Tag: deficit

As a Matter of Fact, the Baltic Nations Are a Success Story

I got a few cranky emails after my post suggesting the United States should copy the Baltic nations and implement genuine spending cuts. These emailers were upset that I favorably commented on the fiscal discipline of Estonia, Lithuania, and Latvia while failing to reveal that these nations were suffering from high unemployment.

From the tone of this correspondence, my new friends obviously think this is a “gotcha” moment. The gist of their messages is that the economic downturn that hit the Baltic nations is proof that the free-market model has failed, and that I somehow was guilty of a cover-up.

That’s certainly a strange interpretation, especially since I specifically noted that the three nations had suffered from an economic downturn. There’s no questioning the fact that unemployment spiked upwards because of the global financial crisis, which was especially damaging to the Baltics since they all had real estate bubbles.

But let’s deal with the bigger issue, which is whether this downturn is proof that the free market failed (and, for the sake of argument, let’s assume that all three Baltic nations are free market even though only Estonia gets high scores in the Economic Freedom of the World rankings).

If you look at the IMF’s World Economic Outlook Database, it does show that the Baltic nations had serious economic downturns. Indeed, if we look at the data from 2008 to the present, the recession was far deeper in those nations than in Western Europe and North America.

So at first glance, it seems my critics have a point.

But what happens if you look at a longer period of data? The IMF has data for all three Baltic nations going back to 1999. And if we look at the entire 12-year period, it turns out that Estonia, Latvia, and Lithuania have enjoyed comparatively strong growth. Indeed, as seen in the chart below the jump, they even surpass Hong Kong.

In other words, the Baltic nations may have suffered larger-than-average economic downturns, but they also enjoyed stronger-than-average booms. And the net effect is that they are now in much better shape than the nations that had smaller recessions but also less-robust growth.

A sophisticated critic may look at the data and say they’re meaningless because convergence theory suggests that middle-income countries almost always will grow faster than rich nations. That’s a fair point, so let’s now compare the three Baltic nations to three other nations that were at the same level of development at the turn of this century.

As you can see, the Baltic nations are doing substantially better than other middle-income nations. By the way, skeptics should feel free to peruse the IMF data to confirm that I didn’t cherry-pick nations to make my point (indeed, I deliberately picked Thailand since it was emerging from the Asian financial crisis and is an example of a nation that enjoyed very good growth in the 2000-2011 period).

The point of this post is not that the Baltic nations are perfect. Estonia is ranked 12th in the Economic Freedom rankings, which is impressive, but Lithuania is 33rd and Latvia is 55th. Those aren’t bad scores considering that these nations are recovering from communist tyranny, to be sure, but Hong Kong isn’t in any danger of being dethroned.

Instead, my argument is that the Baltic nations are making slow but steady progress, and I’m quite confident that the recent decisions by these nations to reduce the burden of government spending will help put them back on an above-average growth path.

That is something the United States should emulate.

Let’s Copy the Baltic Nations and Really Cut Spending

All the talk of spending cuts in Washington is fictitious. Even the House Republican Study Committee budget allows spending to increase, on average, by 1.7 percent each year for the next decade. The Ryan budget, which critics deride for its “savage” cuts, allows spending to rise by an average of 2.8 percent each year. And Obama’s budget allows spending to climb, on average, by 4.7 percent each year—which is more than twice the projected rate of inflation.

Too bad American policymakers can’t copy the Baltic nations of Estonia, Latvia, and Lithuania. Like the United States, these nations got in fiscal trouble, thanks to the combination of excessive spending and an economic downturn triggered by falling real estate prices.

But unlike the United States, these nations didn’t follow the Keynesian policy of more deficit spending. Lawmakers in the Baltic nations recognized, to borrow the words of Dan Hannan, that “you cannot spend your way out of recession or borrow your way out of debt.”

So they reduced spending. Not in the Washington sense, where politicians get to increase spending and call it a cut because outlays didn’t rise even faster. The Baltic nations imposed real cuts. And not just for one year, but in both 2009 and 2010. Here’s the data from the European Union for the Baltic nations.

Interestingly, it appears that fiscal restraint has been very successful for the Baltic nations. After suffering a steep downturn, economic growth has returned. Amazingly, Estonia is even back to having a budget surplus.

It’s also worth noting that other nations have enjoyed great success with fiscal restraint. This video shows how Canada, Ireland, Slovakia, and New Zealand dramatically reduced the burden of government spending by freezing or capping outlays. Not quite as impressive as what’s happened in the Baltics, but definitely very good compared to what’s been happening in the United States.

Seven Reasons to Oppose Higher Taxes

As I have explained elsewhere, tax increases are a bad idea - unless you favor bigger government.

And I’ve already added my two cents to the tax debate between Senator Coburn and Grover Norquist regarding the desirability of higher taxes.

So it won’t surprise anyone to know that I fully agree with this new video from the Center for Freedom and Prosperity, which offers seven reasons why higher taxes are a bad idea.


The video is narrated by Piyali Bhattacharya of Young Americans for Liberty, and here are her seven reasons.

  1. Tax increases are not needed
  2. Tax increases encourage more spending
  3. Tax increases harm economic performance
  4. Tax increases foment social discord
  5. Tax increases almost never raise as much revenue as projected
  6. Tax increases encourage more loopholes
  7. Tax increases undermine competitiveness

I think reasons #1, #2, #3, and #5 are the most powerful.

To a considerable degree, my video on balancing the budget makes the same point as reason #1 about why higher taxes are unnecessary. Simply stated, balancing the budget merely requires a modest degree of fiscal discipline, such as capping spending so it only grows 2 percent per year.

And if tax increases are not needed to balance the budget, then the only purpose they serve is to facilitate a bigger burden of government spending, which is why I like reason #2.

And reason #3 is standard economic analysis, making the common-sense point that if you punish something, you get less of it. This is why it is so misguided to impose higher tax rates on work, saving, investment, and entrepreneurship.

Last but not least, reason #5 is just another way of saying that the Laffer Curve is real, as I explain in this tutorial.

Monday Links

  • “Sadly, in Egypt’s case, a freely elected civilian government may prove powerless in the face of the deeply entrenched and well-organized military.”
  • “Washington politicians from both parties, and bureaucrats, have for decades successfully decreased our freedom and liberties as they have regulated more and more of our lives, including our retirement.”
  • “The Ryan proposal correctly focuses on achieving debt reduction through spending cuts, but this very gradual debt reduction schedule is a weakness that could lead to its downfall.”
  • “Nearly two years ago Sen. McCain, along with Senators Graham and Lieberman, was supping with Qaddafi in Tripoli, discussing the possibility of Washington providing military aid.”
  • Cato media fellow Radley Balko joined FOX Business Network’s Stossel recently to discuss your right to make video recordings of police, and why exercising that right frequently is vital to liberty:


Taxing the Rich Is the Cure for Everything!

Under current law, Social Security is supposed to be an “earned benefit,” where taxes are akin to insurance premiums that finance retirement benefits for workers. And because there is a cap on retirement benefits, this means there also is a “wage-base cap” on the amount of income that is hit by the payroll tax.

For 2011, the maximum annual retirement benefit is about $28,400 and the maximum amount of income subject to the payroll tax is about $107,000.

It appears that President Obama wants to radically change this system so that it is based on a class-warfare model. During the 2008 campaign, for instance, then-Senator Obama suggested that the program’s giant long-run deficit could be addressed by busting the wage-base cap and imposing the payroll tax on a larger amount of income.

For the past two years, the White House (thankfully) has not followed through on this campaign rhetoric, but that’s now changing. His Fiscal Commission, as I noted last year, suggested a big hike in the payroll tax burden. And the President reiterated his support for a class-warfare approach earlier this week, leading the Wall Street Journal to opine:

Speaking Tuesday in Annandale, Virginia, Mr. Obama came out for lifting the cap on income on which the Social Security payroll tax is applied. Currently, the employer and employee each pay 6.2% up to $106,800, a level that rises with inflation each year.

…Mr. Obama didn’t hint at specifics, though he did run in 2008 on a plan to raise the “tax max” by somewhere between two to eight percentage points for the top 3% of earners.

…[M]ost of the increase could be paid by the middle class or modestly affluent — i.e., those who merely make somewhat more than $106,800. A 6.2% additional hit on every extra dollar they make above that level is a huge reduction from their take-home pay. If the cap is removed entirely, it will also mean a huge increase in the marginal tax rates that affect decisions to work, invest and save. In a recent paper for the American Enterprise Institute, Andrew Biggs calculates that this and other tax increases Mr. Obama favors would bring the top marginal rate to somewhere between 57% and 68% when factoring in state taxes. Tax levels like these haven’t been seen since the 1970s.

Obama is cleverly avoiding specifics, largely because the potential tax hike could be enormous. The excerpt above actually understates the potential damage since it mostly focuses on the “employee” side of the payroll tax. The “employer” share of the tax (which everyone agrees is paid for by workers in the form of reduced take-home wages) is also 6.2 percent, so the increase in marginal tax rates for affected workers could be as high as 12.4 percentage points.

After the jump is a video from the Center for Freedom and Prosperity, narrated by yours truly, that elaborates on why this is the wrong approach.

Senator Corker Explains His Plan to Cap Spending and Reduce the Fiscal Burden of Government

America is in fiscal peril in the short run because of a 10-year spending binge by Bush and Obama and in the long run because of a toxic combination of entitlement programs and demographics.

Congressman Paul Ryan has introduced a budget plan to address America’s fiscal crisis, but Senator Reid and President Obama have summarily rejected his proposal, so it appears the United States will continue to drift in the wrong direction.

Something is needed to compel action. One might think that such an impetus would have been provided by the recent decision by Standard & Poor’s to downgrade the fiscal outlook for the United States. But this development hasn’t affected the spending culture in Washington.

But there is hope. Senator Corker has legislation that would force Congress to act – and automatically impose fiscal discipline if they don’t. His bill caps – and then slowly reduces – government spending as a share of national economic output (gross domestic product).

I’ve already written about the merits of this proposal, including an explanation of the all-important enforcement mechanism of sequestration (automatic spending cuts). Here’s Senator Corker’s description of his plan, as delivered at a Cato Institute conference on the Economic Impact of Government Spending.

To build on the Senator’s comments, there are two things that deserve special emphasis.

  1. He correctly understands that the problem is the size of government. As explained in this video, spending is the problem and deficits are a symptom of that problem.

    Unfortunately, many policy makers focus on the budget deficit, which often makes them susceptible to misguided policies such as higher taxes. At best, such an approach merely substitutes one bad way of financing federal spending with another bad way of financing federal spending. And it’s much more likely that higher taxes will simply lead to more spending, thus exacerbating the real problem.

  2. Senator Corker’s legislation has a real enforcement mechanism. If Congress fails to produce a budget that meets the annual spending cap, there is a “sequester” provision that automatically takes a slice out of almost every federal program.

    Modeled after a similar provision in the successful Gramm-Rudman-Hollings law of the 1980s, this sequester puts real teeth in the CAP Act and ensures that the burden of government spending actually would be reduced.

Some people complain that Senator Corker’s plan is too timid and that it doesn’t balance the budget by 2021. While it would be desirable to impose additional fiscal restraint, the Tennessee Senator has deliberately chosen a more modest goal in order to attract support from colleagues on the other side of the aisle. And he does have Democratic co-sponsors, something that is critical given the composition of the Senate.

Since I’m just a policy wonk, I’ll leave it to the other people to argue about what’s feasible in the current political environment. My final comment, though, is that we’re on an unsustainable path that will lead to the end of American exceptionalism and turn the United States into a decrepit, European-style welfare state. So I’m not going to complain if someone has a plan that finally moves policy in the right direction, albeit not quite as fast as I prefer.

Why Are Geithner and Bernanke Trying to Panic Financial Markets with Debt Limit Demagoguery?

By taking advantage of  “must-pass” pieces of legislation, Republicans have three chances this year to restrain the burden of government.  They didn’t do very well with the “CR fight” over appropriated spending for the rest of FY2011, which was their first opportunity. I was hoping for an extra-base hit off the fence, but the GOP was afraid of a government shutdown and negotiated from a position of weakness. As such, the best interpretation is that they eked out an infield single.

The next chance to impose fiscal discipline will be the debt limit. Currently, the federal government “only” has the authority to borrow $14.3 trillion (including bookkeeping entries such as the IOUs in the Social Security Trust Fund). This is a very big number, but America’s gross federal debt will hit that limit soon, perhaps May or June.

Republicans say they will not raise the debt limit unless such legislation is accompanied by meaningful fiscal reforms. The political strategists in the Obama White House understandably want to blunt any GOP effort, so they are claiming that any delay in passing a “clean debt limit” will have catastrophic consequences. Specifically, they are using Treasury Secretary Tim Geithner and Federal Reserve Bank Chairman Ben Bernanke to create fear and uncertainty in financial markets.

Just a few days ago, for instance, the Treasury Secretary was fanning the flames of a financial meltdown, as noted by Bloomberg:

“Default would cause a financial crisis potentially more severe than the crisis from which we are only now starting to recover,” Geithner said. “For these reasons, default by the United States is unthinkable.”

The Fed Chairman also tried to pour gasoline on the fire. Here’s a passage from an article in the New York Times earlier this year:

Mr. Bernanke said the debt ceiling should not be used as a negotiating tactic, warning that even the possibility of the United States not being able to pay its creditors could create panic in the debt markets.

There are two problems with these statements from Geithner and Bernanke. First, it is a bit troubling that the Treasury Secretary and Fed Chairman are major players in a political battle. The Treasury Secretary, like the Attorney General, traditionally is supposed to be one of the more serious and non-political people in a  President’s cabinet. And the Fed Chairman is supposed to be completely independent, yet Bernanke is becoming a mouthpiece for Obama’s fiscal policy.

But let’s set aside this first concern and focus on the second problem, which is whether Geithner and Bernanke are being honest. Simply stated, does a failure to raise the debt limit mean default? According to a wide range of expert opinion, the answer is no.

Donald Marron, head of the Urban-Brookings Tax Policy Center and former Director of the Congressional Budget Office, explained what actually would happen in an article for CNN Money.

Our monthly bills average about $300 billion, while revenues are about $180 billion. If we hit the debt limit, the federal government would be able to pay only 60 cents of every dollar it should be paying. But even that does not mean that we will default on the public debt. Geithner would then choose which creditors to pay promptly and which to defer. …Geithner would undoubtedly keep making payments on the public debt, rolling over the outstanding principal and paying interest. Interest payments are relatively small, averaging about $20 billion per month, and paying them on time is essential to America’s enviable position in world capital markets.

And here is the analysis of Stan Collender, one of Washington’s elder statesman on budget issues (and definitely not a small-government conservative).

There is so much misinformation and grossly misleading talk about what will happen if the federal debt ceiling isn’t increased that, before any more unnecessary bloodcurdling language is used that increases everyone’s anxiety, it’s worth taking a few steps back from the edge. …if a standoff on raising the debt ceiling lasts for a significant amount of time, the alternatives to borrowing eventually may not be enough to provide the government with the cash it needs to meet its obligations. Even at that point, however, a default wouldn’t be automatic because payments to existing bondholders could be made the priority while payments to others could be delayed for months.

The Economist magazine also is nonplussed by the demagoguery coming from Washington.

Tim Geithner, the treasury secretary, sent Congress a letter on January 6th describing in gory detail the “catastrophic economic consequences” such an event would entail. …Even with no increase in the ceiling, the Treasury can easily service its existing debt; it is free to roll over maturing issues, and tax revenue covers monthly interest payments by a large multiple. But in that case it would have to postpone paying something else: tax refunds, Medicare or Medicaid payments, civil-service salaries, or Social Security (pensions) cheques.

There are countless other experts I could cite, but you get the point. The United States does not default if the debt limit remains at $14.3 trillion. The only exception to that statement is that default is possible if the Treasury Secretary makes a deliberate (and highly political) decision to not pay bondholders. And while Geithner obviously is willing to play politics, even he would be unlikely to take this step since it is generally believed that the Treasury Secretary may be personally liable if there is a default.

The purpose of this post is not to argue that the debt limit should never be raised. That would require an instant 40 percent reduction in the size of government. And while that may be music to my ears (and some people are making that argument), I have zero faith that politicians would let that happen. Instead, my goal is to help fiscal conservatives understand that Geithner and Bernanke are being dishonest and that they should not be afraid to hold firm in their demands for real reform in exchange for a debt limit increase.

Last but not least, with all this talk about the debt limit, it’s worth reminding everyone that deficits and debt are merely symptoms of too much government spending. As this video explains, spending is the disease and debt is merely one of the symptoms.

By the way, the final chance this year to impose spending restraint will be around October 1, when the 2011 fiscal year expires and the 2012 fiscal year begins. But I won’t be holding my breath for anything worthwhile if Republicans screw up on the debt limit just like they failed to achieve much on the CR fight.