Tag: government spending

Testifying to the Joint Economic Committee about “Debt Limit Brinksmanship”

As we get closer to the debt limit, the big spenders in Washington are becoming increasingly hysterical about the supposed possibility of default if politicians lose the ability to borrow more money.

I testified yesterday to the Joint Economic Committee on “The Economic Costs of Debt-Ceiling Brinkmanship” and I explained (reiterating points I made back in 2011) that there is zero chance of default.

Why? Because, as I outline beginning about the 3:10 mark of the video, annual interest payments are about $230 billion and annual tax collections are approaching $3 trillion.

I actually made five points in my testimony. The first three should be quite familiar to regular readers.

First, America’s main fiscal problem is that government is too big. That’s the disease. Deficits and debt are symptoms of that underlying problem.

Second, you achieve good fiscal policy by following “Mitchell’s Golden Rule” so that government grows slower than private sector economic output.

Third, we’ve made some progress in the last two years thanks to genuine fiscal restraint, and we can balance the budget in a very short period of time if lawmakers impose a very modest bit of spending discipline in the future.

The fourth point, which I already discussed above, is that there’s no risk of default - unless the Obama Administration deliberately wants that to happen. But that’s simply not a realistic possibility.

My fifth and final point deserves a bit of extra discussion. I explained that Greece is now suffering through a very deep recession, with record unemployment and harsh economic conditions. I asked the Committee a rhetorical question: Wouldn’t it have been preferable if there was some sort of mechanism, say, 15 years ago that would have enabled some lawmakers to throw sand in the gears so that the government couldn’t issue any more debt?

Debt limit jokesYes, there would have been some budgetary turmoil at the time, but it would have been trivial compared to the misery the Greek people currently are enduring.

I closed by drawing an analogy to the situation in Washington. We know we’re on an unsustainable path. Do we want to wait until we hit a crisis before we address the over-spending crisis? Or do we want to take prudent and modest steps today - such as genuine entitlement reform and spending caps - to ensure prosperity and long-run growth.

Seems like the answer should be simple…at least if you’re not trying to get reelected by bribing voters with their own money.

P.S. My argument for short-term fighting today to avoid fiscal crisis in the future was advanced in greater detail by a Wall Street expert back in 2011.

P.P.S. You can enjoy some good debt limit cartoons by clicking here and here.

A Rare Sign of Fiscal Sanity in France

We have an amazing man-bites-dog story today.

Let’s begin with some background information. A member of the European Commission recently warned that:

“Tax increases imposed by the Socialist-led government in France have reached a “fatal level”…[and] that a series of tax hikes since the Socialists took power 14 months ago – including €33bn in new taxes this year – threatens to “destroy growth and handicap the creation of jobs”.

Given the pervasive statism of the European Commission, that was a remarkable admission.

But the Commissioner who issued that warning, Olli Rehn, is Finnish, so French politicians presumably don’t listen to his advice any more than they listen to the thoughtful, well-meaning, and generous suggestions I make.

Indeed, based on the actions of the current President and the former President, we can say with great confidence that French politicians compete over who can pursue the most misguided policies.

But maybe, just maybe, there are some people inside France who realize the house of cards is in danger of collapse.

Here are some excerpts from a story I never thought I would read. At least one senior official in France has woken up to the dangers of ever-rising taxes and an always-growing burden of government spending.

France’s state auditor urged the government Tuesday to redouble efforts to limit spending rather than increases taxes… The head of the state auditor, Didier Migaud, said the interruption in deficit reduction stemmed primarily from lower-than-expected tax revenue, due to the weak economy. Yet, he said “the spiraling welfare debt was particularly abnormal and particularly dangerous.” During his first year in power, President François Hollande relied on large tax increases to plug holes in public finances, including social programs such as pensions, unemployment benefits and health care. But economic stagnation in 2012, coupled with a mild recession at the start of 2013, has waylaid the plan, while both companies and households are crying foul over what some have called “a tax overdose.” Mr. Migaud added his voice, saying: “The strategy of fixing the system by collecting new revenue is reaching its limits.”

Before any further analysis, I have to make one correction to the story. Hollande’s plan was not “waylaid” by a recession. Instead, his policies doubtlessly helped cause a recession. You don’t impose huge tax hikes on productive behavior without some sort of negative impact on economic performance.

So the “holes in public finances” are at least partially a result of the Laffer Curve. As I’ve repeatedly warned, higher tax rates rarely - if ever - collect as much money as politicians expect.

Returning to the specific case of France, the fiscal variable that should set off the most alarm bells is that the burden of government spending has soared to 57 percent of GDP. And based on projections from the BIS, OECD, and IMF, that number is going to get even worse in the future.

This is the data that presumably has convinced Monsieur Migaud that France is approaching the point of no return on taxes and spending.

Interestingly, the French people may be ahead of their politicians. Polling data from 2010 and 2013 show that ordinary people very much understand the need to limit the size and scope of government.

Heck, a majority of French people have said they would be interested in escaping to the United States if they had the opportunity. And successful people already have been leaving the country because of punitive tax rates.

But I’m not sure I believe the aforementioned polls. If the French people genuinely have sound views, why do they keep electing bad politicians? Of course, the same thing could be said about the United States, so perhaps I shouldn’t throw stones in my glass house.

P.S. My favorite example of government running amok in France is the law threatening three years in jail if you say your husband is a fat slob or if you accuse your wife of being a nag.

P.P.S. The most vile French official may be the current Prime Minister, who actually had the gall to complain that some of his intended victims weren’t quietly entering the slaughterhouse.

P.P.P.S. Just in case you think I’m exaggerating about France being a fiscal hellhole, more than 8,000 households last year were subjected to a tax burden of more than 100 percent . Obama must be very envious.

It’s Amazingly Simple to Balance the Budget

I’m testifying tomorrow to the Joint Economic Committee about “The Economic Costs of Debt-Ceiling Brinkmanship.”

I won’t give away what I’m going to say (though you can probably figure out my views rather easily by reading this, this, and this), but I do want to share a chart from my testimony.

It shows that it is remarkably simple to balance the budget with a modest amount of spending restraint.

Based on Congressional Budget Office data, we can balance the budget in just three years if spending grows by “only” 1 percent per year.

Balanced Budget with Spending Restraint

The chart also shows that you can balance the budget in just four years if spending is allowed to grow “just” two percent annually.

And if you for some reason think that the burden of government spending should rise faster than inflation, then we can balance the budget in seven years by restraining spending so that it grows 3 percent each year.

Here are a couple of relevant observations.

Can You Spell L-A-F-F-E-R C-U-R-V-E?

I’m thinking of inventing a game, sort of a fiscal version of Pin the Tail on the Donkey.

Only the way my game will work is that there will be a map of the world and the winner will be the blindfolded person who puts his pin closest to a nation such as Australia or Switzerland that has a relatively low risk of long-run fiscal collapse.

That won’t be an easy game to win since we have data from the BIS, OECD, and IMF showing that government is growing far too fast in the vast majority of nations.

We also know that many states and cities suffer from the same problems.

A handful of local governments already have hit the fiscal brick wall, with many of them (gee, what a surprise) from California.

The most spectacular mess, though, is about to happen in Michigan.

The Washington Post reports that Detroit is on the verge of fiscal collapse.

After decades of sad and spectacular decline, it has come to this for Detroit: The city is $19 billion in debt and on the edge of becoming the nation’s largest municipal bankruptcy. An emergency manager says the city can make good on only a sliver of what it owes—in many cases just pennies on the dollar.

This is a dog-bites-man story. Detroit’s problems are the completely predictable result of excessive government. Just as statism explains the problems of Greece. And the problems of California. And the problems of Cyprus. And the problems of Illinois.

Mirror, Mirror, on the Wall, Which Nation Is in the Deepest Fiscal Doo-Doo of All?

According to the Bank for International Settlements, the United States has a terrible long-run fiscal outlook. Assuming we don’t implement genuine entitlement reform, the only countries in worse shape are the United Kingdom and Japan.

The Organization for Economic Cooperation and Development, meanwhile, also has a grim fiscal outlook for America. According to their numbers, the only nations in worse shape are New Zealand and Japan.

But I’ve never been happy with these BIS and OECD numbers because they focus on deficits, debt, and fiscal balance. Those are important indicators, of course, but they’re best viewed as symptoms.

The underlying problem is that the burden of government spending is too high. And what the BIS and OECD numbers are really showing is that the public sector is going to get even bigger in coming decades, largely because of aging populations. Unfortunately, you have to read between the lines to understand what’s really happening.

But now I’ve stumbled across some IMF data that presents the long-run fiscal outlook in a more logical fashion. As you can see from this graph (taken from this publication), they show the expected rise in age-related spending on the vertical axis and the amount of needed fiscal adjustment on the horizontal axis.

In other words, you don’t want your nation to be in the upper-right quadrant, but that’s exactly where you can find the United States.

IMF Future Spending-Adjustment Needs

Yes, Japan needs more fiscal adjustment. Yes, the burden of government spending will expand by a larger amount in Belgium. But America combines the worst of both worlds in a depressingly impressive fashion.

So thanks to FDR, LBJ, Nixon, Bush, Obama and others for helping to create and expand the welfare state. They’ve managed to put the United States in a worse long-run position than Greece, Italy, Spain, Portugal, France, and other failing welfare states.

The Stopped Clock at the IMF Tells Us that It Is Time to Reduce Bureaucratic Excess

I’ve repeatedly explained that Keynesian economics doesn’t work because any money the government spends must first be diverted from the productive sector of the economy, which means either higher taxes or more red ink. So unless one actually thinks that politicians spend money with high levels of effectiveness and efficiency, this certainly suggests that growth will be stronger when the burden of government spending is modest (and if spending is concentrated on “public goods,” which can have a positive “rate of return” for the economy).

I’ve also complained (to the point of being a nuisance!) that there are too many government bureaucrats and they cost too much.

But I never would have thought that there were people at the IMF who would be publicly willing to express the same beliefs. Yet that’s exactly what two economists found in a new study. Here are some key passages from the abstract:

We quantify the extent to which public-sector employment crowds out private-sector employment using specially assembled datasets for a large cross-section of developing and advanced countries… Regressions of either private-sector employment rates or unemployment rates on two measures of public-sector employment point to full crowding out. This means that high rates of public employment, which incur substantial fiscal costs, have a large negative impact on private employment rates and do not reduce overall unemployment rates.

So even an international bureaucracy now acknowledges that bureaucrats “incur substantial fiscal costs” and “have a large negative impact on private employment.”

Well knock me over with a feather!

Next thing you know, one of these bureaucracies will tell us that government spending, in general, undermines prosperity. Hold on, the European Central Bank and World Bank already have produced such research. And the Organization for Economic Cooperation and Development has even explained how welfare spending hurts growth by reducing work incentives.

To be sure, these are the results of research by staff economists, whom the political appointees at these bureaucracies routinely ignore. Nonetheless, it’s good to know that there’s powerful evidence for smaller government, just in case we ever find some politicians who actually want to do the right thing.

What’s the Better Role Model, France or Switzerland?

At the European Resource Bank conference earlier this month, Pierre Bessard from Switzerland’s Institut Liberal spoke on a panel investigating “The Link between the Weight of the State and Economic prosperity.”

His presentation included two slides that definitely are worth sharing.

The first slide, which is based on research from the Boston Consulting Group, looks at which jurisdictions have the most households with more than $1 million of wealth.

Switzerland is the easy winner, and you probably won’t be surprised to see Hong Kong and Singapore also do very well.

Switzerland Liberal Institute 2

Gee, I wonder if the fact that Switzerland (#4), Hong Kong (#1), and Singapore (#2) score highly on the Economic Freedom of the World index has any connection with their comparative prosperity?

That’s a rhetorical question, of course.

Most sensible people already understand that countries with free markets and small government out-perform nations with big welfare states and lots of intervention.

Speaking of which, let’s look at Pierre’s slide that compares Swiss public finances with the dismal numbers from Eurozone nations.

Switzerland Liberal Institute 1

The most impressive part of this data is the way Switzerland has maintained a much smaller burden of government spending.

One reason for this superior outcome is the Swiss “Debt Brake,” a voter-imposed spending cap that basically prevents politicians from increasing spending faster than inflation plus population.

Now let’s compare Switzerland and France, which is what I did last Saturday at the Free Market Road Show conference in Paris.

As part of my remarks, I asked the audience whether they thought that their government, which consumes 57 percent of GDP, gives them better services than Germany’s government, which consumes 45 percent of GDP.

They said no.

I then asked if they got better government than citizens of Canada, where government consumes 41 percent of GDP.

They said no.

And I concluded by asking them whether they got better government than the people of Switzerland, where government is only 34 percent of economic output (I used OECD data for my comparisons, which is why my numbers are not identical to Pierre’s numbers).

Once again, they said no.

The fundamental question, then, is why French politicians impose such a heavy burden of government spending - with a very high cost to the economy - when citizens don’t get better services?

Or maybe the real question is why French voters elect politicians that pursue such senseless policies?

But to be fair, we should ask why American voters elected Bush and Obama, both of whom have made America more like France?