Tag Archives: chris edwards.

With Govt Spending at 41% of GDP should President Obama try to raise taxes?

October 21, 2011 – 3:07 pm

Cato Institute: Government spending is 41% of GDP

I love the Cato Institute because they give us the facts that liberals just can’t refute. Instead of trying to raise our taxes, President Obama should be cutting spending.

American Government Spending: 41% of GDP

Posted by Chris Edwards

My good friend Kathy Ruffing at CBPP takes me to task for testifying that government spending in the United States is 41 percent of GDP, which in my view is a very high and harmful level.

Kathy says that recent U.S. spending data is “exaggerated” because of the recession, and indeed, spending has soared not only here, but in most major countries because of the unfortunate popularity of Keynesian pump-priming theories. My point was that the American smaller-government advantage eroded both during the Bush growth years and during the Obama recession years, as seen in Figure 2 of my testimony.  

Kathy noted that the OECD data I used are different than U.S. national income accounts data published by the Bureau of Economic Analysis. Well, that’s right. Every country has quirks in the way they do their national income data. The advantage of using OECD data is that the economists at the OECD adjust for these quirks and create spending data that is comparable across countries. If Kathy has more accurate international comparisons, I’d love to see them.

Finally, Kathy says that just because American government spending divided by GDP is about 40 percent, that “doesn’t mean that government controls about 40 percent of the U.S.economy.” I don’t agree. She means that government does not produce 40 percent of gross domestic product, which is true. The broader figure of 40 or 41 percent includes not just government production but government transfers. And transfers do entail government control over resources because both the taxing and spending activities involved in transfer programs distort private sector behavior. Thus, the government misallocates resources both when it “produces” useless solar power activities in its own labs and when it subsidizes failed private solar companies.   

Anyway, thanks to Kathy for raising the important issue of the overall size of government because it is something that the policy community should focus more attention on. For data geeks, the OECD has all kinds of cross-country comparison data here. Government spending is Table 25.

Federal Spending per Household Is Skyrocketing

Everyone wants to know more about the budget and here is some key information with a chart from the Heritage Foundation and a video from the Cato Institute.

The federal government is spending more per household than ever before. Since 1965, spending per household has grown by nearly 162 percent, from $11,431 in 1965 to $29,401 in 2010. From 2010 to 2021, it is projected to rise to $35,773, a 22 percent increase.

INFLATION-ADJUSTED DOLLARS (2010)

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Federal Spending per Household Is Skyrocketing

Source: U.S. Census Bureau, White House Office of Management and Budget, and Congressional Budget Office.

Chart 1 of 42

In Depth

  • Policy Papers for Researchers

  • Technical Notes

    The charts in this book are based primarily on data available as of March 2011 from the Office of Management and Budget (OMB) and the Congressional Budget Office (CBO). The charts using OMB data display the historical growth of the federal government to 2010 while the charts using CBO data display both historical and projected growth from as early as 1940 to 2084. Projections based on OMB data are taken from the White House Fiscal Year 2012 budget. The charts provide data on an annual basis except… Read More

  • Authors

    Emily GoffResearch Assistant
    Thomas A. Roe Institute for Economic Policy StudiesKathryn NixPolicy Analyst
    Center for Health Policy StudiesJohn FlemingSenior Data Graphics Editor

By Everette Hatcher III | Posted in Cato Institute, President Obama, spending out of control, Taxes | Also tagged , , , | Comments (0)

Cato Institute:Spending is our problem Part 6

October 21, 2011 – 12:02 am

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.

People think that we need to raise more revenue but I say we need to cut spending. Take a look at a portion of this article from the Cato Institute:

The Damaging Rise in Federal Spending and Debt

by Chris Edwards

Joint Economic Committee
United States Congress

Joint Economic CommitteeUnited States Congress

Added to cato.org on September 20, 2011

This testimony was delivered on September 20, 2011.

Conclusions

Federal spending is soaring, and government debt is piling up at more than a trillion dollars a year. Official projections show rivers of red ink for years to come unless policymakers enact major budget reforms. Unless spending and deficits are cut, the United States is headed for economic ruin as growth falls and rising debt threatens further financial crises.

Policymakers should turn their full attention to long-run spending reforms. They should begin terminating the many unneeded and damaging federal programs that draw resources out of the private sector and sap the economy’s strength. The essays on Cato’s website http://www.DownsizingGovernment.org describe many federal programs that produce low or negative returns. Programs often create economic distortions, damage the environment, restrict individual freedom, or have high levels of fraud and abuse.

I’ve proposed a plan to cut spending on entitlements, defense, and discretionary spending over 10 years to balance the budget.25 Spending reforms should aim to revive constitutional federalism and reverse the expansion of the federal government into areas better left to state and local governments, businesses, charities, and individuals.

Some analysts worry that spending cuts would hurt the economy, but other high-income nations have cut spending with very positive results. In the mid-1990s, for example, Canada faced a debt crisis caused by runaway spending — similar to our current situation. But the Canadian government changed course and slashed total spending 10 percent in just two years — which would be like us chopping annual spending by $360 billion in two years.26 Total government spending in Canada was cut by more than 10 percentage points of GDP over a decade. The Canadian economy did not sink into a recession as Keynesian economists might fear, but instead was launched on a 15-year economic boom.

A recent Joint Economic Committee report summarizes other international examples of spending cuts coinciding with strong economic growth.27 Thus, spending cuts should not be viewed as bad tasting medicine needed only to cure our debt disease, but as an opportunity to create positive and lasting benefits to the economy and society.

Thank you for holding these important hearings.

Notes:
.
25 http://www.DownsizingGovernment.org/balanced-budget-plan.
26 See http://www.cato-at-liberty.org/cutting-government-the-canadian-way and see http://www.cato-at-liberty.org/canadas-spending-cuts-and-economic-growth.
27 Joint Economic Committee, “Spend Less, Owe Less, Grow the Economy,” Republican Staff, March 15, 2011

By Everette Hatcher III | Posted in Cato Institute, spending out of control | Also tagged , , , | Comments (0)

Cato Institute:Spending is our problem Part 4

October 19, 2011 – 7:35 am

Cato Institute:Spending is our problem Part 4

Should we spend more federal money to help the poor?

Uploaded by on Oct 3, 2011

The so-called War on Poverty has failed. Making government bigger and creating more federal redistribution programs has been bad news for taxpayers. But the welfare state also has been a disaster for the less fortunate, creating a flypaper effect that makes it difficult for people to lead independent and self-reliant lives. This Center for Freedom and Prosperity Foundation video shows how the poverty rate was falling after World War II — but then stagnated once the federal government got involved. www.freedomandprosperity.org

People think that we need to raise more revenue but I say we need to cut spending. Take a look at a portion of this article from the Cato Institute:

The Damaging Rise in Federal Spending and Debt

by Chris Edwards

Joint Economic Committee
United States Congress

Joint Economic CommitteeUnited States Congress

Added to cato.org on September 20, 2011

This testimony was delivered on September 20, 2011.

Baseline Projections Are Optimistic

In support of building a large “fiscal buffer,” policymakers should recognize that both short-term and long-term CBO projections are optimistic in various ways. Perhaps the future will include some positive budget surprises, but the big risk factors seem to be on the negative side.

In CBO’s baseline, federal deficits fall substantially over the coming decade, partly due to changes under the recent Budget Control Act. However, spending will be higher than projected if:

  • Policymakers lift caps in the Budget Control Act.
  • Policymakers launch new spending programs or respond to unforeseen crises or wars.
  • Higher interest rates push up interest costs, which is a risk that gets magnified as federal debt grows larger.
  • A major recession causes large cost increases in programs sensitive to economic cycles, such as unemployment insurance.
  • Policymakers respond to another recession with costly new “stimulus” plans. The persistence of Keynesian policy ideas in Washington is an important risk to the outlook for federal debt.

There are likely to be negative shocks in coming years that we don’t foresee. Consider that in its January 2008 budget outlook, CBO projected that U.S. economic growth would slow in 2008 but then rebound fairly strongly in subsequent years.15 CBO discussed the risk of a recession, but didn’t foresee the calamity that was already starting. The upshot is that policymakers should take a conservative approach and build a “fiscal buffer” with large spending cuts now before another recession causes the deficit to soar again.

CBO’s long-range projections — such as the “alternative fiscal scenario” (AFS) shown in Figure 1 — are also optimistic. In its basic projections, CBO does not factor in the negative effects of rising spending, debt, or taxes on GDP after 2021, but it does do that in a separate analysis.16 If spending actually followed the course shown in Figure 1, CBO estimates that GDP in 2035 would be up to 10 percent less than shown in the AFS, and GNP would be up to 18 percent less. In turn, spending-to-GDP and debt-to-GDP ratios would be worse than usually shown in long-range budget charts.

Under the AFS, rising deficit spending could reduce American incomes. The CBO finds that real GNP per capita could stop growing in the late 2020s, and then start falling after that. In a historic reversal, future generations of Americans would become successively poorer.

The way to ensure our continued prosperity is to cut federal spending and reduce debt. In a 2010 analysis, the CBO compared the high-spending AFS with Rep. Paul Ryan’s “Roadmap” plan.17 The Ryan plan would restrain federal spending to roughly current levels for the next few decades, and then start reducing it. By the late 2020s, GNP per capita under the Ryan plan would begin rising above the flat and then falling levels under the AFS. By the late 2050s, GNP per capita would be 70 percent higher under the Ryan plan than under the AFS.18

15 Congressional Budget Office, “The Budget and Economic Outlook: Fiscal Years 2008 to 2018,” January 2008, Chapter 2.
16 See Chapter 2 in Congressional Budget Office, “Long-Term Budget Outlook,” June 2011.
17 Congressional Budget Office, Douglas Elmendorf letter to Paul Ryan, January 27, 2010, http://www.cbo.gov/ftpdocs/108xx/doc10851/01-27-Ryan-Roadmap-Letter.pdf.
18 Congressional Budget Office, Douglas Elmendorf letter to Paul Ryan, January 27, 2010, p. 16.

By Everette Hatcher III | Posted in Cato Institute, spending out of control | Also tagged , , , | Comments (0)

Cato Institute:Spending is our problem Part 4

October 19, 2011 – 12:55 am

Cato Institute:Spending is our problem Part 4

Should we spend more federal money to help the poor?

Uploaded by on Oct 3, 2011

The so-called War on Poverty has failed. Making government bigger and creating more federal redistribution programs has been bad news for taxpayers. But the welfare state also has been a disaster for the less fortunate, creating a flypaper effect that makes it difficult for people to lead independent and self-reliant lives. This Center for Freedom and Prosperity Foundation video shows how the poverty rate was falling after World War II — but then stagnated once the federal government got involved. www.freedomandprosperity.org

People think that we need to raise more revenue but I say we need to cut spending. Take a look at a portion of this article from the Cato Institute:

The Damaging Rise in Federal Spending and Debt

by Chris Edwards

Joint Economic Committee
United States Congress

Joint Economic CommitteeUnited States Congress

Added to cato.org on September 20, 2011

This testimony was delivered on September 20, 2011.

Baseline Projections Are Optimistic

In support of building a large “fiscal buffer,” policymakers should recognize that both short-term and long-term CBO projections are optimistic in various ways. Perhaps the future will include some positive budget surprises, but the big risk factors seem to be on the negative side.

In CBO’s baseline, federal deficits fall substantially over the coming decade, partly due to changes under the recent Budget Control Act. However, spending will be higher than projected if:

  • Policymakers lift caps in the Budget Control Act.
  • Policymakers launch new spending programs or respond to unforeseen crises or wars.
  • Higher interest rates push up interest costs, which is a risk that gets magnified as federal debt grows larger.
  • A major recession causes large cost increases in programs sensitive to economic cycles, such as unemployment insurance.
  • Policymakers respond to another recession with costly new “stimulus” plans. The persistence of Keynesian policy ideas in Washington is an important risk to the outlook for federal debt.

There are likely to be negative shocks in coming years that we don’t foresee. Consider that in its January 2008 budget outlook, CBO projected that U.S. economic growth would slow in 2008 but then rebound fairly strongly in subsequent years.15 CBO discussed the risk of a recession, but didn’t foresee the calamity that was already starting. The upshot is that policymakers should take a conservative approach and build a “fiscal buffer” with large spending cuts now before another recession causes the deficit to soar again.

CBO’s long-range projections — such as the “alternative fiscal scenario” (AFS) shown in Figure 1 — are also optimistic. In its basic projections, CBO does not factor in the negative effects of rising spending, debt, or taxes on GDP after 2021, but it does do that in a separate analysis.16 If spending actually followed the course shown in Figure 1, CBO estimates that GDP in 2035 would be up to 10 percent less than shown in the AFS, and GNP would be up to 18 percent less. In turn, spending-to-GDP and debt-to-GDP ratios would be worse than usually shown in long-range budget charts.

Under the AFS, rising deficit spending could reduce American incomes. The CBO finds that real GNP per capita could stop growing in the late 2020s, and then start falling after that. In a historic reversal, future generations of Americans would become successively poorer.

The way to ensure our continued prosperity is to cut federal spending and reduce debt. In a 2010 analysis, the CBO compared the high-spending AFS with Rep. Paul Ryan’s “Roadmap” plan.17 The Ryan plan would restrain federal spending to roughly current levels for the next few decades, and then start reducing it. By the late 2020s, GNP per capita under the Ryan plan would begin rising above the flat and then falling levels under the AFS. By the late 2050s, GNP per capita would be 70 percent higher under the Ryan plan than under the AFS.18

15 Congressional Budget Office, “The Budget and Economic Outlook: Fiscal Years 2008 to 2018,” January 2008, Chapter 2.
16 See Chapter 2 in Congressional Budget Office, “Long-Term Budget Outlook,” June 2011.
17 Congressional Budget Office, Douglas Elmendorf letter to Paul Ryan, January 27, 2010, http://www.cbo.gov/ftpdocs/108xx/doc10851/01-27-Ryan-Roadmap-Letter.pdf.
18 Congressional Budget Office, Douglas Elmendorf letter to Paul Ryan, January 27, 2010, p. 16.

By Everette Hatcher III | Posted in Cato Institute, spending out of control | Also tagged , , , , , , , | Comments (0)

Cato Institute:Spending is our problem Part 3

October 18, 2011 – 6:47 am

Cato Institute:Spending is our problem Part 3

Uploaded by on Feb 15, 2011

Dan Mitchell, Senior Fellow at the Cato Institute, speaks at Moving Forward on Entitlements: Practical Steps to Reform, NTUF’s entitlement reform event at CPAC, on Feb. 11, 2011.

____________________

People think that we need to raise more revenue but I say we need to cut spending. Take a look at a portion of this article from the Cato Institute:

The Damaging Rise in Federal Spending and Debt

by Chris Edwards

Joint Economic Committee
United States Congress

Joint Economic CommitteeUnited States Congress

Added to cato.org on September 20, 2011

This testimony was delivered on September 20, 2011.

Harmful Effects of Deficit Spending

Federal deficit spending has exploded. Even with the recent passage of the Budget Control Act, the deficit is still expected to be about $1 trillion next year. The damage caused by this spending includes:

1. Transferring resources from higher-valued private activities to lower-valued government activities. With government spending already at 41 percent of GDP, new spending will likely have a negative return, which will reduce output.
2. Creating pressure to increase taxes in the future, which would reduce growth. Higher taxes impose “deadweight losses” on the economy of at least $1 for every $2 of added revenues, as discussed below.
3. Increasing federal debt, which creates economic uncertainty and a higher risk of financial crises, as Europe’s woes illustrate. Research indicates that economic growth tends to fall as debt rises above about 90 percent of GDP, as discussed below.

Economists in the Keynesian tradition dispute the first point. They believe that the demand-side “stimulus” benefits of spending are so important that they outweigh the problems of microeconomic distortions and misallocations caused by federal programs. However, it is very difficult to see any economic boost from the huge deficit spending of recent years.

The total Keynesian stimulus in recent years includes not only the 2009 stimulus package of more than $800 billion, but the total amount of federal deficit spending. We’ve had deficit spending of $459 billion in fiscal 2008, $1.4 trillion in fiscal 2009, $1.3 trillion in fiscal 2010, and $1.3 trillion in fiscal 2011. Despite that huge supposed stimulus, U.S. unemployment remains at high levels and the current recovery has been the slowest since World War II.5

The Obama administration claimed that there are large “multiplier” benefits of federal spending, but the recent spending spree seems to have mainly just suppressed private-sector activities.6 Stanford University’s John Taylor took a detailed look at GDP data over recent years, and he found little evidence of any benefits from the 2009 stimulus bill.7 Any “sugar high” to the economy from spending increases was apparently small and short-lived. Harvard University’s Robert Barro estimates that any small multiplier benefits that the stimulus bill may have had is greatly outweighed by the future damage caused by higher taxes and debt.8

John Taylor recently testified that deficit-spending stimulus actions “have not only been ineffective, they have lowered investment and consumption demand by increasing concerns about the federal debt, another financial crisis, threats of inflation or deflation, higher taxes, or simply more interventions. Most businesses have plenty of cash to invest and create jobs. They’re sitting on it because of these concerns.”9

As federal debt grows larger, the problems caused by fiscal uncertainty will get magnified. The CBO notes that “growing federal debt also would increase the probability of a sudden fiscal crisis, during which investors would lose confidence in the government’s ability to manage its budget and the government would thereby lose its ability to borrow at affordable rates. Such a crisis would . . . probably have a very significant negative impact on the country.”10

Research by economists Kenneth Rogoff and Carmen Reinhart found that government debt burdens above 90 percent of GDP are associated with lower economic growth.11 After examining data on dozens of countries, they concluded that “high debt is associated with slower growth; a relationship which is robust across advanced and emerging markets.”12 High debt can also be associated with inflation crises, “financial repression,” and other problems. Furthermore, high public and private debt acts as a “contagion amplifier” in the globalized economy.

A new paper by economists at the Bank for International Settlements (BIS) similarly found that when government debt in OECD countries rises above a threshold of about 85 percent of GDP, economic growth is slower.13 As debt rises, borrowers become increasingly sensitive to changes in interest rates and other shocks. “Higher nominal debt raises real volatility, increases financial fragility, and reduces average growth,” the authors note.14

The BIS economists conclude that countries should build a “fiscal buffer” by keeping its debt well below the danger threshold. They note that without major reforms, debt-to-GDP levels will soar in coming decades in most advanced economies due to population aging. Thus, one more reason for the United States to cut its spending and debt is to help it weather future financial crises spilling over from countries that are in even worse shape than we are.

 
5 See Joint Economic Committee, “Uncharted Depths: Welcome to Barack Obama’s ‘Recover Bummer,'” Republican Staff, June 23, 2011. And see the comments of economists Robert Gordon and Robert Hall at http://www.cato-at-liberty.org/biggest-keynesian-stimulus-slowest-recovery.
6 See Robert J. Barro, “Government Spending Is No Free Lunch,” Wall Street Journal, January 22, 2009; John F. Cogan and John B. Taylor, “The Obama Stimulus Impact? Zero,” Wall Street Journal, December 9, 2010; John H. Cochrane, “Fiscal Stimulus, Fiscal Inflation, or Fiscal Fallacies,” University of Chicago Booth School of Business, February 27, 2009.
7 John Taylor, Testimony to the House Committee on Oversight and Government Reform, Subcommittee on Regulatory Affairs, Stimulus Oversight, and Government Spending, February 16, 2011.
8 Robert J. Barro, “The Stimulus Evidence One Year Later,” Wall Street Journal, February 23, 2010.
9 John Taylor, Testimony to the Senate Finance Committee, Subcommittee on Fiscal Responsibility and Economic Growth, September 13, 2011.
10 Congressional Budget Office, “Long-Term Budget Outlook,” June 2011, p. 22.
11 The authors summarize their findings in Carmen Reinhart and Kenneth Rogoff, “A Decade of Debt,” National Bureau of Economic Research, Working Paper 16827, February 2011.
12 Carmen Reinhart and Kenneth Rogoff, “A Decade of Debt,” National Bureau of Economic Research, Working Paper 16827, February 2011, p. 5.
13 Stephen Cecchetti, M.S. Mohanty, and Fabrizio Zampolli, “The Real Effects of Debt,” Bureau for International Settlements, September 2011.
14 Stephen Cecchetti, M.S. Mohanty, and Fabrizio Zampolli, “The Real Effects of Debt,” Bureau for International Settlements, September 2011, p. 4.

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Cato Institute:Spending is our problem Part 2

October 17, 2011 – 7:45 am

Cato Institute:Spending is our problem Part 2

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.

__________________________

People think that we need to raise more revenue but I say we need to cut spending. Take a look at a portion of this article from the Cato Institute:

The Damaging Rise in Federal Spending and Debt

by Chris Edwards

Joint Economic Committee
United States Congress

Joint Economic CommitteeUnited States Congress

Added to cato.org on September 20, 2011

This testimony was delivered on September 20, 2011.

America Has a High-Spending and High-Debt Government

Some analysts say that America can afford to increase taxes and spending because it is a uniquely small-government country. Alas, that is no longer the case. Data from the Organization for Economic Cooperation and Development (OECD) show that federal, state, and local government spending in the United States this year is a huge 41 percent of GDP.

Figure 2 shows that government in the United States used to be about 10 percentage points of GDP smaller than the average government in the OECD. But that size advantage has fallen to just 4 percentage points. A few high-income nations — such as Australia — now have smaller governments and much lower government debt than the United States.

 

Historically, America’s strong growth and high living standards were built on our relatively smaller government. The ongoing surge in federal spending is undoing this competitive advantage we had enjoyed in the world economy. CBO projections show that without reforms federal spending will rise by about 10 percentage points of GDP by 2035. If that happens, spending by American governments will be more than half of GDP by that year. That would doom young people to unbearable levels of taxation and a stagnant economy with fewer opportunities.

American government debt has also soared to abnormally high levels. Figure 3 shows OECD data for gross government debt as a share of GDP.3 (The data include debt for federal, state, and local governments). In 2011, gross government debt is 101 percent of GDP in the United States, substantially above the OECD average of 78 percent.4

3 Organization for Economic Cooperation and Development, “Economic Outlook Database,” September 2011, Annex Table 32.
4 This is a simple average of OECD countries. The OECD publishes a weighted average, but that figure is, of course, heavily influenced by the United States.

 

By Everette Hatcher III | Posted in Cato Institute, spending out of control | Also tagged , , , | Comments (0)

Cato Institute:Spending is our problem Part 1

October 13, 2011 – 12:18 pm

Uploaded by on Feb 15, 2011

Dan Mitchell, Senior Fellow at the Cato Institute, speaks at Moving Forward on Entitlements: Practical Steps to Reform, NTUF’s entitlement reform event at CPAC, on Feb. 11, 2011.

People think that we need to raise more revenue but I say we need to cut spending. Take a look at a portion of this article from the Cato Institute:

The Damaging Rise in Federal Spending and Debt

by Chris Edwards

Joint Economic Committee
United States Congress

Joint Economic CommitteeUnited States Congress

Added to cato.org on September 20, 2011

This testimony was delivered on September 20, 2011.

Mr. Chairman and members of the committee, thank you for inviting me to testify today. My comments will examine the likely damage to the economy if federal spending and debt keep spiraling upward.

Rising Spending and Debt

Federal spending and debt have soared over the past decade. As a share of gross domestic product, spending grew from 18 percent in 2001 to 24 percent in 2011, while debt held by the public jumped from 33 percent to 67 percent. The causes of this expansion include the costs of wars, growing entitlement programs, rising spending on discretionary programs, and the 2009 economic stimulus bill.

Projections from the Congressional Budget Office show that without reforms spending and debt will keep on rising for decades to come.1 Under the CBO’s “alternative fiscal scenario,” spending will grow to about 34 percent of GDP by 2035, as shown in Figure 1, and debt held by the public will increase to at least 187 percent of GDP.2

 

Hopefully, we will never reach anywhere near those levels of spending and debt. Going down that path would surely trigger major financial crises, as the ongoing debt problems in Europe illustrate. It is also very unlikely that Americans would support such a huge expansion of the government. The results of the 2010 elections suggest that the public has already started to revolt against excessive federal spending and debt.

Some policymakers are calling for a “balanced” package of spending cuts and tax increases to reduce federal deficits. But CBO projections show that the long-term debt problem is not a balanced one — it is caused by historic increases in spending, not shortages of revenues. Revenues have fallen in recent years due to the poor economy, but when growth returns, revenues are expected to rise to the normal level of about 18 percent of GDP — even with all current tax cuts in place. It is spending that is expected to far exceed normal levels in the future, and thus spending is behind the huge increases in debt that are projected.

1 Congressional Budget Office, “Long-Term Budget Outlook,” June 2011.
2 Organization for Economic Cooperation and Development, “Economic Outlook Database,” September 2011, Annex Table 25, http://www.oecd.org/dataoecd/5/51/2483816.xls.

By Everette Hatcher III | Posted in Cato Institute, spending out of control | Also tagged , , , | Comments (0)

Congress unwilling to cut budget deficit to avoid downgrade in credit rating

August 6, 2011 – 11:49 am

It is a sad day since the US got downgraded in our credit. Evidently Congress did not cut enough out of the bloated budget.

08/05/2011

NEW YORK — There is plenty to dislike about the recently enacted bipartisan deal to cut spending and reduce the national debt. For starters, it neither cuts spending, nor reduces the national debt. After weeks of federal hand-wringing, taxpayers should hope that our masters in Washington become serious about slashing spending. If not, this republic will implode, not eventually on “the children,” but soon atop today’s struggling adults.

“The budget deal doesn’t cut federal spending at all,” Cato Institute analyst Chris Edwards explains. “The ‘cuts’ in the deal are only cuts from the Congressional Budget Office’s ‘baseline,’ which is a Washington construct of ever-rising spending…The federal government will still run a deficit of $1 trillion next year. This deal will ‘cut’ the 2012 budget of $3.6 trillion by just $22 billion, or less than 1 percent.”

Edwards observes that Washington’s “cuts” rarely reduce anything. President Obama​, for instance, proposed boosting the Corporation for Public Broadcasting from $432 million this year to $451 million in FY 2012. However, handing CPB $441 million would constitute a $10 million “cut” In Washington versus a $9 million increase in the real-world.

Thus, as Edwards vividly illustrates at Cato’s downsizinggovernment.org website, these budget “cuts” actually raise federal discretionary spending non-stop for the next 10 years — from $1.04 trillion in Fiscal Year 2012 to $1.23 trillion in FY 2021.

As for red ink, Washington just extended the federal credit card’s limit from $14.3 trillion to $16.7 trillion. In 2021, the national debt is expected to reach $22 trillion — a figure 54 percent above $14.3 trillion. What debt reduction?

Washington refuses to learn what millions of overextended Americans recognize daily: One cannot escape debt by tunneling ever deeper into it.

Fitch, Moody’s, and Standard & Poor’s monitor all of this and are weighing whether or not to scrap America’s sterling AAA credit rating. A debt downgrade would hammer national prestige, hike interest rates, and heap short-term agony on an already achy nation. However, such a startling development may supply the face-down-in-the-gutter moment that Washington’s bipartisan spendaholics desperately need to hit rock bottom, grow up, and enter rehab. Everything else has failed during the Bush-Obama era of the ever-expanding state.

Meanwhile, the Select Committee that will spring from the debt deal may generate some good news amid these shadows. As it seeks at least $1.5 trillion in spending cuts by November 23, it should act boldly to improve America’s fiscal outlook:

•A staggering $703 billion in allocated but unspent revenues languish in federal accounts. Several Republicans have sponsored bills to shift this K2 of cash from dust collection to debt reduction. I have addressed these forgotten funds so often that my computer keyboard hurts. Will the Select Committee finally listen?

•The Catalog of Federal Domestic Assistance includes the People’s Garden Grant Program, Appalachian Development Highway System, and 2,182 other federal subsidy programs. Many of these should be terminated rather than trimmed, so they never return to menace taxpayers.

•The Select Committee should padlock entire departments (Agriculture, Education, and Housing, for starters), privatize other agencies (FAA, National Weather Service, NPR), and devolve many more to the states via block grants (Medicaid, Food Stamps).

•The Select Committee should raise and index the Social Security eligibility age from 67 to 68 for those born in the 1960s, 69 for children of the ’70s, etc. Medicare’s age-65 threshold similarly should be modernized for these cohorts. Old-age benefits should reflect life expectancy today, not in the 1930s and ’60s, when they were concocted.

“We are less than three years away from where Greece had its debt crisis as to where they were from debt to GDP,” former U.S. Comptroller General David Walker told CNBC Tuesday. “We are not exempt from a debt crisis,” he added. “We have serious interest rate risk. We have serious currency risk. We have serious inflation risk over time. If it happens, it will be sudden, and it will be very painful.”

Mr. Murdock, a New York-based commentator to HUMAN EVENTS, is a columnist with the Scripps Howard News Service and a media fellow with the Hoover Institution on War, Revolution and Peace at Stanford University

By Everette Hatcher III | Posted in Current Events | Also tagged , , , | Comments (0)

Democrats punt the ball on real spending cuts and Boehner doesn’t do much better

July 28, 2011 – 3:19 pm

The Arkansas Times Blog reported today:

Debt ceiling non-compromise updates

BOEHNER: Screaming Hell no you cant! Ah, the good old days.

  • BOEHNER: Screaming “Hell no you can’t!” Ah, the good old days.

Slate has a running update of the debt ceiling debate in Washington. So far it looks like Speaker of the House John Boehner will have the votes in the House to pass his plan. Sen. Harry Reidhas said the bill will be defeated when considered in the Senate. 

“As soon as the House completes its vote tonight, the Senate will move to take up that bill,” Reid said on the Senate floor. “It will be defeated. No Democrat will vote for a short-term Band-Aid that would put our economy at risk and put the nation back in this untenable situation a few short months from now.”

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Harry Reid and the Democrats have not lifted a finger to cut federal spending and  the markets know it. I am disappointed in Boehner’s recent attempt to get a bill together. It really does not cut spending much either. Chris Edwards of the Cato Institute takes us through the figures.

Boehner’s New Plan Doesn’t Cut Spending

Posted by Chris Edwards

House Speaker John Boehner has revised his budget plan in response to an unfavorable analysis by the CBO. The CBO has examined Boehner’s new plan and finds that it would cut spending by $917 billion over 10 years. Of the total, only $761 billion would be cuts to programs. The rest of the savings would be from reduced interest costs.

Actually, the revised Boehner plan doesn’t cut spending at all. The chart shows the discretionary spending caps in the new Boehner plan. Spending increases every year—from $1.043 trillion in 2012 to $1,234 trillion in 2021. (These figures exclude the costs of wars in Iraq and Afghanistan).

The “cuts” in the Boehner plan are only cuts from the CBO baseline, which is an assumed path of constantly rising spending. If Congress wanted to, it could require CBO to increase its “baseline” spending by, say, $5 trillion over the next decade. Then Boehner could claim that he was “cutting” spending by $5.9 trillion, even though his plan hadn’t changed. You can see that discretionary “cuts” against baselines don’t mean anything.

The way to make real spending cuts is to abolish programs and agencies. But it’s been eight months since a landslide election that focused on the issue of spending cuts, and the Republican leadership hasn’t proposed any major terminations. 

Senator Tom Coburn told us exactly where he wants to cut spending in this 620-page report. Senator Rand Paul has detailed $500 billion in specific cuts. Where are the spending cut plans of the other fiscal conservatives in Congress?

Members need to step up to the plate and tell us where they would cut the budget. (For help, they can look here). The reality of ongoing $1 trillion deficits is that Congress has to start abolishing programs, privatizing activities, and making other lasting reforms. Promising to reduce spending growth a bit from projected baseline increases won’t do the job.

By Everette Hatcher III | Posted in Cato Institute, President Obama, spending out of control | Also tagged , , , | Comments (0)

Government spending has got too high in the USA

July 22, 2011 – 11:43 pm

Max Brantley of the Arkansas Times Blog is very fond of quoting Paul Krugman concerning his view that the worst thing we could do now is cut federal spending. However, federal spending doesn’t work to pull us out of a recession.

 

Federal Spending Doesn’t Work

by Chris Edwards

Despite ongoing federal deficits of more than $1 trillion a year, many liberals are calling for more government spending to “create jobs.” At the same time, liberals are opposing budget cuts because that would supposedly hurt the economic recovery. And then there is the perennial problem of Democrats and Republicans defending spending on their particular favored programs.

With all these forces arrayed against budget sanity, it’s time to take a back-to-basics look at the role of government spending in the economy.

Federal spending has soared over the past decade. As a share of gross domestic product, spending grew from 18 percent in 2001 to 24 percent in 2011. The causes of this expansion include the costs of wars, growing entitlement programs, the 2009 stimulus bill and rising spending on discretionary programs such as education.

The reality is that Washington is very bad at trying to micromanage short-term economic performance.

New projections from the Congressional Budget Office show that without reforms spending will keep rising for decades to come. The CBO’s “alternative fiscal scenario” shows spending growing to 34 percent of GDP by 2035. Thus, the federal government is on course to gobble up almost twice as much of the U.S. economy 24 years from now as it did just a decade ago.

America is becoming a big-government nation

Sadly, America is rapidly becoming a big-government nation. Data from the Organization for Economic Cooperation and Development compares spending by all levels of government among its 31 high-income member countries. This year, government spending in the United States hit 41 percent of GDP, meaning that more than 4 out of every 10 dollars that we produce is consumed by our federal, state and local governments.

We used to have a substantial government size advantage compared to other countries. But Figure 1 shows that while government spending in the United States was about 10 percentage points of GDP smaller than the average OECD country in the past, that gap has now shrunk to just 4 points. A number of high-income nations — such as Australia — now have smaller governments than does the United States.

This is very troubling because America’s strong growth and high living standards were historically built on our relatively small government. The ongoing surge in federal spending is undoing this competitive advantage that we have enjoyed in the world economy.

CBO projections show that federal spending will rise by about 10 percentage points of GDP between now and 2035. If that happens, governments in the United States will be grabbing more than half of everything produced in the nation by that year. That would doom future generations of Americans to unbearable levels of taxation and a stagnant economy with fewer opportunities.

Government spending doesn’t stimulate

There is renewed talk in Washington about further spending measures to try and stimulate the weak economy. That idea is remarkably naïve and misguided. It is now more than two years after passage of the $821 billion stimulus package in 2009, and it is obvious that that effort was a hugely expensive Keynesian policy failure.

The Obama administration’s attempt to pump up “aggregate demand” in the economy simply hasn’t worked. In Keynesian theory, the total amount of deficit spending is the amount of “stimulus” delivered to the economy. Well, we’ve had deficit spending of $459 billion in 2008, $1.4 trillion in 2009, $1.3 trillion in 2010 and $1.4 trillion in 2011.

Yet despite that enormous deficit-spending stimulus, U.S. unemployment remains stuck at more than 9 percent and the recovery is very sluggish compared to prior recoveries. Indeed, the current recovery appears to be slower than any since World War II, according to a recent Joint Economic Committee study.

Obama administration economists had claimed that the Keynesian “multipliers” from government spending are large, meaning that spending would give a big boost to GDP. But other economists have found that Keynesian multipliers are actually quite small, meaning that added government spending mainly just displaces private-sector activities. Stanford University economist John Taylor took a detailed look at GDP data over recent years, and he found little evidence of any benefits from the 2009 stimulus bill. Any “sugar high” to the economy from recent increases in government spending was at best very small and short-lived.

The reality is that Washington is very bad at trying to micromanage short-term economic performance. Its failed stimulus actions have just put the nation further into debt, which will harm our long-term prosperity. Harvard University’s Robert Barro calculated that any short-term benefit that the 2009 stimulus bill may have provided is greatly outweighed by the future damage caused by higher taxes and debt.

The government’s leaky bucket

Let’s take a look at how government spending damages the economy over the long run. Spending is financed by the extraction of resources from current and future taxpayers. The resources consumed by the government cannot be used to produce goods in the private marketplace. For example, the engineers needed to build a $10 billion government high-speed rail line are taken away from building other products in the economy. The $10 billion rail line creates government-connected jobs, but it also kills at least $10 billion worth of private jobs.

Indeed, the private sector would actually lose more than $10 billion in this example. That is because government spending and taxing creates “deadweight losses,” which result from distortions to working, investment and other activities. The CBO says that deadweight loss estimates “range from 20 cents to 60 cents over and above the revenue raised.” Harvard University’s Martin Feldstein thinks that deadweight losses “may exceed one dollar per dollar of revenue raised, making the cost of incremental governmental spending more than two dollars for each dollar of government spending.” Thus, a $10 billion high-speed rail line would cost the private economy $20 billion or more.

The government uses a “leaky bucket” when it tries to help the economy. Former chairman of the Council of Economics Advisors, Michael Boskin, explains: “The cost to the economy of each additional tax dollar is about $1.40 to $1.50. Now that tax dollar … is put into a bucket. Some of it leaks out in overhead, waste and so on. In a well-managed program, the government may spend 80 or 90 cents of that dollar on achieving its goals. Inefficient programs would be much lower, $0.30 or $0.40 on the dollar.” Texas A&M economist Edgar Browning comes to similar conclusions about the magnitude of the government’s leaky bucket: “It costs taxpayers $3 to provide a benefit worth $1 to recipients.”

The larger the government grows, the leakier the bucket becomes. On the revenue side, tax distortions rise rapidly as tax rates rise. On the spending side, funding is allocated to activities with ever lower returns as the government expands. Figure 2 illustrates the consequences of the leaky bucket. On the left-hand side, tax rates are low and the government initially delivers useful public goods such as crime reduction. Those activities create high returns, so per-capita incomes initially rise as the government grows.

As the government expands further, it engages in less productive activities. The marginal return from government spending falls and then turns negative. On the right-hand side of the figure, average incomes fall as the government expands. Government in the United States — at more than 40 percent of GDP — is almost certainly on the right-hand side of this figure.

In his 2008 book, Stealing from Ourselves, Professor Browning concludes that today’s welfare state reduces GDP — or average U.S. incomes — by about 25 percent. That would place us quite far to the right in Figure 2, and it suggests that federal spending cuts would substantially increase U.S. incomes over time.

All the official projections show rivers of red ink for years to come unless federal policymakers enact major budget reforms. Unless spending is cut, the United States is headed for economic ruin. We need to cut entitlements, domestic discretionary programs and defense spending, as Cato has detailed at http://www.DownsizingGovernment.org.

Cutting spending would boost the economy because many federal programs have very low or negative returns. Many programs cause severe economic distortions. Other programs damage the environment and restrict individual freedom. And the federal government has expanded into hundreds of areas that would be better left to state and local governments, businesses, charities and individuals.

With the upcoming debt-limit vote, fiscal conservatives in Congress have a real chance to start turning the tide. If they don’t stick to their guns, the “life, liberty and pursuit of happiness” we celebrate this July 4 will become meaningless as Washington usurps an ever larger share of our incomes and our economy

By Everette Hatcher III | Posted in Cato Institute | Also tagged , , | Comments (0)