Tag: Deficits

Will the GOP Finally Cut Farm Subsidies?

With trillion dollar deficits and mounting federal debt, will Congress finally get serious about cutting farm subsidies? We’ve been disappointed before, but there are a few hopeful signs—like the front-page story in this morning’s Washington Post—that this Congress may be serious about cutting billions in payments to farmers. As the Post reports:

In their recent budget proposals, House Republicans and House Democrats targeted farm subsidies, a program long protected by members of both parties. The GOP plan includes a $30 billion cut to direct payments over 10 years, which would slash them by more than half. Those terms are being considered in the debt-reduction talks led by Vice President Biden, according to people familiar with the discussions.

The Post story profiles a freshman Republican from Kansas, Tim Huelskamp, a fifth-generation farmer himself, who has been traveling his sprawling district telling his farmer constituents that they can no longer be exempt from budget discipline. Many farmers in his district appear to agree.

It remains an open question whether the Republican freshman class will live up to Tea-Party principles of limited government when it comes to agricultural subsidies, as we have speculated ourselves (here, here, and here) at the trade center.

Farm subsidies have certainly been a weak spot of Republicans in the past. According to our online trade-vote feature, more than half of the GOP House caucus voted in May 2008 to override President Bush’s veto of the previous, subsidy laden farm bill. In July 2007, more than half the GOP caucus voted against any cuts in the sugar program, and more than two-thirds opposed any cuts in cotton subsidies. (Of course, Democrats were just as bad overall on farm subsidies.)

The next farm bill, due to be written by this Congress, will tell us a lot about whether the Republicans really believe what they’ve been saying about limiting government and reducing the debt.

Tax Cuts, Loopholes, and Government Size

President Obama wants to raise revenues by reducing tax deductions and other tax breaks, which the administration calls “spending in the tax code.” Donald Marron of the Tax Policy Center argues that “hundreds of billions of dollars of spending are disguised as tax cuts.”

Don is a very good economist, and he is concerned that special interest tax breaks can misallocate resources the same way that spending subsidies do. I agree. But I’m also concerned that tax breaks and spending subsidies have different implications for the size of government, which is where I part ways with Don and the president.

The following Tax Policy Matrix helps sort out which sorts of tax cuts make economic sense when government size is also a consideration.

The government distorts the economy and reduces GDP through both its taxing and spending actions. One reason is that both taxes and spending cause individuals and businesses to change their behaviors and reallocate resources in suboptimal ways. The table has columns for tax and spending distortions. It also has a column for government debt because running deficits today may translate into higher levels of distortionary taxes tomorrow.

The table includes two Starve-the-Beast scenarios. “With Starve-the-Beast” means that tax cuts will reduce government spending to some extent over time. A narrow tax base shot full of loopholes creates allocation distortions, but if starve-the-beast works that sort of tax base also limits the government’s size creating a counterbalancing benefit to GDP.

In the short run, starve-the-beast may or may not work. Bill Niskanen says that it does not, but I think the effectiveness of it changes over time as political culture changes. In the 1980s and 1990s, policymakers took corrective actions when deficits rose, but the revival of Keynesianism in recent years changed the political culture and, for a while, nullified the fear of deficits for many politicians.

In the long run, it seems obvious that the inflow of tax revenues to the government is a hard check on spending because there are financial market limits to government borrowing.

Let’s go through the rows in the table:

Row 1. The government starts off with a balanced budget and with tax and spending systems that cause medium damage.

Row 2. The government cuts taxes $100 by way of a loophole. Tax distortions rise because marginal tax rates are unchanged and we’ve added a new distortion. Higher debt likely pushes up future tax distortions. This appears to be a poor policy choice.

Row 3. The government cuts taxes $100 by way of marginal rate cut. Tax distortions are reduced, which increases economic growth. The downside is higher debt. This may or may be a good policy depending on the quality of the tax cut. If the cut is to a very distortionary part of the tax code—such as the corporate income tax rate—this policy could make sense. One reason is that the deficit increase might end up being quite small because of the positive economic response to the pro-efficiency tax cut.

Row 4. With starve-the-beast operational, a special interest tax cut becomes a bit of a closer call. Tax distortions and debt rise, but government spending falls somewhat, so the net effect on the economy is unclear. However, I think there are considerations here aside from economics. Special interest tax breaks—such as the ethanol tax break—are troubling because they represent a corruption of the law, an affront to the American ideal of “equal justice under law.” So just on that basis, I’m against special interest breaks, and indeed am in favor replacing the current code with a flat tax.

Row 5. A pro-efficiency tax cut is very likely a winner if you assume that starve-the-beast is operational. Tax and spending distortions both fall, although there is a modest increase in debt.

So far we’ve left out the most important fiscal tool available to policymakers—spending cuts to unneeded and damaging programs to reduce government harm to the economy. The best policy choice would be to combine pro-growth tax cuts with spending cuts to harmful programs. That would reduce government distortions on both sides of the budget, and thus unambiguously increase GDP.

In sum, without matching spending cuts, tax cuts may or may not make sense depending on the type of cut and whether reducing Uncle Sam’s diet will force him to slim down in subsequent years. But it is a fiscal policy win-win to match spending cuts with cuts to the most damaging parts of the tax code.

Why Budgets Are Busted

Three stories in today’s Washington Post help us to understand why governments around the world are facing unmanageable deficits. On the front page:

When Prime Minister Jose Luis Rodriguez Zapatero took power seven years ago, he and his Socialist Workers’ Party set out to perfect the welfare state in Spain. The goal was to equal— or even surpass — lavish social protections that have long been the rule for Spain’s Western European neighbors.

True to his Socialist principles and riding an economic boom, Zapatero raised the minimum wage and extended health insurance to cover everything from sniffles to sex changes. He made scholarships available to all. Young adults got rent subsidies called “emancipation” money. Mothers got $3,500 for the birth of a child, toddlers attended free nurseries and the elderly got stipends for nursing care.

On page 3, a story about federal pensions, which still offer federal employees

a benefit lost long ago by many workers at private companies — a guaranteed retirement check paid largely by the boss.

These traditional pensions, called defined-benefit plans, have long been an attractive feature of government work.

On the op-ed page, George Will notes that in 1975 then-governor Jerry Brown said that his plan was

To stand up to the special pleaders who are encamped, I should say, encircling the state capitol, and to see through their particular factional claims to the broad public interest.

Three years later, “Brown conferred on government employees the right to unionize and bargain collectively.” Now, from prison guards to teachers, the public employee unions press for unaffordable spending and block efforts at reform. And again-governor Jerry Brown would rather raise taxes than stand up to the unions that helped elect him.

As has been noted many times, politicians spend all the money that comes in when times are good. They don’t put anything aside for the possibility of lean years. And they make commitments, like pensions and collective bargaining agreements, that will prove to be fiscal time bombs, exploding long after the next election. It looks like the long run is here.

Rand Paul’s Balanced Budget Plan

Sen. Rand Paul (R-KY) has released a detailed plan that would balance the federal budget in five years. Paul’s plan would achieve balance by halting and reversing the historic rise in federal spending. Taxes would not be increased, but revenues would steadily increase as the economy recovers.

The following charts compare Paul’s plan versus President Obama’s recent budget submission for fiscal 2012:

While Obama intends to continue spending at a historically high level, Paul would reduce spending as a share of the economy. Paul takes the scalpel to all areas of federal spending, including discretionary, defense, and mandatory. However, it is not a radical plan. In fact, it’s a practical, common sense budget that recognizes that the federal government’s growth has become unsustainable, and thus a threat to our economic well-being and future living standards.

Spending Restraint Works: Examples from Around the World

America faces a fiscal crisis. The burden of federal spending has doubled during the Bush-Obama years, a $2 trillion increase in just 10 years. But that’s just the tip of the proverbial iceberg. Because of demographic changes and poorly designed entitlement programs, the federal budget is going to consume larger and larger shares of America’s economic output in coming decades.

For all intents and purposes, the United States appears doomed to become a bankrupt welfare state like Greece.

But we can save ourselves. A previous video showed how both Ronald Reagan and Bill Clinton achieved positive fiscal changes by limiting the growth of federal spending, with particular emphasis on reductions in the burden of domestic spending. This new video from the Center for Freedom and Prosperity provides examples from other nations to show that good fiscal policy is possible if politicians simply limit the growth of government.

 

These success stories from Canada, Ireland, Slovakia, and New Zealand share one common characteristic. By freezing or sharply constraining the growth of government outlays, nations were able to rapidly shrinking the economic burden of government, as measured by comparing the size of the budget to overall economic output.

Ireland and New Zealand actually froze spending for multi-year periods, while Canada and Slovakia limited annual spending increases to about 1 percent. By comparison, government spending during the Bush-Obama years has increased by an average of more than 7-1/2 percent. And the burden of domestic spending has exploded during the Bush-Obama years, especially compared to the fiscal discipline of the Reagan years. No wonder the United States is in fiscal trouble.

Heck, even Bill Clinton looks pretty good compared to the miserable fiscal policy of the past 10 years.

The moral of the story is that limiting the growth of spending works. There’s no need for miracles. If politicians act responsibly and restrain spending, that allows the private sector to grow faster than the burden of government. That’s the definition of good fiscal policy. The new video above shows that other nations have been very successful with that approach. And here’s the video showing how Reagan and Clinton limited spending in America.

Deconstructing the Spending Side of Obama’s Proposed FY2012 Budget

President Obama’s proposed budget for fiscal year 2012 has been released and there is lots of rhetoric in Washington about “budget cuts.”

At first glance, this seems warranted. According to the just-released fiscal blueprint, the federal government is spending about $3.8 trillion this year and the President is proposing to spending a bit more than $3.7 trillion next year. In other words, the White House is going beyond a budget freeze and is actually proposing to spend $90 billion less next year than is being spent this year.

That certainly seems consistent with my proposal to solve America’s fiscal problems by restraining the growth of spending.

But you won’t find a smile on my face. This new budget may be better than Obama’s first two fiscal blueprints, but that’s damning with faint praise. The absence of big initiatives such as the so-called stimulus scheme or a government-run healthcare plan simply means that there’s no major new proposal to accelerate America’s fiscal decline.

But neither is there any plan to undo the damage of the past 10 years, which resulted in a doubling in the burden of government spending during a period when inflation was less than 30 percent.

Moreover, many of the supposed budget savings (such as nearly $40 billion of lower jobless benefits) are dependent on better economic performance. I certainly hope the White House is correct about faster growth and more job creation, but they’ve been radically wrong for the past two years and it might not be wise to rely on optimistic assumptions.

Some of the fine print in the budget also is troubling, such as Table 4.1 of OMB’s Historical Tables of the Budget, which shows that some agencies are getting huge increases, including:

  • 17 percent more money for International Assistance Programs;
  • 24 percent more money for the Executive Office of the President;
  • 13 percent for the Department of Transportation; and
  • 12 percent more for the Department of State.

But these one-year changes in outlays are dwarfed by the 10-year trend. Since 2001, spending has skyrocketed in almost every part of the budget. Even with the supposed “cuts” in Obama’s budget, there will be:

  • 112 percent more spending for the Department of Agriculture;
  • 100 percent more spending for the Department of Education;
  • 154 percent more spending for the Department of Energy;
  • 110 percent more spending for the Department of Health and Human Services;
  • 175 percent more spending for the Department of Labor; and
  • 82 percent for the Department of Transportation.

And remember that inflation was less than 30 percent during this period.

The budget needs to be dramatically downsized, yet the President has proposed that we tread water.

But even that’s too optimistic. America’s real fiscal challenge is that the burden of government spending will dramatically increase in coming decades, thanks largely to an aging population and poorly designed entitlement programs. Barring some sort of change, the United States will suffer the same problems that are now afflicting failed welfare states such as Greece and Portugal.

On the issue of entitlement reform, however, the President is missing in action. He’s not even willing to embrace the timid proposals of his own Fiscal Commission.

Tomorrow, we’ll look at the tax side of the President’s budget.

To Fix the Budget, Bring Back Reagan…or Even Clinton

President Obama unveiled his fiscal year 2012 budget today, and there’s good news and bad news. The good news is that there’s no major initiative such as the so-called stimulus scheme or the government-run healthcare proposal. The bad news, though, is that government is far too big and Obama’s budget does nothing to address this problem.

But perhaps the folks on Capitol Hill will be more responsible and actually try to save America from becoming a big-government, European-style welfare state. The solution may not be easy, but it is simple. Lawmakers merely need to restrain the growth of government spending so that it grows slower than the private economy.

Actual spending cuts would be the best option, of course, but limiting the growth of spending is all that’s needed to slowly shrink the burden of government spending relative to gross domestic product.

Fortunately, we have two role models from recent history that show it is possible to control the federal budget. This video from the Center for Freedom and Prosperity uses data from the Historical Tables of the Budget to demonstrate the fiscal policy achievements of both Ronald Reagan and Bill Clinton.

Some people will want to argue about who gets credit for the good fiscal policy of the 1980s and 1990s.

Bill Clinton’s performance, for instance, may not have been so impressive if he had succeeded in pushing through his version of government-run healthcare or if he didn’t have to deal with a Republican Congress after the 1994 elections. But that’s a debate for partisans. All that matters is that the burden of government spending fell during Bill Clinton’s reign, and that was good for the budget and good for the economy. And there’s no question he did a much better job than George W. Bush.

Indeed, a major theme in this new video is that the past 10 years have been a fiscal disaster. Both Bush and Obama have dramatically boosted the burden of government spending – largely because of rapid increases in domestic spending.

This is one of the reasons why the economy is weak. For further information, this video looks at the theoretical case for small government and this video examines the empirical evidence against big government.

Another problem is that many people in Washington are fixated on deficits and debt, but that’s akin to focusing on symptoms and ignoring the underlying disease. To elaborate, this video explains that America’s fiscal problem is too much spending rather than too much debt.

Last but not least, this video reviews the theory and evidence for the “Rahn Curve,” which is the notion that there is a growth-maximizing level of government outlays. The bad news is that government already is far too big in the United States. This is undermining prosperity and reducing competitiveness.