‘The Dangerous Gym Membership’?
Here’s a poor, unsuccessful letter I sent to the editor of the Washington Post:
“The dangerous gym membership” [Jan. 12] claims that in Medicare Advantage, “advertising a plan as the go-to health insurance source for marathoners could lure in a healthier subscriber base, disrupting the rest of the market place in the process.” Oh?
Does it disrupt the market for sneakers when running shops advertise themselves to marathoners? Since when does giving consumers something they want disrupt the market? That’s why markets exist.
What’s disrupting the market for seniors’ health insurance is government—in this case, Congress’ counter-productive attempt to cross-subsidize the sick via price controls that forbid carriers to consider each applicant’s risk when offering and pricing health insurance.
‘Virginia Shouldn’t Enable Federal Takeover of Health Care’
Bart Hinkle has an excellent column in the Richmond Times-Dispatch about why Virginia—and all states—should refuse to create one of Obamacare’s health insurance “exchanges”:
Any state exchange will have to abide by the Obama administration’s directives… If Washington is going to dictate the terms, why should Virginia foot the bill?
Mitt Romney, the Value-Added Tax, and America’s European Future
My Iowa caucus predictions from yesterday were hopelessly wrong, probably because I was picking with my heart rather than my head. As I noted a couple of weeks ago, Mitt Romney’s openness to a value-added tax makes him a dangerously flawed candidate, and I hoped Iowa voters shared my concern.
In a column for today’s Wall Street Journal, I elaborated on those concerns, explaining why a VAT is bad fiscal policy. I had three main points. First, I noted that the big spenders need a VAT in order to achieve a European-sized welfare state in America.
… the left needs a VAT. It is the only realistic way to collect the huge amount of revenue that will be necessary to finance the mountainous benefits promised by our entitlement programs. Which is exactly what happened in Europe, where welfare-state policies only became feasible after VATs were adopted, beginning in the late 1960s.
Second, I explained that the left favors this giant tax on the middle class because they want more money and soak-the-rich taxes don’t generate much revenue.
First, there aren’t enough wealthy people to finance big government. According to IRS data from before the recession, when we had the most rich people with the most income, there were about 321,000 households with income greater than $1 million, and they had aggregate taxable income of about $1 trillion. That’s a lot of money, but it wouldn’t balance the budget even if the government confiscated every penny—and if it did, how much income do you suppose would be available in year two? Second, higher tax rates don’t raise as much revenue as expected. Upper-income individuals are far more likely to rely on interest, dividends and capital gains—and it is much easier to control the timing, level and composition of capital income, so as to avoid exposing it to the tax man.
Obama Has United the World … in Opposition to Bad U.S. Tax Policy
Last year, I came up with a saying that “Bad Government Policy Begets More Bad Government Policy” and labeled it “Mitchell’s Law” during a bout of narcissism.
There are lots of examples of this phenomenon, such as the misguided War on Drugs being a precursor to intrusive, costly, and ineffective money laundering policies.
Or how about government healthcare subsidies driving up the price of healthcare, which then leads politicians to decide that there should be even more subsidies because healthcare has become more expensive.
But if you want a really stark example of Mitchell’s Law, the Internal Revenue Code is littered with examples.
The politicians created a nightmarishly complex tax system, for instance, and then decided that enforcing the wretched system required the erosion of civil liberties and constitutional freedoms.
The latest example of this process involves the Foreign Account Tax Compliance Act, a piece of legislation that was imposed in 2010 because politicians assumed they could collect lots of tax revenue every single year by getting money from so-called tax havens.
“Liberalism’s Problem in One Graph”
That’s the title of Ezra Klein’s blogpost last night. Americans are increasingly distrustful of Big Government, it seems (64% in 2011, up from 35% in 1965), as opposed to Big Business (26% versus 29%) and Big Labor (8% versus 17%). Here’s the graph:
Of course, given that Big Labor these days is mostly in the public sector, you can really add its total to that of Big Government. And given corporate subsidies, part of Big Business can be thrown in there too. In any event, sobering news for the Occupy Wall Street crowd, and surely an electorate for political candidates who want to shrink the size of government.
European Central Bank Research Shows that Government Spending Undermines Economic Performance
Europe is in the midst of a fiscal crisis caused by too much government spending, yet many of the continent’s politicians want the European Central Bank to purchase the dodgy debt of reckless welfare states such as Spain, Italy, Greece, and Portugal in order to prop up these big government policies.
So it’s especially noteworthy that economists at the European Central Bank have just produced a study showing that government spending is unambiguously harmful to economic performance. Here is a brief description of the key findings.
…we analyse a wide set of 108 countries composed of both developed and emerging and developing countries, using a long time span running from 1970-2008, and employing different proxies for government size… Our results show a significant negative effect of the size of government on growth. …Interestingly, government consumption is consistently detrimental to output growth irrespective of the country sample considered (OECD, emerging and developing countries).
There are two very interesting takeaways from this new research. First, the evidence shows that the problem is government spending, and that problem exists regardless of whether the budget is financed by taxes or borrowing. Unfortunately, too many supposedly conservative policy makers fail to grasp this key distinction and mistakenly focus on the symptom (deficits) rather than the underlying disease (big government).
The second key takeaway is that Europe’s corrupt political elite is engaging in a classic case of Mitchell’s Law, which is when one bad government policy is used to justify another bad government policy. In this case, they undermined prosperity by recklessly increasing the burden of government spending, and they’re now using the resulting fiscal crisis as an excuse to promote inflationary monetary policy by the European Central Bank.
The ECB study, by contrast, shows that the only good answer is to reduce the burden of the public sector. Moreover, the research also has a discussion of the growth-maximizing size of government.
… economic progress is limited when government is zero percent of the economy (absence of rule of law, property rights, etc.), but also when it is closer to 100 percent (the law of diminishing returns operates in addition to, e.g., increased taxation required to finance the government’s growing burden – which has adverse effects on human economic behaviour, namely on consumption decisions).
This may sound familiar, because it’s a description of the Rahn Curve, which is sort of the spending version of the Laffer Curve. This video explains.
The key lesson in the video is that government is far too big in the United States and other industrialized nations, which is precisely what the scholars found in the European Central Bank study.
Another interesting finding in the study is that the quality and structure of government matters.
Growth in government size has negative effects on economic growth, but the negative effects are three times as great in non-democratic systems as in democratic systems. …the negative effect of government size on GDP per capita is stronger at lower levels of institutional quality, and ii) the positive effect of institutional quality on GDP per capita is stronger at smaller levels of government size.
The simple way of thinking about these results is that government spending doesn’t do as much damage in a nation such as Sweden as it does in a failed state such as Mexico.
Last but not least, the ECB study analyzes various budget process reforms. There’s a bit of jargon in this excerpt, but it basically shows that spending limits (presumably policies similar to Senator Corker’s CAP Act or Congressman Brady’s MAP Act) are far better than balanced budget rules.
…we use three indices constructed by the European Commission (overall rule index, expenditure rule index, and budget balance and debt rule index). …The former incorporates each index individually whereas the latter includes interacted terms between fiscal rules and government size proxies. Particularly under the total government expenditure and government spending specifications…we find statistically significant positive coefficients on the overall rule index and the expenditure rule index, meaning that having these fiscal numerical rules improves GDP growth for these set of EU countries.
This research is important because it shows that rules focusing on deficits and debt (such as requirements to balance the budget) are not as effective because politicians can use them as an excuse to raise taxes.
At the risk of citing myself again, the number one message from this new ECB research is that lawmakers – at the very least – need to follow Mitchell’s Golden Rule and make sure government spending grows slower than the private sector. Fortunately, that can happen, as shown in this video.
But my Golden Rule is just a minimum requirement. If politicians really want to do the right thing, they should copy the Baltic nations and implement genuine spending cuts rather than just reductions in the rate of growth in the burden of government.
American Politicians Should Copy Canada’s Leftist Government of the 1990s and Cap Spending
Since I’ve written before about Canada’s remarkable period of fiscal restraint during the 1990s, I was very pleased to see that the establishment press is finally giving some attention to what our northern neighbors did to reduce the burden of government spending.
Here are some key passages from a Reuters story.
“Everyone wants to know how we did it,” said political economist Brian Lee Crowley, head of the Ottawa-based think tank Macdonald-Laurier Institute, who has examined the lessons of the 1990s. But to win its budget wars, Canada first had to realize how dire its situation was and then dramatically shrink the size of government rather than just limit the pace of spending growth. It would eventually oversee the biggest reduction in Canadian government spending since demobilization after World War Two. …The turnaround began with Chretien’s arrival as prime minister in November 1993, when his Liberal Party – in some ways Canada’s equivalent of the Democrats in the U.S. – swept to victory with a strong majority. The new government took one look at the dreadful state of the books and decided to act. “I said to myself, I will do it. I might be prime minister for only one term, but I will do it,” said Chretien. …The Liberals thought their first, rushed budget – delivered in February 1994, three months after taking office, was tough. It reformed unemployment insurance entitlements, and cut defense and foreign aid… The upstart Reform Party, then the main national opposition party, had campaigned on “zero-in-three” – balance the budget in three years. “We were always trying to go faster,” said Reform’s leader at the time, Preston Manning. …The Liberals were stung by the criticism and, at first reluctantly but then with gusto, they got out the chain saws. …Cutting government spending programs went against the Liberal grain. Contrary to the Reform Party, the Liberals saw a more important role for government. Paul Martin now has a lasting reputation as the finance minister who slayed Canada’s deficit, but the conversion from spender to cutter was painful. His father, also called Paul, had helped create Medicare, Canada’s publicly funded health care system, and suddenly here was Paul Junior contemplating massive cuts.
This is a remarkable story. My only real quibble is that the fiscal restraint actually started the year before the Liberal Party took power, as the chart illustrates.
But the key thing to understand is that Canada enjoyed a five-year period when government spending increased by an average of only 1 percent each year.
There are more good passages in the story. Can anybody imagine Obama doing this?
At one 1994 cabinet meeting, Martin announced a spending freeze. A minister put forward a project that needed funding but Chretien cut him off, reminding him of Martin’s freeze. A second minister raised his hand to ask for funding, and a testy Chretien told the cabinet that the next minister to ask for new money would see his whole budget cut by 20 percent. …The ratio of spending cuts to tax hikes was seven-to-one. Asked why, Chretien said simply: “There was more need on one side than the other.” …Cuts ranged from five percent to 65 percent of departmental budgets.
By the way, while there were a few tax hikes implemented, they were trivial. Tax revenue as a share of GDP rose from 44.2 percent of GDP to 44.5 percent a GDP, an increase that probably was going to happen anyhow as Canada’s economy recovered.
So what were the results of Canada’s spending freeze?
The following passage has some numbers, but the second chart shows that the burden of government spending in Canada (right axis) fell from 53 percent of GDP to 44 percent of GDP in just five years. And red ink (left axis) completely disappeared.
The deficit disappeared by 1997 and the debt-to-GDP ratio began a rapid decline – it is now at about 34 percent. …After wrestling the deficit to the ground, Canada enjoyed what Crowley calls the payoff decade, outperforming the rest of the G7 on growth, job creation and inward investment. From 1997 to 2007, it averaged 3.3 percent economic growth. while U.S. growth averaged 2.9 percent.
The most important thing to understand is that Canada’s economy improved because the burden of government spending was reduced. Moreover, because the underlying disease was being treated, this meant two of the symptoms of excessive government – deficits and debt – also became less of a problem.
Last but not least, there are rewards for good policy. Just as Reagan enjoyed a landslide in 1984 after sticking to his guns, Canada’s Liberal Party also reaped the benefits of doing the right thing.
The final lesson is that you can impose painful spending cuts and still win elections. Chretien went on to win two more back-to-back to form majority governments, a rare feat. ,,,Drummond, who later moved to the private sector and is now an advisor helping the Ontario provincial government slash its deficit, noted that governments on the right and left in Saskatchewan, Alberta and Ontario won more voter support after their own budget cuts in the 1990s.
Here’s a video I narrated that looks at the Canadian experience, as well as similar good reforms in New Zealand, Ireland, and Slovakia.
Last but not least, let’s put all of this in context. As demonstrated here, the U.S. would enjoy a balanced budget in just eight years if politicians could be convinced to limit spending so that it increased by 1 percent each year.
Supercommittee Tax Fight Is About Increasing Spending, not Reducing Deficits
Some people have asked why I’m so agitated about the possibility that Republicans may acquiesce to tax increases as part of the Supercommittee negotiations.
Rather than get into a lengthy discourse about the proper role of the federal government or an analysis of how the Bush-Obama spending binge worsened America’s fiscal situation, I think this chart from a previous post says it all.
Republicans are considering a surrender on taxes because they are afraid that a deadlock will lead to a sequester, which would mean automatic budget savings. And the sequester, according to these politicians, would “cut” the budget too severely.
But as the chart illustrates, that is utter nonsense.
There are only budget cuts if you use dishonest Washington budget math, which magically turns spending increases into spending cuts simply because the burden of government isn’t expanding even faster.
If we use honest math, we can see what this debate is really about. Should we raise taxes so that government spending can grow by more than $2 trillion over the next 10 years?
Or should we have a sequester so that the burden of federal spending climbs by “only” $2 trillion?
The fact that this is even an issue tells us a lot about whether the GOP has purged itself of the big-government virus of the Bush years.
A few Republicans say that a sellout on tax hikes is necessary to protect the defense budget from being gutted, but this post shows that defense spending will climb by about $100 billion over the next 10 years under a sequester. And that doesn’t even count all the supplemental funding bills that doubtlessly will be enacted.
In other words, anyone who says we need to raise taxes instead of taking a sequester is really saying that we need to expand the burden of government spending.
So even though Ronald Reagan and Calvin Coolidge are two of my heroes, now you know why I don’t consider myself a Republican.
Five Lessons for America from the European Fiscal Crisis
I’ve written about the fiscal implosion in Europe and warned that America faces the same fate if we don’t reform poorly designed entitlement programs such as Medicare and Medicaid.
But this new video from the Center for Freedom and Prosperity, narrated by an Italian student and former Cato Institute intern, may be the best explanation of what went wrong in Europe and what should happen in the United States to avoid a similar meltdown.
I particularly like the five lessons she identifies.
1. Higher taxes lead to higher spending, not lower deficits. Miss Morandotti looks at the evidence from Europe and shows that politicians almost always claim that higher taxes will be used to reduce red ink, but the inevitable result is bigger government. This is a lesson that gullible Republicans need to learn – especially since some of them want to acquiesce to a tax hike as part of the “Supercommitee” negotiations.
2. A value-added tax would be a disaster. This was music to my ears since I have repeatedly warned that the statists won’t be able to impose a European-style welfare state in the United States without first imposing this European-style money machine for big government.
3. A welfare state cripples the human spirit. This was the point eloquently made by Hadley Heath of the Independent Women’s Forum in a recent video.
4. Nations reach a point of no return when the number of people mooching off government exceeds the number of people producing. Indeed, Miss Morandotti drew these two cartoons showing how the welfare state inevitably leads to fiscal collapse.
5. Bailouts don’t work. This also was a powerful lesson. Imagine how much better things would be in Europe if Greece never received an initial bailout. Much less money would have been flushed down the toilet and this tough-love approach would have sent a very positive message to nations such as Portugal, Italy, and Spain about the danger of continued excessive spending.
If I was doing this video, I would have added one more message. If nations want a return to fiscal sanity, they need to follow “Mitchell’s Golden Rule,” which simply states that the private sector should grow faster than the government.
This rule is not overly demanding (spending actually should be substantially cut, including elimination of departments such as HUD, Transportation, Education, Agriculture, etc), but if maintained over a lengthy period will eliminate all red ink. More importantly, it will reduce the burden of government spending relative to the productive sector of the economy.
Unfortunately, the politicians have done precisely the wrong thing during the Bush-Obama spending binge. Government has grown faster than the private sector. This is why this new video is so timely. Europe is collapsing before our eyes, yet the political elite in Washington think it’s okay to maintain business-as-usual policies.
Please share widely…before it’s too late.
Who’s Winning the Race to Fiscal Destruction: Europe or the United States?
Even though the unwashed masses decided that I didn’t win my stimulus debate in New York City, I continue my fight for the hearts and minds of the American people.
I’m now taking part in a debate for U.S. News & World Report on “Who Is Handling Its Debt Crisis Better: United States or Europe?”
This was a tough question. I asked the organizer whether I could vote none of the above, but I was told I had to pick an option.
As you can see, I said the United States was doing a better job – but only by default.
Our long-run outlook is grim, but at least we still have time to reform the entitlement programs and save America… The only major difference is that European nations are farther down the path to fiscal collapse. The welfare state was adopted earlier in Europe and government spending among euro nations now consumes a staggering 49 percent of economic output. This heavy fiscal burden, especially when combined with onerous tax systems, helps explain why growth is anemic. …the United States still can turn things around. Greece, Italy, and other welfare states have probably passed the point of no return, but it’s still possible for American lawmakers to fix the entitlement crisis by turning Medicaid over to the states , modernizing Medicare into a premium-support system, and transitioning to a system of personal retirement accounts for younger workers. If those reforms don’t take place, the consequences won’t be pleasant. To be blunt, there won’t be an IMF to bail out the United States.
For all intents and purposes, I contend that America can be saved if something like the Ryan budget is approved.
You can vote on this page on whether you like or dislike what I said, as well as what the other participants said.
Helping to Explain Greece’s Collapse in a Single Picture
Politicians in Europe have spent decades creating a fiscal crisis by violating Mitchell’s Golden Rule and letting government grow faster than the private sector.
As a result, government is far too big today, and nations such as Greece are in the process of fiscal collapse.
But that’s the good news — at least relatively speaking. Over the next few decades, the problems will get much worse because of demographic change and unsustainable promises to spend other people’s money.
(By the way, America will suffer the same fate in the absence of reforms.)
Here’s one stark indicator of why Greece is in the toilet.
Look at the skyrocketing number of people riding in the wagon of government dependency (and look at these cartoons to understand why this is so debilitating).
By the way, Greece’s population only increased by a bit more than 16 percent during this period. Yet the number of bureaucrats jumped by far more than 100 percent.
And don’t forget that this chart just looks at the number of bureaucrats, not their excessive pay and bloated pensions.
With this in mind, do you agree with President Obama and want to squander American tax dollars on a bailout for Greece?
Sequestration Is a Small Step in Right Direction, Not Something to Be Feared
I have sometimes wondered whether it is accurate to say that Republicans are the “Stupid Party.”
We’ll soon know the answer to that question. As part of the debt limit agreement, the politicians agreed to set up a “Supercommittee” comprised of six Republicans and six Democrats that was responsible for producing at least $1.2 trillion of supposed deficit reduction.
But the Democrats appointed a group of hardcore leftists to the Supercommittee, which means that it is virtually impossible to get the necessary seven votes for a good agreement. Indeed, the more relevant question is whether one or more of the Republicans surrenders to a big tax hike.
Fortunately, there is an alternative. The law says that there will be automatic spending reductions if the Supercommittee does not reach an agreement. The political establishment in Washington thinks that this outcome—known as sequestration—would be horrible.
They tell as that a sequester would mean “savage” and “draconian” budget cuts. The only “responsible” approach, we are told, is to go along with a tax increase.
This is hogwash. The automatic spending cuts are only “cuts” using Washington’s dishonest budget math. Here’s a chart showing how much spending will grow over the next 10 years, and the relatively tiny reduction in budgetary growth that will be caused if there is a sequester.
We’ve actually been down this path before. There was a small sequester back in the mid-1980s, shortly after the Gramm-Rudman-Hollings law was enacted. There was much wailing and gnashing of teeth, but the sequestration helped restrain the growth of spending and helped bring about a record amount of deficit reduction in 1987.
There was a similar (unsuccessful) fight in 1989. Here’s what then-Senator Bob Packwood of Oregon wrote in 1989.
…the sequester has become the focus of partisan debate . Each side accuses the other of being responsible for “deep and arbitrary” budget cuts . Some legislators say we should do whatever it takes to cancel the sequester, even if it means higher taxes. While a sequester is certainly not the ideal way to resolve this year’s budget dispute, there are reasons to believe that the fiscal discipline of a sequester is the medicine we need to cure the budget process. For all its drawbacks, a sequester is real deficit reduction . Instead of budget gimmicks, accounting tricks, phony cuts, and “revenue enhancements,” a sequester would reduce spending levels by a fixed percentage in eligible spending programs . In other words, unlike most deficit reduction packages, sequestration would actually reduce the deficit.
The only argument against a sequester, at least among conservatives, is that a sequester would impose too much of a burden on the defense budget. But I’ve already explained in this post that the defense budget will climb by about $100 billion under sequestration.
I don’t know whether Republicans are the stupid party, but I know they will be very stupid if they don’t take the sequester and declare victory.
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