Fiscal Imbalance, Explained

March/​April 2016 • Policy Report

Some of the most pressing questions about global economies — whether governments are spending beyond their means, for example, and if so by how much — concern what economists call “fiscal imbalance.” Although this is a concept familiar to economists, it can often be difficult for non‐​economists to decipher. In“Fiscal Imbalance: A Primer” (White Paper), Director of Economic Policy Studies Jeffrey Miron provides a clear introduction to the concept of fiscal imbalance. Fiscal imbalance essentially concerns whether a government can continue forever to make the expenditures necessitated by its existing policies, given the expected revenues under those policies and the government’s debt. This includes its ability to borrow money in the future — which is not infinite. This imbalance, as Miron writes in “U.S. Fiscal Imbalance over Time: This Time Is Different” (White Paper), is growing. He projects fiscal imbalance for every year between 1965 and 2014, revealing that the United States has seen a rising fiscal imbalance since the early 1970s. “As of 2014, the fiscal imbalance stands at $117.9 trillion, with few signs of future improvement even if GDP growth accelerates or tax revenues increase relative to historic norms,” he warns. “Thus the only viable way to restore fiscal balance is to scale back mandatory spending policies, particularly on large health care programs such as Medicare, Medicaid, and the Affordable Care Act (ACA).”

Gun control advocates persistently call for measures like universal background checks, a ban on high‐​capacity magazines, or a ban on so‐​called “assault weapons.” But, as associate policy analyst David B. Kopel argues in “The Costs and Consequences of Gun Control” (Policy Analysis no. 784), “Such proposals are not likely to stop a deranged person bent on murder.” Kopel examines the actual costs and benefits of these popular gun‐​control measures, demonstrating that they would prove largely ineffective. “Before adding new gun regulations to the legal code, policymakers should remember that several mass murders in the U.S. were prevented because citizens used firearms against the culprit before the police arrived on the scene,” he warns.

The brutal Charlie Hebdo killings last year were a shocking act of violence, but unfortunately, not the first violent reactions to speech perceived as blasphemy. As Robert Corn‐​Revere , a partner at Davis Wright Tremaine LLP, writes in “To Confront the Assassin’s Veto, or to Ratify It?” (Working Paper no. 36), “This was yet another grim marker in the cross‐​cultural conflict illustrated by events such as the Ayatollah Khomeini’s 1989 fatwah against Salman Rushdie for writing The Satanic Verses, the 2004 murder of filmmaker Theo van Gogh on the streets of Amsterdam for perceived insults to Islam, and the violent reaction to the cartoons of Mohammad published in the Danish newspaper Jyllands‐​Posten in 2005.” Corn-Revere’s paper confronts the question of how the law should deal with these sinister attempts to chill speech.

“Every child deserves the chance at a great education and the American dream,” Cato policy analyst Jason Bedrick, Goldwater Institute education director Jonathan Butcher, and former Goldwater Institute vice president for litigation Clint Bolick — who has since been appointed to the Arizona Supreme Court — write in “Taking Credit for Education: How to Fund Education Savings Accounts through Tax Credits” (Policy Analysis no. 785). In an effort to improve education, several states have passed laws allowing students to receive an Education Savings Account (ESA) which parents can put toward alternative education services. In this analysis, the authors show how legislators can design ESAs that will work in the 40 states with constitutional provisions that prohibit the use of public funds at religious schools. “Tax‐​credit‐​funded ESAs would empower families with more educational options while enhancing accountability and refraining from coercing anyone into financially supporting ideas they oppose,” they write.

China, as Cato vice president James Dorn puts it, is “at a crossroads.” It has made tremendous progress in recent years by expanding the market and strengthening property rights. But at the same time, its powerful one‐​party state maintains a strong grip on citizens’ private and commercial dealings. “The damage China’s illiberal state has inflicted on the nation is becoming evident as the economy slows, debts mount, and state‐​owned enterprises (SOEs) draw capital away from the more productive private sector,” writes Dorn in “China’s Challenge: Expanding the Market, Limiting the State” (Working Paper no. 34). He highlights the importance of renewing interest in China’s ancient culture and writings on topics like freedom and limited government — a legacy which its authoritarian leaders have obscured.

In “Climate Models and Climate Reality: A Closer Look at a Lukewarming World” (Working Paper no. 35), Center for the Study of Science director Pat Michaels and assistant director Chip Knappenberger further the case for the “lukewarmers” — those who believe that the evidence for some human‐​caused climate change is persuasive, but that, contrary to the alarmists, this warming occurs in accordance with the lower end of expectations from mainstream science. They contend that the rate of warming over the past several decades has been so slow it was “completely unexpected” by any of the climate models — “a worrying indication that the current stateof‐ the‐​art climate models are not up to the task of simulating the actual behavior of the earth’s climate.” This consequently throws efforts to implement climate policy based on these models into serious doubt.

Technological advances in recent years have led to a bevy of increasingly small, cheap, and sophisticated weapons. “This new diffusion of power has major implications for the conduct of warfare and national strategy,” U.S. National Defense University distinguished research fellow T. X. Hammes argues in “Technologies Converge and Power Diffuses: The Evolution of Small, Smart, and Cheap Weapons” (Policy Analysis no. 786). Hammes delves into the particular challenges posed by various types of emerging technology, like drones, artificial intelligence, and nanoenergetics, or explosives. With such abundant and affordable technology available, the United States may be exposed to much more danger when waging military campaigns in the future. “Increasingly,” he writes, “we will have to ask the question ‘Is the strategic benefit of an intervention worth the cost when the enemy can strike back in and out of theater?’”

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