Tag: federal budget

Paul Ryan’s Budget: It’s Still Big Government

Chris Edwards provided an ample overview of Rep. Paul Ryan’s (R-WI) budget proposal, so I won’t rehash the numbers. Instead, I’ll just add a few comments.

Democrats and the left will squeal that Paul Ryan’s budget proposal is a massive threat to the poor, the sick, the elderly, etc, etc. It’s baloney, but a part of me thinks that he might deserve it. Why? Because the excessive rhetoric employed by the left to criticize lower spending levels for domestic welfare programs isn’t much different than the excessive rhetoric Ryan uses to argue against sequestration-induced reductions in military spending. For instance, Ryan speaks of the “devastation to America’s national security” that sequestration would allegedly cause. (See Christopher Preble’s The Pentagon Budget: Myth vs. Reality).

Now I’m sure that I’ll receive emails admonishing me for failing to recognize that the Constitution explicitly gives the federal government the responsibility to defend the nation while the constitutionality of domestic welfare programs isn’t quite so clear. Okay, but what are Ryan’s views on the constitutionality of domestic welfare programs?

At the outset of Ryan’s introduction to his plan, he quotes James Madison and says that the Founders designed a “Constitution of enumerated powers, giving the federal government broad authority over only those matters that must have a single national response, while sharply restricting its authority to intrude on those spheres of activity better left to the states and the people.” That’s nice, but then he proceeds to make statements like this:

But when government mismanagement and political cowardice turn this element of the social contract into an empty promise, seniors are threatened with denied access to care and the next generation is threatened with a debt that destroys its hard earned prosperity. Both consequences would violate President Lyndon B. Johnson’s pledge upon signing the Medicare law: ‘No longer will older Americans be denied the healing miracle of modern medicine…No longer will young families see their own incomes, and their own hopes, eaten away simply because they are carrying out their deep moral obligations to their parents, and to their uncles, and their aunts.’ To fulfill Johnson’s pledge in the 21st century, America’s generations-old health and retirement security programs must be saved and strengthened.

Social contract? Well, so much for those enumerated limits on federal power.

Ryan’s “Statement of Constitutional and Legal Authority” only cites Congress’s general power to tax and spend. Based on the contents of his proposal, which would do little to rein in the federal government’s scope, one could conclude that Ryan’s view of federal power is almost as expansive as that of his Democratic colleagues. Yes, Ryan would reduce the size of government by reducing federal spending as a percentage of GDP. But as I often point out, promises to reduce spending in the future don’t mean a lot when you have a federal government that has the ability to spend money on pretty much any activity that it wants. And under Ryan’s plan, the federal government would be able to continue spending money on pretty much any activity that it wants.

Paul Ryan’s Spending Plan

House Budget Committee chairman Paul Ryan (R-WI) has introduced his annual budget blueprint. The plan will likely pass the House but won’t become law this year.

However, the plan signals the direction that House Republicans want to go in budget battles with the Democrats this year, and it also shows the likely thrust of policy under a possible Republican president next year.

Here are a few highlights:

  • Total federal outlays would fall from $3,624 billion this year to $3,530 billion next year. Those figures are $24 billion less than under President Obama’s budget this year and $187 billion next year.
  • Of the $187 billion savings compared to Obama next year, $38 billion would come from discretionary programs, $146 billion from so-called entitlements, and $3 billion from interest costs.
  • Ryan’s proposed spending in 2022 of $4,888 billion would be a modest 13 percent less than Obama’s proposed spending that year. That’s a useful statistic to remember when you read the inevitable stories about how Ryan would slash, burn, and pillage the government safety net.
  • Indeed, Ryan’s proposed increase in federal spending from $3,624 billion this year to $4,888 by 2022 represents fairly robust annual average growth of three percent.
  • As a share of GDP, the Ryan budget would trim outlays from 23.4 percent this year to 19.8 percent by 2022. That reduction would simply get spending back to around the normal historical level. And note that spending would still be higher than the 18.2 percent achieved in the last two years under President Clinton.
  • Ryan would repeal the 2010 health care law and reform Medicare by transitioning to a consumer-choice model. Those changes are expected to reduce annual outlays in 2022 by $258 billion.
  • Perhaps a more important proposal is the block-granting of Medicaid and other entitlement programs such as food stamps. Those Ryan reforms would save $313 billion annually by 2022.
  • Converting entitlements to block grants would allow the federal government to clamp down on federal costs while giving the states strong incentives to improve program efficiency.
  • The Ryan budget does not propose Social Security reform. Paul Ryan favors major reforms to this program, but he apparently thinks that reforming health care and other entitlements is a higher priority right now.
  • Aside from a few obvious targets—such as high-speed rail and the 2010 health care law—the Ryan budget shies away from abolishing specific programs, agencies, and departments.
  • Too often the Ryan budget proposes to fix broken programs when the proper reform would be elimination. Ryan proposes to “consolidate” federal job-training programs, for example, but these programs have a history of failure over the last five decades. Furthermore, job training is not a proper federal role within the U.S. constitutional structure.

In sum, Ryan’s proposals would make modest reforms to the giant federal welfare state. By Washington standards the Ryan plan is bold, and Paul Ryan certainly deserves his reputation as the sharpest and most energetic budget reformer on Capitol Hill.

However, there is too much happy talk in the Ryan plan about how failed big-government programs can be made to work better, and not enough focus on terminating activities that are properly state, local, and private in nature.

P.S. I think my budget-cutting plan is a better one.

How Can Obama Look at these Two Charts and Conclude that America Should Have Higher Double Taxation of Dividends and Capital Gains?

As discussed yesterday, the most important number in Obama’s budget is that the burden of government spending will be at least $2 trillion higher in 10 years if the President’s plan is enacted.

But there are also some very unsightly warts in the revenue portion of the President’s budget. Americans for Tax Reform has a good summary of the various tax hikes, most of which are based on punitive, class-warfare ideology.

In this post, I want to focus on the President’s proposals to increase both the capital gains tax rate and the tax rate on dividends.

Most of the discussion is focusing on the big increase in tax rates for 2013, particularly when you include the 3.8 tax on investment income that was part of Obamacare. If the President is successful, the tax on capital gains will climb from 15 percent this year to 23.8 percent next year, and the tax on dividends will skyrocket from 15 percent to 43.4 percent.

But these numbers understate the true burden because they don’t include the impact of double taxation, which exists when the government cycles some income through the tax code more than one time. As this chart illustrates, this means a much higher tax burden on income that is saved and invested.

The accounting firm of Ernst and Young just produced a report looking at actual tax rates on capital gains and dividends, once other layers of tax are included. The results are very sobering. The United States already has one of the most punitive tax regimes for saving and investment.

Looking at this first chart, it seems quite certain that we would have the worst system for dividends if Obama’s budget is enacted.

The good news, so to speak, is that we probably wouldn’t have the worst capital gains tax system if the President’s plan is enacted. I’m just guessing, but it looks like Italy (gee, what a role model) would still be higher.

Let’s now contemplate the potential impact of the President’s tax plan. I am dumbfounded that anybody could look at these charts and decide that America will be in better shape with higher tax rates on dividends and capital gains.

This isn’t just some abstract issue about competitiveness. As I explain in this video, every single economic theory – even Marxism and socialism – agrees that saving and investment are key for long-run growth and higher living standards.

So why is he doing this? I periodically run into people who are convinced that the President is deliberately trying to ruin the nation. I tell them this is nonsense and that there’s no reason to believe elaborate conspiracies.

President Obama is simply doing the same thing that President Bush did: Making bad decisions because of perceived short-run political advantage.

According to Obama’s Budget, Burden of Federal Spending Will Be $2 Trillion Higher in 10 Years

President Obama’s budget proposal was unveiled today, generating all sorts of conflicting statements from both parties.

Some of the assertions wrongly focus on red ink rather than the size of government. Others rely on dishonest Washington budget math, which means spending increases magically become budget cuts simply because outlays are growing at a slower rate than previously planned.

When you strip away all the misleading and inaccurate rhetoric, here’s the one set of numbers that really matters. If we believe the President’s forecasts (which may be a best-case scenario), the burden of federal spending will grow by $2 trillion between this year and 2022.

In all likelihood, the actual numbers will be worse than this forecast.

The President’s budget, for instance, projects that the burden of federal spending will expand by less than 1 percent next year. That sounds like good news since it would satisfy Mitchell’s Golden Rule.

But don’t believe it. If we look at the budget Obama proposed last year, federal spending was supposed to fall this year. Yet the Obama Administration now projects that outlays in 2012 will be more than 5 percent higher than they were in 2011.

The most honest assessment of the budget came from the President’s Chief of Staff, who openly stated that, “the time for austerity is not today.”

With $2 trillion of additional spending (and probably more), that’s the understatement of the century.

What makes this such a debacle is that other nations have managed to impose real restraints on government budgets. The Baltic nations have made actual cuts to spending. And governments in Canada, New Zealand, Slovakia, and Ireland generated big improvements by either freezing budgets or letting them grow very slowly.

I’ve already pointed out that the budget could be balanced in about 10 years if the Congress and the President displayed a modest bit of fiscal discipline and allowed spending to grow by no more than 2 percent annually.

But the goal shouldn’t be to balance the budget. We want faster growth, more freedom, and constitutional government. All of these goals (as well as balancing the budget) are made possible by reducing the burden of federal spending.

The New Pentagon Budget: Better, but Not Great

The changes announced in the Pentagon’s new budget guidance are, from my perspective, mostly good news, but woefully insufficient. They show how even limited austerity encourages prioritization among weapons systems that suddenly have to compete. A few more budgets like this and we’ll be getting somewhere.

The White House has not yet released the actual budget, but the Pentagon yesterday released a new document that explains the minor cuts in line for its slice. The document, unlike all the other defense strategy and guidance documents that have come out in recent years, sticks to plain English, avoids geopolitical gobbledygook, and tells you the budgetary impacts of its assertions. For that alone the Pentagon deserves some credit.

The document claims to be a guide to savings of $487 billion over 10 years. But you only get that figure by counting against past White House budget requests and their associated spending trajectory. We are saving just $6 billion from fiscal year 2012 to 2013, or 3.2% adjusted for inflation. If we leave out falling war costs, we have essentially frozen defense spending for two fiscal years (2011 and 2012), letting it grow at about inflation and then slightly slower, respectively. The Pentagon expects defense spending to grow at the rate of inflation or faster starting in fiscal year 2014, although their estimates of inflation are self-serving.

The new spending trajectory would cut about 8 percent from the base budget by the end of the decade. That’s from a budget that doubled in real terms from 1998 until 2012. And some of those savings are not really saved; they have simply migrated into the war budget. Keep in mind also that those savings are just a plan, one that is unlikely to last, particularly as presidents and Congresses change.

The biggest change in this budget is the beginning in a reduction of ground forces. The document says we will cut 80,000 troops from the Army and 20,000 from the Marines. The rationale is solid: we are probably not going to be committing large numbers of troops to another occupation of a populous country in revolt any time soon. Yet the cut leaves both forces with more personnel than they had prior to the expansion of ground forces that began in 2008. A real strategic shift away from occupational warfare would entail a bigger drawdown of Army and Marine personnel.

The document also reaffirms the administration’s decision to remove two army brigades from Europe, roughly halving our combat presence there. That’s good news given the absence of threat there and our NATO allies’ free-riding on U.S. taxpayers. But it only amounts to recommitting to a Bush administration plan. And we are unfortunately adding troops in the Philippines and Australia, at best a useless gesture that may encourage China’s military buildup.

The budget also takes a useful step in reducing the amount of tactical Air Force squadrons by six. Given the precision-revolution in targeting that makes each aircraft far more destructive and the increased Navy capability to strike targets from carriers, far bigger cuts in these forces are possible. Oddly, this reduction comes without a planned reduction in the purchase of F-35 Joint Strike Fighters.

Even worse, the Pentagon here reaffirms its commitment to the F-35B—the short-take-off and vertical landing version—taking it off “probation.” That version is meant to fly on amphibious landing ships to support missions where Marines attack shorelines. It’s hard to imagine such a mission where helicopters are insufficient for air-support and there is no carrier-based aircraft available to help the Marines, especially now that the Pentagon is again planning on operating 11 carriers.

The new version of the Global Hawk unmanned aerial vehicle is evidence of austerity forcing choices. The Pentagon now wants to cancel it because it is at least as expensive as the U-2 manned aircraft, which accomplishes similar tasks. This budget also usefully endorses the early retirement of some of our airlift capacity and tries to kill a new Army ground combat vehicle.

Another positive development is the request for two new rounds of base closures. This process requires legislation from Congress to form a Base Closure and Realignment Commission (BRAC).

Still, the hard choices here are few. Many observers were hopeful that budget savings would include cutting our excessive means of delivering nuclear weapons. But while the proposal delays production of the new ballistic missile submarine and speaks vaguely of a “different” sort of nuclear arsenal, it supports the continuation of the triad. There is still hope on this front, however. The Air Force plans to build its next bomber initially without nuclear weapons delivery capability, adding it later in development. That amounts to dangling bait for budget cutters. Like the F-35B, the nuclear bomber has an unnecessary mission that a more austere budget would cause us to reconsider

So while the changes in this budget may be the first step toward a more restrained military posture, including perhaps a strategy of offshore balancing, they are a minor one. A true offshore balancing strategy would involve a greater shift of resources from the Army to the Navy. This budget, by contrast, seems unlikely to end the traditional budget split where each service gets roughly one-third of the base.

Unsurprisingly, Defense Secretary Leon Panetta used his press conference yesterday to push Congress to amend the Budget Control Act to avoid sequestration, the across-the-board cuts in the Pentagon’s budget due next January, which would roughly double the cuts outlined here. I have argued that these pleas seem to play into Republicans’ hand in the coming budget negotiations. Readers should also know that the Pentagon could avoid the “meat-axe” nature of sequestration (to use Panetta’s language) by budgeting at the level sequestration would accomplish, roughly $492 billion, or about what non-war defense spending was in 2007. That would let the Pentagon choose how to make cuts. The strategic insights guiding these minor cuts could be exploited to make those larger ones.

Cross-posted from the Skeptics at the National Interest.

ObamaCare—The Way of the Dodo

In the latest issue of Virtual Mentor, a journal of the American Medical Association, I try to capture the multiple absurdities that make up ObamaCare. An encapsulation:

During the initial debate over ObamaCare, House Speaker Nancy Pelosi (D-CA) famously said, “We have to pass [it] so you can find out what’s in it.” One irreverent heir to Hippocrates quipped, “That’s what I tell my patients when I ask them for a stool sample.” The similarities scarcely end there…

ObamaCare supporters are ignoring the federal government’s dire fiscal situation; ignoring the law’s impact on premiums, jobs, and access to health insurance; ignoring that a strikingly similar law has sent health care costs higher in Massachusetts; ignoring public opinion, which has been solidly against the law for more than 2 years; ignoring the law’s failures (when they’re not declaring them successes); and ignoring that the law was so incompetently drafted that it cannot be implemented without shredding the separation of powers, the rule of law, and the U.S. Constitution itself. Rather than confront their own errors of judgment, they self-soothe: The public just doesn’t understand the law. The more they learn about it, the more they’ll like it…

This denial takes its most sophisticated form in the periodic surveys that purport to show how those silly voters still don’t understand the law. (In the mind of the ObamaCare zombie, no one really understands the law until they support it.) A prominent health care journalist had just filed her umpteenth story on such surveys when I asked her, “At what point do you start to question whether ObamaCare supporters are just kidding themselves?”

Her response? “Soon…”

(For more proof that ObamaCare supporters can draw from an apparently bottomless well of denial, see this article by Politico.)

The Biggest Budget in History

The Wall Street Journal notes today that the federal government spent more money in the just-concluded 2011 fiscal year than in any year in history, and no one noticed. What happened to all that austerity and all those spending cuts that we heard about all year? Well, some of us warned over the past year that they were all smoke and mirrors.

Now that the year’s over, you can see in this chart from the Journal that the federal government spent more and borrowed more in 2011 than in any previous year—$900 billion more than just four years ago, and $150 billion more than last year: