New CBO Numbers Confirm – Once Again – that Modest Spending Restraint Can Balance the Budget
The Congressional Budget Office has just released the update to its Economic and Budget Outlook.
There are several things from this new report that probably deserve commentary, including a new estimate that unemployment will “remain above 8 percent until 2014.”
This certainly doesn’t reflect well on the Obama White House, which claimed that flushing $800 billion down the Washington rathole would prevent the joblessness rate from ever climbing above 8 percent.
Not that I have any faith in CBO estimates. After all, those bureaucrats still embrace Keynesian economics.
But this post is not about the backwards economics at CBO. Instead, I want to look at the new budget forecast and see what degree of fiscal discipline is necessary to get rid of red ink.
The first thing I did was to look at CBO’s revenue forecast, which can be found in table 1-2. But CBO assumes the 2001 and 2003 tax cuts will expire at the end of 2012, as well as other automatic tax hikes for 2013. So I went to table 1-8 and got the projections for those tax provisions and backed them out of the baseline forecast.
That gave me a no-tax-hike forecast for the next 10 years, which shows that revenues will grow, on average, slightly faster than 6.6 percent annually. Or, for those who like actual numbers, revenues will climb from a bit over $2.3 trillion this year to almost $4.4 trillion in 2021.
Let Europe Be—and Defend—Europe
In the midst of difficult domestic political battles, Barack Obama begins a lengthy European trip today. He should encourage the continent to increase its defense capabilities and take on greater regional security responsibilities.
Presidential visits typically result in little of substance. President Obama’s latest trip will be no different if he reinforces the status quo. His policy mantra once was “change.” No where is “change” more necessary than in America’s foreign policy, especially towards Europe.
Despite obvious differences spanning the Atlantic, the U.S. and European relationship remains extraordinarily important. The administration should press for increased economic integration, with lower trade barriers and streamlined regulations to encourage growth.
At the same time, however, Washington should encourage development of a European-run NATO with which the U.S. can cooperate to promote shared interests to replace today’s America-dominated NATO which sacrifices American interests to defend Europe. Americans no longer can afford to defend the rest of the world. The Europeans no longer need to be defended.
Although World War II ended 66 years ago, the Europeans remain strangely dependent on America. Political integration through the European Union has halted; economic integration through the Euro is under sharp challenge; and military integration through any means is reversing.
Indeed, the purposeless war in Libya, instigated by Great Britain and France, has dramatically demonstrated Europe’s military weakness. Despite possessing a collective GDP and population greater than that of America, the continent’s largest powers are unable to dispatch a failed North African dictator.
President Barack Obama starts with visits to Ireland, the UK, and France. In the latter he will consult with the heads of the G8 nations, which include Germany and Italy.
His message should be clear: while America will remain politically and economically engaged in Europe, it will no longer take on responsibility for setting boundaries in the Balkans, policing North Africa, and otherwise defending prosperous industrial states from diminishing threats. Washington should expect the continent to become a full partner, which means promoting the security of its members and stability of its region.
The president should deliver a similar message when he continues on to Poland. Part of “New Europe,” which worries more about the possibility of revived Russian aggression, Warsaw has cause to spend more on its own defense and cooperate more closely with its similarly-minded neighbors on security issues.
In fact, Poland, Slovakia, Hungary, and the Czech Republic, members of the “Visegrad Group,” recently announced creation of a “battle group” separate from NATO command to emphasize regional defense. The president should welcome this willingness to take on added defense responsibilities.
Spending Restraint Works: Examples from Around the World
America faces a fiscal crisis. The burden of federal spending has doubled during the Bush-Obama years, a $2 trillion increase in just 10 years. But that’s just the tip of the proverbial iceberg. Because of demographic changes and poorly designed entitlement programs, the federal budget is going to consume larger and larger shares of America’s economic output in coming decades.
For all intents and purposes, the United States appears doomed to become a bankrupt welfare state like Greece.
But we can save ourselves. A previous video showed how both Ronald Reagan and Bill Clinton achieved positive fiscal changes by limiting the growth of federal spending, with particular emphasis on reductions in the burden of domestic spending. This new video from the Center for Freedom and Prosperity provides examples from other nations to show that good fiscal policy is possible if politicians simply limit the growth of government.
Which Nation Will Be the Next European Debt Domino…or Will It Be the United States?
Thanks to decades of reckless spending by European welfare states, the newspapers are filled with headlines about debt, default, contagion, and bankruptcy.
We know that Greece and Ireland already have received direct bailouts, and other European welfare states are getting indirect bailouts from the European Central Bank, which is vying with the Federal Reserve in a contest to see which central bank can win the “Most Likely to Appease the Political Class” Award.
But which nation will be the next domino to fall? Who will get the next direct bailout?
Some people think total government debt is the key variable, and there’s been a lot of talk that debt levels of 90 percent of GDP represent some sort of fiscal Maginot Line. Once nations get above that level, there’s a risk of some sort of crisis.
But that’s not necessarily a good rule of thumb. This chart, based on 2010 data from the Economist Intelligence Unit (which can be viewed with a very user-friendly map), shows that Japan’s debt is nearly 200 percent of GDP, yet Japanese debt is considered very safe, based on the market for credit default swaps, which measures the cost of insuring debt. Indeed, only U.S. debt is seen as a better bet.
Five Lessons from Ireland
The news is going from bad to worse for Ireland. The Irish Independent is reporting that the Swiss Central Bank no longer will accept Irish government bonds as collateral. The story also notes that one of the world’s largest bond firms, PIMCO, is no longer purchasing debt issued by the Irish government.
And this is happening even though (or perhaps because?) Ireland received a big bailout from the European Union and the International Monetary Fund (and the IMF’s involvement means American taxpayers are picking up part of the tab).
I’ve already commented on Ireland’s woes, and opined about similar problems afflicting the rest of Europe, but the continuing deterioration of the Emerald Isle deserves further analysis so that American policy makers hopefully grasp the right lessons. Here are five things we should learn from the mess in Ireland.
American Taxpayers Should Not Bail Out the European Union
The fiscal disintegration of Europe is bad news, though I confess to a bit of malicious glee every time I read about welfare states such as Greece and Portugal getting to the point where they no longer have the ability to borrow enough money to finance their bloated public sectors (I have mixed feelings about Ireland since that nation at least has been a good example of low tax corporate tax rates, but I still think they should get punished for over-spending and bailouts). This I-told-you-so attitude is not very mature on my part, but one hopes that American politicians will learn the right lessons and something good will come from this mess.
I have not written much about the topic in recent months, in part because I don’t have much to add to my original post about this issue back in February. All the arguments I made then are still true, particularly about the moral hazard of bailouts and the economic damage of rewarding excessive government. So why bother repeating myself, particularly since this is an issue for Europeans to solve (or, as is their habit, to make worse)?
Unfortunately, it appears that all of us need to pay closer attention to this issue. The Obama Administration apparently thinks American taxpayers should subsidize European profligacy. Here’s a passage from a Reuters report about a potential bailout for Europe via the IMF.
The United States would be ready to support the extension of the European Financial Stability Facility via an extra commitment of money from the International Monetary Fund, a U.S. official told Reuters on Wednesday. “There are a lot of people talking about that. I think the European Commission has talked about that,” said the U.S. official, commenting on enlarging the 750 billion euro ($980 billion) EU/IMF European stability fund. “It is up to the Europeans. We will certainly support using the IMF in these circumstances.” “There are obviously some severe market problems,” said the official, speaking on condition of anonymity. “In May, it was Greece. This is Ireland and Portugal. If there is contagion that’s a huge problem for the global economy.”
This issue will be an interesting test for the GOP. I think it’s safe to say that the Tea Party movement didn’t elect Republicans so they could expand the culture of bailouts – especially if that means handouts for profligate European governments. Some people will argue that American taxpayers aren’t at risk because this would be a bailout from the IMF instead of the Treasury. But that’s an absurd and dishonest assertion. The United States is the largest “shareholder” in that international bureaucracy, and there’s no way the IMF can get more involved without American support.
In some sense, this is a corporatism vs. free markets battle for Republicans. Big banks and Wall Street often support bailouts since they like the idea of somebody else saving them from their bad investment decisions (though American financial institutions fortunately are not as exposed as their European counterparts). Economists despise bailouts, by contrast, since they subsidize risky choices and lead to the misallocation of capital.
Which side is John Boehner on? Or Mitch McConnell? And what about Mitt Romney, or Mike Huckabee?
Don’t Blame Ireland’s Mess on Low Corporate Tax Rates
Ireland is in deep fiscal trouble and the Germans and the French apparently want the politicians in Dublin to increase the nation’s 12.5 percent corporate tax rate as the price for being bailed out. This is almost certainly the cause of considerable smugness and joy in Europe’s high-tax nations, many of which have been very resentful of Ireland for enjoying so much prosperity in recent decades in part because of a low corporate tax burden.
But is there any reason to think Ireland’s competitive corporate tax regime is responsible for the nation’s economic crisis? The answer, not surprisingly, is no. Here’s a chart from one of Ireland’s top economists, looking at taxes and spending for past 27 years. You can see that revenues grew rapidly, especially beginning in the 1990s as the lower tax rates were implemented. The problem is that politicians spent every penny of this revenue windfall.
When the financial crisis hit a couple of years ago, tax revenues suddenly plummeted. Unfortunately, politicians continued to spend like drunken sailors. It’s only in the last year that they finally stepped on the brakes and began to rein in the burden of government spending. But that may be a case of too little, too late.
The second chart provides additional detail. Interestingly, the burden of government spending actually fell as a share of GDP between 1983 and 2000. This is not because government spending was falling, but rather because the private sector was growing even faster than the public sector.
This bit of good news (at least relatively speaking) stopped about 10 years ago. Politicians began to increase government spending at roughly the same rate as the private sector was expanding. While this was misguided, tax revenues were booming (in part because of genuine growth and in part because of the bubble) and it seemed like bigger government was a free lunch.
But big government is never a free lunch. Government spending diverts resources from the productive sector of the economy. This is now painfully apparent since there no longer is a revenue windfall to mask the damage.
There are lots of lessons to learn from Ireland’s fiscal/economic/financial crisis. There was too much government spending. Ireland also had a major housing bubble. And some people say that adopting the euro (the common currency of many European nations) helped create the current mess.
The one thing we can definitely say, though, is that lower tax rates did not cause Ireland’s problems. It’s also safe to say that higher tax rates will delay Ireland’s recovery. French and German politicians may think that’s a good idea, but hopefully Irish lawmakers have a better perspective.
Ireland Imposes Real Cuts on Bureaucrat Pay
Ireland may be in a recession (caused in large part by misguided housing subsidies), but there are two things worth admiring about the Emerald Isle’s public policy. Many wonks already know about the first policy, the 12.5 percent corporate tax rate that helped transform Ireland from the “sick man of Europe.” But it seems that Irish policymakers are reading Chris Edwards, because the second admirable policy is that lawmakers actually cut civil service compensation by 13.5 percent. And these are real cuts, not the type of phony gimmick you find in Washington, where something is called a “cut” simply because it didn’t increase as fast as previously planned.
A columnist writing in the UK-based Times wonders why Irish bureaucrats did not go nuts with public protests and speculates that maybe they actually understand that they have a sweetheart deal compared to their brethren in the productive sector of the economy:
Because of the budget deficit, shrinking economy and untenable level of national debt, all public service salaries will be cut by an average of 13.5 per cent, with immediate effect…and will apply to frontline public workers in health, education, transport and local services and also to MPs, Ministers of State and the Attorney-General. …Couldn’t happen, could it? Actually it has, and close to home. …public sector pay in the Republic has been cut. Not frozen, sharply cut. …although the payslips have been changed for many months now, the schools are open, the hospitals treat the sick, rubbish is collected and paper pushed around briskly enough in public organisations. Belts are tight all right and pips are squeaking; but the country whose public pay once led the EU league has not imploded into the chaos of suicidal strikes, unburied bodies, closed schools and garbage mountains, which the UK or France would expect as a matter of course if a government did any such thing. …Yet the pay cuts — I say again, 10 to 15 per cent cuts in pay, real and immediate holes in the family budget — have not caused the enraged citizenry to pull down the pillars of the temple around their own heads and everybody else’s. They just haven’t. Why? …unlike the self-righteous whiners who speak for British public service unions, middle-Ireland still knows that a secure and pensionable job is a privilege: that working in the public sector is not an altruistic gift to the nation, but a damn lucky break.
Since I have a multi-part series on “Bureaucrats vs. Taxpayers” at my International Liberty blog, I especially enjoyed this part of the column, which provides a real-world glimpse at the corrupting allure of cushy government employment:
I saw a spirited, self-mocking sketch performed by 12-year-olds in a village hall entertainment the other night about “Marty Matchmaker O’Donoghue, where every ould stocking will find an ould shoe”. The girl being advertised to the men is talked up by the matchmaker as having “a Government Job! A clerk at the council office — I tell ye, she’s a laying hen!” Friends confirm that it’s an old saying: “Marry a teacher or a nurse, you’ve got a laying hen.” It does not seem that way in boom times, but even in the UK it is becoming true.
Blasphemy Laws Are an Admission of Failure
The Washington Post feature “On Faith” today discusses Ireland’s new, profoundly misguided blasphemy law. Blasphemers there can now be fined up to $35,000. That’s a lot of money for a few little words.
Atheist Ireland is testing — and protesting — the law by publishing blasphemous quotations like the following:
“Thou hast said: nevertheless I say unto you, Hereafter shall ye see the Son of man sitting on the right hand of power, and coming in the clouds of heaven.”
“Ye are of your father the devil, and the lusts of your father ye will do. He was a murderer from the beginning, and abode not in the truth, because there is no truth in him.”
“May Allah curse the Jews and Christians for they built the places of worship at the graves of their prophets.”
“Show me just what Muhammad brought that was new and there you will find things only evil and inhuman, such as his command to spread by the sword the faith he preached.”
They are, respectively, from Jesus, Jesus, Muhammad, and Benedict XVI.
Maybe it’s an American thing, but the Post apparently couldn’t find any panelists to defend the law. These folks are all professional wordsmiths, of course, and these tend to be most supportive of the freedoms that they depend on the most. As I noted in my recent Policy Analysis, those who are most easily offended, and who value free speech the least, tend to gravitate not to newspapers, but to governments (and university administrations). That’s where the power is.
Susan Jacoby, for whom I have the utmost respect, even calls the law Pythonesque, likening it to the Ministry of Silly Walks. Of course, there’s this as well:
Blasphemy laws are oddities, because they concede an awful lot of emotional power to the blasphemer. They tell the world: My feelings are so very fragile. Or perhaps they say: My god is so very weak — so weak that he needs state protection against other gods, or even against mere potty-mouthed humans. Either way, it’s an embarrassing admission, but hardly the business of government. If your god can’t take the heat, he’s hardly a god at all.
Jesus and Mo put it very well indeed:
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