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Archive for the ‘Welfare’ Category

President Obama unveiled his fiscal year 2012 budget today, and there’s good news and bad news. The good news is that there’s no major initiative such as the so-called stimulus scheme or the government-run healthcare proposal. The bad news, though, is that government is far too big and Obama’s budget does nothing to address this problem.

But perhaps the folks on Capitol Hill will be more responsible and actually try to save America from becoming a big-government, European-style welfare state. The solution may not be easy, but it is simple. Lawmakers merely need to restrain the growth of government spending so that it grows slower than the private economy.

Actual spending cuts would be the best option, of course, but limiting the growth of spending is all that’s needed to slowly shrink the burden of government spending relative to gross domestic product.

Fortunately, we have two role models from recent history that show it is possible to control the federal budget. This video from the Center for Freedom and Prosperity uses data from the Historical Tables of the Budget to demonstrate the fiscal policy achievements of both Ronald Reagan and Bill Clinton.

Some people will want to argue about who gets credit for the good fiscal policy of the 1980s and 1990s.

Bill Clinton’s performance, for instance, may not have been so impressive if he had succeeded in pushing through his version of government-run healthcare or if he didn’t have to deal with a Republican Congress after the 1994 elections. But that’s a debate for partisans. All that matters is that the burden of government spending fell during Bill Clinton’s reign, and that was good for the budget and good for the economy. And there’s no question he did a much better job than George W. Bush.

Indeed, a major theme in this new video is that the past 10 years have been a fiscal disaster. Both Bush and Obama have dramatically boosted the burden of government spending – largely because of rapid increases in domestic spending.

This is one of the reasons why the economy is weak. For further information, this video looks at the theoretical case for small government and this video examines the empirical evidence against big government.

Another problem is that many people in Washington are fixated on deficits and debt, but that’s akin to focusing on symptoms and ignoring the underlying disease. To elaborate, this video explains that America’s fiscal problem is too much spending rather than too much debt.

Last but not least, this video reviews the theory and evidence for the “Rahn Curve,” which is the notion that there is a growth-maximizing level of government outlays. The bad news is that government already is far too big in the United States. This is undermining prosperity and reducing competitiveness.

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Hello from the Most Serene Republic of San Marino, a 24-square mile enclave centered around Monte Titano in eastern Italy. I’m here for a conference on “Competition and Alliances among States.”

Like many other so-called tax havens, San Marino has been bludgeoned in recent years by politicians from high-tax nations, who resent the flow of jobs and capital to low-tax jurisdictions. This is creating problems for the economy, which is one of the most prosperous in the world.

I will speak later today about the ongoing battle between those who favor tax competition and those who want tax harmonization. Not surprisingly, my presentation will include some jabs at France, Germany, and other high-tax nations, as well as statist international bureaucracies such as the Organization for Economic Cooperation and Development.

But my main goal will be to put this battle in context, pointing out that the attacks against low-tax jurisdictions will get more intense in the future as welfare states begin to fall apart and politicians desperately search for more revenue to delay the day of reckoning.

This is not to imply that San Marino is a laissez-faire paradise. Yes, comparatively low tax rates have generated prosperity, but prosperity generates a lot of tax revenue (the Laffer Curve strikes again!), and the nation’s politicians have succumbed to temptation and spent all the money. Indeed, there is not much difference between the welfare state in San Marino and the one in Italy.

The moral of the story, of course, is that all nations should strive to shrink the overall burden of government. San Marino should try to be more like Hong Kong and less like France. The same is true for the United States.

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I’m disappointed, but not surprised, to read in the Washington Post that President Obama has decided against any changes to restrain Social Security spending. He’ll still probably subject us to pious and insincere rhetoric about fighting red ink in tonight’s State-of-the-Union address, but it is very revealing that the President is rejecting even the recommendations of his hand-picked Commission.

More than two months after his deficit commission first laid out a plan for reining in the national debt, President Obama has yet to embrace any of its controversial provisions – and he is unlikely to break that silence Tuesday night. …the president’s decision not to lay out his own vision for reducing the national debt has infuriated balanced-budget advocates, who fear that a bipartisan consensus for action fostered last month by Obama’s commission could wither without presidential leadership. …Liberals…applauded the decision, arguing that Social Security cuts are neither necessary to reduce current deficits nor a wise move politically.

I won’t be surprised, though, if Obama proposes in his budget to increase the Social Security payroll tax burden. That’s an idea he endorsed during the 2008 campaign.

The right approach, by the way, is not just cutting benefits, but rather letting younger workers shift their payroll taxes into personal retirement accounts, as explained in this video that was released earlier this month.

But the President’s reluctance to touch Social Security is only part of the story. The White House actually intends to push for more government spending. Only they won’t phrase it that way. The President will claim the new spending is an “investment.” But Senator Durbin of Illinois committed a gaffe and admitted this is just a repeat of the failed stimulus.

“It’s part of a stimulus. but we’re sensitive to the deficit,” Durbin said on “Fox News Sunday” when asked by host Chris Wallace about the president’s expected plans to call for more spending for infrastructure, education, research in his State of the Union address Tuesday night to a joint session of Congress.

I’m not sure why people are talking about a new, centrist-oriented Obama. Recycling big-government proposals is hardly a sign of fiscal restraint. And ducking-and-running on entitlements hardly seems to indicate a new era of fiscal responsibility.

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I don’t think I’ve ever promoted a book since starting this blog, but the new autobiography from Walter Williams is too good not to recommend. But don’t believe me. Walter was just interviewed by the Wall Street Journal, and you can get a flavor for his blunt style and crisp analysis. Speaking for myself, I’m going to steal his line about how “Politicians exploit economic illiteracy.” Read the entire WSJ column here, but mostly get his book and read that.

Even in the antebellum era, when slaves often weren’t permitted to wed, most black children lived with a biological mother and father. During Reconstruction and up until the 1940s, 75% to 85% of black children lived in two-parent families. Today, more than 70% of black children are born to single women. “The welfare state has done to black Americans what slavery couldn’t do, what Jim Crow couldn’t do, what the harshest racism couldn’t do,” Mr. Williams says. “And that is to destroy the black family.”

…Walter Williams was a libertarian before it was cool. And like other prominent right-of-center blacks—Clarence Thomas, Thomas Sowell, Shelby Steele—his intellectual odyssey began on the political left.

…“I thought some laws, like minimum-wage laws, helped poor people and poor black people and protected workers from exploitation. I thought they were a good thing until I was pressed by professors to look at the evidence.”

…He earned his doctorate in 1972 from UCLA, which had one of the top economics departments in the country, and he says he “probably became a libertarian through exposure to tough-mined professors”—James Buchanan, Armen Alchian, Milton Friedman—”who encouraged me to think with my brain instead of my heart. I learned that you have to evaluate the effects of public policy as opposed to intentions.”

…in 1982 he published his first book, “The State Against Blacks,” arguing that laws regulating economic activity are far larger impediments to black progress than racial bigotry and discrimination. Nearly 30 years later, he stands by that premise.

…Mr. Williams’s writings have sought to highlight “the moral superiority of individual liberty and free markets,” as he puts it. “I try to write so that economics is understandable to the ordinary person without an economics background.” His motivation? “I think it’s important for people to understand the ideas of scarcity and decision-making in everyday life so that they won’t be ripped off by politicians,” he says. “Politicians exploit economic illiteracy.”

…”You find more and more black people—not enough in my opinion but more and more—questioning the status quo,” he says. “When I fill in for Rush, I get emails from blacks who say they agree with what I’m saying. And there are a lot of white people questioning ideas on race, too. There’s less white guilt out there. It’s progress.”

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I’ve already poked fun at Herman Van Rompuy, the nondescript über-bureaucrat who has risen to the non-elected post of European Council President. I’ve mocked Rompuy’s attempts to compete with other European politicians, and I encourage everyone to have a good laugh at this video of Van Rompuy getting eviscerated by a British MEP.

We now have a new reason to roll our eyes about Van Rompuy. He is whining about those mean, nasty bond traders who have decided that it is a somewhat risky proposition to lend money to Europe’s welfare states. Even though Van Rompuy has no experience with money (other than spending the fruits of other people’s labor), he imperiously thinks it is “absurd” to put Greece and Portugal in the same category as Ukraine and Argentina.

I guess he would prefer if everyone just pretended these countries were in good shape and able to pay their bills, sort of like a fiscal version of “The Emperor’s New Clothes.”

Here’s the relevant passage from an article in the EU Observer.

European Council President Herman Van Rompuy has lashed out at ‘bond vigilantes’ over the treatment of peripheral eurozone economies in recent months. Speaking in London after a meeting with Prime Minister David Cameron on Thursday (13 January), Mr Van Rompuy described recent events as “absurd” and said the likes of Greece and Portugal should not be treated the same as poor countries: “Recent market developments are sometimes rather strange. The spreads now show default risks for some eurozone countries bigger than for emerging countries like Ukraine or Argentina: that is absurd.”

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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.

Interest payments on debt may be a better gauge of a nation’s fiscal health. The next chart (2011 data) shows the same countries, and the two nations with the highest interest costs, Greece and Ireland, already have been bailed out. Interestingly, Japan is in the best shape, even though it has the biggest debt. This shows why interest rates are very important. If investors think a nation is safe, they don’t require high interest rates to compensate them for the risk of default (fears of future inflation also can play a role, since investors don’t like getting repaid with devalued currency).

Based on this second chart, it appears that Italy, Portugal, and Belgium are the next dominos to topple. Portugal may be the best bet (no pun intended) based on credit default swap rates, and that certainly is consistent with the current speculation about an official bailout.

Spain is the wild card in this analysis. It has the second-lowest level of both debt and interest payments as shares of GDP, but the CDS market shows that Spanish government debt is a greater risk than bonds from either Italy or Belgium.

By the way, the CDS market shows that lending money to Illinois and California is also riskier than lending to either Italy or Belgium.

The moral of the story is that there is no magic point where deficit spending leads to a fiscal crisis, but we do know that it is a bad idea for governments to engage in reckless spending over a long period of time. That’s a recipe for stifling taxes and large deficits. And when investors see the resulting combination of sluggish growth and rising debt, eventually they will run out of patience.

The Bush-Obama policy of big government has moved America in the wrong direction. But if the data above is any indication, America probably has some breathing room. What happens on the budget this year may be an indication of whether we use that time wisely.

 

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Here are a few predictions for next year. It will be hot in Dallas in July, it will be cold in Stockholm in February, and Governor Jerry Brown of California will ask Uncle Sam for some sort of bailout.

I’m actually not sure about the first two predictions, but I think the last one is as close to a sure thing as you can get. Sven Larson is one of America’s top experts on state fiscal issues (his blog is an excellent resource for people who want to keep informed about the shenanigans of governors and state legislatures), and here’s his assessment of the mess in California.

California state spending has outgrown the state’s tax base by 1.3 percentage points annually for 25 years. Simple arithmetic dictates that in lieu of constant tax increases, this perpetuates a deficit. From 1985 to 2009 state GDP in California grew by 5.5 percent per year, on average (not adjusted for inflation). Annual growth in state spending was 6.8 percent, on average. Three spending categories have dominated this spending spree: public schools, cash assistance and Medicaid. Making up half of state spending, they are outlets for traditional redistributive welfare state policy. …Of the three aforementioned spending categories, two have grown faster than state GDP, i.e., the tax base, throughout the past quarter-century: • Public school spending grew at 6.5 percent per year on average, one full percent faster than state GDP • Medicaid grew at 10.7 percent per year on average, approximately twice the rate of state GDP.

In other words, California is in a fiscal mess because spending has grown too rapidly. It’s unclear why taxpayers in other states should be ripped off so that Golden State politicians can maintain an unsustainable vote-buying racket – particularly when the state goes out of its way to punish economic growth and discourage job creation.

To make matters worse, bailouts (or even the expectation of bailouts) send a terrible signal. Matt Mitchell (no relation) of the Mercatus Center looked at precisely this issue and concluded that state politicians would be even more profligate if they got any indication that they could shift the tax burden to people in other states. He even found an interesting study showing how sub-national governments in Germany responded to this kind of perverse incentive structure. Here’s an excerpt from that research.

States with a softer budget constraint [i.e., greater expectation that the German national government will bail them out], have higher deficits and debts and receive more bailout funds. …The larger the expectation of a bailout, the higher the amount spent in a number of spending categories, and special interests are most likely to benefit from this additional spending. We also find that bailout expectations lead to less efficient state government service provision.

By the way, I don’t want to imply that this is solely a California issue. There are several states that have taxed and spent themselves into fiscal ditches. Indeed, it’s quite likely that Illinois may be the first state to experience a fiscal collapse.

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