that Congress get rid of it. Cohn isn’t worried about states “sticking it to their citizens.” He’s worried about states sticking it to ObamaCare.

The title of Cohn’s blog post is, “Obamacare’s Critics Refuse to Give Up.” At least we can agree on that much.

For the Sake of Intellectual Integrity, Republicans Should Not Cite the CBO When Arguing against Obama’s Proposed Fiscal-Cliff Tax Hike

I’ve commented before how the fiscal fight in Europe is a no-win contest between advocates of Keynesian deficit spending (the so-called “growth” camp, if you can believe that) and proponents of higher taxes (the “austerity” camp, which almost never seems to mean spending restraint).

That’s a left-vs-left battle, which makes me think it would be a good idea if they fought each other to the point of exhaustion, thus enabling forward movement on a pro-growth agenda of tax reform and reductions in the burden of government spending.

That’s a nice thought, but it probably won’t happen in Europe since almost all politicians in places such as Germany and France are statists. And it might never happen in the United States if lawmakers pay attention to the ideologically biased work of the Congressional Budget Office (CBO).

CBO already has demonstrated that it’s willing to take both sides of this left-v-left fight, and the bureaucrats just doubled down on that biased view in a new report on the fiscal cliff.

For all intents and purposes, the CBO has a slavish devotion to Keynesian theory in the short run, which means more spending supposedly is good for growth. But CBO also believes that higher taxes improve growth in the long run by ostensibly leading to lower deficits. Here’s what it says will happen if automatic budget cuts are cancelled.

Eliminating the automatic enforcement procedures established by the Budget Control Act of 2011 that are scheduled to reduce both discretionary and mandatory spending starting in January and maintaining Medicare’s payment rates for physicians’ services at the current level would boost real GDP by about three-quarters of a percent by the end of 2013.

Not that we should be surprised by this silly conclusion. The CBO repeatedly claimed that Obama’s faux stimulus would boost growth. Heck, CBO even claimed Obama’s spending binge was successful after the fact, even though it was followed by record levels of unemployment.

But I think the short-run Keynesianism is not CBO’s biggest mistake. In the long-run, CBO wants us to believe that higher tax burdens translate into more growth. Check out this passage, which expresses CBO’s view the economy will be weaker 10 years from now if the tax burden is not increased.

…the agency has estimated the effect on output that would occur in 2022 under the alternative fiscal scenario, which incorporates the assumption that several of the policies are maintained indefinitely. CBO estimates that in 2022, on net, the policies included in the alternative fiscal scenario would reduce real GDP by 0.4 percent and real gross national product (GNP) by 1.7 percent. …the larger budget deficits and rapidly growing federal debt would hamper national saving and investment and thus reduce output and income.

In other words, CBO reflexively makes two bold assumption. First, it assumes higher tax rates generate more money. Second, the bureaucrats assume that politicians will use any new money for deficit reduction. Yeah, good luck with that.

To be fair, the CBO report does have occasional bits of accurate analysis. The authors acknowledge that both taxes and spending can create adverse incentives for productive behavior.

…increases in marginal tax rates on labor would tend to reduce the amount of labor supplied to the economy, whereas increases in revenues of a similar magnitude from broadening the tax base would probably have a smaller negative impact or even a positive impact on the supply of labor. Similarly, cutting government benefit payments would generally strengthen people’s incentive to work and save.

But these small concessions do not offset the deeply flawed analysis that dominates the report.

But that analysis shouldn’t be a surprise. The CBO has a track record of partisan and ideological work.

While I’m irritated about CBO’s bias (and the fact that it’s being financed with my tax dollars), that’s not what has me worked up. The reason for this post is to grouse and gripe about the fact that some people are citing this deeply flawed analysis to oppose Obama’s pursuit of class warfare tax policy.

Why would some Republican politicians and conservative commentators cite a publication that promotes higher spending in the short run and higher taxes in the long run? Well, because it also asserts - based on Keynesian analysis - that higher taxes will hurt the economy in the short run.

…extending the tax reductions originally enacted in 2001, 2003, and 2009 and extending all other expiring provisions, including those that expired at the end of 2011, except for the payroll tax cut—and indexing the alternative minimum tax (AMT) for inflation beginning in 2012 would boost real GDP by a little less than 1½ percent by the end of 2013.

At the risk of sounding like a doctrinaire purist, it is unethical to cite inaccurate analysis in support of a good policy.

Consider this example. If some academic published a study in favor of the flat tax and it later turned out that the data was deliberately or accidentally wrong, would it be right to cite that research when arguing for tax reform? I hope everyone would agree that the answer is no.

Yet that’s precisely what is happening when people cite CBO’s shoddy work to argue against tax increases.

It’s very much akin to the pro-defense Republicans who use Keynesian arguments about jobs when promoting a larger defense budget.

To make matters worse, it’s not as if opponents lack other arguments that are intellectually honest.

So why, then, would anybody sink to the depths necessary to cite the Congressional Budget Office?

Europe’s Crisis Is Because of Too Much Government, Not the Euro Currency

The mess in Europe has been rather frustrating, largely because almost everybody is on the wrong side.

Some folks say they want “austerity,” but that’s largely a code word for higher taxes. They’re fighting against the people who say they want “growth,” but that’s generally a code word for more Keynesian spending.

So you can understand how this debate between higher taxes and higher spending is like nails on a chalkboard for someone who wants smaller government.

And then, to get me even more irritated, lots of people support bailouts because they supposedly are needed to save the euro currency.

When I ask these people why a default in, say, Greece threatens the euro, they look at me as if it’s the year 1491 and I’ve declared the earth isn’t flat.

So I’m delighted that the Wall Street Journal has published some wise observations by a leading French economist (an intellectual heir to Bastiat!), who shares my disdain for the current discussion. Here are some excerpts from Prof. Salin’s column, starting with his common-sense hypothesis.

…there is no “euro crisis.” The single currency doesn’t have to be “saved” or else explode. The present crisis is not a European monetary problem at all, but rather a debt problem in some countries—Greece, Spain and some others—that happen to be members of the euro zone. Specifically, these are public-debt problems, stemming from bad budget management by their governments. But there is no logical link between these countries’ fiscal situations and the functioning of the euro system.

Salin then looks at how the artificial link was created between the euro currency and the fiscal crisis, and he makes a very good analogy (and I think it’s good because I’ve made the same point) to a potential state-level bankruptcy in America.

The public-debt problem becomes a euro problem only insofar as governments arbitrarily decide that there must be some “European solidarity” inside the euro zone. But how does mutual participation in the same currency logically imply that spendthrift governments should get help from the others? When a state in the U.S. has a debt problem, one never hears that there is a “dollar crisis.” There is simply a problem of budget management in that state.

He then says a euro crisis is being created, but only because the European Central Bank has surrendered its independence and is conducting backdoor bailouts.

Because European politicians have decided to create an artificial link between national budget problems and the functioning of the euro system, they have now effectively created a “euro crisis.” To help out badly managed governments, the European Central Bank is now buying public bonds issued by these governments or supplying liquidity to support their failing banks. In so doing, the ECB is violating its own principles and introducing harmful distortions.

Last but not least, Salin warns that politicians are using the crisis as an excuse for more bad policy - sort of the European version of Mitchell’s Law, with one bad policy (excessive spending) being the precursor of an additional bad policy (centralization).

Politicians now argue that “saving the euro” will require not only propping up Europe’s irresponsible governments, but also centralizing decision-making. This is now the dominant opinion of politicians in Europe, France in particular. There are a few reasons why politicians in Paris might take that view. They might see themselves being in a similar situation as Greece in the near future, so all the schemes to “save the euro” could also be helpful to them shortly. They might also be looking to shift public attention away from France’s internal problems and toward the rest of Europe instead. It’s easier to complain about what one’s neighbors are doing than to tackle problems at home. France needs drastic tax cuts and far-reaching deregulation and labor-market liberalization. Much simpler to get the media worked up about the next “euro crisis” meeting with Angela Merkel.

This is a bit of a dry topic, but it has enormous implications since Europe already is a mess and the fiscal crisis sooner or later will spread to the supposedly prudent nations such as Germany and the Netherlands. And, thanks to entitlement programs, the United States isn’t that far behind.

So may as well enjoy some humor before the world falls apart, including this cartoon about bailouts to Europe from America, the parody video about Germany and downgrades, this cartoon about Greece deciding to stay in the euro, this “how the Greeks see Europe” map, and this cartoon about Obama’s approach to the European model.

P.S. Here’s a video narrated by a former Cato intern about the five lessons America should learn from the European fiscal crisis.