Archive for the ‘General’ Category
Switzerland’s ‘Debt Brake’ Is a Role Model for Spending Control and Fiscal Restraint
I’ve argued, ad nauseam, that the single most important goal of fiscal policy is (or should be) to make sure the private sector grows faster than the government. This “golden rule” is the best way of enabling growth and avoiding fiscal crises, and I’ve cited nations that have made progress by restraining government spending.
But what’s the best way of actually imposing such a rule, particularly since politicians like using taxpayer money as a slush fund?
Well, the Swiss voters took matters into their own hands, as I describe in today’s Wall Street Journal.
Americans looking for a way to tame government profligacy should look to Switzerland. In 2001, 85% of its voters approved an initiative that effectively requires its central government spending to grow no faster than trendline revenue. The reform, called a “debt brake” in Switzerland, has been very successful. Before the law went into effect in 2003, government spending was expanding by an average of 4.3% per year. Since then it’s increased by only 2.6% annually.
So how does this system work?
Switzerland’s debt brake limits spending growth to average revenue increases over a multiyear period (as calculated by the Swiss Federal Department of Finance). This feature appeals to Keynesians, who like deficit spending when the economy stumbles and tax revenues dip. But it appeals to proponents of good fiscal policy, because politicians aren’t able to boost spending when the economy is doing well and the Treasury is flush with cash. Equally important, it is very difficult for politicians to increase the spending cap by raising taxes. Maximum rates for most national taxes in Switzerland are constitutionally set (such as by an 11.5% income tax, an 8% value-added tax and an 8.5% corporate tax). The rates can only be changed by a double-majority referendum, which means a majority of voters in a majority of cantons would have to agree.
In other words, the debt brake isn’t a de jure spending cap, but it is a de facto spending cap. And capping the growth of spending (which is the underlying disease) is the best way of controlling red ink (the symptom of excessive government).
Switzerland’s spending cap has helped the country avoid the fiscal crisis affecting so many other European nations. Annual central government spending today is less than 20% of gross domestic product, and total spending by all levels of government is about 34% of GDP. That’s a decline from 36% when the debt brake took effect. This may not sound impressive, but it’s remarkable considering how the burden of government has jumped in most other developed nations. In the U.S., total government spending has jumped to 41% of GDP from 36% during the same time period.
Switzerland is moving in the right direction and the United States is going in the wrong direction. The obvious lesson (to normal people) is that America should copy the Swiss. Congressman Kevin Brady has a proposal to do something similar to the debt brake.
Rep. Kevin Brady (R., Texas), vice chairman of the Joint Economic Committee, has introduced legislation that is akin to the Swiss debt brake. Called the Maximizing America’s Prosperity Act, his bill would impose direct spending caps, but tied to “potential GDP.” … Since potential GDP is a reasonably stable variable (like average revenue growth in the Swiss system), this approach creates a sustainable glide path for spending restraint.
In some sense, Brady’s MAP Act is akin to Sen. Corker’s CAP Act, but the use of “potential GDP” makes the reform more sustainable because economic fluctuations don’t enable big deviations in the amount of allowable spending.
To conclude, we know the right policy. It is spending restraint. We also know a policy that will achieve spending restraint. A binding spending cap. The problem, as I note in my op-ed, is that “politicians don’t want any type of constraint on their ability to buy votes with other people’s money.”
Overcoming that obstacle is the real challenge.
P.S. A special thanks to Pierre Bessard, the President of Switzerland’s Liberales Institut. He is a superb public intellectual and his willingness to share his knowledge of the Swiss debt brake was invaluable in helping me write my column.
CISPA and the Right Way to Do Cybersecurity Information Sharing
The White House has issued a threat to veto the Cyber Intelligence Information Sharing Protection Act (CISPA) in its current form, despite recent amendments aimed at assuaging the concerns of privacy and civil liberties advocates:
H.R. 3523 fails to provide authorities to ensure that the Nation’s core critical infrastructure is protected while repealing important provisions of electronic surveillance law without instituting corresponding privacy, confidentiality, and civil liberties safeguards. For example, the bill would allow broad sharing of information with governmental entities without establishing requirements for both industry and the Government to minimize and protect personally identifiable information. Moreover, such sharing should be accomplished in a way that permits appropriate sharing within the Government without undue restrictions imposed by private sector companies that share information.
The bill also lacks sufficient limitations on the sharing of personally identifiable information between private entities and does not contain adequate oversight or accountability measures necessary to ensure that the data is used only for appropriate purposes. Citizens have a right to know that corporations will be held legally accountable for failing to safeguard personal information adequately. The Government, rather than establishing a new antitrust exemption under this bill, should ensure that information is not shared for anti-competitive purposes.
Greece Is Imploding
Money matters. That’s why I have kept my eye on Greece’s money supply (M3). It’s been contracting in an increasing rate since February 2010. Since March 2010, I have concluded that the writing was on the wall and that all the debt sustainability numbers calculated by the International Monetary Fund, the European Union and the Greek government could be thrown in their respective bureaucratic trash cans. Well, even though the Bank of Greece is still behind the curve, it’s catching up. The Bank has just revised its forecast of Greece’s 2012 growth — down from -4.5% to -5.0%. The current annual rate of contraction (-19%) of the Greek money supply guarantees many more eruptions from that Balkan nation.
Incentives for Unauthorized Immigration Remain
Michael Barone had an excellent piece in today’s Examiner where he wrote that the Mexican unauthorized immigration problem is going away because net Mexican migration is around zero for the first time since the Great Depression. Barone points out many reasons for this change: the size of the Mexican emigration cohort is remaining steady (Mexican women are about 1/3 as fertile in recent years as they were in 1970), U.S. economic growth is sluggish, sectors of the U.S. economy that employ unauthorized workers were some of the hardest hit in recent years, and Mexican economic growth is rapidly increasing incomes South of the border. All right so far.
But Barone is wrong to assume that just because Mexican unauthorized migration is abating that the problem will go away. For hundreds of millions of the world’s poor, the incentives to migrate remain.
Immigration is mostly driven by economics. The cost of moving here (ignoring the cost of dealing with the U.S.government) is going to continue to fall while the benefits will remain high. Since 40 to 50 percent of unauthorized immigrants entered the U.S. legally and overstayed their visas, some unauthorized migrants don’t need to cross a harsh desert anymore. Migrant source countries are changing again but the flow won’t stop.
Very poor countries don’t send many immigrants because the people there can’t afford to move. That’s why there aren’t many immigrants from the poorest nations of the world. People have to reach a certain level of prosperity before they can afford to migrate. After that point is reached, immigration continues until the gains from doing so shrink. The income gap between Mexico and the U.S. has narrowed so migration is slowing down on its own accord.
Other Central Americans still feel the economic pressure to migrate even if U.S. law doesn’t cooperate. This trend is reflected in the estimates of the unauthorized population compiled by the Department of Homeland Security. From 2000 to 2011 the unauthorized Mexican population increased by 45 percent. Over the same time the number of unauthorized Guatemalans increased by 82 percent and Hondurans by a whopping 132 percent.
Human smugglers have many informal routes into the U.S. Until recently they’ve mostly been serving Mexicans but they are diversifying into other countries and finding migrants who will pay more. Smuggling prices are hard to come by since it’s illegal but anecdotal evidence suggests Chinese pay $75,000 per person and Indians pay around $20,000 to come to the U.S. illegally.
The lack of a legal route for most potential migrants combined with a strict enforcement mechanism increases the costs and diminishes the benefits of migrating. But for millions the benefits of coming illegally still outweigh the costs of working in the informal economy. When economic growth in the U.S. recovers unauthorized immigration will also recover. The source countries for these immigrants may shift but at long as our immigration laws are restrictive and the benefits of coming here are greater than the costs, unauthorized immigration will persist.
Portuguese Finance Minister Admits Keynesian Stimulus Was a Flop
President Obama imposed a big-spending faux stimulus program on the economy back in 2009, claiming that the government needed to squander about $800 billion to keep the unemployment rate from rising above 8 percent.
How did that work out? One possible description is that the so-called stimulus became a festering pile of manure. About three years have passed, and the joblessness rate hasn’t dropped below 8 percent. But the White House has been sprinkling perfume on that pile of you-know-what and claiming that the Keynesian spending binge was good policy.
But not every politician is blindly ideological like Obama. Vitor Gaspar, Portugal’s Finance Minister, is willing to admit error. Here are some relevant excerpts from a New York Times report.
Mr. Gaspar, speaking to The New York Times last week, has a message for observers who say Europe needs to substantially relax its austerity approach: We tried stimulus and it backfired. Like some other European countries, Portugal tried what Mr. Gaspar called “a Keynesian style expansion” in 2008, referring to a theory by economist John Maynard Keynes. But it didn’t turn things around, and may have made things worse.
Why does the Portuguese Finance Minister have this view? Well, for the simple reason that the economy got worse and more spending put his country in a deeper fiscal ditch.
The yield on Portuguese government bonds – more than 11 percent on longer-term bonds — is substantially higher than the yields on debt issued by Ireland, Spain or Italy. …The main fear among investors is that Portugal is going to have to ask for a second bailout from the International Monetary Fund and the European Union, which committed $103 billion of financial aid in 2011.
Maybe the big spenders in Portugal should import some of the statist bureaucrats at Congressional Budget Office. The CBO folks could then regurgitate the moving-goalposts argument that they’ve used in the United States and claim that the economy would be even weaker if the government hadn’t wasted more money.
But perhaps the Portuguese left doesn’t think that will pass the laugh test.
In any event, some of us can say we were right from the beginning about this issue.
Not that being right required any keen insight. Keynesian policies failed for Hoover and Roosevelt in the 1930s. So-called stimulus policies also failed for Japan in 1990s. And Keynesian proposals failed for Bush in 2001 and 2008.
Just in case any politicians are reading this post, I’ll make a point that normally goes without saying: Borrowing money from one group of people and giving it to another group of people does not increase prosperity.
But since politicians probably aren’t capable of dealing with a substantive argument, let’s keep it simple and offer three very insightful cartoons: here, here, and here.
If Only Politicians Were More Like Good Parents
Sometimes I wish politicians were more like good parents. I know that doesn’t sound very libertarian — the last thing we want is for politicians to become humanity’s moms and dads — but there’s at least one thing good parents do that most politicians constantly avoid: saying “no.”
When kids want their food pyramids to have a base of candy, center of ice cream, and peak of ice cream with candy sprinkles, good parents say “no.”
When young ‘uns want to show off their mumblety-peg skills with the Bowie knife they found in dad’s old camping gear, good parents say “no.”
And when the children want to borrow the family sedan for a little off-road speed competition, good parents say “no.”
Of course, saying no all the time doesn’t make life with the kiddos easy or fun. The kids get angry. Mom and dad fume. “I hate you” may even be uttered. But refusing to help the children seriously endanger their arteries, digits, or worse – even if it makes the parents’ life tougher – is what good parenting is all about.
If only our politicians would exercise the same restraint. But they don’t, with the latest case-in-point being the drive to keep interest rates on subsidized federal student loans at super-low levels. It will be the centerpiece of a three-state presidential tour beginning today.
Currently, interest rates on subsidized loans — loans on which Washington pays the interest while a borrower is in school and for a six-month period after graduation — are at 3.4 percent, a surface-skimming level reached after the College Cost Reduction and Access Act of 2007 cut rates in half over a five year period. Rates are scheduled to return to 6.8 percent in July.
The argument proffered for keeping the rates at 3.4 percent is that interest rates generally are at historic lows, and 6.8 percent would simply be too high. Much more important, though, seems to be the political reality: President Obama appears intent on currying favor with both college students and, frankly, any voters looking at exorbitant college prices and asking “how the heck am I going to pay for that?”
But it’s not just the current president who appears to be playing politics. Mitt Romney, the presumptive GOP challenger to Mr. Obama, yesterday also urged Congress to freeze the rate at 3.4 percent.
Sometimes, Governments Lie (6th Anniversary Ed.)
(This blog post first appeared at Cato@Liberty following the release of the 2006 Medicare and Social Security trustees’ reports. I repost it, with updated links and “exhaustion dates” because sadly nothing else has changed.)
Year after year, federal officials speak of the Social Security and Medicare trust funds as if they were real. Yesterday Today, the government announced that the Social Security trust fund will be exhausted in 2040 2033 and that the Medicare hospital insurance trust fund will be exhausted in 2018 2024— projections that the media dutifully reported.
But those dates are meaningless, because there are no assets for these “trust funds” to exhaust. The Bush administration wrote in its FY2007 budget proposal:
These balances are available to finance future benefit payments and other trust fund expenditures—but only in a bookkeeping sense. These funds…are not assets…that can be drawn down in the future to fund benefits…When trust fund holdings are redeemed to pay benefits, Treasury will have to finance the expenditure in the same way as any other Federal expenditure: out of current receipts, by borrowing from the public, or by reducing benefits or other expenditures. The existence of large trust fund balances, therefore, does not, by itself, increase the Government’s ability to pay benefits.
This is similar to language in the Clinton administration’s FY2000 budget, which noted that the size of the trust fund “does not…have any impact on the Government’s ability to pay benefits” (emphasis added).
I offer the following proposition:
If the government knows that there are no assets in the Social Security and Medicare “trust funds,” and yet projects the interest earned on those non-assets and the date on which those non-assets will be exhausted, then the government is lying.
If that’s the case, then these annual trustees reports constitute an institutionalized, ritualistic lie. Also ritualistic is the media’s uncritical repetition of the lie.
Tax Complexity: Am I a Liar?
Andrew Sullivan cited an op-ed of mine last week regarding the complexity of the tax code.
One person commenting on Andrew’s article said:
I am a corporate tax lawyer with 25 years’ experience. I can’t prove it, but in my experience the vast majority of the complexity of the tax law has nothing to do with tax breaks. It has to do with providing precise rules to deal with an infinite variety of structures and transactions, in the face of taxpayers and their tax counsel who are determined to minimize their tax bill. Rules relating to tax breaks are insignificant in volume compared to the rules relating to consolidated tax returns, corporate reorganizations, foreign tax credits, taxation of the foreign subsidiaries of U.S. corporations (Subpart F) and hundreds of other things.
The Cato Institute article you link to is filled with lies and half-truths (which is about what I would expect from a Cato Institute article on taxes). The ‘tax rules’ do not span 73,608 pages and do not cover nine feet of shelf space. The standard CCH edition of the Code is 5,500 pages long, but that is highly misleading. That volume is targeted at tax practitioners and includes old statutory provisions that have been repealed or revised. Because of the obscure way that the regs are paginated, it is not easy to tell how many pages they are, but I would estimate it at about 30,000 pages, which includes proposed regs and the preambles to regulations. The entire set of Code and regs takes up about 18 inches on my shelf. To give you an idea about how much the Code and regs have expanded over the years, my set from 1987 takes up around 10 inches.
The volume that Chris Edwards describes in the Cato article probably refers to the bound CCH Standard Federal Tax Reporter, which may indeed cover nine feet and contain 73,608 pages. However, that volume is exclusively designed for practitioners and includes not only the Code and regs, but also commentary written by CCH and annotations from case law.
I don’t understand why people make such snarky comments when they clearly haven’t done their homework. Let me note first that I mainly agree with the writer’s first paragraph, at least with respect to the business tax code. He points to what I call “homemade” loopholes, which are different from the loopholes specifically legislated by Congress for special interests. Homemade loopholes stem from the inherent complexity of taxing business income, and they are an important reason why chopping the high U.S. corporate tax rate would create a large dynamic response from businesses. That is, it would not be worth the cost or legal risk for businesses to invent so many tax avoidance tricks if we had a much lower corporate tax rate. If we cut the rate, the U.S. corporate tax base would expand automatically as homemade loopholes shrank.
Now, about those “lies.” CCH itself publicizes the data I used showing federal tax rules spanning 73,608 pages. The CCH folks have been publishing information on federal taxation since 1913, so they know what they are talking about. Note that I said tax “rules” not tax “code.” The total rules that tax practitioners have to take into account are lengthier than just the code and regulations, and that’s what the broader CCH publication captures.
By the way, my “nine feet of shelf space” comes straight from the IRS National Taxpayer Advocate. This official watchdog agency cites (on pages 4/5) the nine-foot CCH Standard Federal Tax Reporter as one of their metrics of tax complexity. In the past, I’ve called CCH analysts to discuss with them the meaning of their published page counts.
It is true that average households don’t get into the nitty gritty of those nine feet of rules. But many thousands of highly paid professionals do have to on behalf of their individual and business tax clients. That is part of the reason why the current federal tax system is so wasteful. It consumes the time and energy of a huge number of skilled people, probably including the grumpy tax lawyer who called me a liar.
If the CCH page count doesn’t convince Mr. Grumpy that the tax system is wasting a lot of human effort, here is one more IRS Advocate factoid for him to consider (page 5):
Two companies publish newsletters daily that report on new developments in the field of taxation; the print editions often run 50-100 pages and the electronic databases contain substantially more detailed information.
Washington’s One Percent
Stories about the wealth of Washington, D.C., have become commonplace, but this Sunday front-page story in the Washington Post adds more details to the lifestyles of the rich and powerful:
At the Collection at Chevy Chase, a $1,100 purple python pump gleams in the window of the Gucci store. Across Wisconsin Avenue at TTR Sotheby’s, sales agents prepare to sell a $32 million riverview home near Annapolis — one of the most expensive properties ever listed in the D.C. area. And at a nearby Whole Foods, BMWs idle in the circular drive as shoppers dash in for $19.99-a-pound Dijon-crusted rack of lamb.
Long before “the 1 percent” became part of the political lexicon, a growing number of highly educated, dual-income families were driving the region’s top income levels into the stratosphere.
To be considered part of the 1 percent in this area, it takes a household income far above the national average of $387,000. The gateway for the region is $527,000. In the District, the top 1 percent of households bring in at least $617,000; in Montgomery County, more than $606,000; and in Fairfax County, $532,000, according to an analysis of census statistics by The Washington Post and Sentier Research, a firm that specializes in income data….
The percentage of area households with impressive, if not eyepopping, salaries has grown as well. In 1980, just 3 percent of households in the region had incomes that were the equivalent of $200,000 or more in today’s dollars. Now [after an increase in the national debt from $1 trillion to $15 trillion] 13 percent do.
Sounds like the Capitol in The Hunger Games. Washington’s citizens are less frivolous, though — despite recent news stories. The one percent in Washington are lawyers, lobbyists, government contractors, and the doctors and entrepreneurs who serve them. But unlike regions where actual wealth is created — software, automobiles, financial services, capital allocation, movies and television, medicine — Washington’s economy is based on the confiscation and transfer of wealth produced elsewhere. As such, Washington’s wealth is a net loss for economic growth in the country.
‘May Cause Drowsiness, Use Caution Around Machinery’
Frank Harty of the Iowa law firm Nyemaster Goode describes a new kind of employer headache arising from the Obama administration’s hardline enforcement efforts on the Americans with Disabilities Act (ADA) front:
…Common sense dictates that any medication that carries with it a warning that it “may cause drowsiness” or that the patient should “use caution” if operating machinery may pose a risk in the workplace. It is for this reason that many employers adopt a policy requiring employees to self report the use of prescription pain killers. This is especially important in potentially dangerous workplaces such as manufacturing and construction.
In a recent action that defies common sense, the Equal Employment Opportunity Commission has taken the position that such policies are unlawful under the Americans With Disabilities Act. The ADA prohibits an employer from conducting “medical inquiries” without a business reason to do so. In EEOC v. Product Fabricators, Inc., an action in federal court in Minnesota, the EEOC required a manufacturing employer to abandon its policy of encouraging employees to inform supervisors if they are under the influence of narcotic pain killers such as Vicodin. The EEOC took the position that an employer cannot ask about prescription pain killer usage unless it has “objective” evidence that an employee is impaired on the job.
This places employers in a very difficult position….
In particular, it puts employers to a choice between waiting until there is an actual accident caused by an employee’s nodding off or zoning out — thus at last providing “objective” evidence of risk — and the risk of a large judgment payable to an employee who has not yet gotten into accidents and whose lawyer will claim that there was no objective evidence to support a suspicion of impairment.
The Eighth Circuit upheld the agency’s stance earlier this year and an EEOC press release from February notes that the company agreed to pay $40,000 to settle the dispute. Harty notes that one “thing is certain: it will be employers, not the Equal Employment Opportunity Commission, who deal with the fallout from the loss of life and limb in the workplace.”
College Scholars, Mindless Borrowers?
A few days ago Rep. Virginia Foxx (R-NC), chairwoman of the House higher education subcommittee, had the audacity to say in a radio interview that she didn’t have a lot of sympathy for students who racked up $80,000 to $200,000 in college debt. Opportunists have leapt at the chance to attack her, branding her as either mean, or out of touch because what led to her discussion of college debt was retelling how she grew up poor and paid her way through school.
Now let’s be clear: Foxx wasn’t deriding bachelor’s grads holding average debt — about $25,000 for the two-thirds of students with debt — but people with big multiples of that. You know, the ones seemingly featured in every news story or congressional hearing dealing with higher education. And it is, often, very hard to sympathize with such people if you are able to track down crucial information about them such as what they’ve studied, where they’ve chosen to go to school, and what they spend their money on. This CBS News piece is a classic of the Woe-is-Huge-Student-Debtor genre, which Radley Balko and I took apart at the time of its airing.
There’s no question that the price of higher education has been rising at breathtaking rates, and profit-maximizing schools – and politicians who fuel the maximization – bear a good chunk of the blame. But is it really beyond the pale to suggest that maybe some students, who seem to accumulate debt without a care in the world until payment comes due, bear some responsibility for their predicament? Indeed, aren’t these supposed to be pretty smart people — you know, “college material” — who should at a minimum be capable of estimating costs, loan burdens, and potential earnings? Of course, but try bringing that up in the higher education cost debate. You’ll instantly become the Dean Wormer of the group, reviled for killing all the fun of poverty-crying students.
And here’s the thing: Giving the impression that students face an even greater burden than they do — which is exactly the effect of repeatedly focusing on fringe debtors — only encourages Washington politicians to pour even more money into student aid, letting schools raise prices even faster.
The vitriolic response to Rep. Foxx is exactly why so little progress is made in politics generally, and higher ed specifically. There are just some things you can’t talk about, no matter how important than may be, and if you dare bring them up you can expect anything but an honest discussion. You can expect only cheap shots and smears.
Politico: Opponents Are Winning the Debate over ObamaCare ‘Exchanges’
Politico has a great story about how free-market groups are defeating ObamaCare Exchanges at the state level:
Conservatives like John Graham of the Pacific Research Institute have also been touring states with the platform provided by the American Legislative Exchange Council to help kill off state-based exchanges, a key piece of health reform that will help millions of people purchase insurance coverage — often with federal subsidies — starting in 2014.
“Our approach has to be absolute noncollaboration, civil disobedience — well, not civil disobedience but resistance … by whatever means,” said Graham.
Two years into the law’s implementation, conservative emissaries have contributed to impressive stats. Almost all red states are holding off on exchange legislation at least until the Supreme Court decides on the Affordable Care Act, and in most of those states, exchange-building legislation has crawled to a stop.
I have to point out three problems with the story, though. First, the Cato Institute and I are libertarian, not conservative.
Second, the article identifies Cato, ALEC, and AFP as being “funded partly by the Koch brothers.” Even though these groups have no direct or indirect financial interest in this issue, and even though Cato currently receives no funding from the Kochs, and even though Cato is currently fighting a hostile takeover attempt by the Kochs, I guess that’s a fair categorization. What isn’t fair is how the article fails to disclose that Leavitt Partners has a direct financial interest in this issue: Leavitt is getting paid by states to help implement Exchanges. (See “Health Exchanges: A New Gold Mine,” Politico, June 27, 2011.) It would have been nice if the article mentioned that all the moneyed interests – including health insurance carriers and many Chambers of Commerce – are on the pro-Exchange side. But it at least should have mentioned Leavitt’s financial interest.
Third, I’m not sure what basis there is for saying “most legal experts think” the federal government can offer tax credits and subsidies in federal Exchanges. My co-author Jonathan Adler and I have been following that debate closely. Only a handful of scholars have even commented on the issue, and they are fairly evenly split. If I’m unaware of others who have weighed in, I’d like to hear about them.
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