Tuesday, April 26, 2011

Fiscal irresponsibility 9: ATR and the soul of limited government

There is an on-going protracted debate whether to raise taxes in the US to reduce the fiscal bleeding of the US federal government each year, caused by past and present fiscal irresponsibility by the occupants of the White House and the leaders in Capitol Hill. But such debate is not so much between the Republicans and the Democrats, but within or among Republicans themselves and their supporters.

Dan Mitchell of Cato wrote today a good article, Tax increases are political poison for the GOP, about the debate between Sen. Tom Coburn (R-Oklahoma) and Grover Norquist, the head of the Americans for Tax Reforms (ATR). The former is arguing that Republicans should accept some tax hikes and compromise with the Democrats to reduce the budget deficit, the latter is arguing that such compromise will result in even bigger government, not smaller, in the future. Dan Mitchell wrote,

From an economic perspective, there are all sorts of important issues:

1. What is better for the economy, lower spending or higher taxes?

2. Is it possible to balance the budget without higher taxes?

3. Would tax increases be used for deficit reduction or more spending?

The US federal government is projected to have another double-digit budget deficit this year after a similar deficit of more than 10 percent of GDP last year. Chart is from The Economist, Buy now, pay later, April 13th 2011 issue.

Politicians, even from a political party that is supposed to advance limited government, fiscal responsibility and free market, are generally easy to be hoodwinked into believing that more taxes, not more spending cuts, will promote more economic growth and more job creation (and reduce poverty) over the long-term. It is important, therefore, that independent and private think tanks and citizen pressure groups which are not organizationally part of any political party -- like the ATR -- exist and do their work of reminding elected politicians of their pledge to the voters when they were still campaigning.

There is no way that more taxes, more transfer of money from the citizens' pockets to the state and politicians' whims, will promote fiscal and personal responsibility. Where there is fiscal irresponsibility, personal irresponsibility would quickly follow. When government for instance, would subsidize healthcare even for unhealthy lifestyle-acquired diseases, then more people will become less watchful, less responsible, about their personal health.

Grover and his staff at ATR are doing their job well. But even their best effort will not be enough to block politicians' populism and its slow slide towards more statism, more welfarism, and ultimately towards the "big bang" of a real fiscal crisis. Ordinary citizens -- Americans, Europeans, Asians, and so on -- should realize that surrendering their personal freedom to state or collective freedom will be counter-productive.

Independent and free market-oriented think tanks like ATR and Cato can only help provide the philosophical guideposts and economic studies. The ordinary people, aware of the limits of government and their individual potentials, will have to put the future into their hands now.

Related topics here will be

Fiscal irresponsibility 4: US public debt, and

Fiscal irresponsibility 5: US entitlement spending.


Lardy said...

"Many of you have talked about the need to pay down our national debt. I listened, and I agree. We owe it to our children and our grandchildren to act now, and I hope you will join me to pay down $2 trillion in debt during the next 10 years. At the end of those 10 years, we will have paid down all the debt that is available to retire. That is more debt repaid more quickly than has ever been repaid by any nation at any time in history," - George W. Bush, in his first major address to Congress in 2001.

So, will the US be able to pay down $2 trillion in debt in 2011 without raising revenues?

Or has the US paid it down DURING the last 10 years when Bush cut taxes?

I will give more credit to Sen. Coburn for injecting realism to the Republicans' dilemma.

Orthodoxy, whether from the Left or from the Right, spells trouble.

Bienvenido Oplas Jr said...

Thanks Lardy. First there was the Bush war in Afghanistan after 9/11. Then the Bush war for oil in Iraq. Then the Bush-Obama bail-outs, with $1+ trillion a year budget deficit. Grover has more sense. It's all a problem of over-spending, higher taxes will not be able to solve anything. ATR and Grover also outlined several potential revenues via privatization of several US govt assets, several hundred billion $ without resorting to higher or new taxes.

Lardy said...

I understand the recent history of the big-surplus-to-big-deficits. VP Cheney once said "deficits don't matter" ... And thus, they did not mind spending.

To Norquist's credit, he admonished Republicans in a speech in Oct 2008 by saying that Republicans cannot spend its way out the crisis.

On the revenues aside, a good start would be just to let the Bush tax cuts expire in 2012.

On spending cuts, good luck to that. Both Democrats and Republicans have core bases that enjoyed certain entitlements. And you have defense spending, which Bush once said that it should not be included in measuring deficits.

Jim Manzi was asked how much taxes needed to be raised just to maintain current entitlements. He said,

"The total present value of payments expected under Social Security and Medicare beyond what is expected to be collected under current tax laws is about $100 trillion.

One way to put that amount of money in context is to note that it is about twice the amount of all the net private assets that exist in America today."

That is HUGE. As entitlements would not just magically disappear and risk political defeats, Norquist needs to let off a little in his no-tax orthodoxy.

Lardy said...

Hi Noy, you said "Bush-Obama bailouts with $1 trillion a year budget deficit".

I quite agree. In 2009, the New York Times calculated that 37% of the deficits were due the economic downturn, 33% were due to Bush's policies, 20% were due to Obama's extensions of Bush's policies, and another 10% were due to Obama's policies like the stimulus."

Or to put it another way, 90% were due to conservative policies, and the other 10% was to try and fix the economic collapse caused by conservative policies.


Bienvenido Oplas Jr said...

Thanks again, Lardy. Estimates of the unfunded liabilities in US entitlements that I have read range from $60 to $200 trillion, so your $100 trillion is within the range and is a practical figure. How to "solve" such huge amount?
1. tax-and-tax-till-they-die.
2. drastically cut the entitlements per head or per case.
3. extend the mandatory retirement to 70 yrs old and hope that many retirees will die at 71 or 72 so they just work and work and draw very little from entitlements.
4. take in as many foreign workers as possible, let them work and work to pay for on-going entitlement, but they themselves won't be entitled to it when they retire.
5. large-scale privatization, from government schools and universities to national parks.
6. all of the above + many others.

Bienvenido Oplas Jr said...

About the bail-outs, it's one of the failures of the promulgation of the rule of law in America. Not a single top corporate honchos involved, like the top guys of Lehman, went to jail. BIG governments always create big business cronyism.

Todd said...

A. There's nothing "conservative" about hiking spending, from around $2 trillion to nearly $4 trillion.

B. There's nothing remotely "conservative" about taking the spending of the "emergency" years, and establishing that as the new baseline, which is what Obama has done.

C. Raising the top US tax rate from 35% (45% including state income taxes) back to 40% (50%) would barely dent the $1.6 trillion deficit here.

D. Do you really think it would do the Philippines any good to raise the top tax rate from 32% to 45% would do anyone in the Philippines any good?

It is the spending. Not $100 billion for "Bush's War" (I could argue the description of that one) but the kind of spending used to buy votes. Ironic the United States is moving faster and faster towards the historic form of cronyism the Philippines has been known for, just as the Philippines is slowly moving away from it, and now growing like gangbusters!

Bienvenido Oplas Jr said...

Thanks Todd. BIG governments can go anywhere from cronyism to monopoly capitalism to gangbusters and back, whether they are poor or rich country governments. Both are fiscally irresponsible, always living beyond their means, always living on endless borrowings. What differentiates them is the way they promulgate the rule of law. Thus, a poor country (Philippines, Indonesia, India, etc.) that borrow and borrows will get higher interest as lenders entertain the small possibility of not being paid in the future. Whereas the US, UK, Japan, etc. can borrow and borrow and interest rate will be relatively small as lenders know that they will be paid back almost 100%.