Leftists don't have many reasons to be cheerful.
Global economic developments keep demonstrating (over and over again) that big government and high taxes are not a recipe for prosperity. That can't be very encouraging for them.
They also can't be very happy about the Obama presidency. Yes, he was one of them, and he was able to impose a lot of his agenda in his first two years. But that experiment with bigger government produced very dismal results. And it also was a political disaster for the left since Republicans won landslide elections in 2010 and 2014 (you could also argue that Trump's election in 2016 was a repudiation of Obama and the left, though I think it was more a rejection of the status quo).
But there is one piece of good news for my statist friends. The tax cuts in Kansas have been partially repealed. The New York Times is overjoyed by this development.
The Republican Legislature and much of Kansas has finally turned on Gov. Sam Brownback in his disastrous five-year experiment to prove the Republicans’ “trickle down” fantasy can work in real life — that huge tax cuts magically result in economic growth and more, not less, revenue. ...state lawmakers who once abetted the Brownback budgeting folly passed a two-year, $1.2 billion tax increase this week to begin repairing the damage. ...It will take years for Kansas to recover.
And you won't be surprised to learn that Paul Krugman also is pleased.
Here's some of what he wrote in his NYT column.
...there was an idea, a theory, behind the Kansas tax cuts: the claim that cutting taxes on the wealthy would produce explosive economic growth. It was a foolish theory, belied by decades of experience: remember the economic collapse that was supposed to follow the Clinton tax hikes, or the boom that was supposed to follow the Bush tax cuts? ...eventually the theory’s failure was too much even for Republican legislators.
Another New York Times columnist did a victory dance as well.
The most momentous political news of the past week...was the Kansas Legislature’s decision to defy the governor and raise income taxes... Kansas, under Gov. Sam Brownback, has come as close as we’ve ever gotten in the United States to conducting a perfect experiment in supply-side economics. The conservative governor, working with a conservative State Legislature, in the home state of the conservative Koch brothers, took office in 2011 vowing sharp cuts in taxes and state spending, except for education — and promising that those policies would unleash boundless growth. The taxes were cut, and by a lot.
Brownback's supply-side experiment was a flop, the author argues.
The cuts came. But the growth never did. As the rest of the country was growing at rates of just above 2 percent, Kansas grew at considerably slower rates, finally hitting just 0.2 percent in 2016. Revenues crashed. Spending was slashed, even on education... The experiment has been a disaster. ...the Republican Kansas Legislature faced reality. Earlier this year it passed tax increases, which the governor vetoed. Last Tuesday, the legislators overrode the veto. Not only is it a tax increase — it’s even a progressive tax increase! ...More than half of the Republicans in both houses voted for the increases.
If you read the articles, columns, and editorials in the New York Times, you'll notice there isn't a lot of detail on what actually happened in the Sunflower State. Lots of rhetoric, but short on details.
So let's go to the Tax Foundation, which has a thorough review including this very helpful chart showing tax rates before the cuts, during the cuts, and what will now happen in future years (the article also notes that the new legislation repeals the exemption for small-business income).
We know that folks on the left are happy about tax cuts being reversed in Kansas. So what are conservatives and libertarians saying?
The Wall Street Journal opined on what really happened in the state.
...national progressives are giddy. Their spin is that because the vote reverses Mr. Brownback’s tax cuts in a Republican state that Donald Trump carried by more than 20 points, Republicans everywhere should stop cutting taxes. The reality is more prosaic—and politically cynical. ...At bottom the Kansas tax vote was as much about unions getting even with the Governor over his education reforms, which included making it easier to fire bad teachers.
And the editorial also explains why there wasn't much of an economic bounce when Brownback's tax cuts were implemented, but suggests there was a bit of good news.
Mr. Brownback was unlucky in his timing, given the hits to the agricultural and energy industries that count for much of the state economy. But unemployment is still low at 3.7%, and the state has had considerable small-business formation every year since the tax cuts were enacted. The tax competition across the Kansas-Missouri border around Kansas City is one reason Missouri cut its top individual tax rate in 2014.
The upshot is that supposedly conservative Kansas will now have a higher top marginal individual income-tax rate (5.7%) than Massachusetts (5.1%). And the unions will be back for another increase as spending rises to meet the new greater revenues. This is the eternal lesson of tax increases, as Illinois and Connecticut prove.
And Reason published an article by Ben Haller with similar conclusions.
What went wrong? First, the legislature failed to eliminate politically popular exemptions and deductions, making the initial revenue drop more severe than the governor planned. The legislature and the governor could have reduced government spending to offset the decrease in revenue, but they also failed on that front. Government spending per capita remained relatively stable in the years following the recession to the present, despite the constant fiscal crises. In fact, state expenditure reports from the National Association of State Budget Officers show that total state expenditures in Kansas increased every year except 2013, where expenditures decreased a modest 3 percent from 2012. It should then not come as a surprise that the state faced large budget gaps year after year. ...tax cuts do not necessarily pay for themselves. Fiscal conservatives, libertarians, ...may have the right idea when it comes to lowering rates to spur economic growth, but lower taxes by themselves are not a cure-all for a state's woes. Excessive regulation, budget insolvency, corruption, older demographics, and a whole host of other issues can slow down economic growth even in the presence of a low-tax environment.
Since Haller mentioned spending, here's another Tax Foundation chart showing inflation-adjusted state spending in Kansas. Keep in mind that Brownback was elected in 2010. The left argued that he "slashed" spending, but that assertion obviously is empty demagoguery.
Now time for my two cents.
Looking at what happened, there are three lessons from Kansas.
- A long-run win for tax cutters. If this is a defeat, I hope there are similar losses all over the country. If you peruse the first chart in this column, you'll see that tax rates in 2017 and 2018 will still be significantly lower than they were when Brownback took office. In other words, the net result of his tenure will be a permanent reduction in the tax burden, just like with the Bush tax cuts. Not as much as Brownback wanted, to be sure, but leftists are grading on a very strange curve if they think they've won any sort of long-run victory.
- Be realistic and prudent. It's a good idea to under-promise and over-deliver. That's true for substance and rhetoric.
- Don't claim that tax cuts pay for themselves. That only happens in rare circumstances, usually involving taxpayers who have considerable control over the timing, level, and composition of their income. In the vast majority of cases, tax cuts reduce revenue, though generally not as much as projected once "supply-side" responses are added to the equation.
- Big tax cuts require some spending restraint. Since tax cuts generally will lead to less revenue, they probably won't be durable unless there's eventually some spending restraint (which is one of the reasons why the Bush tax cuts were partially repealed and why I'm not overly optimistic about the Trump tax plan).
- Tax policy matters, but so does everything else. Lower tax rates are wonderful, but there are many factors that determine a jurisdiction's long-run prosperity. As just mentioned, spending restraint is important. But state lawmakers also should pay attention to many other issues, such as licensing, regulation, and pension reform.
- Many Republicans are pro-tax big spenders. Most fiscal fights are really battles over the trend line of spending. Advocates of lower tax rates generally are fighting to reduce the growth of government, preferably so it expands slower than the private sector. Advocates of tax hikes, by contrast, want to enable a larger burden of government spending. What happened in Kansas shows that it's hard to starve the beast if you're not willing to put government on a diet.
By the way, all three points are why the GOP is having trouble in Washington.
The moral of the story? As I noted when writing about Belgium, it's hard to have good tax policy if you don't have good spending policy.
For folks who prefer a more quantitative approach, Economic Freedom of the World uses dozens of variables to rank nations based on key indices such as rule of law, size of government, regulatory burden, trade openness, and stable money.
One of the heartening lessons from this research is that countries don't need perfect policy. So long as there is simply "breathing room" for the private sector, growth is possible. Just look at China, for instance, where hundreds of millions of people have been lifted from destitution thanks to a modest bit of economic liberalization.
Indeed, it's remarkable how good policy (if sustained over several decades) can generate very positive results.
That's the main message in this new video from the Center for Freedom and Prosperity.
The first part of the video, narrated by Abir Doumit, reviews success stories from around the world, including Hong Kong, Singapore, Chile, Estonia, Taiwan, Ireland, South Korea, and Botswana.
Pay particular attention to the charts showing how per-capita economic output has grown over time in these jurisdictions compared to other nations. That's the real test of what works.
The second part of the video exposes the scandalous actions of international bureaucracies, which are urging higher fiscal burdens in developing nations
even though no poor nation has ever become a rich nation with bigger government. Never.
Yet bureaucracies such as the United Nations, the International Monetary Fund, and the Organization for Economic Cooperation and Development are explicitly pushing for higher taxes in poor nations based on the anti-empirical notion that bigger government is a strategy for growth.
I'm not joking.
As Ms. Doumit remarks in the video, these bureaucracies never offer a shred of evidence for this bizarre hypothesis.
And what's especially frustrating is that the big nations of the western world (i.e., the ones that control the international bureaucracies) all became rich when government was very small.
And while the bureaucracies never provide any data or evidence, the Center for Freedom and Prosperity's video is chock full of substantive information. Consider, for instance, this chart showing that there was almost no redistribution spending in the western world as late as 1930.
Unfortunately, the burden of government spending in western nations has metastasized starting in the 1930s. Total outlays now consume enormous amounts of economic output and counterproductive redistribution spending is now the biggest part of national budgets.
But at least western nations became rich first and then made the mistake of adopting bad fiscal policy (fortunately offset by improvements in other areas such as trade liberalization).
The international bureaucracies are trying to convince poor nations, which already suffer from bad policy, that they can succeed by imposing additional bad fiscal policy and then magically hope that growth will materialize.
And having just spent last week observing two conferences on tax and development at the United Nations in New York City, I can assure you that this is what they really think.
I'm a big fan of the Baltic nations of Estonia, Latvia, and Lithuania.
These three countries emerged from the collapse of the Soviet Empire and they have taken advantage of their independence to become successful market-driven economies.
One key to their relative success is tax policy. All three nations have flat taxes. Estonia's system is so good (particularly its approach to business taxation) that the Tax Foundation ranks it as the best in the OECD.
And the Baltic nations all deserve great praise for cutting the burden of government spending in response to the global financial crisis/great recession (an approach that produced much better results than the Keynesian policies and/or tax hikes that were imposed in many other countries).
But good policy in the past is no guarantee of good policy in the future, so it is with great dismay that I share some very worrisome news from two of the three Baltic countries.
First, we have a grim update from Estonia, which may be my favorite Baltic nation if for no other reason than the humiliation it caused for Paul Krugman. But now Estonia may cause sadness for me. The coalition government in Estonia has broken down and two of the political parties that want to lead a new government are hostile to the flat tax.
Estonia's government collapsed Wednesday after Prime Minister Taavi Roivas lost a confidence vote in Parliament, following months of Cabinet squabbling mainly over economic policies. ...Conflicting views over taxation and improving the state of Estonia's economy, which the two junior coalition partners claim is stagnant, is the main cause for the breakup. ...The core of those policies is a flat 20 percent tax on income. The Social Democrats say the wide income gaps separating Estonia's different social groups would best be narrowed by introducing Nordic-style progressive taxation. The two parties said Wednesday that they will immediately start talks on forming a coalition with the Center Party, Estonia's second-largest party, which is favored by the country's sizable ethnic-Russian majority and supports a progressive income tax.
And Lithuanians just held an election and the outcome does not bode well for that nation's flat tax.
After the weekend run-off vote, which followed a first round on October 9, the centrist Lithuanian Peasants and Green Union party LGPU) ended up with 54 seats in the 141-member parliament. ...The conservative Homeland Union, which had been tipped to win, scored a distant second with 31 seats, while the governing Social Democrats were, as expected, relegated to the opposition, with just 17 seats. ...The LPGU wants to change a controversial new labour code that makes it easier to hire and fire employees, impose a state monopoly on alcohol sales, cut bureaucracy, and above all boost economic growth to halt mass emigration. ...Promises by Social Democratic Prime Minister Butkevicius of a further hike in the minimum wage and public sector salaries fell flat with voters.
The Social Democrats sound like they had some bad idea, but the new LGPU government has a more extreme agenda. It already has proposed to create a special 4-percentage point surtax on taxpayers earning more than €12,000 annually (the government also wants to expand double taxation, which also is contrary to the tax-income-only-once principle of a pure flat tax).
So the bad news is that the flat tax could soon disappear in Estonia and Lithuania.
But the good news, based on my discussions with people in these two nations, is that the battle isn't lost. At least not yet.
In both cases, policy can't be changed unless all parties in the coalition government agree. Fortunately, they haven't reached that point.
And hopefully that point will never be reached if Estonia and Lithuania want long-run success.
All of the Baltic nations get reasonably good scores from Economic Freedom of the World. Ditching the flat tax will cause their scores to decline.
Given that fiscal policy is only 20 percent of a nation's grade, adopting some bad tax policy may not seem like the end of the world.
But the flat tax isn't just good policy. It also has symbolic value, telling both domestic entrepreneurs and global investors that a country has a commitment to a system that won't impose extra punishment just because a person contributes more to national economic output.
By the way, the LPGU Party is very correct to worry about emigration. The Baltic nations (like most countries in Eastern Europe) face a very large demographic problem. And every time a young person leaves for better opportunities elsewhere (even if that better opportunity is a big welfare check), that makes the long-run outlook even more challenging.
But imposing a more punitive tax system is exactly the opposite of what should happen if the goal is faster growth so that people don't leave the nation.
Let's close with a famous quote from John Ramsay McCulloch, a Scottish economist from the 1800s.
To be sure, progressive taxation didn't lead to total catastrophe, so McCulloch's warning may seem overwrought by today's standards.
But the so-called progressive income tax did lead to the modern welfare state. And the modern welfare state, when combined with demographic change, is threatening immense economic and societal damage in many nations.
So what he wrote in 1863 may turn out to be very prescient for historians in 2063 who wonder why the western world collapsed.
P.S. If Estonia and Lithuania move in the wrong direction, Latvia could be a big winner. That nation already has received some positive attention for being fiscally responsible, and it also has withstood pressure from the IMF to impose bad tax policy. So Latvia is well positioned to reap the benefits if Estonia and Lithuania shoot themselves in the foot.
I must be perversely masochistic because I have the strange habit of reading reports issued by international bureaucracies such as the International Monetary Fund, World Bank, United Nations, and Organization for Economic Cooperation and Development.
But one tiny silver lining to this dark cloud is that it's given me an opportunity to notice how these groups have settled on a common strategy of urging higher taxes for the ostensible purpose of promoting growth and development.
Seriously, this is their argument, though they always rely on euphemisms when asserting that politicians should get more money to spend.
- The OECD, for instance, has written that "Increased domestic resource mobilisation is widely accepted as crucial for countries to successfully meet the challenges of development and achieve higher living standards for their people."
The Paris-based bureaucrats of the OECD also asserted that "now is the time to consider reforms that generate long-term, stable resources for governments to finance development."
- The IMF is banging on this drum as well, with news reports quoting the organization's top bureaucrat stating that "...economies need to strengthen their fiscal frameworks…by boosting...sources of revenues." while also reporting that "The IMF chief said taxation allows governments to mobilize their revenues."
- And the UN, which has "...called for a tax on billionaires to help raise more than $400 billion a year" routinely categorizes such money grabs as "financing for development."
As you can see, these bureaucracies are singing from the same hymnal, but it's a new version.
In the past, the left agitated for higher taxes simply in hopes for having more redistribution.
And they've urged higher taxes because of spite and hostility against those with high incomes.
Some folks on the left also have supported higher taxes on the theory that the economy's performance is boosted when deficits are smaller.
But now, they are advocating higher taxes (oops, excuse me, I mean they are urging "resource mobilization" to generate "stable resources" so there can be "financing for development" in order to "strengthen fiscal frameworks") on the theory that bigger government is the way to get more growth.
You probably won't be surprised to learn, however, that these reports from international bureaucracies never provide any evidence for this novel hypothesis. None. Zero. Zilch. Nada. The null set.
They simply assert that governments will be able to make presumably wonderful growth-generating "investments" if politicians can squeeze more money from the private sector.
And I strongly suspect that this absence of evidence is deliberate. Simply stated, international bureaucracies are willing to produce shoddy research (just look at what the IMF and OECD wrote about the relationship between growth and inequality), but there's a limit to how far data can be tortured and manipulated.
Especially when there's so much evidence from real scholars that economic performance is weakened when government gets bigger.
Not to mention that most sentient beings can look around the world and look at the moribund economies of nations with large governments (such as France, Italy, and Greece) and compare them with the better performance of places with smaller government (such as Hong Kong, Switzerland, and Singapore).
But if you read the aforementioned reports from the international bureaucracies, you'll notice that some of them focus on getting more growth in poor nations.
Perhaps, some statists might argue, government is big enough in Europe, but not big enough in poorer regions such as sub-Saharan Africa.
So let's look at the numbers. Is it true that governments in the developing world don't have enough money to provide core public goods?
The answer is no.
But before sharing those numbers, let's look at some historical data. A few years ago, I shared some research demonstrating that countries in North America and Western Europe became rich in the 1800s and early 1900s when the burden of government spending was very modest.
One would logically conclude from this data that today's poor nations should copy that approach.
Yet here's the data from the International Monetary Fund on government expenditures in various poor regions of the world. As you can see, the burden of government spending in these areas is two or three times larger than it was in America and other nations that when they made the move from agricultural poverty to middle class prosperity.
The bottom line is that small government and free markets is the recipe for growth and prosperity in all nations.
Just don't expect international bureaucracies to share that recipe since one of the obvious conclusions is that we therefore don't need parasitical bodies like the IMF, OECD, World Bank, and UN.
P.S. Unsurprisingly, Hillary Clinton also has adopted the mantra of higher-taxes → bigger government → more growth.
Okay, I'll admit the title of this post is an exaggeration. There are lots of things you should know - most bad, though some good - about international bureaucracies.
That being said, regular readers know that I get very frustrated with the statist policy agendas of both the International Monetary Fund and the Organization for Economic Cooperation and Development.
I especially object to the way these international bureaucracies are cheerleaders for bigger government and higher tax burdens. Even though they ostensibly exist to promote greater levels of prosperity!
I've written on these issues, ad nauseam, but perhaps dry analysis is only part of what's needed to get the message across. Maybe some clever image can explain the issue to a broader audience (something I've done before with cartoons and images about the rise and fall of the welfare state, the misguided fixation on income distribution, etc).
It took awhile, but I eventually came up with (what I hope is) a clever idea. And when a former Cato intern with artistic skill, Jonathan Babington-Heina, agreed to do me a favor and take the concept in my head and translate it to paper, here are the results.
I think this hits the nail on the head.
Excessive government is the main problem plaguing the global economy. But the international bureaucracies, for all intents and purposes, represent governments. The bureaucrats at the IMF and OECD need to please politicians in order to continue enjoying their lavish budgets and exceedingly generous tax-free salaries.
So when there is some sort of problem in the global economy, they are reluctant to advocate for smaller government and lower tax burdens (even if the economists working for these organizations sometimes produce very good research on fiscal issues).
Instead, when it's time to make recommendations, they push an agenda that is good for the political elite but bad for the private sector. Which is exactly what I'm trying to demonstrate in the cartoon,
But let's not merely rely on a cartoon to make this point.
In an article for the American Enterprise Institute, Glenn Hubbard and Kevin Hassett discuss the intersection of economic policy and international bureaucracies. They start by explaining that these organizations would promote jurisdictional competition if they were motivated by a desire to boost growth.
...economic theory has a lot to say about how they should function. ...they haven’t achieved all of their promise, primarily because those bodies have yet to fully understand the role they need to play in the interconnected world. The key insight harkens back to a dusty economics seminar room in the early 1950s, when University of Michigan graduate student Charles Tiebout...said that governments could be driven to efficient behavior if people can move. ...This observation, which Tiebout developed fully in a landmark paper published in 1956, led to an explosion of work by economists, much of it focusing on...many bits of evidence that confirm the important beneficial effects that can emerge when governments compete. ...A flatter world should make the competition between national governments increasingly like the competition between smaller communities. Such competition can provide the world’s citizens with an insurance policy against the out-of-control growth of massive and inefficient bureaucracies.
Using the European Union as an example, Hubbard and Hassett point out the grim results when bureaucracies focus on policies designed to boost the power of governments rather than the vitality of the market.
...as Brexit indicates, the EU has not successfully focused solely on the potentially positive role it could play. Indeed, as often as not, one can view the actions of the EU government as being an attempt to form a cartel to harmonize policies across member states, and standing in the way of, rather than advancing, competition. ...an EU that acts as a competition-stifling cartel will grow increasingly unpopular, and more countries will leave it.
They close with a very useful suggestion.
If the EU instead focuses on maximizing mobility and enhancing the competition between states, allowing the countries to compete on regulation, taxation, and in other policy areas, then the union will become a populist’s dream and the best economic friend of its citizens.
Unfortunately, I fully expect this sage advice to fall upon deaf ears. The crowd in Brussels knows that their comfortable existence is dependent on pleasing politicians from national governments.
And the same is true for the bureaucrats at the IMF and OECD.
The only practical solution is to have national governments cut off funding so the bureaucracies disappear.
But, to cite just one example, why would Obama allow that when these bureaucracies go through a lot of effort to promote his statist agenda?
Much of my work on fiscal policy is focused on educating audiences about the long-run benefits of small government and modest taxation.
But what about the short-run issue of how to deal with a fiscal crisis? I have periodically weighed in on this topic, citing research from places like the European Central Bank and International Monetary Fund to show that spending restraint is the right approach.
And I've also highlighted the success of the Baltic nations, all of which responded to the recent crisis with genuine spending cuts (and I very much enjoyed exposing Paul Krugman's erroneous attack on Estonia).
Today, let's look at Cyprus. That Mediterranean nation got in trouble because of an unsustainable long-run increase in the burden of government spending. Combined with the fallout caused by an insolvent banking system, Cyprus suffered a deep crisis earlier this decade.
Unlike many other European nations, however, Cyprus decided to deal with its over-spending problem by tightening belts in the public sector rather than the private sector.
This approach has been very successful according to a report from the Associated Press.
...emerging from a three-year, multi-billion euro rescue program, Cyprus boasts one of the highest economic growth rates among the 19 Eurozone countries — an annual rate of 2.7 percent in the first quarter. Finance Minister Harris Georgiades says Cyprus turned its economy around by aggressively slashing costs but also by avoiding piling on new taxes that would weigh ordinary folks down and put a serious damper on growth. "We didn't raise taxes that would burden an already strained economy," he told The Associated Press in an interview. "We found spending cuts that weren't detrimental to economic activity."
Cutting spending and avoiding tax hike? This is catnip for Dan Mitchell!
But did Cyprus actually cut spending, and by how much?
That's not an easy question to answer because the two main English-language data sources don't match.
According to the IMF data, outlays were sliced to €8.1 billion in 2014, down from a peak of €8.5 in 2011. Though the IMF indicates that those numbers are preliminary.
The European Commission database shows a bigger drop, with outlays of €7.0 billion in 2015 compared to €8.3 billion in 2011 (also an outlay spike in 2014, presumably because of a bank bailout).
The bottom line is that, while it's unclear which numbers are most accurate, Cyprus has experienced a multi-year period of spending restraint.
And having the burden of government grow slower than the private sector always has been and always will be the best gauge of good fiscal policy.
By contrast, there's no evidence that tax increases are a route to fiscal probity.
Indeed, the endless parade of tax hikes in Greece shows that such an approach greatly impedes economic recovery.
Though not everybody in Cyprus supports prudent policy.
Critics have accused the government of working its fiscal gymnastics on the backs of the poor — essentially chopping salaries for public sector workers. Pambis Kyritsis, head of the left-wing PEO trade union, said the government's "neo-liberal" policies coupled with the creditors' harsh terms have widened the chasm between the have and have-nots to huge proportions. ...Georgiades turned Kyritsis argument around to reinforce his point that there shouldn't be any let-up in the government's reform program and fiscal discipline.
In the European context, "liberal" or "neo-liberal" means pro-market and small government (akin to "classical liberal" or "libertarian" in the United States).
Semantics aside, it will be interesting to see whether Finance Minister Georgiades is correct about maintaining spending discipline as the economy rebounds.
As the above table indicates, there are several examples of nations getting good results by limiting the growth of government spending. But there are very few examples of long-run success since very few nations have politicians with the fortitude to control outlays if the economy is growing and generating an uptick in tax revenue (which is why states like California periodically get in trouble).
This is why the best long-run answer is some sort of constitutional spending cap, similar to what exists in Switzerland or Hong Kong.
The bottom line if that spending restraint is good short-run policy and good long-run policy. Though I doubt Hillary Clinton will learn the right lesson.
P.S. Cyprus also is a reasonably good role model for how to deal with a banking crisis.
We can learn a lot of economic lessons from Europe.
- Never adopt a VAT unless you want much bigger government.
- Bigger government means lower living standards.
- Don't believe Bernie Sanders about the Nordic nations.
Today, we're going to focus on another lesson, which is that higher taxes lead to more red ink. And let's hope Hillary Clinton is paying attention.
I've already made the argument, using European fiscal data to show that big increases in the tax burden over the past several decades
have resulted in much higher levels of government debt.
But let's now augment that argument by considering what's happened in recent years.
There's been a big fiscal crisis in Europe, which has forced governments to engage in austerity.
But the type of austerity matters. A lot.
Here's some of what I wrote back in 2014.
...austerity is a catch-all phrase that includes bad policy (higher taxes) and good policy (spending restraint). But with a few notable exceptions, European nations have been choosing the wrong kind of austerity (even though Paul Krugman doesn’t seem to know the difference).
As of 2012, there were €9 of tax hikes for every €1 of supposed spending cuts according to one estimate. That's even worse than some of the terrible budget deals we've seen in Washington.
At this point, a clever statist will accuse me of sour grapes and state that I'm simply unhappy that politicians opted for policies I don't like.
I'll admit to being unhappy, but my real complaint is that higher tax burdens don't work.
And you don't have to believe me. We have some new evidence from an international bureaucracy based in Europe.
In a working paper for the European Central Bank, Maria Grazia Attinasi and Luca Metelli crunch the numbers to determine if and when "austerity" works in Europe.
...many Euro area countries have adopted fiscal consolidation measures in an attempt to reduce fiscal imbalances...in most cases, fiscal consolidation did not result, at least in the short run, in a reduction in the debt-to-GDP ratio...calls for a more temperate approach to fiscal consolidation have increased on the ground that the drag of fiscal restraint on economic growth could lead to an increase rather than a decrease in the debt-to-GDP ratio, as such fiscal consolidation may turn out to be self-defeating. ...The aim of this paper is to investigate the effects of fiscal consolidation on the general government debt-to-GDP ratio in order to assess whether and under which conditions self defeating effects are likely to materialise and whether they tend to be short-lived or more persistent over time.
Now let's look at the results of their research.
It turns out that austerity does work, but only if it's the right kind. The authors find that spending cuts are successful and higher tax burdens backfire.
The main finding of our analysis is that...In the case of revenue-based consolidations the increase in the debt-to-GDP ratio tends to be larger and to last longer than in the case of spending-based consolidations. The composition also matters for the long term effects of fiscal consolidations. Spending-based consolidations tend to generate a durable reduction of the debt-to-GDP ratio compared to the pre-shock level, whereas revenue-based consolidations do not produce any lasting improvement in the sustainability prospects as the debt-to-GDP ratio tends to revert to the pre-shock level. ...strategy is more likely to succeed when the consolidation strategy relies on a durable reduction of spending, whereas revenue-based consolidations do not appear to bring about a durable improvement in debt sustainability.
Unfortunately, European politicians generally have chosen the wrong approach.
This is an important policy lesson also in view of the fact that revenue-based consolidations tend to be the preferred form of austerity, at least in the short run, given also the political costs that a durable reduction in government spending entail.
Here are a few important observations from the study's conclusion.
...the findings of our analysis are in line with those of the literature on successful consolidation, namely that the composition of fiscal consolidation matters and that a durable reduction in the debt-to-GDP ratio is more likely to be achieved if consolidation is implemented on the expenditure side, rather than on the revenue side. In particular, when fiscal consolidation is implemented via an increase in taxation, the debt-to-GDP ratio reverts back to its pre-shock level only in the long run, thus failing to generate an improvement in the debt ratio, and producing what we call a self-defeating fiscal consolidation. ...fiscally stressed countries benefit from an immediate reduction in the level of debt when reducing spending.
showing nations that have obtained very good results with multi-year periods of spending restraint.
My examples are from all over the world and cover all sorts of economic conditions. And the results repetitively show that when you deal with the underlying problem of too much government, you automatically improve the symptom of red ink.
I then ask my statist pals to show me a similar table of data for countries that have achieved good results with higher taxes.
I'm still waiting for an answer.
Which is why the only good austerity is spending restraint.
P.S. Paul Krugman is remarkably sloppy and inaccurate when writing about austerity. Check out his errors when commenting on the United Kingdom, Germany, and Estonia.