There is this myth going around among America’s “big tent libertarians” (predominantly concentrated to the Tenderfoot Coast between Baltimore and Tysons Corner) that we here in America need to look to Sweden in order to figure out how to do things right. The latest example is an article by Matt Kibbe in the Forbes Magazine, where Kibbe, the president and CEO of Freedom Works, raises the highest-taxed nation on Earth to the skies.
I, for one, thought Freedom Works wanted more economic freedom in America, not less, but since I am not paying Kibbe’s salary I will concentrate on dispersing the mythologically rosy clouds upon which he serves his vision of adopting Swedish policies in America.
The headlines from across the pond read “Europe Rejects Austerity” as the French and Greeks elected socialists and even some neo-national socialists to office. These new officials have promised tax rates as high as 75 percent on millionaires, and have vowed to continue government spending unabashed in the wake of staggering levels of debt and anemic economic growth and persistent double- digit unemployment. However, there is one finance minister in one European nation that is bucking the trend, and, instead of ridicule and failure, he’s been named Europe’s best finance minister by the Financial Times. … His name is Anders Borg and he’s Swedish. That’s right, the European nation famously stereotyped for having aggressive taxation to fund an omnipresent state has actually decided that in response to the Eurozone crisis and the continued effects of the global economic downturn, or “Great Recession”, that it’s time to ease up on taxes and reduce the size of government.
After this bombastic set-up, Kibbe has a lot to deliver on. But already here we can see that he has not bothered to read Remaking America: Welcome to the Dark Side of the Welfare State, a book about the disaster waiting for us if we here in America were to copy the Swedish welfare state.
While Sweden is not technically in the Eurozone, as it does not use the Euro as currency, it has been drawn into the financial mess of the Eurozone by sheer proximity. Unemployment in 2011 was north of 7.5 percent and GDP growth was anemic at .4 percent projected for 2012.
If Kibbe checked his facts, he’d see that the only sector that has been growing in Sweden for the past 20-odd years is the export industry. Private consumption growth rates were at one third to one half of American levels for the last three decades of the 20th century. Since then the parity has been smaller, but only because America’s private consumption has grown more slowly.
Gross exports is the largest category of Sweden’s GDP. What does that mean? That households are living a very poor life while an isolated corporate sector is making good money. There is virtually no tricke-down from the export-oriented manufacturing industries to the rest of the economy.
In the Spring 2012 Economic and Budget Policy Guidelines, the Swedish Government and its Finance Minister, Anders Borg, have laid out a plan that is focused on lowering taxes. Their rationale? “When indviduals and families get to keep more their income, their independence and their opportunities to shape their own lives also increase.”
These “tax cuts” consist almost entirely of an Earned Income Tax Credit, which has increased the already steep marginal effects in the Swedish income tax system. That system, which starts at a 30-percent local income tax rate and tops out north of 60 percent, is now even more discouraging toward hard work, career-advancement and the pursuit of higher education. The more you make, the more government will take on the margin. All the Swedish version of the EITC does is encourage people to take low-paying jobs – and stay there.
Borg also wants to lower the corporate tax rate as a way of meeting the government’s goal of “full employment”. The government has already cut property taxes and other luxury taxes on the rich to lure investors and entrepreneurs back to Sweden.
The corporate income tax is about six percent of total tax revenues. Largely insignificant, in other words. Property taxes barely even register on the government revenue radar screen. Government revenues depend predominantly on personal income taxes and consumption-based taxes, such as but not limited to the value added tax. Besides, the property tax reform was initiated long ago and really has nothing to do with some kind of overall strategy by the current administration.
The government has also slashed spending across the board, including on the welfare programs that used to be Sweden’s claim to fame.
Every Swedish government over the past 20 years has executed spending cuts. Between 1995 and 2005 the socialized health care system laid off 21 percent of its staff. Between 2000 and 2006 the general income security system cut spending by tightening eligibility requirements to such a degree that they were running 15-percent surpluses year in and year out.
Did this benefit the economy? Of course not. Taking people’s money in the form of taxes and then refusing to spend it is not a policy for smaller government. Standard of living has remained virtually flat since the big crisis in the early ’90s, and the total tax burden on Swedish families and businesses is still the highest in the world.
They’ve also installed caps on annual government expenditures: real and enforceable limits that the Swedes believe are pivotal to economic stability. They explain in their Policy Guidelines that “the expenditure ceiling is the Government’s most important tool for meeting the surplus.”
Kibbe is wrong. These spending cuts were put in place in the late ’80s and reinforced by reforms to the national government’s budget appropriations process in the mid-’90s. Has this changed the role that government plays in the Swedish economy? Only for the worse: government now takes in on average 102 krona in taxes for every 100 krona it spends. Does Freedom Works really endorse that kind of government budgeting??
Imagine that, a government that stays within its limits.
And taxes are still the highest in the world. Freedom Works has to make up its mind: does it want a balanced budget or less government?
Then Matt Kibbe spins the no-austerity-here wheel one more turn, repeating the fiscal mythology that Veronique de Rugy marketed earlier this year (and I responded to here):
We have now seen that attempts at austerity within the Eurozone have met a similar fate: none of it was serious. As spending increases have been squandered, spending cuts have been a charade, failing to target the big government programs at the core of the debt crisis.
[What] Sweden is doing is working. And it’s working better than even Minister Borg expected. Despite slow projected growth for 2012, Sweden is expecting annual GDP growth of over 3 percent starting next year, projected out through 2016 by which time their unemployment is expected to slide down to just about 5 percent.
Pure accounting trickery. Sweden has enormous general income security programs where people can participate for a variety of reasons. With the exception of unemployment benefits, when government stashes away a person in one of these programs that person vanishes from the unemployment rolls. Sweden also has Europe’s highest youth unemployment rate.
Kibbe’s praise of Sweden’s superficial fiscal achievements…
During this time the Swedish gross debt is expected to drop from 37.7 percent/GDP to 22.5 percent/GDP as a result of government surpluses.I don’t think Kibbe could even imagine that this is what is going on in Sweden. But from now on I hope he studies up on the practices of the world’s largest, most authoritarian welfare state before he raises its superficial fiscal achievements to the skies.
…is overshadowed by his ignorance of the actual workings of the world’s largest, most authoritarian welfare state. One example of how the Swedish government balances its budget is from the general income security system, run by a government agency funded by very high payroll taxes. This agency forces sick people back to work by simply refusing to recognize their doctor’s notes on their medical condition. I report in detail on this practice in my aforementioned book Remaking America.
Long story short: the fiscal responsibility that Matt Kibbe sees and praises is actually achieved on the backs of cancer patients who are forced back to work because the government can no longer afford to pay their benefits.
Hopefully, Freedom Works is not in the business of generally handing out accolades to the world’s largest welfare states. But regardless of why Freedom Works is suddenly so interested in the big Swedish government, the real story here is that any attempt at keeping the welfare state will always fail in the end. In Sweden’s case the “salvage operation” has come in the form of massive austerity programs – in the ’90s government executed net spending cuts equivalent to nine percent of GDP – while still maintaining the world’s highest taxes.
There is only one sustainable solution: end the welfare state.
It is not just in Greece or California that government has spent itself out of control. Virtually every country in the EU, and every state in the U.S., has a serious spending problem, and the problem is always of the long-term kind. As I have explained on numerous occasions, growth in government did not start yesterday. A good example of this is Pennsylvania, a state with a long-term punitive-tax problem and a morbidly obese government: from 2008 to 2011 (preliminary numbers) state spending increased by $11.4 billion, or 19.4 percent.
This has started a debate in The Keystone State over the core functions of government. So far, the debate does not seem to have reached the hallowed halls of the legislature, nor the office of Governor Corbett. However, he still has time to come around on that issue. He succeeded the notorious spend-as-you-go Governor Rendell, and has started off his tenure with at least a nominal acknowledgement of the need to rein in state spending. He is continuing an effort made by his predecessor and the state legislature at keeping the General Fund (a.k.a., “operating budget”) flat. As the Central Penn Business Journal (CPBJ) reports, he his getting kudos for this from at least parts of the Pennsylvania business community:
The Lancaster Chamber of Commerce Industry supports Gov. Tom Corbett’s approach to the state budget, according to a position statement the organization released this morning. The chamber “supports the governor’s commitment to strengthen the financial foundation of our state government” through “aligning the state’s resources with the core functions and priorities of government,” the statement said.
That’s a bold statement. There are no structural spending reforms in the Corbett budget, i.e., no efforts to rein in the structural spending drivers such as Medicaid, welfare, public education and other entitlements. Instead, the governor takes a cheese slicer and cuts away a margin from all spending programs.
Nevertheless, he is at least interested in trying to keep government from running amok on taxpayers. This is a good start if you want to talk about the core functions of government. Back to the CPBJ:
As in previous years, the chamber declined to comment on specific budget provisions. Instead, it called for broad changes it said would improve Pennsylvania’s business climate, including reform of business taxes, unemployment insurance, prevailing wage and the state pension system. In a separate position paper on the education budget, the chamber reiterated its calls for pension and prevailing wage reform and also called for two-year budgeting and for permitting school districts to furlough staff for budget reasons.
This is all surface scratching and, obviously, no principled discussion about what government should and should not do. That is where the Lancaster Chamber of Commerce needs to get, because the only way to make sure a budget fits within the ability of taxpayers to pay for it, is to rein it in by principles, not spending cuts. One intermediate measure is to tie the spending growth parameters to the growth parameters of personal income. Almost all taxes are paid out of personal income – in addition to income taxes, we pay sales, use and property taxes out of current earnings. These represent approximately 90 percent of the revenues that go into the Pennsylvania state General Fund. If government spending grows faster than personal income, and does so over several years, then the state government creates an obvious need to raise taxes over time.
The Lancaster Chamber of Commerce misses out on this point. That is understandable, since they are only concerned with the current budget, but it would be a good idea for them to take a look at the longer perspective of state spending. This would help them understand that even though the governor wants to cut business taxes by $275 million, the relief is in all likelihood going to be temporary.
Fortunately, the long-term, core-functions perspective is addressed in a new report by the Commonwealth Foundation, one of Pennsylvania’s two free-market think tanks:
Total Pennsylvania state government spending has consistently outpaced the growth of personal income. From 1970 to 2011, the state operating budget as a percent of Pennsylvanians’ personal income grew from 8.8% to 12.0%. Per family of four, total state spending grew by more than $12,000 in inflation-adjusted dollars since 1970.
This is precisely the kind of comparative analysis of state spending that I have been promoting on this blog! I am happy to see that my fellow freedom fighters in The Keystone State have picked up on this. I am especially happy to see this given that I recently had to reprimand the good folks at the Commonwealth Foundation for endorsing an addiction tax that would increase government revenues.
Back to their report on state spending:
State and local taxes take more than 10% of Pennsylvanians’ income—$4,400 per person. Pennsylvania has the 10th highest state and local tax burden, up from 24th in 1990. … Despite the dramatic growth in state government spending, Pennsylvania ranks among the worst states in the nation in key economic performance indicators. From 1991-2011, Pennsylvania ranks 41st in job growth, 46th in population growth, and 48th in personal income growth. From 2000 to 2010, Pennsylvania’s private sector lost 103,700 jobs, while government employment grew by 33,400.
Again, good analysis. This means that in 2000 every 1,000 private employees in Pennsylvania had to support 125 state and local government employees; in 2010 that number had increased to 132 per 1,000. This is a long term growth trend in virtually every state, temporarily interrupted in 2011 as the stimulus money tapered off, something that the CF report mentions briefly. They then go on to explain:
Over the last 20 years, the percentage growth of state government spending has a negative relationship with total job growth in Pennsylvania. According to IRS data, Pennsylvania lost a net 77,184 taxpayers to other states from 2000 to 2010. This out-migration resulted in a net loss of $4.3 billion in household income.
I have previously reported a marginally higher outbound migration loss for Pennsylvania, but that is beside the point. The message to Pennsylvania’s governor and legislators is clear: get your act together, rein in spending, shrink government permanently and put the promotion of economic freedom at the top of your agenda. The Commonwealth Foundation has some ideas of their own, baked together as a Taxpayer Protection Act, which would:
Limit future growth in state and local government spending. Government spending increases would be limited to the rate of inflation plus population growth. Require the prioritization of spending by government. Funding for core government functions will be more than sufficient.
This is a great idea so long as the CF is also ready to take the fight with the legislature over what the core functions of government are. I, for one, suggest that those functions are limited to what is permitted under Robert Nozick’s minimal state, and what is permissible under the strict definition of macroeconomic uncertainty. I am eagerly awaiting a proposal from the hard-working people at the Foundation.
Ensure a prudent Rainy Day Fund. 25% of excess taxes collected would be placed into a Rainy Day Fund that can be used to balance the budget in times of recession.
The thinking behind this point is that the state will continue to have spending that varies pro-cyclically, i.e., increases when tax revenues go down, and vice versa. This however means that a considerable part of state spending has to come in the form of entitlements. Since the CF also wants government to concentrate on its core functions, this implies that the CF wants entitlements to be part of the state’s core functions. I disagree – entitlements violate Nozick’s elaborated Lockean principle of justice in acquisition. But at least the Foundation is making a concerted effort in the right direction.
Provide tax relief for families. 75% of all excess state tax revenues will be used to reduce Personal Income Tax rates. After the Rainy Day Fund reaches 5% of spending, all excess revenues will be used to reduce tax rates.
OK, let’s stop there. I am wondering what part of state spending the CF is focusing on. Pennsylvania has been taking enormous amounts of federal funds over the past few years. Between 2008 and 2011 the federal share of total state spending increased from 31 to 43 percent. According to the preliminary numbers from the National Association of State Budget Officers, Federal Funds are now bigger than the General Fund in Pennsylvania. This means that if the Commonwealth Foundation is placing its fiscal restrictions – the Taxpayer Protection Act – on General Fund spending only, then state legislators will do what their peers in Colorado did after Colorado passed a similar measure 20 years ago: they just shifted spending away from the General Fund, into the Other Funds. They also asked for more and more Federal Funds. The end result is a state budget that is growing just as fast (Colorado state spending has been growing at the same pace after TABOR was passed as it did before its enactment) but with less control and influence from the state’s own taxpayers.
I am happy to see that the Commonwealth Foundation is ramping up its efforts to fight for less government spending. I hope their next step will be a clear, indisputable definition of core government functions. It is a debate that we need to take everywhere, but Pennsylvania is of course a nice place to start.
The battle for California’s future is heating up. After his first year in office, Governor Brown seems to have given up on his attempts to rein in spending. He is going to take a $7-billion tax increase package to the voters next November. The purpose is evidently to avoid further battles with the spendoholics among the ranks of his Democrat party. But there are signs that Governor Brown’s shift to the traditional tax-and-spend strategy, which is deeply entrenched in Sacramento, may not be as popular as he might think. Conservative republicans in California, long a marginal fringe on the political map, have been emboldened over the past couple of years, and they are now determined to take on their state’s big-government political conglomerate. The Sacramento Bee reports:
A day after Gov. Jerry Brown asked voters for $7 billion in additional taxes, three fiscal conservatives Tuesday filed a ballot initiative to cap state spending growth. The proposal would reconfigure the Gann Limit, a 1979 spending restriction passed on the heels of tax-limiting Proposition 13. Voters later softened the spending cap, and the state is now spending $17 billion below the maximum allowed.
As well-intended as the Gann Limit was, it has been a failure, both in terms of policy – it never changed the spendoholic mindset in Sacramento – and in terms of numbers. If we follow state spending data 25 years back in time and assume that the Gann Limit had successfully capped state government spending on par with the Proposition 13 limit on property tax increases, the state would only had spent 39 percent of what it actually spent in 2009. This is a somewhat rigorous interpretation of the intentions behind the Gann Limit, but it nevertheless shows how weak the California state legislature has been, and still is, on the spending side of the budget.
With this in mind, it is easy to understand why California conservatives are seeing a sunrise on the horizon:
The California Taxpayers Association, Howard Jarvis Taxpayers Association and Small Business Action Committee want to reset the Gann Limit at the 2010-11 spending level. They would limit growth based on a formula driven generally by personal income growth and population. In years where tax revenues are greater than the limit, the state would first have to pay down debt and then divide up to $2 billion between schools and a rainy-day fund. If money is left over, the state would return funds to taxpayers.
One problem with measurements of state spending is that they tend to focus entirely on the General Fund. This can lead to mistakes, such as in this Sacramento Bee article:
The state general fund spent $91.5 billion in 2010-11, down 11 percent from the $103.0 billion peak in 2007-08. Officials at the three organizations said state leaders need a constitutional restriction to limit spending in the future.
The estimated spending figure for FY2010 is $218 billion according to the National Association of State Budget Officers. This number includes General, Federal and Other Funds. In-state sourced spending, in other words the General and Other funds, stayed flat from 2009 to 2010, but Federal Funds grew by more than $13 billion.
When California’s conservatives go for stricter spending limits, they should keep this in mind, but also learn from Colorado. They put a TABOR-based spending cap in place some 20 years ago, in order to significantly rein in state spending. However, the cap only applied to the General Fund, which led legislators to re-route spending from the General Fund to the Other Funds category. As a result, state spending in Colorado has increased by an average of 9.4 percent per year over the past two decades.
There are two types of remedy for this spending cap ineptitude. The first is, of course, to explicitly extend the cap to all three types of spending, and to put a cap on the state’s ability to fund spending with loans. The second is to put in place a plan that will permanently remove spending programs from the state budget. This takes time, but is a working, lasting remedy guaranteed to relieve taxpayers of increasingly heavy spending obligations.