AMERICAN CONSERVATISM IN 2008 AND BEYOND

Real, you are correct about the predictions that Fox would be biased. Moreover, the predictions have proven to be understated.

Interesting video. Illustrates perfectly Fox's fair and balanced.

On the Obama thread, there is a short discussion on taxes and government expenditures loosely related to Obama's proposed economic plan should he become President. I posted the following piece there and wonder how many might agree with it? If not, what problems do you see with it?

Note: It is a long piece but at least read the background at the beginning.

Statement
of

Chris Edwards
Director of Tax Policy Studies,
Cato Institute

before the

Senate Committee on Finance,
Subcommittee on Long-Term Growth and Debt Reduction

Regarding
America's Public Debt: How Do We Keep It From Rising?
September 28, 2006

Mr. Chairman and members of the committee, thank you for inviting me to testify today on the topic of controlling growth in the federal public debt. Federal debt continues to rise as spending growth keeps running ahead of the increased tax revenues the government is enjoying as a result of the strong economy. I will discuss some of the relationships between federal debt, spending, and taxation in light of recent budget developments.

Background: The Cost of Federal Spending

To support its large budget, the federal government will extract $2.4 trillion in taxes and about $300 billion in borrowed funds from families, businesses, and investors in fiscal 2006. That extraction transfers resources from the more productive private sector to the generally less productive government sector of the economy. Many studies have shown that, all else equal, the larger the government's share of the economy, the slower economic growth will be.1 That is true regardless of whether higher spending is financed by increased taxes or higher deficits, which can be considered deferred taxes on future generations.

It is clear that a larger federal budget results in slower growth when you consider that a big share of spending is aimed at "social" goals, not at spurring growth. Indeed, 50 percent of the federal budget goes to transfers, which are typically justified on "fairness" grounds, not economic grounds.2 For example, the largest federal program, Social Security, has a negative impact on growth the way it is currently structured. People may support the current Social Security system for non-economic reasons, but economists believe that its pay-as-you-go structure reduces national savings and economic growth.

An additional problem is that extracting the current and future taxes needed to support federal spending is a complex and economically damaging process. As a result, substantially more than one dollar of private activities are displaced for every added dollar of spending. Those added costs are called "deadweight losses," which are inefficiencies created by distortions to working, investment, and entrepreneurship. Those distortions reduce the nation's standard of living

The Congressional Budget Office found that "typical estimates of the economic [deadweight] cost of a dollar of tax revenue range from 20 cents to 60 cents over and above the revenue raised."3 Studies by Harvard's Martin Feldstein have found that deadweight losses are even larger. He noted that "the deadweight burden caused by incremental taxation ... 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."4

What this means is that the large increases in federal spending of recent years will create a substantial toll on the economy because current or future taxes will be higher than otherwise to fund the expansion. There is no free lunch on the spending side of the federal budget, but we can minimize the damage of raising federal funds by continuing to reform the most distortionary aspects of the income tax system.

Deficits and Tax Cuts Spending Increases, Not Tax Cuts, Are the Problem

Have tax cuts or spending increases caused today's large budget deficits? Federal outlays have increased from $1.9 trillion in fiscal 2001 to $2.7 trillion by fiscal 2006, an increase of $800 billion. By contrast, the tax cuts enacted in 2001 and 2003 have reduced federal revenues by roughly $200 billion this year.10 Thus, recent spending increases are four times more important in explaining the current budget deficit than are recent tax cuts.11

Another way to think about recent tax cuts is that they have helped reverse the large tax increases of 1990 and 1993. CBO data shows that those tax increases increased federal revenues by a combined 1.1 percent of GDP over the first five years after each was enacted. The 2001 and 2003 tax cuts reduced revenues by a similar magnitude of 1.2 percent of GDP over the first five years after each was enacted.12

Regardless of whether or not one supports recent tax cuts, it is clear that there are gigantic long-term fiscal problems on the spending side of the budget. The Government Accountability Office has projected a long-range business-as-usual scenario for the budget.13 The projections assume that entitlement programs are not reformed, and that other programs and taxes stay at the same size as today relative to GDP. Under that scenario, federal spending would grow from 20 percent of GDP today to a staggering 45 percent of GDP by 2040. Such a European-sized government would bring with it slow growth, lower wages, a lack of opportunities, and many other pathologies.

Unfortunately, the long-term fiscal situation could be even worse than that. The GAO's "static" estimates ignore the economic death spiral that would occur if taxes were raised in an attempt to fund higher spending. Higher taxes would result in greater tax avoidance, slower growth, less reported income, and thus less than expected tax revenue, perhaps prompting policymakers to jack up tax rates even higher.

Consider Social Security and Medicare Part A, which are funded by the federal payroll tax. On a static basis, the cost of these two programs as a share of taxable wages is projected to rise from 14 percent in 2005 to 25 percent in 2040.14 But as tax rates rise, the tax base will shrink. To get the money it would need to pay for rising benefits, and taking into account this dynamic effect, the government would have to hike the payroll tax rate to about 30 percent by 2040.15 That would be a crushing blow to working Americans, who would have to pay this tax in addition to all the other federal and state taxes they pay.

Note that on top of these federal costs, state and local governments are also imposing large and unfunded obligations on future generations. State and local governments have rapidly rising levels of bond debt, and they have unfunded costs for their workers' pension and health plans that could total more than $2 trillion.16

Reform Options Capping Total Federal Spending
Senator Gregg's proposals are a good starting point for discussing budget reforms, but Congress should also consider a more comprehensive budget control idea. That is to impose a statutory cap on the annual growth in total federal outlays, including discretionary and entitlement spending.20 Deficits are a byproduct of the overspending problem, and such a cap would target that core problem directly. The basic principle of a budget growth cap is that the government should live within constraints, as average families do, and not consume an increasing share of the nation's output.

Prior budget control efforts have imposed caps on discretionary spending, but not entitlement spending. Yet the rapid growth in entitlement spending may cause a major budget crisis, and thus should be included under any cap. There has been interest in capping entitlements in the past. In 1992, the bipartisan Strengthening of America Commission, headed by Sens. Sam Nunn (D-GA) and Pete Domenici (R-NM), proposed capping all non-Social Security entitlement spending at the growth rate of inflation plus the number of beneficiaries in programs.21 The Entitlement Control Act of 1994 (H.R. 4593) introduced by Rep. Charles Stenholm (D-TX) would have capped the growth in all entitlement programs to inflation plus one percent plus the number of beneficiaries. Both of those proposals included procedures for sequestering entitlement spending with broad cuts if the caps were breached.

A simple way to structure a cap is to limit annual spending growth to the growth in an economic indicator such as personal income. Another possible cap is the sum of population growth plus inflation. In that case, if population grew at 1 percent and inflation was 3 percent, then federal spending could grow at most by 4 percent. That is the limit used in Colorado's successful "TABOR" budget law. Whichever indicator is used should be smoothed by averaging it over about five years.

An interesting alternative would be to simply cap total federal spending growth at a fixed percentage, such as four percent. That would make it easy for Congress to plan ahead in budgeting, and would prevent efforts to change caps by fudging estimates of economic indicators. Another interesting advantage of a fixed percentage cap is that it would provide an incentive for Congress to support a low inflation policy by the Federal Reserve Board.

With a spending cap in place, Congress would pass annual budget resolutions making sure that discretionary and entitlement spending was projected to fit under the cap for upcoming years. Reconciliation instructions could be included to reduce entitlement spending to fit under the cap for the current budget year and to reduce out-year spending to fit under projected future caps.

The Office of Management and Budget would provide regular updates regarding whether spending is likely to breach the annual cap, and Congress could take corrective actions as needed. If a session ended and the OMB determined that outlays were still above the cap, the president would be required to cut, or sequester, spending across the board by the amount needed. The GRH and the BEA included sequester mechanisms that covered only portions of the defense, nondefense, and entitlement budgets, but a sequester on the overall budget would be a better approach.

A shortcoming of a statutory spending cap and other budget rules is that Congress would always have the option of rewriting the law if it didn't want to comply. But a cap on overall spending would be a very simple and high-profile symbol of restraint for supporters in Congress and the public to rally around and defend. An overall cap on spending growth of, say, four percent is easy to understand, and watchdog groups would keep the public informed about any cheating by policymakers. Over time, public awareness and budgetary tradition would aid in the enforcement of a cap.

Conclusion

Federal policymakers need a change in mindset and tougher budget rules to ward off large tax hikes and rising debt as entitlement costs soar in future years. Policymakers need to scour the budget for programs and agencies to cut.22 A cap on total federal spending should be part of the solution to get the budget under control. Clearly, current budget rules have not worked very well, and we should experiment with new rules to try and get a grip on the overspending problem.

Thank you for holding these important hearings. I look forward to working with the committee on its agenda for federal budget reform.

Chris Edwards
Director of Tax Policy Studies
Cato Institute

The Cato Institute is incredibly conservative, and has been wrong on virtually everything.

His statement is what one would expect from Cato.

No Cato is not 'incredibly conservative' nor is it particularly conservative on anything other than taxes and spending. And yes, a view that lower taxes and less spending is beneficial for Americans and for the country is a long standing stance of the Cato Institute and is backed up by massive data demonstrating the truth of that. Republicans are a target for criticism every bit as much as Democrats or anybody else when that principle is violated.

From this morning's e-mail:

I didn't expect foxfyre to be a reader of the Onion. Pretty funny stuff from the Onion much of which could be posted by someone who had no clue it is all satire.

And considering that this is known since 1998 ...

Satire? Really? Surely you jest.

But if we are going to consider it satire rather than just a humorous piece, we have to admit that satire isn't satire unless it is built upon a foundation of truth.

That works for me. Glad you guys brought it up.

Well, 'officially' it's an "urban legend", since 1998.

Then Snopes is even a bigger idiot than some posting on this thread if they declared it an 'urban legend' instead of a humorous piece.

So you thought it was a"humorous" or "urban legend" piece but posted it on a "politics" thread with zero indication that it was other than a serious article? Interesting.

Might be, Foxfyre. But the same is with about.com (there it's noted in 'urban legend - Congress Parodies and Political Satire' - category), the AFU And Urban Legends Archive , the ....

Walter I honestly don't care. It came in my e-mail. I thought it was funny. I posted it.

I should have known that the trolls would try to make a big deal out of it and you couldn't just accept it as a joke without analyzing it to death.

My mistake.

Carry on.

And I was only replying to your response

I know and I suppose you'll keep digging up other unrelated stuff to post to support whatever anal examination you deem necessary.

Anybody who treated that piece as an urban legend; i.e. something that was put out there as fact as opposed to a humorous piece; is an idiot. If not Snopes then whoever treated it that way. Okay?

You better take it serious, dys. After all, if you have no sense of humor, what choice do you have?

Fox,

The article was hilarious.

Anyone who had to be told that it was a humorous piece is even funnier.

Yeah I know, but I've misplaced that little humor program Tico gave me. This would certainly be the place to install it.

While we're at it, I would like to apologize to Walter who also doesn't always understand American humor and who I snapped at more harshly than was warranted. He just happened to chime in when I was especially annoyed at a succession of dealings with trolls, idiots, and other exercises in futility.

Well, I understand American humour - at least a bit.

That's partly due to my subscription with The Onion, from where I'm aware of that article since .... well, nearly ten years now.