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.
Per Dollar Spent, OECD Subsidies May Be the Most Destructively Wasteful Part of the Federal Budget
I’m not a fan of international bureaucracies.
I’ve criticized the United Nations for wanting global taxes. I’ve condemned the International Monetary Fund for promoting bigger government. I’ve even excoriated the largely unknown Basel Committee on Banking Supervision for misguided regulations that contributed to the financial crisis.
But the worse international bureaucracy, at least when measured on a per-dollar-spent basis, has to be the Paris-based Organization for Economic Cooperation and Development.
OECD Headquarters: Living the good life at US expense
American taxpayers finance nearly one-fourth of the OECD’s budget, at a cost of more than $100 million per year, and in exchange we get a never-ending stream of bad policy recommendations.
This Center for Freedom and Prosperity study has all the gory details. The OECD bureaucrats (who get tax-free salaries, by the way) endorsed Obamacare, supported the failed stimulus, and are big advocates of a value-added tax for America.
What’s especially frustrating is that the OECD initially was designed to be a relatively innocuous bureaucracy that focused on statistics. Indeed, it was even viewed as a free-market counterpart to the Soviet Bloc’s Council for Mutual Economic Assistance.
My, how things change.
Perhaps the most odious example of bad OECD policy is the campaign against tax competition. Beginning during the 1990s, the OECD has attacked low-tax jurisdiction for the supposed crime of having good tax laws that attract jobs and capital from high-tax nations such as France and Greece.
So why did the OECD launch this project to prop up Europe’s welfare states? The answer can be found in an excellent new study from Professor Andrew Morriss at the University of Alabama Law School and Lotta Moberg, a Ph.D student in economics at George Mason University.
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?
Germany’s Not a Good Role Model…Except When Compared to the Profligate U.S.
Last week in New York City, during my Intelligence Squared debate about stimulus, I pointed out that Germany is doing better than the United States and explained that they largely avoided any Bush/Obama Keynesian spending binges.
One of my opponents disagreed and asserted that I was wrong. Germany, this person argued, was dong better because it was more Keynesian thanks to “automatic stabilizers” that resulted in big spending increases.
This claim was made with such certainty that I wondered if I made a mistake.
Well, we were both right about Germany doing better. In the past few years, it has been enjoying yearly growth of about 3.5 percent while growth in the United States has remained below 3 percent.
But who was right about the key issue of whether Germany has been more Keynesian? At first, I was going to be lazy and not bother combing the data. But then I got motivated after reading an excellent post about Germany’s pro-growth reforms, written for National Review by Veronique de Rugy of the Mercatus Center.
So I looked up the data on annual government spending in the United States and Germany and discovered that I was right (gee, what a shock). As the chart shows, the burden of government spending has increased faster in the United States. And that is true whether 2007 or 2008 is used as the base year.
To make sure the comparison was fair, I sliced the numbers every possible way. But the results were the same, regardless of whether state and local government spending was included, whether TARP spending was included, which base year was selected, or whether I used annual spending increases or multi-year spending increases.
In every single case, the burden of government spending grew faster in the United States from 2007 to 2011.
This does not mean Germany is a role model. Government spending in Germany is far too high and it continues to grow. All we can say is that Germany is not going in the wrong direction as fast as the United States.
Oh, I suppose we also can say that I was right and my opponent was wrong. The United States has been more Keynesian than Germany.
Speaking of Germany, I combed my archives and found only one post that said anything nice about German politicians.
My other German posts mocked the country’s scheme to tax prostitutes, mocked the government for losing the blueprints for its new spy headquarters, mocked the government for a money-losing scheme to tax coffee, and even mocked the supposedly conservative Chancellor for wanting to impose new taxes.
So even though Veronique is correct about some positive changes, the Germans have a long way to go.
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.
Will Republicans Choose Sequester Savings or a Supercommittee Surrender?
The budget fights this year began with the “shutdown” battle, followed by the Ryan budget and then the debt limit. These fights have mostly led to uninspiring kiss-your-sister outcomes, which is hardly surprising given divided government.
Now the crowd in DC is squabbling over Obama’s latest stimulus/tax-the-rich scheme, though that’s really more of a test run by the White House to determine whether class warfare will be an effective theme for the 2012 campaign.
The real budget fight, the one we should be closely monitoring, is what will happen with the so-called Supercommittee.
To refresh your memory, this is the 12-member entity created as part of the debt limit legislation. Split evenly between Democrats and Republicans, the Supercommittee is supposed to recommend $1.2 trillion-$1.5 trillion of deficit reduction over the next 10 years. Assuming, of course, that 7 out of the 12 members can agree on anything.
There are two critical things to understand about the Supercommittee.
- The Democrats have openly stated that their top political goal is to seduce Republicans into capitulating to a tax hike.
- Harry Reid and Nancy Pelosi appointed hard-core leftists to the Supercommittee.
With these points in mind, it doesn’t take a genius to realize that the Supercommittee is designed — at least from the perspective of the left — to seduce gullible Republicans into going along with a tax hike.
New Video Shows the War on Poverty Is a Failure
The Center for Freedom and Prosperity has released another “Economics 101″ video, and this one has a very powerful message about the federal government’s so-called War on Poverty.
As explained by Hadley Heath of the Independent Women’s Forum, the various income redistribution schemes being imposed by Washington are bad for taxpayers — and bad for poor people.
The video has a plethora of useful information, but the data on the poverty rate is particularly compelling. Prior to the War on Poverty, the United States was getting more prosperous with each passing year and there were dramatic reductions in the level of destitution.
But once the federal government got involved in the mid-1960s, the good news evaporated. Indeed, the poverty rate has basically stagnated for the past 40-plus years, usually hovering around 13 percent depending on economic conditions.
Another remarkable finding in the video is that poor people in America rarely suffer from material deprivation. Indeed, they have wide access to consumer goods that used to be considered luxuries – and they also have more housing space than the average European (and with Europe falling apart, the comparisons presumably will become even more noteworthy).
The most important message of the video, however, is that small government and economic freedom are the best answers for poverty. As Hadley explains, poor people can be liberated to live meaningful, self-reliant lives if we can reduce the heavy burden of the federal government.
Last but not least, the video doesn’t address every issue in great detail, and there are three additional points that should be added to any discussion of poverty.
- The biggest beneficiaries of the current system are the army of bureaucrats that receive very comfortable salaries administering various programs.
- The Obama Administration is looking to re-define poverty in a way that would expand the welfare state and increase the burden of redistribution programs.
- The welfare reform legislation of the 1990s was a small step in the right direction because it eliminated a federal entitlement and shifted responsibility back to the state level. This success story should be replicated for programs such as Medicaid.
This last point is worth emphasizing because it is also one of the core messages of the video. The federal government has done a terrible job dealing with poverty. The time has come to get Washington out of the racket of income redistribution.
Happy Fiscal New Year (with an Unhappy Obama Hangover)
Today, October 1, is the first day of the 2012 fiscal year.
And if you’re wondering why America’s economy seems to have a hangover (this cartoon is a perfect illustration), it’s because politicians had a huge party with our money in FY2011.
We don’t have final numbers for the fiscal year that just ended, but let’s look at the CBO Monthly Budget Report, the CBO Economic and Budget Update, and the OMB Historical Tables, and see whether there’s anything worth celebrating.
- The federal government spent about $3.6 trillion in FY2011, more money than any government has ever spent in a 12-month period in the history of the world.
- The FY2011 budget is nearly double the burden of federal spending just 10 years earlier, when federal outlays consumed “only” $1.86 trillion.
- The federal budget in FY2011 consumed about 24 percent of national output, up sharply compared to a spending burden in FY2001 of “just” 18.2 percent of GDP.
- Defense spending is too high, and has increased by about $400 billion since 2001, but the vast majority of the additional spending is for domestic spending programs.
- Federal tax revenue in FY2011 will be about $2.25 trillion, an increase of 7-8 percent over FY2010 levels.
- Economic stagnation has affected tax revenues, which are lower than the $2.6 trillion level from FY2007.
- Federal receipts amount to about 15.3 percent of GDP, below the long-run average of 18 percent of GDP.
- The Congressional Budget Office does predict that revenues will rise above the 18-percent average – without any tax increases – by the end of the decade.
- Record levels of government spending, combined with low revenues caused by a weak economy, will result in a $1.3 trillion deficit.
- This is the third consecutive deficit of more than $1 trillion.
- The publicly-held national debt (the amount borrowed from the private sector) is now more than $10 trillion.
With budget numbers like these, no wonder America has a fiscal hangover.
And let’s be blunt about assigning blame. Yes, Obama has been a reckless big spender, but he is merely continuing the irresponsible statist policies of his predecessor.
Fortunately, there is a solution. All we need to do is restrain the growth of federal spending, as explained in this video.
But we also know that it is difficult to convince politicians to do what’s right for the nation. And if they don’t change the course of fiscal policy, and we leave the federal government on autopilot, then America is doomed to become another Greece.
The combination of poorly designed entitlement programs (mostly Medicare and Medicaid) and an aging population will lead to America’s fiscal collapse.
Dramatic Increase in Poverty Rate: One Small Step for Obama, One Giant Step for the So-Called War on Poverty
The Census Bureau has just released the 2010 poverty numbers, and the new data is terrible.
There are now a record number of poor people in America, and the poverty rate has jumped to 15.1 percent.
But I don’t really blame President Obama for these grim numbers. Yes, he’s increased the burden of government, which doubtlessly has hindered the economy’s performance and made things worse, but the White House crowd legitimately can argue that they inherited a crummy situation.
What’s really striking, if we look at the chart, is that the poverty rate in America was steadily declining. But then, once President Lyndon Johnson started a “War on Poverty,” that progress came to a halt.
As I’ve explained before, the so-called War on Poverty has undermined economic progress by trapping people in lives of dependency. And this certainly is consistent with the data in the chart, which show that the poverty rate no longer is falling and instead bumps around between 12 percent and 15 percent.
This is bad news for poor people, of course, but it’s also bad news for taxpayers. The federal government, which shouldn’t have any role in the field of income redistribution, has squandered trillions of dollars on dozens of means-tested programs. And they’ve arguably made matters worse.
By the way, just in case you think I’m being too easy on Obama, read this post about how the Administration is considering a terrible plan to re-define poverty in order to justify ever-larger amounts of redistribution.
I fully agree that the president’s policies definitely have made—and will continue to make—matters worse. But the fundamental problem is 40-plus years of a misguided “War on Poverty” by the federal government.
Obama’s Economic Policy: From Tragedy to Farce
Herman Cain probably had the best reaction to the President’s speech: “We waited 30 months for this?”
My reaction yesterday was mixed. In some sense, I was almost embarrassed for the President. He demanded a speech to a joint session of Congress and then produced a list of recycled (regurgitated might be a better word) Keynesian gimmicks.
But I was also angry. Tens of millions of Americans are suffering, but Obama is unwilling to admit big government isn’t working. I don’t know whether it’s because of ideological blindness or short-term politics, but it’s a tragedy that ordinary people are hurting because of his mistakes.
The Wall Street Journal this morning offered a similar response, but said it in a nicer way.
This is not to say that Mr. Obama hasn’t made any intellectual progress across his 32 months in office. He now admits the damage that overregulation can do, though he can’t do much to stop it without repealing his own legislative achievements. He now acts as if he believes that taxes matter to investment and hiring, at least for the next year. And he now sees the wisdom of fiscal discipline, albeit starting only in 2013. Yet the underlying theory and practice of the familiar ideas that the President proposed last night are those of the government conjurer. More targeted, temporary tax cuts; more spending now with promises of restraint later; the fifth (or is it sixth?) plan to reduce housing foreclosures; and more public works spending, though this time we’re told the projects really will be shovel-ready.
And let’s also note that Obama had the gall to demand that Congress immediately enact his plan – even though he hasn’t actually produced anything on paper!
And then, for the cherry on the ice cream sundae, he says he wants the so-called supercommittee to impose a bunch of class-warfare taxes to finance his latest scheme.
What began as tragedy has now become farce.
If you didn’t see it when I posted it a month or so ago, here’s the video I did last year when Obama was proposing a second faux stimulus. Now that he’s on his fourth of fifth jobs-bill/stimulus/growth-package/whatever, it’s worth another look.
Though I must confess that I made a mistake when I put together this video. I mistakenly assumed the economy would have at least managed to get back to a semi-decent level of growth. More confirmation that economists are lousy forecasters.
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