Archive for the ‘Tax and Budget Policy’ Category
According to Obama’s Budget, Burden of Federal Spending Will Be $2 Trillion Higher in 10 Years
President Obama’s budget proposal was unveiled today, generating all sorts of conflicting statements from both parties.
Some of the assertions wrongly focus on red ink rather than the size of government. Others rely on dishonest Washington budget math, which means spending increases magically become budget cuts simply because outlays are growing at a slower rate than previously planned.
When you strip away all the misleading and inaccurate rhetoric, here’s the one set of numbers that really matters. If we believe the President’s forecasts (which may be a best-case scenario), the burden of federal spending will grow by $2 trillion between this year and 2022.
In all likelihood, the actual numbers will be worse than this forecast.
The President’s budget, for instance, projects that the burden of federal spending will expand by less than 1 percent next year. That sounds like good news since it would satisfy Mitchell’s Golden Rule.
But don’t believe it. If we look at the budget Obama proposed last year, federal spending was supposed to fall this year. Yet the Obama Administration now projects that outlays in 2012 will be more than 5 percent higher than they were in 2011.
The most honest assessment of the budget came from the President’s Chief of Staff, who openly stated that, “the time for austerity is not today.”
With $2 trillion of additional spending (and probably more), that’s the understatement of the century.
What makes this such a debacle is that other nations have managed to impose real restraints on government budgets. The Baltic nations have made actual cuts to spending. And governments in Canada, New Zealand, Slovakia, and Ireland generated big improvements by either freezing budgets or letting them grow very slowly.
I’ve already pointed out that the budget could be balanced in about 10 years if the Congress and the President displayed a modest bit of fiscal discipline and allowed spending to grow by no more than 2 percent annually.
But the goal shouldn’t be to balance the budget. We want faster growth, more freedom, and constitutional government. All of these goals (as well as balancing the budget) are made possible by reducing the burden of federal spending.
Obama’s Budget, Taxes, and Doctors
President Obama is releasing his FY2013 budget today, and it’s more of the same—trillion-dollar deficits, huge spending, and tax hikes on high-earners. The president wants to raise taxes substantially on households earning more than $250,000. It’s all about fairness he claims, even though effective tax rates on high-earners are already double the rates on middle-earners.
More importantly, supporters of President Obama’s soak-the-rich tax strategy don’t seem to be concerned about the negative consequences for the economy. They seem to have convinced themselves that the Top 1 Percent is dominated by shady Wall Street speculators and other supposed economic leeches.
The reality is that the Top 1 Percent is mainly populated by highly productive people who are crucial to America’s economy. Let’s look at one of the largest subgroups within the Top 1 Percent—doctors and surgeons. Bureau of Labor Statistics data show that there are about 700,000 doctors and surgeons in the United States. The Washington Post on Sunday provides median 2011 doctor salaries from a medical organization survey. Salaries range from $208,658 for family doctors to $501,808 for orthopedic surgeons.
The marketplace has rewarded doctors generously, but everyone knows that makes sense because doctors have extensive education and often work long hours in stressful environments. In its occupational overview of physicians and surgeons, the Bureau of Labor Statistics notes that these professionals need “4 years of undergraduate school, 4 years of medical school, and 3 to 8 years of internship and residency,” which are requirements “among the most demanding of any occupation.”
The BLS also notes that “many physicians and surgeons work long, irregular hours. In 2008, 43 percent of all physicians and surgeons worked 50 or more hours a week.” Doctors often need to make emergency visits to hospitals and nursing homes, and they need to spend many additional hours reading to keep up with medical advances.
So doctors study hard, work hard, and serve a crucial role in society. And what does President Obama want to do to them? He wants to punish them with higher taxes.
If doctor salaries are in the $200,000 to $500,000 range, then most of them will be hit by Obama’s plan to raise top income tax rates. Even doctors with salaries in the lower $200,000 range would be hit if they have spouses that work or if they have investment income that pushes their overall income into the president’s punishment range.
Raising taxes on doctors would damage the economy because doctors will work less and they will have less money to reinvest in their practices. Doctors are exactly the type of workers who have large behavioral responses to tax increases. Facing higher marginal tax rates, a substantial number of doctors will reduce their hours worked or they will retire earlier. In the long run, fewer people will want to go into this difficult profession if the government reduces the after-tax rewards.
The Washington Post story focused on the expected shortages of doctors in coming years. Raising taxes on doctors will make such shortages worse. Just at a time when the nation needs more doctors because of the aging of the population, liberal punish-the-productive policies threaten to exacerbate doctor shortages in our health care system.
The Obama Budget — Some Day My Cuts Will Come
It’s being reported that in his 2013 budget President Obama will propose to increase spending now and reduce the deficit some day. Isn’t that what every budget promises these days? As I noted last summer during the debt ceiling fight at the Britannica Blog, fiscal conservatives should be very skeptical of plans and proposals that promise to cut spending some day—not this year, not next year, but swear to God some time in the next ten years:
As the White Queen said to Alice, “Jam to-morrow and jam yesterday—but never jam to-day.” Cuts tomorrow and cuts in the out-years—but never cuts today.
We’ve become so used to these unfathomable levels of deficits and debt—and to the once-rare concept of trillions of dollars—that we forget how new all this debt is. In 1981, after 190 years of federal spending, the national debt was “only” $1 trillion. Now, just 30 years later, it’s past $15 trillion. So here’s a graphic representation from the Washington Post (now about half a trillion behind) of debt dysfunction:
Those are the kind of numbers that caused the Tea Party movement and the Republican victories of 2010. And where did all this debt come from? As the Tea Partiers know, it came from the rapid increase in federal spending over the past decade:
Annual federal spending rose by a trillion dollars when Republicans controlled the government from 2001 to 2007. It has risen another trillion during the Bush-Obama response to the financial crisis. So spending every year is now twice what it was when Bill Clinton left office 10 years ago, and the national debt is almost three times as high. Republicans and Democrats alike should be able to find wasteful, extravagant, and unnecessary programs to cut back or eliminate. And yet many voters, especially Tea Partiers, know that both parties have been responsible. Most Republicans, including today’s House leaders, voted for the No Child Left Behind Act, the Iraq war, the prescription drug entitlement, and the TARP bailout during the Bush years. That’s one reason that even voters outraged at the Obama-Reid-Pelosi spending surge can’t quite get enthusiastic about Republicans.
The problem on Capitol Hill is spending, deficits, and debt. Members of Congress need to tell the president that you don’t rein in out-of-control spending by increasing it. And if voters want members of Congress to insist on cuts, they’re going to have to let their representatives know that.
CBO Spending Projections, Then and Now
Each January the Congressional Budget Office provides updated projections of the federal budget for the coming decade. Let’s compare the January 2011 projections to the January 2012 projections to see whether the switchover of the House to Republican control during 2011 has made a dent in spending.
We will look at CBO projections for the three basic components of federal spending: discretionary, entitlements, and interest. The three figures below are CBO “baseline” projections of fiscal year outlays, with historical data back to 2007.
Figure 1 shows that discretionary outlays jumped from $1.04 trillion in 2007 to $1.35 trillion in 2011. The CBO’s new projection (red line) for spending in 2012 is $44 billion below what the CBO projected for 2012 last year (blue line). That small reduction is partly attributable to GOP spending restraint efforts.
Looking ahead to 2021, spending is now projected to go down significantly from what was projected last year. That is the result of the budget caps that the Republicans negotiated with the Democrats in the Budget Control Act enacted last summer, and it includes the further reduction in caps stemming from the failure of the “supercommittee.”
If the caps hold, discretionary outlays will be 16 percent lower in 2021 than they might otherwise have been. However, that’s a giant “if” given the track record of Congress. And even if the caps do hold, it would only be a cut of $256 billion in 2021, which would be less than 5 percent of total federal spending that year of more than $5 trillion.
Data in New World Bank Report Shows that Large Public Sectors Reduce Economic Growth
When Ronald Reagan said that big government undermined the economy, some people dismissed his comments because of his philosophical belief in liberty.
And when I discuss my work on the economic impact of government spending, I often get the same reaction.
This is why it’s important that a growing number of establishment outfits are slowly but surely coming around to the same point of view.
- The European Central Bank published a study showing “…a significant negative effect of the size of government on growth.”
- A study by two Harvard economists found that “large adjustments in fiscal policy, if based on well-targeted spending cuts, have often led to expansions.”
- The Organization for Economic Cooperation and Development noted in recent research that welfare programs are economically destructive because they lure people into dependency because “net disposable income would increase despite putting in fewer hours.”
- A study from the International Monetary Fund concluded that “Cuts to pension and health entitlements had the most beneficial effect on economic growth.”
This is remarkable. It’s beginning to look like the entire world has figured out that there’s an inverse relationship between big government and economic performance.
That’s an exaggeration, of course. There are still holdouts pushing for more statism in Pyongyang, Paris, Havana, and parts of Washington, DC.
But maybe they’ll be convinced by new research from the World Bank, which just produced a major report on the outlook for Europe. In chapter 7, the authors explain some of the ways that big government can undermine prosperity.
There are good reasons to suspect that big government is bad for growth. Taxation is perhaps the most obvious (Bergh and Henrekson 2010). Governments have to tax the private sector in order to spend, but taxes distort the allocation of resources in the economy. Producers and consumers change their behavior to reduce their tax payments. Hence certain activities that would have taken place without taxes, do not. Workers may work fewer hours, moderate their career plans, or show less interest in acquiring new skills. Enterprises may scale down production, reduce investments, or turn down opportunities to innovate. …Over time, big governments can also create sclerotic bureaucracies that crowd out private sector employment and lead to a dependency on public transfers and public wages. The larger the group of people reliant on public wages or benefits, the stronger the political demand for public programs and the higher the excess burden of taxes. Slowing the economy, such a trend could increase the share of the population relying on government transfers, leading to a vicious cycle (Alesina and Wacziarg 1998). Large public administrations can also give rise to organized interest groups keener on exploiting their powers for their own benefit rather than facilitating a prosperous private sector (Olson 1982).
No Budget in 1,000 Days? No Budget Ever!
Around the time of President Obama’s State of the Union speech two weeks ago, Republicans and their allies came out arguing that the Democratic Senate hadn’t produced a budget in 1,000 days. Senate Budget Committee chairman Kent Conrad (D-ND) disputes the charge.
Is it true? The new budget season started Monday, so it’s a great time to examine that question.
Budget season really did start Monday. The Congressional Budget Act has a timetable in it (at section 300) that says the president submits his budget on or before the first Monday in February. We’re underway!
But I hope you weren’t holding your breath waiting to get a glimpse of the president’s budget. The White House has kicked back its release by a week—an unfortunate symbol of how both ends of Pennsylvania Avenue flout budget processes in ways large and small.
Now to the question: When was the last Senate budget?
Let’s start with a preliminary question: What is a “budget”?
Unemployment Insurance Fraud: Chile Has Solution
Like other government hand-out programs, the unemployment insurance system suffers from a substantial fraud problem. The Washington Post reports that 90 D.C. city employees and 40 former employees are being investigated for grabbing UI benefits to which they were not entitled. The cost of this fraud has been about $800,000 since 2009.
It’s not hard to rip-off federal subsidy programs, and UI is no exception. The Post reports that “the alleged fraud is not complicated, nor is it uncommon in unemployment insurance programs: Workers apply for checks and receive them legitimately for a time but fail to inform authorities when they go back to work.”
Other sources of UI fraud include the misreporting of earnings, the provision of false ID to gain benefits, and falsifying reasons for employment termination. Nationwide, the Department of Labor estimates that the improper payment rate for UI is about 11 percent, which amounted to $17 billion of wasted taxpayer money in 2010.
What’s the solution? The nation of Chile appears to have found it. In 2002 it created a system of UI personal savings accounts to replace the traditional government hand-out system. The new system built on the success of Chile’s Social Security personal account system. UI personal accounts help solve the fraud problem because workers would only be stealing from their own accounts if they took unjustified benefits.
There are other benefits to the Chilean system. A detailed study in 2010 found that the nation’s savings-based UI system helped improve work incentives and reduced unemployment. Such accounts can also add to the long-term retirement savings of workers.
For a full analysis of the failures of our UI system and possible reforms, see my co-authored essay on DG here.
Another Log for the Government Spending Multiplier Fire
At the center of the debate over efforts by policymakers to “stimulate” the economy with government spending is the issue of fiscal multipliers. Some economists argue that government spending can be a free lunch: an additional dollar of government spending increases GDP by more than one dollar. Other economists say that government spending is not so free: an additional dollar of government spending increases GDP by less than one dollar or even reduces it.
My non-empirically based view is that the mainstream media tends to treat the free lunch position as gospel. Why that appears to be the case I’ll leave to others to speculate, but it is decidedly irritating. Back in 2010, my colleague Alan Reynolds noted that a survey conducted by an economist at the Federal Reserve Bank of San Francisco counted several studies that concluded that the multiplier effect of government spending is less than one.
We can now add to the list another study that found a multiplier of less than one.
From a National Bureau of Economic Research working paper by economist Valerie Ramey:
For the most part, it appears that a rise in government spending does not stimulate private spending; most estimates suggest that it significantly lowers private spending. These results imply that the government spending multiplier is below unity. Adjusting the implied multiplier for increases in tax rates has only a small effect. The results imply a multiplier on total GDP of around 0.5.
Note: For readers who are interested in real world examples of how government spending hinders economic growth, check out DownsizingGovernment.org.
Earmarks are a Symptom of the Problem
A Washington Post investigation identified dozens of examples of federal policymakers directing federal dollars to projects that benefited their property or an immediate family member. Members of Congress have been enriching themselves at taxpayer expense? In other news, the sun rose this morning.
According to the Post, “Under the ethics rules Congress has written for itself, this is both legal and undisclosed”:
By design, ethics rules governing Congress are intended to preserve the freedom of members to direct federal spending in their districts, a process known as earmarking. Such spending has long been cloaked in secrecy and only in recent years has been subjected to more transparency. Although Congress has imposed numerous conflict-of-interest rules on federal agencies and private businesses, the rules it has set for itself are far more permissive.
Lawmakers are required to certify that they do not have a financial stake in the actions they take. In the cases The Post examined, not one lawmaker mentioned that he or she owned property that was near the earmarked project or had a relative who was employed by the company or institution that received the earmark. The reason: Nothing in congressional rules requires them to do so, and the rules do not address proximity.
With the fox guarding the henhouse, the most one can hope to accomplish is to limit the carnage. Many pundits, politicians, and policy wonks argue that a permanent ban on earmarks would be an effective limit. Unfortunately, that’s just wishful thinking as earmarks are merely a symptom of the real problem: Congress can spend other peoples’ money on virtually anything it wants.
Take the example of Rep. Candace Miller (R-MI):
In Harrison Township, Mich., Rep. Candice S. Miller’s home is on the banks of the Clinton River, about 900 feet downstream of the Bridgeview Bridge. The Republican lawmaker said when she learned local officials were going to replace the aging bridge, she decided to make sure the new one had a bike lane.
“I told the road commission, ‘I am going to try to get an earmark for the bike path,’” Miller said, recalling that she said, “If we don’t put a bike path on there while you guys are reconstructing the bridge, it will never happen.”
A member of the House Transportation Committee, Miller in 2006 was able to secure a $486,000 earmark that helped add a 14-foot-wide bike lane to the new bridge. That lane is a critical link in the many miles of bike paths that Miller has championed over the years. When the bridge had its grand reopening in 2009, Miller walked over from her home.
“People earmark for all kinds of things,” she said. “I’m pretty proud of this; I think I did what my people wanted. Should I have told them, ‘We can never have this bike path complete because I happen to live by one section of it’? They would have thrown me out of office.”
Forget how the federal money made it to Harrison Township, Michigan. As I’ve discussed before, the more important concern is that the federal government is funding countless activities that are not properly its domain:
There just isn’t much difference between the activities funded via earmarking and the activities funded by standard bureaucratic processes. The means are different, but the ends are typically the same: federal taxpayers paying for parochial benefits that are properly the domain of state and local governments, or preferably, the private sector. As a federal taxpayer, I’m no better off if the U.S. Dept. of Transportation decides to fund a bridge in Alaska or if Alaska’s congressional delegation instructs the DOT to fund the bridge.
As a taxpayer, it disgusts me that Rep. Miller steered federal dollars to a project in her district that she personally benefited from. But would I be any better off had the money for a bike path in Harrison Township, Michigan come from a grant awarded by the Department of Transportation?
If Harrison Township wanted a bike path, then it should have been paid for with taxes collected by the appropriate unit of local government. Better yet, a private group could have raised the funds. Either way, I don’t see how it’s possible to argue that the U.S. Constitution gives Congress the authority to spend taxpayer money on such activities. Invoking the General Welfare Clause doesn’t pass the laugh test as the bike path obviously doesn’t benefit the rest of the country. The Commerce Clause? Please.
For more on why the federal government should stop subsidizing activities that are properly the domain of the state and local government, see this Cato essay on fiscal federalism.
Acting as the Typhoid Mary of the Global Economy, the OECD Urges Higher Taxes in Latin America
Is it April Fool’s Day? Has somebody in Paris hacked the website at the Organization for Economic Cooperation and Development? Have we been transported to a parallel dimension where up is down and black is white?
Please forgive all these questions. I’m trying to figure out why any organization—even a leftist bureaucracy such as the OECD—would send out a press release entitled, “Rising tax revenues: a key to economic development in Latin American countries.”
Not even Keynesians, after all, think higher taxes are a recipe for growth.
Ah, never mind. I just remembered that the OECD is a hotbed of statism, so the press release makes perfect sense. After all, the U.S.-taxpayer-funded organization has become infamous for reflexively advocating big government.
- The OECD has an anti-tax competition project designed to prop up Europe’s bankrupt welfare states.
- The OECD is pushing a “Multilateral Convention” that is designed to become something akin to a World Tax Organization, with the power to persecute nations with free-market tax policy.
- The OECD has endorsed Obama’s class-warfare agenda, publishing documents endorsing “higher marginal tax rates” so that the so-called rich “contribute their fair share.”
- The OECD pulled off a hat trick of bad policy in a 2010 document, promoting a value-added tax, Obama’s global warming agenda, and failed Keynesian stimulus.
- The OECD endorsed Obamacare, as I explain in this video.
- The OECD even advocates higher taxes when nations are in the middle of economic crisis.
With this dismal track record, it’s hardly a surprise that the Paris-based bureaucracy is now pushing to undermine prosperity in Latin America. Here’s some of what the OECD said in its release.
Additional tax revenues enable governments to simultaneously improve their competitiveness and promote social cohesion through increased spending on education, infrastructure and innovation. Latin American countries have made great strides over the past two decades in raising tax revenues.
You won’t be surprised when I tell you that the Paris-based bureaucrats do not bother to provide even the tiniest shred of proof to support the silly claim that higher taxes improve competitiveness. But that shouldn’t be surprising since even Keynesians don’t believe something that absurd.
And the claim about social cohesion also is a bit of a stretch given the riots, chaos, and social disarray in many European nations.
The only accurate part of the passage is that Latin American nations have increased tax burdens over the past 20 years. To the tax-free bureaucrats at the OECD, that is making “great strides.”
Let’s see what else the OECD had to say.
Despite these improvements, significant gaps between Latin America and OECD countries remain. The average tax to GDP ratio in OECD countries is much higher than in Latin American countries (33.8% compared to 19.2% in 2009, respectively). As the countries in the region still find themselves in relatively strong economic conditions, now is the time to consider reforms that generate long-term, stable resources for governments to finance development.
Wow. The OECD is implying that Latin American nations should mimic OECD nations. In other words, the bureaucrats in Paris apparently think it makes sense to tell nations to copy the failed high-tax, welfare-state model of countries such as Greece, Italy, and Spain.
Is that really the lesson they think people should learn from recent fiscal history? Are they really so oblivious and/or blinded by ideology that they issued the release as these European nations are in the middle of a fiscal crisis?
CBO Forecast Accuracy
Economic variables are key drivers of the numbers in CBO’s budget projections. I noted last week that CBO’s new outlook assumes substantially lower interest rates, which appears to produce more than a trillion dollars of savings over the next decade.
Policymakers should be aware, however, that macroeconomic forecasts are not very accurate, despite the sophisticated models available today. Consider how CBO completely missed the recent recession until after it had already started (in December 2007).
Figure 1 shows CBO’s January 2008 projection of real GDP growth (blue bars). The recession had already started, yet CBO projected that U.S. growth would strengthen substantially in subsequent years. Their forecast for just one year ahead (2009) ended up being a giant 5.2 percentage points off. (These are fiscal years).
The recession caught most economists by surprise, of course. We know now that the deflating housing sector was a key cause of the recession, but it is interesting that CBO missed the seriousness of that factor, even though they have huge models hundreds of equations in length. Housing prices had peaked in 2005-2006, and had already been falling rapidly for two years when CBO made its faulty January 2008 forecast.
The point here is not to pick on CBO, but to raise skepticism about macro forecasts and the policy prescriptions that stem from macro model simulations. Ezra Klein, for example, is convinced that reducing the deficit at this time would be bad for growth because that’s what (Keynesian) macro models predict. But where’s the real-world evidence that cutting deficits is bad for growth? I’ve noted that Canada cut spending and deficits sharply in the 1990s and its economy boomed—the opposite of what Keynesian models would have predicted.
Klein warns America not to follow Britain’s “austerity” policies: “Note the struggles of Britain, which has embraced austerity more fully than perhaps any other major economy, only to see its growth falter and its total debts rise.”
Apparently, Klein hasn’t looked at the actual British data. OECD data (Table 25) show that U.K. government spending soared from 37 percent of GDP in 2000 to 51 percent of GDP in 2010. Spending in 2011 and expected spending for 2012 is cut to about 49 percent of GDP. That’s the brutal “austerity” policy that is undermining British growth?
Here’s one more angle on CBO’s forecast accuracy. Figure 2 shows CBO’s January projections from recent years for fiscal 2011 growth. In the first few years shown, CBO was actually strengthening its view of 2011 growth. It wasn’t until 2010 that CBO’s models finally caught up with the reality of the recession, and the forecast for 2011 was sharply downgraded. In January 2012, CBO reported that actual 2011 growth was 2.1 percent.
Upshot: With respect to budget policies, policymakers should forget what the macro models are saying. What we know for sure is that the government is spending $1 trillion a year more than it takes in. That’s just crazy. We need to cut spending, and we need to start now.
Has Congress Cut Any Spending Yet?
It’s been a year since Republicans assumed control in the House in the wake of the 2010 elections, which were powered by Tea Party concerns about massive federal spending and deficits. With the more conservative House, has Congress made any progress on spending cuts yet?
Let’s compare the new CBO budget projections to CBO’s January 2011 projections. The new 10-year projections do look a little better, at least by Washington standards. A year ago, CBO’s baseline showed the deficit falling modestly from more than $1 trillion this year to $763 billion by 2021. CBO’s new baseline shows the deficit falling to just $279 billion by 2021.
The chart shows federal spending of $3.6 trillion this year and CBO’s projections for 2021 from last year and this year. Last year, 2021 spending was expected to be $5.726 trillion, but this year 2021 spending is expected to be $5.205 trillion. Thus, Congress will apparently be “saving” $521 billion in 2021 compared to what it had planned to spend, although spending is still expected to rise 45 percent over the next nine years.
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