Should Food Stamps Be Restricted to "Healthy Foods"?

As indicated by my post on how to handle prisoners with AIDS, I periodically run into issues where I'm not sure about the right answer. Here's another case. Politicians in New York have a proposal to prohibit people from using food stamps to buy sugary drinks. Part of me is irritated by paternalistic, nanny-state busybodies who want to tell other people how to live. On the other hand, maybe this proposal will make people less willing to mooch off taxpayers by accepting food stamps (though I suspect they'll just bring two carts to the checkout line, one with things that can be purchased with food stamps, and the other filled with sodas, booze, and other items that would require cash). The ideal answer, of course, is to get rid of the federal food stamp program and let states and communities experiment with the best way of handling these issues. Here's an excerpt from the AP report.

New Yorkers on food stamps would not be allowed to spend them on sugar-sweetened drinks under an obesity-fighting proposal being floated by Mayor Michael Bloomberg and Gov. David Paterson. ...If approved, it would be the first time an item would be banned from the federal program based solely on nutritional value. The idea has been suggested previously, including in 2008 in Maine, where it drew criticism from advocates for the poor who argued it unfairly singled out low-income people and risked scaring off potential needy recipients. And in 2004 the USDA rejected Minnesota's plan to ban junk food, including soda and candy, from food stamp purchases, saying it would violate the Food Stamp Act's definition of what is food and could create "confusion and embarrassment" at the register. The food stamp system...does not currently restrict any other foods based on nutrition. Recipients can essentially buy any food for the household, although there are some limits on hot or prepared foods. Food stamps also cannot be used to buy alcohol, cigarettes or items such as pet food, vitamins or household goods. ...There still are many unhealthful products New Yorkers could purchase with food stamps, including potato chips, ice cream and candy.

Where are the '60s Hippies Now that They're Needed to Fight Keynesianism?

Keynesian economic theory is the social-science version of a perpetual motion machine. It assumes that you can increase your prosperity by taking money out of your left pocket and putting it in your right pocket. Not surprisingly, nations that adopt this approach do not succeed. Deficit spending did not work for Hoover and Roosevelt is the 1930s. It did not work for Japan in the 1990s. And it hasn't worked for Bush or Obama.

The Keynesians invariably respond by arguing that these failures simply show that politicians didn't spend enough money. I don't know whether to be amused or horrified, but some Keynesians even say that a war would be the best way of boosting economic growth. Here's a blurb from a story in National Journal.

America's economic outlook is so grim, and political solutions are so utterly absent, that only another large-scale war might be enough to lift the nation out of chronic high unemployment and slow growth, two prominent economists, a conservative and a liberal, said today. Nobelist Paul Krugman, a New York Times columnist, and Harvard's Martin Feldstein, the former chairman of President Reagan's Council of Economic Advisers, achieved an unnerving degree of consensus about the future during an economic forum in Washington. ...Krugman and Feldstein, though often on opposite sides of the political fence on fiscal and tax policy, both appeared to share the view that political paralysis in Washington has rendered the necessary fiscal and monetary stimulus out of the question. Only a high-impact "exogenous" shock like a major war -- something similar to what Krugman called the "coordinated fiscal expansion known as World War II" -- would be enough to break the cycle. ...Both reiterated their previously argued views that the Obama administration's stimulus was far too small to fill the output gap.

Two additional comments. First, if Martin Feldstein's views on this issue represent what it means to be a conservative, then I'm especially glad I'm a libertarian. Second, Alan Reynolds has a good piece eviscerating Keynesianism, including a section dealing with Krugman's World-War-II-was-good-for-the-economy assertion.

Taxpayers vs Bureaucrats, Part XLI

I've avoided this topic in recent weeks because it's too depressing, but this story is too outrageous to ignore. The County of Los Angeles has 199 bureaucrats who "earned" more than $250,000 last year. According to Census Bureau data for 2008, the median household income in the county was 55,000, Here's a blurb from the L.A.Times about incomes of the bureaucratic gilded class.

Nearly 200 Los Angeles County employees earned more than a quarter of a million dollars in 2009, according to a list of the county's top earners released late Monday in response to a Public Records Act request from The Times. The highest earners list was dominated by physicians and other medical personnel, but also included county firefighters and a handful of top sheriff's employees. Some of the best-known names on the list belong to elected officials — although none of the five county supervisors, who make $178,789 a year, qualified. ...The Times requested the base salary, overtime and "other earnings" for county employees whose total annual pay exceeded $250,000. "Other earnings" can include bonuses for special skills or responsibilities or unused benefits cashed out as taxable income, among other things. ...Overtime played a big role, with only 65 people making the list on base salary alone. Thirty workers made more than $80,000 in overtime. Twenty-two of them work for the county Fire Department, four work for public hospitals, two were psychiatrists for the Mental Health Department, and two were physician specialists for the Sheriff's Department.

Obama's Policy Failure, Part I

Former Senator Phil Gramm had a column last week in the Wall Street Journal that deserves two blog posts. This first post highlights Gramm's analysis showing that the U.S. has been very Keynesian compared to Europe, with numerous efforts to jump start the economy with deficit spending. But Senator Gramm hits the nail on the head, comparing America's tepid recovery with the better performance across the Atlantic.

During the average recovery since World War II, gross domestic product (GDP) surpassed the pre-recession high five quarters after the recession began. It has never taken longer than seven quarters. Yet today, after 11 quarters, GDP is still below what it was in the fourth quarter of 2007. The economy is growing at only about a third of the rate of previous postwar recoveries from major recessions. Obama administration officials such as Treasury Secretary Tim Geithner have argued that without their policies the economy would be worse, and we might have fallen "off a cliff." While this assertion cannot be tested, we can compare the recent experience of other countries to our own. ...There are 4.6% fewer people employed in the U.S. today than at the start of the recession. Euro zone countries have lost 1.7% of their jobs. ...This simple comparison suggests...that American economic policy has been less effective in increasing employment than the policies of other developed nations. ...While the most recent quarterly growth figures are just a snapshot in time, it is hardly encouraging that economic growth in the U.S. (1.7%) is lower than in the euro zone (4%), U.K. (4.8%), G-7 (2.8%) and OECD (2%).

Here's How to Balance the Budget

Our fiscal policy goal should be smaller government, but here's a video for folks who think that balancing the budget should be the main objective.



The main message is that restraining the growth of government is the right way to get rid of red ink, so there is no conflict between advocates of limited government and supporters of fiscal balance.

More specifically, the video shows that it is possible to quickly balance the budget while also making all the 2001 and 2003 tax cuts permanent and protecting taxpayers from the alternative minimum tax. All these good things can happen if politicians simply limit annual spending growth to 2 percent each year. And they'll happen even faster if spending grows at an even slower rate.

This debunks the statist argument that there is no choice but to raise taxes.

There Is No Libertarian or Conservative Argument for Higher Taxes

Eli Lehrer has an article on the FrumForum entitled "Five Revenue Raisers the GOP Should Back." He argues it would be good to get rid of preferences such as the state and local tax deduction and the mortgage interest deduction, and he also asserts that there should be "user fees" for things such as transportation.

As an avid supporter of a flat tax and market pricing, I have no objection to these policies. Indeed, I would love to get rid of the state and local tax deduction so that taxpayers in Texas and Florida no longer have to subsidize the fiscal profligacy of politicians in California and New York.

But there is a giant difference between getting rid of certain tax preferences as part of revenue-neutral (or even better, tax-cutting) tax reform and getting rid of tax preferences in order to give politicians more revenue to spend.

The former is a noble goal. Who can argue, after all, with the idea of getting rid of the corrupt and punitive internal revenue code and replacing it with a simple and fair flat tax? Lots of loopholes are eliminated, so there are plenty of tax-raising provisions in tax reform. But every one of those provisions is offset by provisions that lower tax rates and get rid of double taxation of saving and investment.

The latter, by contrast, is an exercise in trying to lose with minimal damage - sort of the "French Army Theory" of taxation, surrender gracefully and hope that your new masters give you a few crumbs after their celebratory feast.

What is especially strange about this approach is that the Republicans who advocate higher taxes claim that they are political realists. Yet if we look at real-world evidence, the moment Republicans show their "realism" by putting taxes on the table, the entire debate shifts.

Instead of the debate being tax-hikes vs. no-tax-hikes, it becomes a debate over who-should-pay-more-tax. Republicans win the first debate. They get slaughtered in the second debate.

Remember when the first President Bush agreed to enter into tax-hike negotiations in 1990? He set out two conditions - that there should be a reduction in the capital gains tax and that there should be no increase in income tax rates. So what happened? As everyone with an IQ above room temperature predicted, the capital gains tax stayed the same and income tax rates increased.

Last but not least, this conversation only exists because some people have thrown in the towel, acquiescing to the idea that there is no way to balance the budget without higher taxes. Yet the Congressional Budget Office data shows that the budget can be balanced by 2020 simply by limiting annual spending growth to 2 percent.

The GOP "Pledge" Doesn't Go Far Enough: There Should Be No Federal Government Role in Housing

Considering they could have sat on their hands and relied on unhappy voters to give them big gains in November, I'm not too unhappy about the House GOP's "Pledge to America." Yes, it's mostly filled with inoffensive motherhood-and-apple-pie language, but at least there's some rhetoric about reining in excessive government. After eight years of fiscal profligacy under Bush, maybe this is a small sign that Republicans won't screw up again if they wind up back in power. That being said, I was a bit disappointed that the GOP couldn't even muster the courage to shut down Fannie Mae and Freddie Mac, the two corrupt government-created entities that bear so much responsibility for the housing mess and subsequent financial crisis. The best the GOP could do was to say "Since taking over Fannie Mae and Freddie Mac, the mortgage companies that triggered the financial meltdown by giving too many high risk loans to people who couldn’t afford them, taxpayers were billed more than $145 billion to save the two companies. We will reform Fannie Mae and Freddie Mac by ending their government takeover, shrinking their portfolios, and establishing minimum capital standards." Is it really asking too much for Republicans to simply say "The federal government has no role in housing and Fannie Mae, Freddie Mac, and the Department of Housing and Urban Development should be eliminated." Heck, the GOP's Pledge doesn't even mention a penny's worth of budget cuts for HUD. Here's an excerpt from Peter Wallison's Bloomberg column, which explains why Fannie and Freddie should be decapitated.

In a year when angry voters are demanding a reduced government role in the economy, it is remarkable that most of the ideas for supplanting Fannie Mae and Freddie Mac are just imaginative ways of keeping government in the business of housing finance. ...This is pretty astonishing. One would think that something might have been learned from the recent past, when two New Deal ideas for government housing support--the savings and loan industry and the government sponsored enterprises, Fannie Mae and Freddie Mac--failed spectacularly. It cost taxpayers $150 billion to clean up the first and may cost more than $400 billion to resolve the second. ...government policy that deliberately degrades loan quality or creates moral hazard will eventually cause devastation in the housing market. ...Government involvement in housing finance is an invitation to disaster. As illustrated by the S&Ls and GSEs, no matter how such a system is structured, government support will hide the real risks.

It's Simple to Balance the Budget without Higher Taxes

John Podesta of the Center for American Progress had a column in Politico yesterday asserting that "closing the budget gap entirely on the spending side would require draconian programmatic cuts." He went on to complain that there are some people who "refuse to look at the revenue side of the ledger – while insisting that we dig the hole $830 billion deeper over the next decade by extending the Bush tax cuts."

Not surprisingly, Mr. Podesta is totally wrong. It's actually not that challenging to balance the budget. And it doesn't even require any spending cuts, though it would be a very good idea to dramatically downsize the federal government. Here's a chart showing this year's spending and revenue totals. It then shows the Congressional Budget Office's estimate of how much revenues will grow, assuming all the 2001 and 2003 tax cuts are made permanent and assuming that the alternative minimum tax is adjusted for inflation. As you can see, balancing the budget is a simple matter of limiting the annual growth of federal spending.

So how is it that Mr. Podesta can spout sky-is-falling rhetoric about "draconian" cuts when all that's needed is fiscal restraint? The answer is that politicians in Washington have concocted a self-serving budget process that automatically assumes that all previously-planned spending increases should occur. So if the politicians put us on a path to make government 8 percent bigger next year and there is a proposal to instead limit spending growth to 3 percent, that 3 percent increase gets portrayed as a 5 percent cut.

This is a great scam, at least for the political class. They get to buy more votes by boosting the burden of government spending, but they get to tell voters that they're being fiscally responsible. And they get to claim that they have no choice but to raise taxes because there's no other way to balance the budget. In the real world, though, this translates into bigger government and puts us on a path to a Greek-style fiscal nightmare.

The goal of fiscal policy should be smaller government, not fiscal balance. Deficits are just a symptom of a government that is too large, as I have explained elsewhere. But the good news is that spending discipline is the right answer, regardless of the objective. I explained this in more detail for a piece in today's Philadelphia Inquirer. Here's an excerpt.

According to the Congressional Budget Office, the federal government this year is spending almost $3.5 trillion. Tax receipts are estimated to be less than $2.2 trillion, which means a projected deficit of about $1.35 trillion. So can we balance the budget when there is that much red ink? And is it possible to eliminate deficits while also extending the 2001 and 2003 tax cuts? The answer is yes. ...It's a simple matter of mathematics. The Congressional Budget Office estimates that tax revenue will grow by an average of 7.3 percent annually over the next 10 years. Reducing the budget deficit is easy - so long as politicians increase overall spending by less than that amount. And with inflation projected to be about 2 percent over the same period, this is an ideal environment for some long-overdue fiscal discipline. If spending is simply capped at the current level with a hard freeze, the budget is balanced by 2016. If we limit spending growth to 1 percent each year, the budget is balanced in 2017. And if we allow 2 percent annual spending growth - letting the budget keep pace with inflation, the budget balances in 2020. ...Interest groups that are used to big budget increases will be upset if spending growth is limited to 1 or 2 percent each year. It means entitlements will need to be reformed. It means we might need to get rid of programs and departments that are not legitimate functions of the federal government. You better believe that these changes will cause a lot of squealing by lobbyists and other insiders. But that complaining will be a sign that fiscal policy is finally heading in the right direction. The key thing to understand is that there is no need for tax increases. Politicians might not balance the budget if we say no to all tax increases. But the experience in Europe shows that oppressive tax burdens are not a recipe for fiscal balance either. Milton Friedman was correct many years ago when he warned that, "In the long run government will spend whatever the tax system will raise, plus as much more as it can get away with."

More Evidence of the Failed Stimulus

Not that we need more evidence, but here are two new items confirming the absurdity of thinking that bigger government is stimulus. First, we have a story from Los Angeles revealing that the city only created 55 jobs with $111 million of stimulus funds. This translates to a per-job cost of $2 million, which is a grossly inefficient rate of return. But this calculation is incomplete because it doesn't measure how many jobs would have been created if the money was left in the productive sector of the economy. Moreover, it's also important to consider long-term costs such as the fact that Los Angeles now has more overhead, which will exacerbate the city's fiscal problems.

The Los Angeles City Controller said on Thursday the city's use of its share of the $800 billion federal stimulus find has been disappointing. The city received $111 million in stimulus under American Recovery and Reinvestment Act (ARRA) approved by the Congress more than year ago. "I'm disappointed that we've only created or retained 55 jobs after receiving $111 million," says Wendy Greuel, the city's controller, while releasing an audit report. ...The audit says the numbers were disappointing due to bureaucratic red tape, absence of competitive bidding for projects in private sectors, inappropriate tracking of stimulus money and a laxity in bringing out timely job reports.

Our second item is a new study from two scholars who find that the cash-for-clunkers program was a total failure. Just as anybody with an IQ above room temperature could have predicted, the overwhelming effect of the program was to encourage people to change when they purchased cars. There was no long-term positive impact on any economic variable.

A key rationale for fiscal stimulus is to boost consumption when aggregate demand is perceived to be inefficiently low. We examine the ability of the government to increase consumption by evaluating the impact of the 2009 “Cash for Clunkers” program on short and medium run auto purchases. Our empirical strategy exploits variation across U.S. cities in ex-ante exposure to the program as measured by the number of “clunkers” in the city as of the summer of 2008. We find that the program induced the purchase of an additional 360,000 cars in July and August of 2009. However, almost all of the additional purchases under the program were pulled forward from the very near future; the effect of the program on auto purchases is almost completely reversed by as early as March 2010 – only seven months after the program ended. ...We also find no evidence of an effect on employment, house prices, or household default rates in cities with higher exposure to the program.

The lesson from the cash-for-clunkers program also can be applied to other temporary programs. Good tax cuts, for instance, become gimmicks when they are temporary. This doesn't mean there is no positive effect on incentives from a payroll tax holiday, temporary expensing, or a two-year extension of the 2001/2003 tax cuts, but the overwhelming impact is to alter the timing of economic activity rather than the level of economic activity.

The Cato Institute - America's Best Think Tank

Okay, I'm biased, but Cato stood up against the so-called stimulus when others were quiet. Cato was against Obamacare, even back when it was called Romneycare. Now, we're leading the fight on restraining Leviathan. The image below is our full page ad on cutting wasteful programs, agencies, and departments - and asking Obama to fulfill his promise on reducing needless spending. Click here for a full-size version.

Overwhelming Evidence for Less Government Spending

Alberto Alesina of Harvard's economics department summarizes some of his research in a column for today's Wall Street Journal. He and a colleague looked at fiscal policy changes in developed nations and found very strong evidence that spending reductions boost growth. This, of course, contrasts with the lack of evidence for the Keynesian notion that growth is stimulated by a bigger burden of government spending.

Politicians argue for increased stimulus spending, as opposed to spending cuts, on the grounds that it would speed up economic recovery. This argument might have it exactly backward. Indeed, history shows that cutting spending in order to reduce deficits may be the key to promoting economic recovery. ...recent stimulus packages have proven that the "multiplier"—the effect on GDP per one dollar of increased government spending—is small. Stimulus spending also means that tax increases are coming in the future; such increases will further threaten economic growth. Economic history shows that even large adjustments in fiscal policy, if based on well-targeted spending cuts, have often led to expansions, not recessions. Fiscal adjustments based on higher taxes, on the other hand, have generally been recessionary. My colleague Silvia Ardagna and I recently co-authored a paper examining this pattern, as have many studies over the past 20 years. Our paper looks at the 107 large fiscal adjustments—defined as a cyclically adjusted deficit reduction of at least 1.5% in one year—that took place in 21 Organization for Economic Cooperation and Development (OECD) countries between 1970 and 2007. ...Our results were striking: Over nearly 40 years, expansionary adjustments were based mostly on spending cuts, while recessionary adjustments were based mostly on tax increases. ...In the same paper we also examined years of large fiscal expansions, defined as increases in the cyclically adjusted deficit by at least 1.5% of GDP. Over 91 such cases, we found that tax cuts were much more expansionary than spending increases. How can spending cuts be expansionary? First, they signal that tax increases will not occur in the future, or that if they do they will be smaller. A credible plan to reduce government outlays significantly changes expectations of future tax liabilities. This, in turn, shifts people's behavior. Consumers and especially investors are more willing to spend if they expect that spending and taxes will remain limited over a sustained period of time. On the other hand, fiscal adjustments based on tax increases reduce consumers' disposable income and reduce incentives for productivity. ...Europe seems to have learned the lessons of the past decades: In fact, all the countries currently adjusting their fiscal policy are focusing on spending cuts, not tax hikes. Yet fiscal policy in the U.S. will sooner or later imply higher taxes if spending is not soon reduced. The evidence from the last 40 years suggests that spending increases meant to stimulate the economy and tax increases meant to reduce deficits are unlikely to achieve their goals. The opposite combination might.

Alesina's research echoes the findings in dozens of other studies, a few of which are cited in this Center for Freedom and Prosperity video I narrated.

Does the War on Poverty Fight Destitution or Subsidize It?

The Census Bureau will be releasing new poverty-rate numbers on Thursday and the numbers are expected to show a big move in the wrong direction. Much of the coverage will be on how much the poverty rate increases, with 15 percent being a likely amount according to some estimate. There also will be lots of discussion about the political implications, as this Associated Press story illustrates.

The number of people in the U.S. who are in poverty is on track for a record increase on President Barack Obama's watch, with the ranks of working-age poor approaching 1960s levels that led to the national war on poverty. Census figures for 2009 — the recession-ravaged first year of the Democrat's presidency — are to be released in the coming week, and demographers expect grim findings. It's unfortunate timing for Obama and his party just seven weeks before important elections when control of Congress is at stake. The anticipated poverty rate increase — from 13.2 percent to about 15 percent — would be another blow to Democrats struggling to persuade voters to keep them in power.

But the real story should be the degree to which the federal government's War on Poverty has been a complete failure. Taxpayers have poured trillions of dollars into means-tested programs, yet the data show no positive results. Indeed, it's quite likely that the programs have backfired. As shown in the chart, Census Bureau data reveal that the poverty rate was steadily falling in the 1950s and early 1960s, but then stagnated once the War on Poverty began. It's possible that there are alternative and/or additional explanations for this shocking development, but government intervention may be encouraging poverty by making indolence more attractive than work.

Why Is the Left so Sensitive about Cuba?

I touched a raw nerve with my post about Fidel Castro admitting that the Cuban model is a failure. Matthew Yglesias and Brad DeLong both attacked me. DeLong's post was nothing more than a link to the Yglesias post with a snarky comment about "why can't we have better think tanks?" Yglesias, to his credit, tried to explain his objections.

This leads Daniel Mitchell to post the following chart which he deems “a good illustration of the human cost of excessive government.”...this mostly illustrates the difficulty of having a rational conversation with Cato Institute employees about economic policy in the developed world. Cuba is poor, but it’s much richer than Somalia. Is Somalia’s poor performance an illustration of the human costs of inadequate taxation? Or maybe we can act like reasonable people and note that these illustrations of the cost of Communist dictatorship and anarchy have little bearing on the optimal location on the Korea-Sweden axis of mixed economies?

I'm actually not sure what argument Yglesias is making, but I think he assumed I was focusing only about fiscal policy when I commented about Cuba's failure being "a good illustration of the human cost of excessive government." At least I think this is what he means, because he then tries to use Somalia as an example of limited government, solely because the government there is so dysfunctional that it is unable to maintain a working tax system.

Regardless of what he's really trying to say, my post was about the consequences of excessive government, not just the consequences of excessive government spending. I'm not a fan of high taxes and wasteful spending, to be sure, but fiscal policy is only one of many policies that influence economic performance. Indeed, according to both Economic Freedom of the World and Index of Economic Freedom, taxes and spending are only 20 percent of a nation's grade. So nations such as Sweden and Denmark are ranked very high because the adverse impact of their fiscal policies is more than offset by their very laissez-faire policies in just about all other areas. Likewise, many nations in the developing world have modest fiscal burdens, but their overall scores are low because they get poor grades on variables such as monetary policy, regulation, trade, rule of law, and property rights.

So, yes, Cuba is an example of "the human cost of excessive government." And so is Somalia.

Sweden and Denmark, meanwhile, are both good and bad examples. Optimists can cite them as great examples of the benefits of laissez-faire markets. Pessimists can cite them as unfortunate examples of bloated public sectors.

P.S. Castro has since tried to recant, claiming he was misquoted. He's finding out, though, that it's not easy putting toothpaste back in the tube.

Obama's New Stimulus Schemes: Same Song, Umpteenth Verse

Like a terrible remake of Groundhog Day, the White House has unveiled yet another so-called stimulus scheme. Actually, they have two new proposals to buy votes with our money. One plan is focused on more infrastructure spending, as reported by Politico.

Seeking to bolster the sluggish economy, President Barack Obama is using a Labor Day appearance in Milwaukee to announce he will ask Congress for $50 billion to kick off a new infrastructure plan designed to expand and renew the nation’s roads, railways and runways. ...The measures include the “establishment of an Infrastructure Bank to leverage federal dollars and focus on investments of national and regional significance that often fall through the cracks in the current siloed transportation programs," and “the integration of high-speed rail on an equal footing into the surface transportation program.”

The other plan would make permanent the research and development tax credit. The Washington Post has some of the details.

Under mounting pressure to intensify his focus on the economy ahead of the midterm elections, President Obama will call for a $100 billion business tax credit this week... The business proposal - what one aide called a key part of a limited economic package - would increase and permanently extend research and development tax credits for businesses, rewarding companies that develop new technologies domestically and preserve American jobs. It would be paid for by closing other corporate tax loopholes, said the official, speaking on condition of anonymity because the policy has not yet been unveiled.

These two proposals are in addition to the other stimulus/job-creation/whatever-they're-calling-them-now proposals that have been adopted in the past 20 months. And Obama's stimulus schemes were preceded by Bush's Keynesian fiasco in 2008. And by the time you read this, the Administration may have unveiled a few more plans. But all of these proposals suffer from the same flaw in that they assume growth is sluggish because government is not big enough and not intervening enough. Keynesian politicians don't realize (or pretend not to realize) that economic growth occurs when there is an increase in national income. Redistribution plans, by contrast, simply change who is spending an existing amount of income. If the crowd in Washington really wants more growth, they should reduce the burden of government, as explained in this video.

The best that can be said about the new White House proposals is that they're probably not as poorly designed as previous stimulus schemes. Federal infrastructure spending almost surely fails a cost-benefit test, but even bridges to nowhere carry some traffic. The money would generate more jobs and more output if left in the private sector, so the macroeconomic impact is still negative, but presumably not as negative as bailouts for profligate state and local governments or subsidies to encourage unemployment - which were key parts of previous stimulus proposals. Likewise, a permanent research and development tax credit is not ideal tax policy, but at least the provision is tied to doing something productive, as opposed to tax breaks and rebates that don't boost work, saving, and investment. We don't know, however, what's behind the curtain. According to the article, the White House will finance this proposal by "closing other corporate tax loopholes." In theory, that could mean a better tax code. But this Administration has a very confused understanding of tax policy, so it's quite likely that they will raise taxes in a way that makes the overall tax code even worse. They've already done this in previous stimulus plans by increasing the tax bias against American companies competing in world markets, so there's little reason to be optimistic now. And don't forget that the President has not changed his mind about imposing higher income tax rates, higher capital gains tax rates, higher death tax rates, and higher dividend tax rates beginning next January.

All that we can say for sure is that the politicians in Washington are very nervous now that the midterm elections are just two months away. This means their normal tendencies to waste money will morph into a pathological form of profligacy.

Dishonest British Budgeting...Just Like We Do It in America

According to news coverage, United Kingdom Prime Minister Cameron is imposing deep and savage budget cuts. I was interviewed by the BBC recently, for instance, and asked whether 25 percent spending reductions were too harsh. And here's an excerpt from a New York Times story that is very representative of the news coverage.

Like a shipwrecked sailor on a starvation diet, the new British coalition government is preparing to shrink down to its bare bones as it cuts expenditures by $130 billion over the next five years and drastically scales back its responsibilities. The result, said the Institute for Fiscal Studies, a research group, will be “the longest, deepest sustained period of cuts to public services spending” since World War II. ...Public-sector unions are planning a series of strikes. Charities — which Mr. Cameron has said should take over some of the responsibilities now held by the state — say that they are at risk of collapse because they are so dependent on government money. And the chief executive of the Supreme Court, the country’s highest, said she did not know whether the court would be able to function at all if its budget were cut by 40 percent.

To be blunt, this type of analysis is completely false. There are no budget cuts in the United Kingdom, at least in terms of total government spending. Instead, the politicians are measuring cuts against some imaginary baseline, which is the same scam that happens in Washington. So if spending increases by 4 percent instead of 7 percent, that is characterized as a 3 percent budget reduction. The chart shows what is happening with overall government spending in the United Kingdom. Notwithstanding phony stories about budget cuts, spending in Prime Minister Cameron's first year is climbing by more than 4 percent - twice as fast as needed to keep pace with inflation.


This doesn't mean that Cameron isn't doing anything right. There is a two-year pay freeze for bureaucrats, for instance, which is at least a small step in the right direction. But the Tory-Liberal Democrat coalition is not a good role model for those who want limited government and fiscal responsibility. There are promises of spending restraint in future years, but those belong in the I'll-believe-it-when-I-see-it category. Spending is supposed to increase by less than 1 percent in next year's budget, for instance, but politicians are very good with tough talk of fiscal discipline in future years. But if we judge them by what they're doing today rather than what they're claiming will happen in the future, Cameron's policies leave much to be desired.

The tax side of the fiscal equation is even more depressing. There is small reduction in the corporate tax rate, but otherwise there is considerable bad news. The new government is leaving in place the new 50 percent top tax rate imposed by Gordon Brown as an election-year class-warfare gimmick. It is boosting the capital gains tax rate from 18 percent to 28 percent. And it increased the VAT rate from 17.5 percent to 20 percent.

Greetings from Colorado

Heading back to Washington after a couple of days at the High Lonesome Ranch and a couple of days at the Steamboat Institute Freedom Conference. The High Lonesome Ranch is a great example of private conservation, with some of the nation's highest concentrations of black bears and mountain lions. The Steamboat Institute conference was a great gathering of free-market people. I spoke on (what a surprise) fiscal policy. The most amusing part of the conference was during Karl Rove's speech, when he remarked that "Dan Mitchell thinks I'm a dangerous liberal." I actually think he's an operational statist, but read this, this, and this and you be the judge.

Time to Shut Down the Congressional Budget Office?

One of the many disappointing things about Republicans is that they fail to correct problems when they get power. After the 1994 "Gingrich Revolution," the GOP had complete control of Capitol Hill. This meant complete authority over the Congressional Budget Office and Joint Committee on Taxation. Did Republicans use this power to fire the old staff and put in people who understood economics? Of course not. I don't know if this is because Republicans are stupid or if it's because they're too timid to take steps that would generate complaints from their enemies. Regardless, what really matters is that CBO and JCT are just as biased today as they were 20 years ago. Diana Furchtgott-Roth of the Hudson Institute exposes CBO's latest shoddy Keynesian analysis. She is correct, and the people making these same arguments 20 years ago were correct. And I'm afraid people will be saying the same things 20 years from now. Which leads me to think that maybe the best approach is to get rid of these bureaucracies.

...on Tuesday the nonpartisan Congressional Budget Office issued a report showing that the American Recovery and Reinvestment Act of 2009 increased the number of people employed by between 1.4 and 3.3 million people in the second quarter of 2010 and lowered unemployment by 0.7 to 1.8 percentage points. CBO concludes that without the Recovery Act unemployment, which stood at 9.5% in July, might exceed 10% and possibly be above 11%. There's just one problem. CBO's latest figures are inconsistent with its claims of the effects of the stimulus bill when it was passed in February 2009. If its models failed to accurately predict the effects of the stimulus bill then, why should we believe the models now? This is important because some are taking the CBO report as proof that the stimulus bill is working and so we need...more stimulus. ...After passage of the stimulus bill, in a March 2009 letter to Iowa Senator Chuck Grassley, CBO predicted that the unemployment rate in the last quarter of 2009 would rise to 9% without the stimulus package, from its then-current level of 8.2%. With the stimulus, CBO said, the unemployment rate would range from 7.8% to 8.5%. The actual rate in December, 11 months after enactment of the stimulus, was 10%, far higher than CBO said it would be absent the stimulus. ...If Americans had known in February of 2009 that the $787 billion stimulus package (whose cost CBO later raised to $862 billion) would not lead to declines in unemployment, but instead a substantial increase in the unemployment rate to 9.5%, opposition to the spending would have been practically universal. Put it another way - if Americans were asked now whether they would prefer today to have back the February 2009 unemployment rate of 8.2% and the $862 billion spent on stimulus, they would say yes. Some say things would have been worse if the stimulus funds had not been spent. They assume that more government spending, including the $862 billion stimulus, must be good for the economy. This form of Keynesian economics fell out of fashion decades ago everywhere, except in the halls of power in Washington. If more government spending always helped the economy, why stop at $862 billion? Why not give each American an unlimited bank account? Then the unemployment rate would likely rise to 100%. But some economists would still offer unverifiable models to "prove" the benefit to the American public.

Taxpayer-Funded Sex Trips to Amsterdam?!?

I think Viagra subsidies for sex offenders are an absurd example of government stupidity in America. I'm also amazed that European taxpayers are forced to pay for penile implants for bureaucrats at the European Commission. But I'm almost speechless to learn that British taxpayers are financing hanky-panky with prostitutes in Amsterdam for some disabled citizens. According to the Daily Mail, taxpayers across the pond also are paying for lap dances, though it's unclear why some beneficiaries are allowed to travel to foreign countries while others stay home. I have great sympathy for people who are disabled, and I certainly have no problem with them purchasing sexual services, but I agree with the guy from the Disability Alliance that this is not an appropriate role for government.

A 'man of 21 with learning disabilities has been granted taxpayers' money to fly to Amsterdam and have sex with a prostitute. His social worker says sex is a 'human right' for the unnamed individual - described as a frustrated virgin. His trip to a brothel in the Dutch capital's red light district next month is being funded through a £520million scheme introduced by the last government to empower those with disabilities. They are given a personal budget and can choose what services this is spent on. The man's social worker, who spoke on the condition of anonymity, said his client was an 'angry, frustrated and anxious young man' who had a need for sex. ...The trip emerged in data from Freedom of Information requests which revealed that many councils are using the money from the government's Putting People First scheme to pay for prostitutes, visits to lap dancing clubs and exotic holidays. ...Critics yesterday said the use of taxpayers' money to fund sex trips abroad as 'deeply worrying'. In Greater Manchester and Norfolk, social care clients have used their payments for internet dating subscriptions. ...Neil Coyle, director of policy at Disability Alliance, said most people with disabilities did not want or expect the state to pay for sexual services. 'Public bodies don't exist to find people sexual partners,' he said.

New York Times Seeks Higher Taxes on the "Rich" as Prelude to Higher Taxes on the Middle Class

In a very predictable editorial this morning, the New York Times pontificated in favor of higher taxes. Compared to Paul Krugman's rant earlier in the week, which featured the laughable assertion that letting people keep more of the money they earn is akin to sending them a check from the government, the piece seemed rational. But that is damning with faint praise. There are several points in the editorial that deserve some unfriendly commentary.

First, let's give the editors credit for being somewhat honest about their bad intentions. Unlike other statists, they openly admit that they want higher taxes on the middle class, stating that "more Americans — and not just the rich — are going to have to pay more taxes." This is a noteworthy admission, though it doesn't reveal the real strategy on the left. Most advocates of big government understand that it will be impossible to turn America into a European-style welfare state without a value-added tax, but they don't want to publicly associate themselves with that view until the political environment is more conducive to success. Most important, they realize that it will be very difficult to impose a VAT without seducing some gullible Republicans into giving them political cover. And one way of getting GOPers to sign up for a VAT is by convincing them that they have to choose a VAT if they don't want a return to the confiscatory 70 percent tax rates of the 1960s and 1970s. Any moves in that direction, such as raising the top tax rate from 35 percent to 39.6 percent next January, are part of this long-term strategy to pressure Republicans (as well as naive members of the business community) into a VAT trap.

Shifting to other assertions, the editorial claims that "more revenue will be needed in years to come to keep rebuilding the economy." That's obviously a novel assertion, and the editors never bother to explain how and why more tax revenue will lead to a stronger economy. Are the folks at the New York Times not aware that both economic growth and living standards are lower in European nations that have imposed higher tax burdens? Heck, even the Keynesians agree (albeit for flawed reasons) that higher taxes stunt growth.

The editorial also asserts that, "Since 2002, the federal budget has been chronically short of revenue." I suppose if revenues are compared to the spending desires of politicians, then tax collections are - and always will be - inadequate. The same is true in Greece, France, and Sweden. It doesn't matter whether revenues are 20 percent of GDP or 50 percent of GDP. The political class always wants more. But let's actually use an objective measure to determine whether revenues are "chronically short." The Democrat-controlled Congressional Budget Office stated in its newly-released update to the Economic and Budget Outlook that federal tax revenues historically have averaged 18 percent of GDP. They are below that level now because of the economic downturn, but CBO projects that revenues will climb above that level in a few years - even if all of the 2001 and 2003 tax cuts are made permanent. Moreover, OMB's historical data shows that revenues were actually above the long-run average in 2006 and 2007, so even the "since 2002" part of the assertion in the editorial is incorrect.

On the issue of temporary tax relief for the non-rich, the editorial is right but for the wrong reason. The editors rely on the Keynesian rationale, writing that, "low-, middle- and upper-middle-income taxpayers...tend to spend most of their income and the economy needs consumer spending" whereas "Tax cuts for the rich can safely be allowed to expire because wealthy taxpayers tend to save rather than spend their tax savings." I've debunked Keynesian analysis so often that I feel that I deserve some sort of lifetime exemption from dealing with this nonsense, but I'll give it another try. Borrowing money from some people in the economy and giving it to some other people in the economy is not a recipe for better economic performance. Economic growth means we are increasing national income. Keynesian policy simply changes who is spending national income, guided by a myopic belief that consumer spending somehow is better than investment spending. The Keynesian approach didn't work for Hoover and Roosevelt in the 1930s, it didn't work for Japan in the 1990s, and it hasn't worked for Obama. And it doesn't matter if the Keynesian stimulus is in the form of tax rebates. Gerald Ford's rebate in the 1970s was a flop, and George W. Bush's 2001 rebate also failed to boost growth. Tax cuts can lead to more national income, but only if marginal tax rates on productive behavior are reduced so that people have more incentive to work, save, and invest. This is an argument for extending the lower tax rates for all income classes, but it's important to point out that the economic benefits will be much greater if the lower tax rates are made permanent.

Last but not least, the editorial asserts that, "The revenue from letting [tax cuts for the rich] expire — nearly $40 billion next year — would be better spent on job-creating measures." Not surprisingly, there is no effort to justify this claim. They could have cited the infamous White House study claiming that the so-called stimulus would keep unemployment under 8 percent, but even people at the New York Times presumably understand that might not be very convincing since the actual unemployment rate is two percentage points higher than what the Obama Administration claimed it would be at this point.

Why Is Keynesian Economics Like a Freddy Krueger Movie?

Working in Washington is a frustrating experience for many reasons, but my personal nightmare is that bad ideas refuse to die. Keynesian economics is a perfect example. It doesn't matter that Keynesian deficit spending didn't work for Hoover and Roosevelt. It doesn't matter that it didn't work for the Japanese all through the 1990s. It doesn't matter that it didn't work for Bush in 2008. And it doesn't matter that it hasn't worked for Obama. The statists simply shrug their shoulders and say there wasn't enough spending. Or that the economy would have been even worse with all the so-called stimulus. With this in mind, I was initially excited to read Kevin Hassett's obituary for Keynesianism, but then I sobered up and realized that evidence is not enough to win this debate. Like a vampire or a Freddy Krueger movie, the bad guy (or bad idea) keeps getting resurrected. So while Kevin's article is very compelling, I don't expect that it will stop politicians from doing the wrong thing in the future.

...some Keynesians who supported Barack Obama's $862 billion stimulus now claim it fell short of their goals not because the idea was flawed, but because the spending package was too small. Christina Romer, the departing chairman of Obama's Council of Economic Advisers, has become a minor cult hero to the Keynesians, thanks to news reports that said her analysis in 2009 suggested the stimulus should be in the range of $1.2 trillion, or 40 percent larger than it turned out to be. The notion that a much-larger U.S. stimulus would have been more successful isn't backed up by evidence. Maybe there would be an argument if some countries were now booming because their stimulus packages were larger. Or if some previous U.S. administration had tried a bigger stimulus and had better luck. The fact is, the U.S. stimulus was the largest among members of the Organization for Economic Cooperation and Development, and the biggest ever tried in the U.S. Nor does the academic literature support what we might call these Not-Enough Keynesians. A 2002 study by economists Richard Hemming, Selma Mahfouz and Axel Schimmelpfennig of recessions in 27 developed economies from 1971 to 1998 found that increased spending by government had, in almost all cases, a barely noticeable impact, and sometimes a negative one. Heavily indebted countries that spent more in recessions grew about 0.5 percent less, relative to trend, than countries that didn't, the study found. ...Supporters of this type of stimulus are either unfamiliar with the literature or willing to ignore it. The result is policy that is harmful to our country and inconsistent with modern economic science. If the Obama economic team were medical doctors, they would be pushing the use of medicine not approved by the Food and Drug Administration. As the economic data again head south, it will be much harder to devise successful economic policies because of the budgetary hole that the Keynesians have dug for us. In all likelihood, the data will soon be so convincingly bad that we'll again debate the need for an economic stimulus. Let's hope that when that begins, all will finally concede that the ideas of John Maynard Keynes are as dead as the man himself, and that Keynesianism is the real voodoo economics.