Archive for the ‘Tax and Budget Policy’ Category
Looking at Austerity in France
Let’s continue with a look at austerity policies in Europe. Yesterday I wrote that in Britain, austerity so far has meant only tax hikes, since government spending, both in nominal and real terms, continues to grow despite the announcement of deep cuts from 10 Downing Sreet. What about France? The country chose a socialist president on Sunday who, according to Paul Krugman and some media outlets, was elected precisely to fight against austerity.
My colleague Dan Mitchell already showed how there haven’t been any spending cuts in France in the last decade. I’d like to dwell on this issue with another graph:
Source: Source: European Commission, Economic and Financial Affairs.
Once again, it’s pretty evident that there hasn’t been any cut in spending in recent years, neither in nominal or real terms. If we look at total government spending as a share of the economy, it went up from 51.6% in 2000 to 56.8% in 2009, and then it came down a bit to 55.9% in 2011—still the highest in the European Union. I doubt that anyone, other than perhaps Paul Krugman, can seriously claim that a decline of 0.9 percentage points in government spending as a share of GDP represents savage austerity.
However, taxes have indeed gone up, and all the presidential candidates, from the far left to the far right, promised to increase them even further. That’s why The Economist reported that, regardless of who won the election, “big companies and rich families are looking at ways to leave France.”
There is more: France hasn’t had a balanced budget since 1973. Its public debt went up from 20.7% of GDP in 1980 to an expected 87% this year. Its budget deficit in 2011, at 5.8%, stands much closer to that of Spain (6.5%) than that of Germany (1%).
So, what austerity is François Hollande pledging to fight?
Republicans Help Save the Economic Development Administration
Yesterday evening I blogged on a pending vote in the House on an amendment introduced by Rep. Mike Pompeo (R-KS) to eliminate funding for the Economic Development Administration. Unfortunately, the amendment failed today on a vote of 129-279. All 175 Democrats voting joined 104 Republicans in keeping the EDA alive.
A single Democrat voting to axe a government program would have been a shock. But congressional Republicans regularly extol the virtues of limited government and free markets. As Rep. Pompeo said in a statement, “If those who talk constantly about rolling back the unsustainable size and scope of the federal government are serious, then they will support my efforts to eliminate the EDA.” Well, 104 Republicans voted to continue spending taxpayer dollars on warmed-over subsidy program that’s been hanging around since the 1960s.
Rep. Kristi Noem (R-SD), for example, voted against the Pompeo amendment. But in a column she penned in April, Noem said “Our debt crisis is a result of Washington spending money it doesn’t have and letting our children and grandchildren pick up the tab.” Noem favors a Balance Budget Amendment and says that “Our government must come together and make the tough decisions to secure our nation’s prosperous future.” Really? Noem says tough decisions need to be made but she can’t even get behind the elimination of the EDA. Talk about chutzpah.
Noem and 85 other Republicans also voted against Rep. Ben Quayle’s (R-AZ) amendment that would have defunded a new corporate welfare program asked for by President Obama in his fiscal 2013 budget proposal. Thanks to the 86 Republicans in the House, instead of terminating programs, taxpayers will get a new one called the Advanced Manufacturing Technology Consortia program.
Negativity aside, Representatives Pompeo and Quayle deserve kudos for actually trying to kill a federal program. Even though their efforts failed this time, they could bear fruit in the future if more members decide that they’d rather not take another vote exposing them to be complete hypocrites.
Looking at ‘Austerity’ in Britain
I’m going to jump into the debate about austerity in Europe because it is being closely followed in Latin America, and many people are drawing the wrong conclusions about how austerity is strangling the European economies. But first, we have to be clear about what we mean by “austerity.”
As the debate between Veronique de Rugy of the Mercatus Center and Ryan Avent at The Economist shows, there are different definitions of austerity. The term could mean fiscal consolidation only by spending cuts. It could mean a mixture of spending cuts and tax increases (the so called “balanced approach”), and it could even be just tax increases. So when people blame “austerity” for Europe’s economic malaise, we could be talking about a very different set of policies in each country.
Let’s look at Britain, which just entered into a double dip recession because of, according to Paul Krugman, “the evident failure” of austerity policies. If we look at spending levels in the UK both in nominal and real terms, we can clearly see that despite the announcement of deep cuts, government spending continues to rise:
Source: European Commission, Economic and Financial Affairs.
It’s clear that, at least in nominal terms, the rate of growth of spending has declined, but that hardly constitutes brutal cuts as Krugman and others want us to believe. If we look at total government spending as a percentage of the economy, Britain reached a peak in 2009 at 51.5%, and that came down to 49.9% in 2011. Can anyone seriously argue that Britain is in a recession because of that tiny drop in spending as a share of the economy?
Now, let’s remember that the Conservative-Liberal Democrat coalition government that came to power in May 2010 adopted what The Economist hailed as a balanced approach of fiscal consolidation based on £1 of tax increases for £3 of spending cuts. To be fair, the British magazine also said that if economic recovery proved hard to achieve, the government should consider a reprieve in tax increases, but not on spending cuts. We all know that the tax increases already took place (the VAT rate went up from 17.5% to 20%, for example). But as we can see, spending cuts haven’t taken place at all. Thus, austerity in Britain consists only of tax increases.
It’s hard to estimate the impact of tax increases on the British economy. Certainly the economic turmoil in Continental Europe has played a role in taking the U.K. into a second recession. But those who claim that “austerity” is responsible for Britain’s economic malaise should be honest and acknowledge that by austerity they mean only tax increases, not spending cuts.
Democratic Tax Policy, Then and Now
My new piece at Daily Caller looks at how the Democratic Party’s approach to tax policy has changed over the decades.
The piece was prompted by a recent article from Norm Ornstein and Tom Mann claiming that needed bipartisan reforms are being blocked by the new “ideologically extreme” Republican Party.
Baloney. It’s the Democrats who have changed. The party’s leaders have moved far to the left on economic issues.
As evidence, I point to this Cato Journal article from 1985 by Democrat Richard Gephardt, who was a leader on tax reform. As a free-market guy, I agree with the great majority of what Gephardt said, yet I agree with virtually nothing that modern Democratic leaders say about tax policy.
Regarding ridding the tax code of special breaks, Gephardt says, “I confess that I am not qualified to act as a central planner and I do not know anybody on either committee who is.” Amen!
And Gephardt says, “We in Congress take pride in the free market system.” When was the last time you heard a Democratic leader say something like that?
Economic Development Administration—Telling Votes in the House
My colleague Sallie James reported this morning on the looming vote in the House to reauthorize the Export-Import Bank. There are two other votes, which could come as soon as this evening, that would provide a similar indication of how serious the Republican-controlled House is about limiting government and supporting free markets.
An amendment to the House’s fiscal 2013 Commerce, Justice, and Science appropriations bill (H.R. 5326) introduced by Rep. Mike Pompeo (R-KS) would eliminate funding for the Economic Development Administration. An amendment introduced by Rep. Mike Michaud (D-ME) would give the EDA an additional $38 million. The House bill appropriates $219 million for the EDA, which is the same amount that President Obama requested.
It’s bad enough that the House Appropriations Committee wants to continue funding this relic of the “Great Society” at any level. However, the appropriations committees are a lost cause regardless of which party is in control. Thus, how the entire Republican House caucus votes on these two amendments will be the more important—and telling—story.
See this Cato essay for background on the Economic Development Administration.
Paul Krugman and the European Austerity Myth
With both France and Greece deciding to jump out of the left-wing frying pan into the even-more-left-wing fire, European fiscal policy has become quite a controversial topic.
But I find this debate and discussion rather tedious and unrewarding, largely because it pits advocates of Keynesian spending (the so-called “growth” camp) against supporters of higher taxes (the “austerity” camp).
Since I’m a big fan of nations lowering taxes and reducing the burden of government spending, I would like to see the pro-tax hike and the pro-spending sides both lose (wasn’t that Kissinger’s attitude about the Iran-Iraq war?). Indeed, this is why I put together this matrix, to show that there is an alternative approach.
One of my many frustrations with this debate (Veronique de Rugy is similarly irritated) is that many observers make the absurd claim that Europe has implemented “spending cuts” and that this approach hasn’t worked.
Here is what Prof. Krugman just wrote about France.
The French are revolting. …Mr. Hollande’s victory means the end of “Merkozy,” the Franco-German axis that has enforced the austerity regime of the past two years. This would be a “dangerous” development if that strategy were working, or even had a reasonable chance of working. But it isn’t and doesn’t; it’s time to move on. …What’s wrong with the prescription of spending cuts as the remedy for Europe’s ills? One answer is that the confidence fairy doesn’t exist — that is, claims that slashing government spending would somehow encourage consumers and businesses to spend more have been overwhelmingly refuted by the experience of the past two years. So spending cuts in a depressed economy just make the depression deeper.
And he’s made similar assertions about the United Kingdom, complaining that, “the government of Prime Minister David Cameron chose instead to move to immediate, unforced austerity, in the belief that private spending would more than make up for the government’s pullback.”
So let’s take a look at the actual data and see how much “slashing” has been implemented in France and the United Kingdom. Here’s a chart with the latest data from the European Union.
Ex-Im Reauthorization Vote Expected Tomorrow
House legislators have reached a “compromise” deal to reauthorize the Export-Import Bank of the United States until 2014 and at an increased funding level ($120 billion, with a possible increase to $140 billion). The compromise builds on a bill crafted by Rep. Eric Cantor (R-VA) I blogged about in March, but seems to largely be a win for the pro-bank folks judging by the increased funding levels, with the “compromise” part being not much more than pathetic sops to those concerned about the bank’s mission, if not its very existence.
Inside U.S. Trade [$] has more details:
House Republican and Democratic leaders late last week announced that they had a reached a compromise deal to reauthorize the Export-Import Bank through fiscal year 2014 and immediately raise its lending cap to $120 billion, with the possibility of further increases to $140 billion during that period if default rates are kept low and other conditions are met. The House expects to consider the bill on Wednesday (May 9) under suspension of rules, a House GOP aide said.
The bill contains a longer reauthorization, and a higher lending cap, than what was included in an initial draft bill floated by Rep. Eric Cantor (R-VA) in March. That draft bill would have renewed the bank’s charter only through June 2013, and would have raised the lending cap to $113 billion, up from the current level of $100 billion.
At the same time, the compromise bill reflects some of the demands of Cantor and other Republicans who are wary of reauthorizing the activities of a bank they say puts taxpayer money at risk and distorts the free market.
For instance, it conditions further increases in the lending cap, to $140 billion for fiscal year 2014, on the bank maintaining a default rate on outstanding loans that is below two percent and submitting other required reports. It also includes language from Cantor’s draft instructing the president to enter into negotiations with other countries to substantially reduce official export financing in general and for aircraft in particular, with the goal of ultimately eliminating such financing altogether.
Under suspension of rules, which is a procedure typically reserved for non-controversial legislation, debate is limited to 40 minutes and the bill must garner a two-thirds majority to pass.
The article goes on to describe all of the ostensible brakes that the Republican leadership have insisted placing on Ex-Im, but they really amount to the usual Washington ways of pretending they are implementing real reform: calls for the bank to issue business plans, address GAO concerns, be more transparent, etc. Nothing, unfortunately, about changing the accounting rules under which the bank operates let alone setting a path to winding down the bank altogether.
In short, the “compromise” is just fiddling while Washington is awash in red ink, and the federal government encroaches more and more into what should be private markets.
A Contradiction in Keynesian Fiscal Policy
There’s an internal contradiction in the way that Keynesian-oriented economists and policymakers address the federal budget situation. I’ve noticed it over and over. A passage in a Washington Post op-ed today by Mohamed El-Erian of Pimco captures it perfectly:
[T]he U.S. fiscal situation requires a carefully designed and well-timed overhaul to make government finances more efficient and fairer—among other things, combining immediate stimulus with a credible set of medium-term tax and entitlement reforms and a sustainable effort to reduce the deficit over time.
El-Erian seems to want more deficit-fueled “stimulus” now, combined with a “credible” plan that would reduce the deficit later on. We hear similar things from administration economists and centrist and liberal budget experts all the time.
Yet how can a Keynesian administration or Keynesians in Congress ever make a “credible” medium- or long-term commitment to deficit reduction? As soon as the next recession hits, they will demand ripping up any previous deficit-reduction deal so that they can stimulate aggregate demand some more.
To Keynesians, the short run is always more important than the long run, so it’s impossible for them to have a “credible” long-run commitment to deficit reduction. Even today, prominent Keynesian economists are demanding more “stimulus,” but the economy is not in recession and the budget deficit (which is “stimulus” to Keynesians) is already over $1 trillion. What happens if the economy slips into recession in 2013 or 2014? The Keynesians would surely break any budget deal and push for a $2 trillion deficit.
Everybody knows that federal policymakers usually break prior deals on discretionary budget caps and agreed-to entitlement cuts. The dominance of Keynesian-minded policymakers and advisers in Washington these days further reduces the believability of any long-term budget deal that policymakers may come up with.
Thus, the best way for policymakers to be truly “credible” on deficit reduction is to start cutting spending right now. Then cut spending more next year, and chop it further the year after that, and then keep on going.
Postal Reform: A Telling Survey
First-class mail is the USPS’s most profitable product. Thus, the large – and permanent – drop in first-class mail volume has the USPS facing red ink as far as the eye can see. The U.S. Postal Service’s inspector general recently reported its findings from focus group discussions held with high-volume first-class mailers and mail service providers. The feedback is quite telling:
- Both mailers and customers are turning to electronic alternatives for the obvious reason that it’s cheaper and more efficient than physical mail. The participants estimated that the per-piece cost of sending transactional mail (e.g., billing statements, invoices, etc) is 45 to 50 cents whereas it costs between “pennies” and 13 cents to send mail electronically. The report notes that “the most senior levels of corporate management have already made decisions to move to electronic means as quickly as possible.”
- The uncertainty caused by congressional dithering over, and mismanagement of, the USPS has created an incentive for mailers to seek alternatives. Participants noted that the USPS “struggles to respond to business setbacks or market changes in a timely manner the way the private corporations can, in part because of legal, regulatory, and congressional constraints.” The constraints include the USPS not being “able to optimize its retail network, close plants, reduce delivery days, or control pricing, like other businesses.”
- According to the report, “Postal Inspection Service investigations and compliance have left a ‘bad taste’ in the mouths of a large segment of high-volume mailers.” Call me crazy, but when you’re already losing customers, it’s probably not a good idea to irritate the ones that you have left.
- On the future of first-class mail, the message is pretty clear: “While the advent of 100 percent electronic communication is not imminent, all focus group participants envisioned a point in the future when the continued use of paper communications, and thus mail, will cease to make economic sense.”
Unfortunately, Congress’s view of the future doesn’t extend beyond the next election. See, for example, the postal “reform” bill recently passed in the Senate that I discussed on Tuesday.
Should Government Fund the Arts?
The New York Times asks how “we” should fund the arts, suggesting for instance a 1.5 percent payroll tax, as they have in Brazil. I answered a slightly different question:
What do art, music, and religion have in common? They all have the power to touch us in the depths of our souls. As one theater director said, “Art has power. It has the power to sustain, to heal, to humanize . . . to change something in you. It’s a frightening power, and also a beautiful power….And it’s essential to a civilized society.”
Which is precisely why art, music, and religion should be kept separate from the state.
Full column here. More writing on the separation of arts and state here.
Senate Postal Reform Bill
The postal reform bill passed in the Senate last week is further evidence that politicians shouldn’t be entrusted with running a hotdog stand, let alone the nation’s mail. The U.S. Postal Service is supposed to operate like a business, but congressional micromanagement makes that impossible. Nevertheless, 62 senators voted for an eye-glazing 191-page bill that would keep Congress’s hand placed firmly around the USPS’s neck.
Here’s a summary from the Washington Post:
The bipartisan measure passed 62 to 37 and would give the Postal Service nearly $11 billion to offer buyouts and early retirement incentives to hundreds of thousands of postal workers and to pay off its debts…The measure also would permit the end of Saturday mail deliveries in two years, only after USPS determines it is financially necessary. The Postal Service also could move forward with plans to shutter thousands of post offices and hundreds of mail distribution centers — but senators placed several restrictions on when, where and how outposts in rural communities could be closed. The bill also modifies mail service standards to ensure that the Postal Service preserves the overnight delivery of mail sent to nearby communities, but allows USPS to slow the delivery of mail destined for destinations farther away…
Senators have worked for more than a year to give USPS the ability to set postage rates and delivery schedules and to determine the fate of unprofitable post offices free of congressional intervention, but senators eager to protect home-state interests added several restrictions. They agreed to strengthen the appeals process for customers opposed to closing a post office; to force USPS to wait until after Election Day to close postal facilities in states that permit voting by mail; and to permit the Postal Service to co-locate post offices in government-owned buildings to save space and money. Senators also approved a plan that forbids the Postal Service from closing a rural post office unless the next-nearest location is no more than 10 miles away.
Over at the leftish Mother Jones, Kevin Drum lists the bill’s “reforms” and concludes that “We are ruled by idiots.” Drum’s beef is that the bill doesn’t make it easier for the USPS to increase prices to generate more revenue. There are arguments for and against higher postal prices, but the fundamental problem—in my opinion—is that prices are set by the government instead of market forces. It is impossible to know what the appropriate prices for postal services should be in the absence of a competitive marketplace for mail. Similarly, Congress dictates that mail be delivered six days a week. Why in the 21st Century must practically every home in the country receive mail six days a week? Again, allow market forces to decide how often people receive mail. Perhaps some people would be willing to pay to receive mail seven days a week. Or three days. Or no days. Instead, we remain stuck with the one-size-fits all government approach that reflects parochial and political, rather than economic and financial, considerations.
As for Drum’s conclusion, I’ll leave that up to readers to decide. I will say that this video of Sen. Tom Carper (D-DE), one of the bill’s sponsors, making the case for using wind farms to power a new fleet of battery-operated USPS delivery vehicles doesn’t help:
Italy Slowly Recognizes that the Substance of ‘Austerity’ Matters
Apologists for big government have regularly warned that Europe’s austerity measures would push the European economy into a recession. To some extent they’ve been correct, but not for the reasons they claim. So far austerity in countries like Greece and Italy have been austerity for the private sector, not the public. They’ve attempted to close budget gaps by tax increases rather than spending cuts. Witness Mario Monti’s implementation of a tax on first home purchases (sure to do wonders for your housing and construction labor markets).
Fortunately there is some small ray of hope that Italy has come to recognize the error of its ways. As reported in today’s Financial Times, instead of pushing for an increase in the value-added tax, Italy will focus its next austerity measures on cutting government. As the Financial Times goes on to explain:
The new government’s €30bn austerity package, passed in December, was heavily oriented towards tax increases rather than spending cuts, an emphasis that is now widely recognised by ministers as having driven Italy deeper into recession.
When even the Financial Times recognizes that tax increases are contractionary, then perhaps there is some hope for Italy (and Europe) after all. Now if we can actually get spending costs of real significance (€30 billion is a rounding error for the Italian government’s budget).
Cato on Facebook
Cato on Twitter
Cato on Google+
Cato on YouTube
