Monday, November 21, 2011

Lessons From Canada: It Fixed Its Fiscal Problems with 7:1 Ratio of Spending Cuts toTax Increases

Some excerpts from a very lengthy, but excellent Reuters article "Insight: Lessons for U.S. from Canada's "Basket Case" Moment":

"Canada's shift from pariah to fiscal darling provides lessons for Washington as lawmakers find few easy answers to the huge U.S. deficit and debt burden. "Everyone wants to know how we did it," said political economist Brian Lee Crowley, head of the Ottawa-based thinktank Macdonald-Laurier Institute, who has examined the lessons of the 1990s.

To win its budget wars, Canada first had to realize how dire its situation was and then dramatically shrink the size of government rather than just limit the pace of spending growth. It would eventually oversee the biggest reduction in Canadian government spending since demobilization after World War Two. The big cuts, and relatively small tax increases, brought a budget surplus within four years.

Canadian debt shrank to 29 percent of gross domestic product in 2008-09, from a peak of 68 percent in 1995-96, and the budget was in the black for 11 consecutive years until the 2008-09 recession. For Canada, the vicious debt circle turned into a virtuous cycle which rescued a currency that had been dubbed the "northern peso." Canada went from having the second worst fiscal position in the Group of Seven industrialized countries, behind only Italy, to easily the best.

It is far from a coincidence that the recent recession was shorter and shallower here than in the United States. Indeed, by January, Canada had recovered all the jobs lost in the downturn, while the U.S. has hardly been able to dent its high unemployment.  Canada's experience turned on its head the prevailing wisdom that spending promises were the easiest way to win elections. Politicians of all kinds and at all levels of government learned that austerity could win.

Canada's scrape with disaster had been building for a long time. Over a decade earlier, top finance department bureaucrats had begun raising the alarm about the problem of rising debt, a hangover from the big government era of the 1970s. The period before Jean Chretien came to power in Canada is often likened to the situation in the U.S. today. The country was not yet peering over a precipice, but was fast approaching it.

The budget deficit more than doubled between 1980 and 1990, rising to 8 percent of GDP in 1983 and 1984, before shrinking to a still unsustainable 5.6 percent just before Chretien took over, and all the time debt was soaring. The debt-to-GDP ratio shot up to 67 percent in 1993-94 from 29 percent in 1980. The numbers aren't that different to the U.S. today with its deficit of around 9 percent for 2011, and debt-to-GDP ratio at 74 percent, up from 40 percent at the end of 2008.

Drawing a parallel to Washington, Scott Clark, associate deputy finance minister in the 1990s, said Canadian leaders before Prime Minister Jean Chretien paid lip service to the debt problem but did nothing.  "There are no lights blinking saying you're at the edge of the cliff," he said. "The one lesson others can give the U.S. is that the higher that debt-to-GDP ratio goes, the more difficult it's going to be."

The ratio of spending cuts to tax hikes was seven-to-one.  Asked why, then-prime minister Jean Chretien, a Liberal who ended up chopping cherished social programs in one of the most dramatic fiscal turnarounds ever, said simply: "There was more need on one side than the other." That contrasts with proposals this year by President Barack Obama and the Democrats to have a much higher proportion of revenue increases in the deficit-tackling mix.

Canadian ministers were told how much they had to cut and then told to come back with a plan on how to do it. Cuts ranged from five percent to 65 percent of departmental budgets and included controversial cuts in transfers that help provinces pay for health and education, decisions that lengthened medical waiting lists for years to come. In the end, program spending fell by about 12 percent between 1994-95 and 1998-99. The percentage fall was substantially more after adjusting for inflation. The deficit disappeared by 1997 and the debt-to-GDP ratio began a rapid decline - it is now at about 34 percent.

"The entire political class decided to stop treating this as a matter of political contention and started treating it as a matter of national interest," said political economist Brian Lee Crowley.  After wrestling the deficit to the ground, Canada enjoyed what Crowley calls the payoff decade, outperforming the rest of the G7 on growth, job creation and inward investment. From 1997 to 2007, it averaged 3.3 percent economic growth while U.S. growth averaged 2.9 percent.

The final lesson is that you can impose painful spending cuts and still win elections. Chretien went on to win two more back-to-back to form majority governments, a rare feat. He argued that a responsible Liberal who believes the state has a role in reducing poverty can only do so by ensuring a financially healthy government."

Note: Emphasis added.

66 Comments:

At 11/21/2011 3:59 PM, Blogger Hydra said...

The big cuts, and relatively small tax increases, brought a budget surplus within four years.

==============================

Some groups were hounding Obama because change did not happen in one year.

 
At 11/21/2011 4:03 PM, Blogger Hydra said...

"The ratio of spending cuts to tax hikes was seven-to-one. ................That contrasts with proposals this year by President Barack Obama and the Democrats to have a much higher proportion of revenue increases in the deficit-tackling mix."

=================================

It apparently contrasts with Republican proposals of zero to one, as well.

 
At 11/21/2011 4:03 PM, Blogger morganovich said...

hydra-

they hounded him because the change was going in the wrong direction.

spending and growth in liabilities exploded under barak and the pelosi/reid congress.

this is not about driving too slowly, it's about having the car pointed in the wrong direction.

 
At 11/21/2011 4:17 PM, Blogger John B. Chilton said...

I've always been a fan of gridlock built into the US system, but it's gotten ridiculous. (And Nordquist is part of the problem, no? -- see Carpe Diem newest post) Does it take a parliamentary system to do a turnaround?

Will US voters deliver either party a controlling mandate?

Another point: The Canadians free ride on our military power.

 
At 11/21/2011 4:18 PM, Blogger Paul said...

"Some groups were hounding Obama because change did not happen in one year."

*Loud guffaw*

Oh, change happened all right. Nothing good came from this idiot, but it was certainly change. Hence the "hounding."

 
At 11/21/2011 4:22 PM, Blogger Michael Hoff said...

"... Jean Chretien, a Liberal who ended up chopping cherished social programs..."

America is yet to produce such a liberal.

 
At 11/21/2011 4:26 PM, Blogger Hydra said...

they hounded him because the change was going in the wrong direction.

=============================

That does not change the essential truth of my statement. If we change direction it will take some time to learn whether it was the right direction or not.

 
At 11/21/2011 4:28 PM, Blogger Hydra said...

Lots of things exploded during the pelosi/reid congress.

That hardly makes them responsible.

 
At 11/21/2011 4:33 PM, Blogger Paul said...

"If we change direction it will take some time to learn whether it was the right direction or not."

Unbelievable. How much time do you need? As Rick Perry said, are you better off than you were 4 trilion dollars ago?

 
At 11/21/2011 4:34 PM, Blogger Hydra said...

*Loud guffaw*

Oh, change happened all right. Nothing good came from this idiot,....

===============================

I expected this kind of red herring response. But it does not change the observation that NO kind of political change is going to instantaneously solve all our problems.

Nor does simply cutting spending come without costs. I compare two once similar counties, in which one pursued a high growth tax and spend path and the other a low tax, no infrastructure path. They saved some taxes but it cost the citizens billions in growth.

 
At 11/21/2011 4:36 PM, Blogger Hydra said...

As Rick Perry said, are you better off than you were 4 trilion dollars ago?

==========

Actually, I am.

Not near as much better off as the top 1% though.

 
At 11/21/2011 4:44 PM, Blogger Hydra said...

How much time do you need?

========================

The article suggests it took the canadians almost four years. I believe there is so much inertia built into the American system that six to eight years is a reasonable lead time before you get enough feedback to tell with certainty what (if anything) is causing what.





Chilton makes a valid point on a more or less free ride for other countries, based on Americas military expenditures. I heard one Brit (speaking on another topic) about the difference in UK and US taxes.

He said he was not sure because he had paid US taxes for many years, but his impression was that UK taxes were a little higher, but he got much more in return for them.

 
At 11/21/2011 4:46 PM, Blogger Paul said...

"But it does not change the observation that NO kind of political change is going to instantaneously solve all our problems."

Nothing Obama's doing is new under the sun. It has always failed,was predicted to fail, and is failing spectacularly now. I find it astonishing you are still waiting for the final verdict.

"Actually, I am."

And do you think this is the norm, or are you still waiting for the evidence to come in?

"Not near as much better off as the top 1% though."

And that hurts you how?

 
At 11/21/2011 6:11 PM, Blogger Unknown said...

@Hydra,
Republicans put forth compromise: http://www.realclearpolitics.com/articles/2011/11/21/the_choice_squabble_or_govern_112130.html

 
At 11/21/2011 6:32 PM, Blogger Hydra said...

I neither said I was the norm, nor that I may have been hurt by those that did better. I merely point out that lots of things changed under this administration that it does not get the " blame" for.

As for how it hurts, when red McCombs claims a 9.6 million loss on his tax return while failing to claim $256 milllion from a stock transaction, that hurts.

 
At 11/21/2011 6:35 PM, Blogger Hydra said...

Iwill be waiting for the final verdict in the opposite direction just as long. I am not such a soft sell as yourself.

 
At 11/21/2011 6:40 PM, Blogger Hydra said...

Unknown. Your link failed.

 
At 11/21/2011 7:47 PM, Blogger kleht said...

"Lessons From Canada: It Fixed Its Fiscal Problems with 7:1 Ratio of Spending Cuts toTax Increases"

I wonder who got gored by the spending cuts and the tax increases. Nothing was said about that.

At least someone in Canada had the brains, and guts, to allow some tax increases.

Too bad we don't have much in the brains and guts department here.

 
At 11/21/2011 8:13 PM, Blogger Aiken_Bob said...

For the life of me I can't understand the folks that want more taxes on whoever. I simple question, if you took spending back to where it was in 2006 life would continue as we know it, what have we gotten in the last 5 years that would justify raising anyone taxes. Every year gov't grows by x%, and you know that 99% of the folks life is not better by x%. If you are honest you know that several dept. could go away and NO ONE would know it happened.

 
At 11/21/2011 8:52 PM, Blogger JohnL said...

This comment has been removed by the author.

 
At 11/21/2011 8:54 PM, Blogger Hydra said...

Aiken: that is an opinion. I cannot see a single verifiable fact in it, except that govt spending generally goes up.

And life goes on.

 
At 11/21/2011 9:03 PM, Blogger JohnL said...

Here in the Great White North there still are a significant number of people that think home prices can reach the sky. We bounced right back after the 08 drop...buy the dip is the call of the day. There could be a bit of a GDP shock if that trade unwinds negatively.
The 46% marginal tax rate is also rather unpleasant. I'm voting for a flat tax, now who's offering that up?

 
At 11/21/2011 11:14 PM, Blogger Larry G said...

Here's an important difference:


Military Expenditure

United States 962,909,000,000 6.9%
Canada 21,800,000,000 1.5%

 
At 11/22/2011 8:18 AM, Blogger the_obtuse_investor said...

Ah, but Canada had the fortune of running into this problem when the rest of the developed world economies were consistently growing.

US and Euro zone today are facing similar issue, but they don't have the crutch of others to stand on.

That being said, it doesn't minimize the sacrifices Canada had to make. I am glad that we (Canada) did that then, instead of kicking the can further down the road.

Cheers

 
At 11/22/2011 8:25 AM, Blogger the_obtuse_investor said...

@JohnL: on flat tax

Flat tax sounds like a great idea on the surface, and only on the surface, because it is very simple.

Flat tax isn't a progressive tax system-- i.e. all rings of income brackets pay the same tax ratio. In fact, it is a regressive tax system. It forces the poor to stay down, and lets the rich get richer.

Flat tax schemes increase inequality in the society. We don't need more of that in Canada-- or any other place in the world.

See http://www.ted.com/talks/lang/en/richard_wilkinson.html . It is an excellent video-- to see what kind of issues inequality creates in economies.

(I am certainly not the type to join the occupy movement, and I am arguably in the "evil" 1%-- but I want to live in a more equal society, just like everyone else)

 
At 11/22/2011 8:30 AM, Blogger the_obtuse_investor said...

@kleht "Too bad we don't have much in the brains and guts department here."

I suspect that US will sort this out, in time. At least, the conversation is happening. This is step 1.

The congress is in a state of funk and is completely ineffective. But this deadlock will break in time.

Times like these, I often think of Churchill's famous quote: "The Americans will always do the right thing... after they've exhausted all the alternatives."

 
At 11/22/2011 8:36 AM, Blogger Larry G said...

Canada also has fairly onerous taxes.... many things are much more expensive in Canada due to their significant GST.

we found no bargain prices on anything in Canada in our trips there.

Fuel is expensive. Cell phones are expensive. Alcohol is expensive. etc

they do use more electricity than we do....per capita I believe.

 
At 11/22/2011 9:14 AM, Blogger Paul said...

This comment has been removed by the author.

 
At 11/22/2011 9:18 AM, Blogger Paul said...

"I am not such a soft sell as yourself."

That's laughable, considering you no doubt voted for this idiot.

 
At 11/22/2011 9:36 AM, Blogger Hydra said...

Why is it laughable? The Canadian experience suggests it takes almost four years to see a result. With the larger American economy it might take longer.

Even if you assume that many new businesses will be created, the average time before they become employers is around ten years.

I believe it takes a long time for policy to take effect and that belief is independennt of who I vote for or who gets elected.

As far as I can tell, those who prematurely criticized Obama, or bush before him, were acting on predilections and prejudices, not evidence. Therefore, their opinions are not to be trusted as anything more than opinion.

 
At 11/22/2011 10:20 AM, Blogger Junkyard_hawg1985 said...

"Here's an important difference:


Military Expenditure

United States 962,909,000,000 6.9%
Canada 21,800,000,000 1.5%"

Larry, Excellent point. 5.4% of GDP is a significant portion of our deficit. Some in the Republican Party are panicking because we will cut $60B/yr from the military budget. I'm not one of them. I think all parts of government have plenty of room to be cut.

 
At 11/22/2011 10:24 AM, Blogger Junkyard_hawg1985 said...

"(I am certainly not the type to join the occupy movement, and I am arguably in the "evil" 1%-- but I want to live in a more equal society, just like everyone else)
" - Obtuse Investor

Dear Obtuse,

While you want to live in a more equal society, how do you define success? What level of income equality is your goal? You may state this as ratio's for the top quintile to the bottom quintile, or as a geometric standard deviation in incomes, or some other metric. I hear people say they want income equality, but no one ever defines it. Would you please define success for me? Thanks,

 
At 11/22/2011 10:33 AM, Blogger the_obtuse_investor said...

@Junkyard_hawg1985:

How about a Gini coefficient of 25% or under.

The fact is that people have different skills, and economies reward different skills at differently. Some people will inevitably make more than others in a capitalistic system.

 
At 11/22/2011 10:52 AM, Blogger Paul said...

"Even if you assume that many new businesses will be created, the average time before they become employers is around ten years."

That's just it. I dont assume many businesses will be created under the most anti-business administration since FDR's.

"As far as I can tell, those who prematurely criticized Obama, or bush before him, were acting on predilections and prejudices, not evidence."

No, we were acting on his actual record and life story. His votes, his associations with radicals, helped us understand who Obama is. We were more right than we imagined. I guess you must have voted for that hopeandchange crap.

 
At 11/22/2011 11:26 AM, Blogger morganovich said...

http://www.coyoteblog.com/coyote_blog/2011/11/help-for-the-super-committee-is-it-a-tax-or-spending-problem.html

the data could not be more clear.

we have a spending problem, not a tax problem.

the problem is that spending has jumped from 18% of gdp to 24%.

meanwhile, healthcare, social security, and wealth transfers have accounted for all of the growth in federal spending.

from the 60's, milspend is down, and these programs have taken up that slack and added their own 6%.

http://www.usgovernmentspending.com/past_spending

as the man said, you are entitled to your own opinion, but not your own facts.

 
At 11/22/2011 11:53 AM, Blogger truth or consequences said...

I'm surprised the item fails to mention the name Mulroney!

Leader of the Conservative Party, Brian Mulroney was Prime Minister (with a big majority in Parliament) from 1984 to 1993.

A great friend and admirerer of Ronal Reagan, Mulroney espoused the same policies and ideologies of Reagan. Although billing himself as a fiscal conservative, deficits and debt ballooned out of control under his watch, mirroring Reagan's record in the US.

In the last years of his terms (2) Mulroney introduced the GST, a value added tax (VAT). This contributed greatly to his abyssmal approving rating before he stepped down just prior to the 1993 election....but it is an improtant factor in Canada's fiscal turnaround in the nineties.

If the US wants a sure fire, quick and easy fix out of it's present fiscal problems...a VAT is it. Too bad it'll never happen.

A VAT is dead simple. A common complaint around here is that millions of "freeloaders" in the states pay no tax. With a VAT not only does EVERYBODY pay but they all pay the same, percentage wise. The real revenue boost of course is that rich people spend way more...but they can't complain/lobby against it because the percentage is the same. Call it a "win win";):) Oh well dream on....

To those who accused Canada of getting a "free ride" on military expenditures, citing it as a factor in this discussion...I offer this:

Imagine that you have a neighbor who feels threatened by a motorcycle gang on the other side of town. Said gang has the audacity of driving down your street now and then. Your neighbor is convinced that the gang will someday stop and cause him and/or his property harm. You don't share his concern and apart from being annoyed at all the noise the gang makes driving by you don't feel threatened that much....

Your neighbor decides to protect himself against his perceived threat and hires a security company to park in front of his house twenty four hours a day.

A few years go by...with no attacks...not only that but your neighbor gets to know a few of the gangmembers and they don't seem to threatening any more....BUT your neighbor keeps paying for that security guard parked in front of his house anyway...for years.

After the fact, do you think he is justified in accusing you of getting "a free ride" for all that time that he paid for private security??

 
At 11/22/2011 12:21 PM, Blogger Paul said...

"Your neighbor decides to protect himself against his perceived threat and hires a security company to park in front of his house twenty four hours a day."

Then it doesn't apply here. The US military isn't "parked in front" of anybody's house, they are killing terrorists across the planet.

 
At 11/22/2011 12:45 PM, Blogger morganovich said...

t or c-

a VAT has a number of other advantages over an income tax. other than parity and ease of administration, it also favors investment and savings as opposed to the consumption focus of an income tax that allows deductions.

the outrageous consumption focus of our current tax code is the epitome of a short term focus. we feel the need to "drive consumers to spend" and to run up vast mountains of debt, in the intermediate and long term, this depresses growth heavily and puts heavy stress on individual balance sheets.

you are absolutely correct that a flat tax is nothing like flat in nominal terms, but it's much better than what we have.

the key issue with a VAT, as any state will tell you, is that revenues fluctuate much more widely than an income tax.

right when the keynsians want to spend to "restore animal spirits" they find themselves short of funds.

i think this is one of the reasons so many "progressives" dislike a VAT. (well, that and the fact that it gives the 51% paying no income tax some skin in the game)

 
At 11/22/2011 12:46 PM, Blogger truth or consequences said...

Paul....the timeline being discussed and what I was talking about is the last twenty years of the last century....it's pre 9/11...the word "terrorist" does not belong here. And BTW Canda has increased military spending greatly in the first decade of this century.

 
At 11/22/2011 12:52 PM, Blogger VangelV said...


It apparently contrasts with Republican proposals of zero to one, as well.


But the point is a good one. Canada had a big spending problem so it did something about it. The US needs to address the same issue but is not willing to do so.

 
At 11/22/2011 12:55 PM, Blogger VangelV said...

Another point: The Canadians free ride on our military power.

How is that? Canada went into Iraq because you were attacked. The last time Canada was attacked it was by the US. If anything the Canadian people would be a lot safer if the US cut its military and minded its own business.

 
At 11/22/2011 1:22 PM, Blogger truth or consequences said...

correction (and minor point) Vange....we went to Afghanistan (and were the for a LONG time)....we passed on Iraq.

and let's not get into 1812 ok? LOL, you'd REALLY be starting something then

for anybody interested in military spending (Can, US, rest of world)...this is a VERY good read


http://www.policyalternatives.ca/sites/default/files/uploads/publications/National%20Office/2011/03/Canadian%20Military%20Spending%202010.pdf

 
At 11/22/2011 2:29 PM, Blogger VangelV said...

correction (and minor point) Vange....we went to Afghanistan (and were the for a LONG time)....we passed on Iraq.

No correction was required. Iraq never attacked the United States and Congress never declared a war against Iraq. For that matter it did not declare war against Afghanistan either so we should have stayed out of that conflict as well.

and let's not get into 1812 ok? LOL, you'd REALLY be starting something then

The War of 1812 was not the point. The point is that nobody has attacked Canada directly since that war. Without foreign attackers the claim that the US is defending Canada is bogus.

 
At 11/22/2011 3:06 PM, Blogger morganovich said...

"The point is that nobody has attacked Canada directly since that war. Without foreign attackers the claim that the US is defending Canada is bogus."

that seems a bit disingenuous v.

it could also mean that the US has done such a good job of promoting regional stability and security that canda has enjoyed such a period.

by your logic, having a security guard outside your store is useless, because you were not robbed.

that seems like some pretty twisted causality.

who knows what would have happened to canada if instead of the regional hegemon on their border, it was 12 little rivals (like say, europe). i doubt their history of peace would be anything like waht it is.

subjunctive history is always a bit of a parlor game, but i think your logic on canada not being attacked is a bit strained and ignores a lot of causality.

living next to the neighborhood cop does have advantages.

 
At 11/22/2011 3:10 PM, Blogger truth or consequences said...

Although it's an often repeated claim, even in Canada...I'll agree with you on: "the claim that the US is defending Canada is bogus." proving that if you repeat something often enough it becomes the "truth" to some people anyways.

In that 11 page PDF document I pasted earlier they list the four or five reasons countries spend money on their military that I found quite interesting because I've never seen that kind of unemotional analysis like that before. It demonstrates that for some countries even 1% of GDP can be "overspending" on defense while for another country 5% might be considered "stingy". It's all a cost/benefit analysis in the end taking into account a countries aspirations as a "player" on the world stage, perceived threats against, desire to threathen, geographical location and ownership of natural resources that might be coveted by others.

OT...now look at "countries" above with no apostrophe....don't that look weird or what?;)

 
At 11/22/2011 3:17 PM, Blogger truth or consequences said...

and Morgy you're right, living beside the neighborhood cop does have its advantages....sort of the same as if you live near a hospital you power seldom goes out because of a winter storm when many other neighborhoods of the same town go dark...(better infrastructure near hospital)

you can pick where you buy a house

 
At 11/22/2011 4:39 PM, Blogger VangelV said...

that seems a bit disingenuous v.

it could also mean that the US has done such a good job of promoting regional stability and security that canda has enjoyed such a period.


I disagree. The US has not defended Canada. It spent its own money to expand its political interests around the world.

 
At 11/22/2011 4:40 PM, Blogger VangelV said...

by your logic, having a security guard outside your store is useless, because you were not robbed.

that seems like some pretty twisted causality.


Not at all. My point is that, just like the US, Canada is protected by two oceans. It has no natural enemies who are looking to cross those oceans and invade.

 
At 11/22/2011 5:09 PM, Blogger Larry G said...

" it could also mean that the US has done such a good job of promoting regional stability and security that canda has enjoyed such a period.

I disagree. The US has not defended Canada. It spent its own money to expand its political interests around the world. "

when we spend more than the next 10 countries combined including Russia and China on "national defense"...

are we trying to be the world's policeman?

and more importantly, can we afford it?

when you include ALL National Defense expenditures - we spend more on National Defense than we take in - in income taxes - before we spend another penny on anything else.

can we afford to do this?

can we have a balanced budget when we spent this much on defense?

 
At 11/22/2011 8:23 PM, Blogger VangelV said...

when we spend more than the next 10 countries combined including Russia and China on "national defense"...

are we trying to be the world's policeman?


No. If you did you would not support dictators across the globe. The money is spent because of imperial ambitions.

and more importantly, can we afford it?

No. You are broke.

 
At 11/22/2011 8:56 PM, Blogger Hydra said...

Some people will inevitably make more than others in a capitalistic system.

+++++++++++

Sure, but that does not imply our current situation in which those that do make more are inexorably increasing the percentage that they take.

 
At 11/22/2011 9:03 PM, Blogger Hydra said...

o, we were acting on his actual record and life story. His votes, his associations with radicals, helped us understand who Obama is. We were more right than we imagined. I guess you must have voted for tha

+++++++++++++++

Like I said. Predilections and prejudices. Not evidence based on results that occurred since any of his policies were passed and subsequently implemented.

 
At 11/23/2011 8:42 AM, Blogger Zachriel said...

morganovich:
http://www.coyoteblog.com/coyote_blog/2011/11/help-for-the-super-committee-is-it-a-tax-or-spending-problem.html

the data could not be more clear.


Take a close look at the graph. Notice during the 1990's revenues increased, expenditures decreased; a surplus resulted with the trend lines looking very good going forward. But something changed around 2001, and the trend reversed.

Notably, Canada did exactly what should have been done. Cut spending and increase taxes during a period of relative prosperity. That leaves the nation in a strong fiscal position for when the tough times inevitably come. Countercyclical policy.

-

Genesis 41

Pharaoh had a dream: He was standing by the Nile, when out of the river there came up seven cows, sleek and fat, and they grazed among the reeds. After them, seven other cows, ugly and gaunt, came up out of the Nile and stood beside those on the riverbank. And the cows that were ugly and gaunt ate up the seven sleek, fat cows. Then Pharaoh woke up.

Pharaoh said to Joseph, “I had a dream, and no one can interpret it. But I have heard it said of you that when you hear a dream you can interpret it.”

Then Joseph said to Pharaoh, “God has revealed to Pharaoh what he is about to do. The seven good cows are seven years. The seven lean, ugly cows that came up afterward are seven years of famine.

“And now let Pharaoh look for a discerning and wise man and put him in charge of the land of Egypt. Let Pharaoh appoint commissioners over the land to take a fifth of the harvest of Egypt during the seven years of abundance. They should collect all the food of these good years that are coming and store up the grain under the authority of Pharaoh, to be kept in the cities for food. This food should be held in reserve for the country, to be used during the seven years of famine that will come upon Egypt, so that the country may not be ruined by the famine.”

So Pharaoh said to Joseph, “I hereby put you in charge of the whole land of Egypt.”

Joseph stored up huge quantities of grain, like the sand of the sea; The seven years of abundance in Egypt came to an end, and the seven years of famine began, just as Joseph had said. There was famine in all the other lands, but in the whole land of Egypt there was food.

 
At 11/23/2011 8:46 AM, Blogger Larry G said...

" But something changed around 2001, and the trend reversed."

yup...

we got involved in two wars, greatly increased spending for DOD and National Defense...

chose to not increase taxes to pay for the wars...

and.. in fact.. cut taxes....

and from that point on - we had a structural deficit... going forward....

 
At 11/23/2011 8:59 AM, Blogger VangelV said...

yup...

we got involved in two wars, greatly increased spending for DOD and National Defense...

chose to not increase taxes to pay for the wars...

and.. in fact.. cut taxes....

and from that point on - we had a structural deficit... going forward....


You missed another big item. The capital gains taxes that were flowing into federal coffers during the NASDAQ bubble dried up when the bubble burst. The growth of spending in the 1990s could not be supported by the revenues coming in. When the Medicare and War spending were added to the baseline there was a huge problem that was not easy to solve without serious spending cuts. But neither party had the courage to tell voters the truth and to end the welfare/warfare policies that were destroying the national balance sheet that had to be supported by individual taxpayers. Without that courage Bush and Obama were allowed to drive the bus towards the fiscal and monetary abyss.

 
At 11/23/2011 9:07 AM, Blogger Zachriel said...

VangelV: The capital gains taxes that were flowing into federal coffers during the NASDAQ bubble dried up when the bubble burst.

The recession was mild and short-lived. Budget surpluses would have continued. Of course, there would obviously be some expenses related to the terror threat, but not nearly enough to threaten the overall fiscal position of the United States. That took multiple missteps.

VangelV: When the Medicare and War spending were added to the baseline there was a huge problem that was not easy to solve without serious spending cuts.

Most of the war spending was simply wasted money. Cutting taxes during war was probably a bad idea. Cutting taxes permanently without making the associated cuts to maintain balance was folly. Medicare and Social Security represented long term problems, but running surpluses for a decade or more would still have left the U.S. in a much stronger position to address those challenges.

 
At 11/23/2011 9:29 AM, Blogger Larry G said...

"The capital gains taxes that were flowing into federal coffers during the NASDAQ bubble dried up when the bubble burst."

you'll have to show this... are you claiming that the source of the deficit was capital gains?

how about showing the trendline?

" The growth of spending in the 1990s could not be supported by the revenues coming in. When the Medicare and War spending were added to the baseline there was a huge problem that was not easy to solve without serious spending cuts."

Medicare Part B - even today only consumes about 210 billion of the budget. back then it was much smaller even though it increased.

"But neither party had the courage to tell voters the truth and to end the welfare/warfare policies that were destroying the national balance sheet that had to be supported by individual taxpayers. Without that courage Bush and Obama were allowed to drive the bus towards the fiscal and monetary abyss."

that's history. Why do we still continue to insist now that we can balance the budget with cuts only?

 
At 11/23/2011 9:32 AM, Blogger Larry G said...

" . Cutting taxes during war was probably a bad idea. Cutting taxes permanently without making the associated cuts to maintain balance was folly...."

ESPECIALLY coming from people who claim fiscal responsibility principles.

It used to be you could count on the Republicans to insist that we curb spending AND if we could not balance with cuts only - to look at revenues.

this all changed in 2000 when Republicans totally abandoned their fiscal conservatism and instituted tax cuts even as our expenditures were skyrocketing ... by their own votes to spend more on wars and Medicare Part D.

 
At 11/23/2011 11:25 AM, Blogger VangelV said...

The recession was mild and short-lived. Budget surpluses would have continued. Of course, there would obviously be some expenses related to the terror threat, but not nearly enough to threaten the overall fiscal position of the United States. That took multiple missteps.

There was never a real recovery after the NASDAQ bubble burst. All the Fed did was inject a massive amount of liquidity into the system that caused price levels to go up. Government spending increased and the near zero interest rates caused a bubble in housing. But the capital gains revenue dried up because of the massive losses in the stock markets there were carried over year after year.

If you look at the data you find a massive increase in Capital Gains revenue from 1990 to 1999. The take began at less than 2% of GDP and ended at 5% of GDP. In 2000, when the markets collapsed so did the capital gains revenue until it fell back down to under 2% of GDP.

While there was a mild pick-up in revenues in the 2000s, it never reached the highs because the new bubble in real estate did not generate much in the way of capital gains.

That said, there were huge missteps. Bush, with the support of both parties, invaded Iraq even though it did not have anything to do with 9/11. He also invaded Afghanistan even though the Taliban offered to turn over bin Laden if it were presented with evidence of involvement in 9/11. He threw money at Egypt, Israel, Turkey, and other nations that were needed to help with the war efforts. He added massive amounts of regulation and increased government departments and their budgets. He and Congress created the DHS and passed a very expensive Patriot Act. Add to that the spending on drugs and he showed himself to be one of the biggest of big-government presidents. Ironically, the Republicans tried to sell him as a Conservative.

When Obama came into office it quickly became apparent that he would simply serve Bush's third term and did nothing substantially different other than to pass a health care bill that was a copy of Romney's, who got the idea from the big government advocates in the Heritage Foundation.

The bottom line is that the US government has continued to spend too much just as it did in the 1980s and 1990s.

 
At 11/23/2011 11:28 AM, Blogger VangelV said...

Most of the war spending was simply wasted money.

I agree.

Cutting taxes during war was probably a bad idea.

No. The wars were a bad idea.

Cutting taxes permanently without making the associated cuts to maintain balance was folly.

I agree. Taxes need to be cut further. Spending needs to be gutted.

Medicare and Social Security represented long term problems, but running surpluses for a decade or more would still have left the U.S. in a much stronger position to address those challenges.

There never were any surpluses. The government was counting excess premiums as revenue without counting the accrued liabilities. The last president to have a true surplus using GAAP accounting rules would be Ike and he only did it once. Before that you have to go back to the 1920s to find a fiscally prudent president.

 
At 11/23/2011 11:35 AM, Blogger VangelV said...

you'll have to show this... are you claiming that the source of the deficit was capital gains?

how about showing the trendline?


Look it up. In 1999 capital gains taxes were 5% of GDP. That fell to less than 2% when the NASDAQ bubble burst.

And no, I am not saying that a fall in tax revenues is the problem. I am saying that the US government has been spending way too much and that many of the departments that it funds have to be eliminated or gutted. The problem is spending, not taxes.

Medicare Part B - even today only consumes about 210 billion of the budget. back then it was much smaller even though it increased.

Everything adds up. As I said above, the government is spending too much and most of it is not permitted by the Constitution because the Constitution does not give the federal government the power to act in areas such as Commerce, Education, Housing, etc.

that's history. Why do we still continue to insist now that we can balance the budget with cuts only?

That is easy. Look at Ron Paul's budget proposals. You get $1 trillion in cuts the first year and a balanced budget by year three. Why the hell is the US government paying to defend Germany, South Korea, Japan, Australia, and other countries? Why does the federal government meddle in Education? Why does the Department of Energy exist? How about Commerce? Housing? Adding layers of federal bureaucracies does not make things run smoother. The bureucrats just get in the way and screw things up.

 
At 11/23/2011 1:06 PM, Blogger Larry G said...

Ron Pauls proposal would have been a logical STARTING POINT for the Republicans in any negotiation....and it would have been pressure on the Dems with regard to increasing taxes....

somewhere between what Ron Paul proposes and what the two deficit commissions proposed is not a radical concept.

A Radical concept is to insist on a cuts-only budget but never make a proposal.

 
At 11/23/2011 1:25 PM, Blogger Zachriel said...

VangelV: If you look at the data you find a massive increase in Capital Gains revenue from 1990 to 1999. The take began at less than 2% of GDP and ended at 5% of GDP.

Um, no. Capital gains receipts peaked at $121 billion, or about 1.2% of GDP.
http://www.cbo.gov/doc.cfm?index=3856&type=0

 
At 11/23/2011 3:14 PM, Blogger Hydra said...

This comment has been removed by the author.

 
At 11/23/2011 3:47 PM, Blogger VangelV said...

Um, no. Capital gains receipts peaked at $121 billion, or about 1.2% of GDP.
http://www.cbo.gov/doc.cfm?index=3856&type=0


You are right. I looked at the wrong line.

http://www.econdataus.com/cgtax05.jpg

But the point is still the same. Capital gains revenues went from $124 billion in 1990 to $644 billion in 2000. After the stock market crash, capital gains revenue fell back to $269 billion, which was less than the revenue taken in before the NASDAQ bubble began to grow after adjusting for inflation. (ref: 01-23-2008_BudgetOutlook.pdf, page 107 of 199)

The bottom line is that the recession caused tax revenues to crash. Although Greenspan did his bit by flooding the system and creating a housing bubble, the income recovery was offset by massive spending for unnecessary wars supported by both Democrats and Republicans. The smaller SS contribution surpluses made it even more difficult and there was no way to hide the damage caused by the massive Bush/Obama spending programs. After the USD has its day in the sun as it appears to deluded speculators be the best looking horse in the glue farm the realization that the US is not all that different than France or Spain is going to cause a problem in the bond markets. Eventually there will have to be debt repudiation and the introduction of a new currency.

 
At 11/23/2011 6:24 PM, Blogger Zachriel said...

VangelV: Capital gains revenues went from $124 billion in 1990 to $644 billion in 2000.

So? You can't explain a $236 billion surplus with a doubling of capital gains receipts, which is what you attempted to do. There were real increases in productivity in the 1990's and real decreases in federal spending.

 

Post a Comment

Links to this post:

Create a Link

<< Home