Tag: fiscal policy

Note to Larry Summers: The Government Borrows for Transfer Payments, Not Investment

“It is time for governments to borrow more money,” according to former treasury secretary Larry Summers.  He is not peddling this advice to Greece and Spain, but to countries like the United States and Japan that can still sell long-term bonds at very low interest rates. Summers urges the United States, in particular, to borrow more for “public investment projects” that are presumed to raise the economy’s future output. He offers the hypothetical example of “a $1 project that yielded even a permanent 4 cents a year in real terms increment to GDP by expanding the economy’s capacity or its ability to innovate.”

Even if such promising projects were easy to find, however, that is not the way the current government has been inclined to spend borrowed money. Despite all the rhetoric about “shovel-ready projects,” about 95 percent of the 2009 stimulus bill consisted of government consumption (salaries), refundable tax credits, and transfer payments which, as Robert Barro notes, “dilute incentives to work.”

Summers says, “Any rational chief financial officer in the private sector would see this as a moment to extend debt maturities and lock in low rates — the opposite of what central banks are doing.” Locking-in low borrowing costs would indeed make sense if the money from selling long bonds were used to retire short-term Treasury bills, but that would not involve borrowing more as Summers proposes.

For both government and households, it is certainly more prudent to use borrowed money to finance investments that will yield a stream of income in the future—either actual income (such as toll roads) or implicit income (the benefits from living in a mortgaged home).

Apostles of the Keynesian doctrine, such as Larry Summers, Paul Krugman, and Alan Blinder, invariably use hypothetical public works examples to make the case for more and more national (taxpayer) debt. Keynesian forecasting models, used by the Congressional Budget Office (CBO) to warn of the looming fiscal cliff and defend the fiscal stimulus of 2009, likewise assume the highest “multiplier” effect from tangible government investments.

In the real world of politics, however, Congress and the White House use borrowed money to placate constituencies with the most political clout. Federal spending on investment projects has essentially nothing to do with the huge 2009-2012 budget deficits (only 29 percent of which can be blamed on the legacy of recession, according to the CBO).

The Table shows that transfer payments and subsidies account for 63.8 percent of estimated spending in 2012, while federal purchases account for 28.4 percent. Also, most federal aid to states is for transfer payments like Medicaid.  Within federal purchases, only 7.6 percent of the spending ($152.5 billion) was counted as gross investment in the first quarter GDP report, and two thirds of that was military equipment and buildings. Net investment, minus depreciation, is smaller still.

If borrowing more for investment was a genuine political priority, rather than an academic conjecture, the government could do that by borrowing less for government payrolls, transfer payments, and subsidies.  At best, Larry Summers has made an argument for spending borrowed money much differently, not for borrowing more.

Why ObamaCare Won’t Help the Sick

The Financial Times published my letter to the editor [$]:

Sir, “Imminent ‘ObamaCare’ ruling poses challenge for Republicans” [$] (May 25) doesn’t quite capture my views when it reports that I believe “resurrecting protections for patients with pre-existing conditions would be wrong.” ObamaCare is wrong precisely because those provisions will not protect patients with pre-existing conditions.

Those “protections” are nothing more than government price controls that force carriers to sell insurance to the sick at a premium far below the cost of the claims they incur. As a result, whichever carrier attracts the most sick patients goes out of business. The ensuing race to the bottom will even harm sick Americans who currently have secure coverage.

The debate over ObamaCare is not between people who care and people who don’t care. It is between people who know how to help the sick, and those who don’t.

How to Tell When ObamaCare Takes a Beating in the Kaiser Poll: the Headline Is about Something Else

Consider these charts from the latest Kaiser Family Foundation tracking poll, released today.

Even when pollsters tell the public that ObamaCare is “reform,” the public still doesn’t like it.

ObamaCare’s slip in this month’s poll is the result of a simultaneous drop in support among both Democrats and Independents.

The people who hate ObamaCare are really, really angry. And they are not going away.

The following shares of voters believe ObamaCare will either be of no use or will be harmful to the following groups: children (47 percent), young adults (51 percent), women (50 percent), the country as a whole (55 percent), themselves and their families (68 percent).

Bear in mind, ObamaCare has always fared better in the Kaiser tracking poll than other polls.

Jonah Goldberg’s Good Advice for the GOP: Confess Your Spending Sins and Repent

In a post last week, I explained that Obama has been a big spender, but noted his profligacy is disguised because TARP outlays caused a spike in spending during Bush’s last fiscal year (FY2009, which began October 1, 2008). Meanwhile, repayments from banks in subsequent years count as “negative spending,” further hiding the underlying trend in outlays.

When you strip away those one-time factors, it turns out that Obama has allowed domestic spending to increase at the fastest rate since Richard Nixon.

I then did another post yesterday in which I looked at total spending (other than interest payments and bailout costs) and showed that Obama has presided over the biggest spending increases since Lyndon Johnson.

Looking at the charts, it’s rather obvious that party labels don’t mean much. Bill Clinton presided during a period of spending restraint, while every Republican other than Reagan has a dismal track record.

President George W. Bush, for instance, scores below both Clinton and Jimmy Carter, regardless of whether defense outlays are included in the calculations. That’s not a fiscally conservative record, even if you’re grading on a generous curve.

This leads Jonah Goldberg to offer some sage advice to the GOP:

Here’s a simple suggestion for Mitt Romney: Admit that the Democrats have a point. Right before the Memorial Day weekend, Washington was consumed by a debate over how much Barack Obama has spent as president, and it looks like it’s picking up again.

…[A]ll of these numbers are a sideshow: Republicans in Washington helped create the problem, and Romney should concede the point. Focused on fighting a war, Bush—never a tightwad to begin with—handed the keys to the Treasury to Tom DeLay and Denny Hastert, and they spent enough money to burn a wet mule. On Bush’s watch, education spending more than doubled, the government enacted the biggest expansion in entitlements since the Great Society (Medicare Part D), and we created a vast new government agency (the Department of Homeland Security).

…Nearly every problem with spending and debt associated with the Bush years was made far worse under Obama. The man campaigned as an outsider who was going to change course before we went over a fiscal cliff. Instead, when he got behind the wheel, as it were, he hit the gas instead of the brakes—and yet has the temerity to claim that all of the forward momentum is Bush’s fault.

…Romney is under no obligation to defend the Republican performance during the Bush years. Indeed, if he’s serious about fixing what’s wrong with Washington, he has an obligation not to defend it. This is an argument that the Tea Party—which famously dealt Obama’s party a shellacking in 2010—and independents alike are entirely open to. Voters don’t want a president to rein in runaway Democratic spending; they want one to rein in runaway Washington spending.

Jonah’s point about “fixing what’s wrong with Washington” is not a throwaway line. Romney has pledged to voters that he won’t raise taxes. He also has promised to bring the burden of federal spending down to 20 percent of GDP by the end of a first term.

But even those modest commitments will be difficult to achieve if he isn’t willing to gain credibility with the American people by admitting that Republicans helped create the fiscal mess in Washington. Especially since today’s GOP leaders in the House and Senate were all in office last decade and voted for Bush’s wasteful spending.

It doesn’t take much to move fiscal policy in the right direction. All that’s required is to restrain spending so that it grows more slowly than the private sector. (With the kind of humility you only find in Washington, I call this “Mitchell’s Golden Rule.”) The entitlement reforms in the Ryan budget would be a good start, along with some much-needed pruning of discretionary spending.

And if you address the underlying problem by limiting spending growth to about 2 percent annually, you can balance the budget in about 10 years. No need for higher taxes, notwithstanding the rhetoric of the fiscal frauds in Washington who salivate at the thought of another failed 1990s-style tax hike deal.

Blocking Obamacare Exchanges Is Only Risky for Obamacare Profiteers

USA Today reports that groups like the American Legislative Exchange Council and the Cato Institute have had much success in discouraging states from creating Obamacare’s health insurance “exchanges.” Even the Heritage Foundation, which once counseled states to establish “defensive” Obamacare exchanges, now counsels states to refuse to create them and to send all exchange-related grants back to Washington.

In response, Obamacare contractor and self-described conservative Republican Cheryl Smith sniffs:

When you work at a think-tank, it’s really easy to come up with these really high-risk plans.

Except, there is no risk to states. The only risks to this strategy are that health insurance companies won’t get half a trillion dollars in taxpayer subsidies, and that certain Obamacare contractors won’t get any more of those lucrative exchange contracts.

Should International Bureaucracies Get Taxing Powers or Direct Funding?

Over the years, I’ve strenuously objected to schemes that would enable international bureaucracies to levy taxes. That’s why I’ve criticized “direct funding” proposals, most of which seem to emanate from the United Nations.

Interestingly, the American left is somewhat divided on these schemes. House Democrats have expressed sympathy for global taxes, but the Obama administration has come out against at least certain worldwide tax proposals.

Unfortunately, proponents of global taxes are like the Energizer Bunny of big government, relentlessly pushing a statist agenda. If the world economy is growing, it’s time for a global tax. If the world economy is stagnant, it’s time for a global tax. If it’s hot outside or cold outside, it’s time for a global tax (since “global warming” is one of the justifications for global taxation, I’m not joking).

Given this ongoing threat, I’m glad that Brian Garst of the Center for Freedom and Prosperity has put together a two-page Libertas explaining why international bureaucracies should not get taxing powers or direct funding.

…it would be imprudent to give international bureaucracies an independent source of revenue. Not only would this augment the already considerable risk of imprudent budgetary practices, it would exacerbate the pro-statism bias in these organizations. …The issue of taxing powers and direct funding has become an important issue because international organizations are challenging the contribution model and pushing for independent sources of revenue. The United Nations has been particularly aggressive in pushing for global taxes, seeking to expand its budget with levies on everything from carbon to financial transactions.

He then highlights one of the most dangerous proposals, a scheme by the World Health Organization to impose a “Solidarity Tobacco Contribution.”

Another subsidiary of the United Nations, the World Health Organization (WHO), is also looking to self-fund through global taxes. The WHO in 2010 publicly considered asking for global consumer taxes on internet activity, online bill paying, or the always popular financial transaction tax. Currently the WHO is pushing for increased excise taxes on cigarettes, but with an important condition that they get a slice of the added revenue. The so-called Solidarity Tobacco Contribution would provide billions of dollars to the WHO, but with no ability for taxpayers or national governments to monitor how the money is spent.

I have to give the left credit. They understand that few people are willing to defend tobacco, so proposing a global tax on cigarettes sounds noble, even though the real goal is to give the WHO a permanent stream of revenue.

Brian explains, though, why any global tax would be a mistake.

What all of these proposals have in common – in addition to their obvious intended use in promoting statist policies – is that they would erode the influence of national governments, reduce international accountability, promote waste, and undermine individual sovereignty and liberty. …Before long, international organizations will begin proposing – no doubt in the name of efficiency or reducing the burden on nation states – that affected taxpayers withhold and transfer taxes directly to the international body. This would effectively mean the end of the Westphalian system of sovereign nation states, and would result in a slew of new statist policies, and increased waste and corruption, as bureaucrats make use of their greater freedom to act without political constraint.

He concludes by noting that a global tobacco tax would be the proverbial camel’s nose under the tent. Once the statists succeed in imposing the first global tax, it will simply be a matter of time before additional levies are imposed.

National governments should not be fooled. Any sort of taxing power or direct funding for international bureaucracies would undermine national sovereignty. More importantly, it will further weaken the ability of people to influence and control the policies to which they are subjected. Moreover, once the first global tax is imposed, the floodgates will be opened for similar proposals.

The point about fiscal sovereignty is also important. Not because national governments are keen to adopt good policy, but because nations at least have to compete against each other.

Over the years, tax competition among governments has led to lower tax rates on personal and corporate income, as well as reductions in the double taxation of income that is saved and invested.

Politicians don’t like being pressured to lower tax rates, which is why international bureaucracies such as the Organization for Economic Cooperation and Development, acting on behalf of Europe’s welfare states, are pushing to undermine tax competition. But so long as there’s fiscal sovereignty, governments will have a hard time imposing confiscatory tax burdens.

Any form of global taxation, however, cripples this liberalizing process since taxpayers would have no safe havens.

Revolt of the Italian Tax Slaves

I wrote last year about a tax protest in Ireland, and I wrote earlier this year about a tax revolt in Greece.

But Irish and Greek taxpayers are wimps compared to their Italian compatriots. When Italians decide to have a tax revolt, they don’t kid around. Here are some remarkable details from the UK-based Telegraph.

In the last six months there has been a wave of countrywide attacks on offices of Equitalia, the agency which handles tax collection, with the most recent on Saturday night when a branch was hit with two petrol bombs.Staff have also expressed fears over their personal safety with increasing numbers calling in sick and with one unidentified employee telling Italian TV: “I have told my son not to say where I work or tell anyone what I do for a living.”

As much as I despise high taxes, I don’t think petrol bombs are the answer. But I am glad that at least some of the bureaucrats feels shame about their jobs.

Not surprisingly, the political elite wants people to be deferential to predatory government.

Annamaria Cancellieri, the interior minister, said she was considering calling in the army in a bid to quell the rising social tensions.“There have been several attacks on the offices of Equitalia in recent weeks. I want to remind people that attacking Equitalia is the equivalent of attacking the State,” she said in an interview with La Repubblica newspaper.

Here’s some advice for Ms. Cancellieri: Maybe people will be less likely to attack “the State” if “the State” stops attacking the people.

But don’t expect that to happen. The Prime Minister also demands obedience to “the State” and there’s rhetoric about “paying taxes is a duty” from other high-level government officials.

Saturday night’s attack took place on the Equitalia office in Livorno and the front of the building was left severely damaged by fire after the bombs exploded. The phrases “Thieves” and “Death to Equitalia” were sprayed onto outside walls. It came just 24 hours after more than 200 people had been involved in running battles with police outside a branch in Naples which left a dozen protesters and officers hurt. …There has also been a striking increase in suicides with people leaving notes directly blaming Equitalia and tax demands. Paola Severino, the Justice minister, said: “The economic situation has produced unease but paying taxes is a duty. On one side there is anger and the problem of paying when the resources are scare but on the other side is the fact that they must be paid.” …Mr Monti has vowed to press on even harder this year to recover the lost money. He is due to have a meeting with Equitalia chief Attilio Befera to discuss the situation and he has already said: “We are not going to take a step back, there will be no giving in to those who have declared was against the revenue and therefore the State. We will not be intimidated.”

Keep in mind, by the way, that this is the government that supposedly is being run by brilliant technocrats, yet they are so incompetent that they appoint the wrong people to posts. But the real problem is that government is far too big, consuming one-half of Italy’s economic output.

If Italy’s political class wants to improve tax compliance, they should listen to the IMF and academic economists, both of whom point out that lower tax rates reduce incentives for evasion and avoidance.

It also would help to shrink the burden of the public sector. Unfortunately, as is the case with most other European nations, “austerity” in Italy mostly means higher taxes, not less spending.