Tag: economics

A Practical (and Semi-Optimistic) Plan to Tame the Federal Leviathan

Like a lot of libertarians and small-government conservatives, I’m prone to pessimism. How can you be cheerful, after all, when you look at what’s been happening in our lifetimes.

New entitlement programs, adopted by politicians from all parties, are further adding to the long-run spending crisis.

The federal budget has become much bigger, luring millions of additional people into government dependency.

The tax code has become even more corrupt and complex, with more than 4,600 changes just between 2001 and 2012 according to a withering report from outgoing Senator Tom Coburn of Oklahoma.

And let’s not forget the essential insight of “public choice” economics, which tells us that politicians care first and foremost about their own interests rather than the national interest. So what’s their incentive to address these problems, particularly if there’s some way to sweep them under the rug and let future generations bear the burden?

And if you think I’m being unduly negative about political incentives and fiscal responsibility, consider the new report from the European Commission, which found that politicians from EU member nations routinely enact budgets based on “rosy scenarios.” As the EU Observer reported:

EU governments are too optimistic about their economic prospects and their ability to control public spending, leading to them continually missing their budget targets, a European Commission paper has argued. …their growth projections are 0.6 percent higher than the final figure, while governments who promise to cut their deficit by 0.2 percent of GDP, typically tend to increase their gap between revenue and spending by the same amount.

Needless to say, American politicians do the same thing with their forecasts. If you don’t believe me, just look at the way the books were cooked to help impose Obamacare.

But set aside everything I just wrote because now I’m going to tell you that we’re making progress and that it’s actually not that difficult to constructively address America’s fiscal problems.

First, let’s look at how we’ve made progress. I just wrote a piece for The Hill. It’s entitled “Republicans are Winning the Fiscal Fight” and it includes lots of data on what’s been happening over the past five years, including the fact that there’s been no growth in the federal budget.

Debunking the Debunking of Dynamic Scoring and the Laffer Curve

Many statists are worried that Republicans may install new leadership at the Joint Committee on Taxation (JCT) and Congressional Budget Office (CBO).

This is a big issue because these two score-keeping bureaucracies on Capitol Hill tilt to the left and have a lot of power over fiscal policy.

The JCT produces revenue estimates for tax bills, yet all their numbers are based on the naive assumption that tax policy generally has no impact on overall economic performance. Meanwhile, CBO produces both estimates for spending bills and also fiscal commentary and analysis, much of it based on the Keynesian assumption that government spending boosts economic growth.

I personally have doubts whether congressional Republicans are smart enough to make wise personnel choices, but I hope I’m wrong.

Matt Yglesias of Vox also seems pessimistic, but for the opposite reason.

He has a column criticizing Republicans for wanting to push their policies by using “magic math” and he specifically seeks to debunk the notion - sometimes referred to as dynamic scoring or the Laffer Curve - that changes in tax policy may lead to changes in economic performance that affect economic performance.

He asks nine questions and then provides his version of the right answers. Let’s analyze those answers and see which of his points have merit and which ones fall flat.

But even before we get to his first question, I can’t resist pointing out that he calls dynamic scoring “an accounting gimmick from the 1970s” in his introduction. That is somewhat odd since the JCT and CBO were both completely controlled by Democrats at the time and there was zero effort to do anything other than static scoring.

I suppose Yglesias actually means that dynamic scoring first became an issue in the 1970s as Ronald Reagan (along with Jack Kemp and a few other lawmakers) began to argue that lower marginal tax rates would generate some revenue feedback because of improved incentives to work, save, and invest.

Now let’s look at his nine questions and see if we can debunk his debunking:

Two Very Depressing Charts for President Obama, Two Very Encouraging Charts for America’s Taxpayers

Let’s look at some fiscal data that must be very depressing for President Obama and other advocates of big government.

Which means, of course, that this information must be very good news for American taxpayers!

Here’s a chart looking at annual federal spending since 2000. You’ll notice that spending skyrocketed from 2000-2009 (a time when libertarians were justifiably glum), but look at how the growth of government came to a screeching halt after 2009.

Here are some specific numbers culled from the OMB data and CBO data. In fiscal year 2009, the federal government spent about $3.52 trillion. In fiscal year 2014 (which ended on September 30), the federal government spent about $3.50 trillion.

In other words, there’s been no growth in nominal government spending over the past five years. It hasn’t received nearly as much attention as it deserves, but there’s been a spending freeze in Washington.

Now let’s look at what happens when government is put on a diet.

Research Shows that Small Government Is Efficient Government

I’ve argued that we’ll get better government if we make it smaller.

And Mark Steyn humorously observed, “our government is more expensive than any government in history – and we have nothing to show for it.”

But can these assertions be quantified?

I had an email exchange last week with a gentleman from Texas who wanted to know if I had any research on the efficiency of government. He specifically wanted to know the “ratio of federal tax dollars collected to the actual delivery of the service.”

That was a challenge. If he simply wanted examples of government waste, I could have overloaded his inbox.

But he wanted an efficiency measure, which requires apples-to-apples comparisons to see which jurisdictions are delivering the most output (government services) compared to input (how much is spent on those services).

My one example was in the field of education, where I was ashamed to report that the United States spends more per student than any other nation, yet we get depressingly mediocre results (though that shouldn’t be a surprise for anyone who has looked at this jaw-dropping chart comparing spending and educational performance).

But his query motivated me to do some research and I found an excellent 2003 study from the European Central Bank. Authored by Antonio Afonso, Ludger Schuknecht, and Vito Tanzi, the study specifically examines the degree to which governments are providing value, and at what cost.

Are Well-Meaning but Misguided Conservatives Being Seduced by the Value-Added Tax?

Having a vision of a free society doesn’t mean libertarians are incapable of common-sense political calculations.

For example, the long-run goal is to dramatically shrink the size and scope of the federal government, both because that’s how the Founding Fathers wanted our system to operate and because our economy will grow much faster if labor and capital are allocated by economic forces rather than political calculations. But in the short run, I’m advocating for incremental progress in the form of modest spending restraint.

Why? Because that’s the best that we can hope for at the moment.

Another example of common-sense libertarianism is my approach to tax reform. One of the reasons I prefer the flat tax over the national sales tax is that I don’t trust that politicians will get rid of the income tax if they decide to adopt the Fair Tax. And if the politicians suddenly have two big sources of tax revenue, you better believe they’ll want to increase the burden of government spending.

Which is what happened (and is still happening) in Europe when value-added taxes were adopted.

And that’s a good segue to today’s topic, which deals with a common-sense analysis of the value-added tax.

Here’s the issue: I’m getting increasingly antsy because some very sound people are expressing support for the VAT.

I don’t object to their theoretical analysis. They say they don’t want the VAT in order to finance bigger government. Instead, they argue the VAT should be used only to replace the corporate income tax, which is a far more destructive way of generating revenue.

And if that was the final–and permanent–outcome of the legislative process, I would accept that deal in a heartbeat. But notice I added the requirement about a “permanent” outcome. That’s because I have two requirements for such a deal:

1. The corporate income tax could never be reinstated.

2. The VAT could never be increased.

And this shows why theoretical analysis can be dangerous without real-world considerations. Simply stated, there is no way to guarantee those two requirements without amending the Constitution, and that obviously isn’t part of the discussion.

The 95 Percent Rule, Bulgaria, and the New York Times

Recent reportage in the New York Times reminded me of my 95 Percent Rule: “95 percent of what you read about economics and finance is either wrong or irrelevant.” In her piece on the Bulgarian elections, Mariana Ionova wrote:

“[Bulgaria’s] economy is growing at an annual rate of about 1.6 percent, but that is the slowest pace in the union, and about half the European average.”

These alleged facts aren’t even in the ballpark (see the accompanying chart). Bulgaria is neither the slowest growing economy in the European Union, nor is it growing at half the European average. In fact, Bulgaria is growing slightly faster than the European average.

Once again, the 95 Percent Rule rules.

Krugman’s ‘Gotcha’ Moment Leaves Something to Be Desired

I’ve had some fun over the years by pointing out that Paul Krugman has butchered numbers when writing about fiscal policy in nations such as FranceEstoniaGermany, and the United Kingdom.

So I shouldn’t be surprised that he wants to catch me making an error. But I’m not sure his “gotcha” moment is very persuasive. Here’s some of what he wrote for today’s New York Times.

Gov. Jerry Brown was able to push through a modestly liberal agenda of higher taxes, spending increases and a rise in the minimum wage. California also moved enthusiastically to implement Obamacare. …Needless to say, conservatives predicted doom. …Daniel J. Mitchell of the Cato Institute declared that by voting for Proposition 30, which authorized those tax increases, “the looters and moochers of the Golden State” (yes, they really do think they’re living in an Ayn Rand novel) were committing “economic suicide.”

Kudos to Krugman for having read Atlas Shrugged, or for at least knowing that Rand sometimes referred to “looters and moochers.” Though I have to subtract points because he thinks I’m a conservative rather than a libertarian.

But what about his characterization of my position? Well, he’s right, though I’m predicting slow-motion suicide. Voting for a tax hike isn’t akin to jumping off the Golden Gate bridge. Instead, by further penalizing success and expanding the burden of government, California is engaging in the economic equivalent of smoking four packs of cigarettes every day instead of three and one-half packs.

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