Tag Archives: democrats and republicans

Do the Republicans have the guts to cut spending?

 

Sometimes I truly wonder if the Republicans have the guts to cut spending? This is what I think when  I read articles like this one below. That is also the reason I wrote the series “The Sixty Six who resisted “Sugar-coated Satan Sandwich” series. Some links below.

Will Republicans Choose Sequester Savings or a Supercommittee Surrender?

Posted by Daniel J. Mitchell

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.

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.

In other words, the likelihood that the Supercommittee will produce a good plan is about the same as seeing me in the outfield during the World Series (the real World Series, not this one).

Fortunately, there is a way to win this fight. All Republicans have to do is…(drum roll, please)…nothing.

To be more specific, if the Supercommittee can’t get a majority for a plan, then automatic budget cuts (a process known as sequestration) will go into effect. But don’t get too excited. We’re mostly talking about the DC version of spending cuts, which simply means that spending won’t rise as fast as previously planned.

But compared to an inside-the-beltway tax-hike deal, a sequester would be a great result.

You’re probably wondering if there’s a catch. After all, if Republicans can win a huge victory for taxpayers by simply rejecting the siren song of higher taxes, then isn’t victory a foregone conclusion?

It should be, but Republicans didn’t get the reputation of being the “Stupid Party” for nothing, and they are perfectly capable of snatching defeat from the jaws of victory.

There are three reasons why Republicans may fumble away victory, even though they have a first down on the opponent’s one-yard line.

If GOPers sell out for either of the first two reasons, then there’s really no hope. America will become Greece and we may as well stock up on canned goods, bottled water, and ammo.

The defense issue, though, is more challenging. Republicans instinctively want more defense spending, so Democrats are trying to exploit this vulnerability. They are saying — for all intents and purposes — that the defense budget will be cut unless GOPers agree to a tax hike.

Republicans should not give in to this budgetary blackmail.

I could make a conservative case for less defense spending, by arguing that the GOP should take a more skeptical view of nation building (the approach they had in the 1990s) and that they should reconsider the value of spending huge sums of money on an outdated NATO alliance.

But I’m going to make two other points instead, in hopes of demonstrating that a sequester is acceptable from the perspective of those who favor a strong national defense.

  • First, the sequester does not take place until January 2013, so defense hawks will have ample opportunity to undo the defense cuts – either through supplemental spending bills or because the political situation changes after the 2012 elections.
  • Second, the sequester is based on dishonest Washington budget math, so the defense budget would still grow, but not as fast as previously planned.

This chart shows what will happen to the defense budget over the next 10 years, based on Congressional Budget Office data comparing “baseline” outlays to spending under a sequester.

As you can see, even with a sequester, the defense budget climbs over the 10-year period by about $100 billion. And, as noted above, that doesn’t even factor in supplemental spending bills.

In other words, America’s national defense will not be eviscerated if there is a sequester.

Here’s the bottom line. The Supercommittee battle should be a no-brainer for the GOP.

They can capitulate on taxes, causing themselves political damage, undermining the economy, and enabling bigger government.

Or they can stick to their no-tax promise, generating significant budgetary savings with a sequester, and boosting economic performance by restraining the burden of government.

 
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Government spending has got too high in the USA

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