Tag: fiscal policy

Exposing Washington’s Dishonest Budget Math

I’ve repeatedly tried to expose pervasive fiscal dishonesty in Washington.

In these John Stossel and Judge Napolitano interviews, for instance, I explain that the crooks in DC have created a system that allows them to claim they’re cutting the budget when the burden of government spending actually is rising.

This sleazy system is designed in part to deceive the American people, and the current squabbling over the fiscal cliff is a good example. The President claims he has a “balanced approach” that involves budget cuts, but look at the second chart at this link and you will see that he’s really proposing bigger government.

This dishonest approach also was used by the President’s Fiscal Commission and last year’s crummy debt limit deal was based on this form of fiscal prevarication.

Here are some key excerpts from a Wall Street Journal editorial exposing this scam.

…President Obama and John Boehner are playing by the dysfunctional Beltway rules. The rules work if you like bigger government, but Republicans need a new strategy, which starts by exposing the rigged game of “baseline budgeting.” …numbers have no real meaning because they are conjured in the wilderness of mirrors that is the federal budget process. Since 1974, Capitol Hill’s “baseline” has automatically increased spending every year according to Congressional Budget Office projections, which means before anyone has submitted a budget or cast a single vote. Tax and spending changes are then measured off that inflated baseline, not in absolute terms. …Democrats designed this system to make it easier to defend annual spending increases and to portray any reduction in the baseline as a spending “cut.” Chris Wallace called Timothy Geithner on this “gimmick” on “Fox News Sunday” this week, only to have the Treasury Secretary insist it’s real. …in the current debate the GOP is putting itself at a major disadvantage by negotiating off the phony baseline. …If Republicans really want to slow the growth in spending, they need to stop playing by Beltway rules and start explaining to America why Mr. Obama keeps saying he’s cutting spending even as spending and deficits keep going up and up and up.

You probably won’t be surprised to learn that other nations rely on this crooked system, most notably the United Kingdom, which supposedly is imposing “savage” cuts even though government spending keeps rising (and they fooled Paul Krugman, though he seems to make a habit of misreading foreign fiscal and economic data).

But let’s return to the American fiscal situation. Republicans almost certainly will lose the battle over the fiscal cliff because they meekly are playing cards with a rigged deck controlled by the other side.

They should expose this scam by using nominal numbers and looking at year-over-year changes in both taxes and spending. I did that last year and showed how simple it is to balance the budget in a short period of time.

They key thing to understand is that (barring a recession) tax revenues rise every year. Indeed, the Congressional Budget Office projects that tax revenue will climb by an average of more than 6 percent annually over the next 10 years - even if the 2001 and 2003 tax cuts are made permanent.

So all that’s really needed to bring red ink under control is a modest bit of spending restraint. This video is from 2010, but the analysis is still completely relevant today.

It’s amazing how good things happen when you follow the Golden Rule of fiscal policy.

Laszewski on ObamaCare: ‘Get Ready for Some Startling Rate Increases’

The invaluable Robert Laszweski:

The Affordable Care Act: Ten Months to Launch “Obamacare”––Get Ready for Some Startling Rate Increases

[…]

I conducted an informal survey of a number of insurers…None of the people I talked to are academics or work for a think tank. None of them are in the spin business inside the Beltway. Every one of them has the responsibility for coming up with the correct rates their companies will have to charge…

On average, expect a 30% to 40% increase in the baseline cost of individual health insurance to account for the new premium taxes, reinsurance costs, benefit mandate increases, and underwriting reforms…

In states with the least mandates or for health insurance companies with the tightest underwriting now, the increase could be a lot more…

[E]xpect individual health insurance rates for people in their 20s and early 30s to about double…

Will the feds be ready to provide an insurance exchange in all of the states that don’t have one on October 1, 2013?

I have no idea. And neither does anyone else I talk to inside the Beltway. We only hear vague reports that parts of the new federal exchange information systems are in testing.

The former CIA director couldn’t get away with an affair in this town but the Obama administration has a complete lid on just where they are on health insurance exchanges and haven’t shown any willingness to want to talk about their progress toward launching on time––except to tell us all not to worry.

We are all worried. I would not want to be responsible for the work that remains and only have ten months to do it…

The Republicans said this would not work. If it does not launch on time, or does with serious problems, I would not want to be an incumbent Democrat.

I told them not to call this the “Affordable Care Act.”

Meet the Press, Check the Facts

This Sunday (2 December 2012), David Gregory hosted a lively session of NBC’s Meet the Press. The focus of Sunday’s program was the so-called Fiscal Cliff. Gregory rounded up many of the usual Washington suspects, including Treasury Secretary Timothy Geithner, and drilled them on their talking points.

Several times, in the course of Gregory’s questioning, he referred to President Bill Clinton’s tough 1993 budget deal. Throughout the broadcast, Gregory kept stressing the fact that the 1993 deal included defense cuts. For Gregory, those cuts were the flavor of the day.

This isn’t surprising. Indeed, most members of Washington’s chattering classes parrot the line that the economy boomed during the Clinton years because Clinton was the beneficiary of the so-called peace dividend, which allowed him to cut defense expenditures.

In fact, if we look carefully at the federal budget numbers, while Clinton did cut defense expenditures, as a percent of GDP, the majority of the Clinton squeeze came from non-defense expenditures. Indeed, as can be seen in the accompanying table, the non-defense squeeze accounted for 2.2 percentage points of President Clinton’s 3.9 total percentage point reduction in the relative size of the federal government.

Clinton squeezed the budget and squeezed hard, from all major angles. This was a case in which a president’s actions actually matched his rhetoric. Recall that, in his 1996 State of the Union address, he declared that “the era of big government is over.”

Clinton’s 1993 deal marked the beginning of the most dramatic decline in the federal government’s share of the U.S. economy since Harry Truman left office. The Clinton administration reduced government expenditures, as a percent of GDP, by 3.9 percentage points. Since 1952, no other president has even come close. 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 percent—the lowest level since 1966.

The table contains the facts. President Clinton knew how to squeeze both defense and non-defense federal expenditures. Indeed, he squeezed non-defense a bit harder than defense. Since 1952, the only other president who has been able to reduce the relative share of non-defense expenditures was Ronald Reagan. Forget the “peace dividend”—it’s all about the Clinton “squeeze dividend.”

ObamaCare’s Magical Premium Tax

The Department of Health and Human Services has announced it will unilaterally impose a (legally questionable) 3.5-percent premium tax on health plans purchased through the ObamaCare Exchanges it operates.

According to The New York Times, an HHS spokeswoman “predicted that insurers would not raise prices” in response to the tax.

If that’s the case, why not make it 35 percent?

ObamaCare Implementation News

Here’s some ObamaCare implementation news from around the interwebs:

  • Minnesota Facing Bigger Bill For State’s Health Insurance Exchange”: Kaiser Health News reports Minnesota has increased its spending projections for operating the state’s ObamaCare Exchange by somewhere between 35-80 percent for 2015. Spending on the Exchange will rise by another 19 percent in the following year.
  • The Wall Street Journal  defends the 25-30 states that aren’t gullible enough to create an Exchange and therefore take the blame for ObamaCare’s higher-than-projected costs.
  • Arizona Gov. Jan Brewer (R) has announced she will not implement an Exchange. That creates another potential state-plaintiff, millions of potential employer-plaintiffs, and (by my count) 430,000 potential individual plaintiffs who could join Oklahoma attorney general Scott Pruitt in challenging the IRS’s illegal ObamaCare taxes. It also means that Arizona can start luring jobs away from tax-happy California. There are four Hostess bakeries in California that might be looking to relocate.
  • I’m enjoying a friendly debate with The New Republic’s Jonathan Cohn and University of Michigan law professor Samuel Bagenstos over whether the those taxes really do violate federal law and congressional intent (spoiler alert: they do). I owe Bagenstos a response.
  • PolitiFact Georgia rated false my claim that operating an ObamaCare Exchange would violate Georgia law. I explain here why it is indeed illegal for Georgia (and 13 other states) to implement an Exchange.
  • ThinkProgress.org reports, “Romney’s Transition Chief Is Encouraging States To Implement Obamacare.” A better headline would have been, “Government Contractor Encourages More Government Contracts.”
  • The Washington Examiner editorializes, “In California…state regulators have warned…insurance premiums will rise by as much as 25 percent once the exchange comes online…That’s the best-case scenario.” And, “In 2014, seven Democratic Senate seats will be up for grabs in states Mitt Romney carried (Alaska, Arkansas, Louisiana, Montana, North Carolina, South Dakota and West Virginia). Unless Obama’s HHS bureaucrats pull off an unprecedented miracle of central planning, Obamacare could well sink Democrats again in 2014, the same way it did in 2010.”

A Laffer Curve Warning about the Economy and Tax Revenue for President Obama and other Class Warriors

Being a thoughtful and kind person, I offered some advice last year to Barack Obama. I cited some powerful IRS data from the 1980s to demonstrate that there is not a simplistic linear relationship between tax rates and tax revenue.

In other words, just as a restaurant owner knows that a 20-percent increase in prices doesn’t translate into a 20-percent increase in revenue because of lost sales, politicians should understand that higher tax rates don’t mean an automatic and concomitant increase in tax revenue.

This is the infamous Laffer Curve, and it’s simply the common-sense recognition that you should include changes in taxable income in your calculations when trying to measure the impact of higher or lower tax rates on tax revenues.

No, it doesn’t mean lower tax rates “pay for themselves” or that higher tax rates lead to less revenue. That only happens in unusual circumstances. But it does mean that lawmakers should exercise some prudence and judgment when deciding tax policy.

Moreover, even though I’m a strong believer in the importance of good tax policy, it’s also important to understand that taxation is just one of many factors that determine economic performance. So lower tax rates, by themselves, are no guarantee of economic vitality, and higher tax rates don’t necessarily mean the world is coming to an end.

With those caveats in mind, take a look at this table from the Congressional Budget Office’s most recent Budget and Economic Outlook. Taken from page 109, it shows what will happen if the economy grows just a tiny bit less than the baseline projection. Not a recession, by any means, just a drop in the projected growth rate of just 1/10th of 1 percent.

As you can see, the 10-year impact is $314 billion, mostly due to lower tax receipts, though there is some impact on outlays because of higher interest costs and a bit of additional entitlement spending.

So why am I sharing these numbers? Because let’s now think about President Obama’s proposed class-warfare tax hike. He wants higher tax rates on investors, entrepreneurs, small business owners and other “rich” taxpayers. And he wants more double taxation of dividends and capital gains. And a higher death tax rate, even higher than the ones imposed by France and Venezuela.

I think some opponents are exaggerating when they claim that this tax hike will cause a recession and cripple the economy. But I do think that it’s reasonable to contemplate the degree to which the Obama tax hikes will slow growth. More than 1/10th of 1 percent? Less than that? Would the damage occur in the first few years? Would it be spread out over time?

Those questions are hard to answer. Ask five economists and you’ll get nine answers, but there is compelling evidence that higher tax rates do have a negative impact.

But some people assume that taxes don’t matter at all. Using models that, for all intents and purposes, naively assume a simplistic linear relationship between tax rates and tax revenue, the number-crunching bureaucrats in Washington estimate that Obama’s proposed tax hikes will generate about $800 billion over 10 years.

I’m not going to pretend I know the economic impact of those higher tax rates, but for the sake of argument, let’s assume that the impact is minor. Indeed, let’s assume that it’s only 1/10th of 1 percent. Based on the CBO sensitivity analysis above, that means that about 40 percent of the projected deficit reduction will fail to materialize.

And that’s not even considering the fact that politicians will probably increase the burden of government spending because of the expectation of additional tax revenue.

Just something to keep in mind as this debate unfolds.

P.S. I actually shared this exact same data when testifying to the Senate Budget Committee earlier this year. Needless to say,  in some cases I think my testimony went in one ear and out the other.

P.P.S. The revenue-maximizing tax rate is not the ideal point on the Laffer Curve.