Good fiscal policy requires the private sector to grow faster than the government. That is the crucial goal of the House Republican budget.
By DANIEL J. MITCHELL
Thanks to several years of fiscal restraint during the 1990s, the burden of federal spending dropped to 18.2% of gross domestic product by the time Bill Clinton left office. The federal budget today consumes more than 24% of economic output, a one-third increase since 2001 in the share of the U.S. economy allocated by politics rather than market forces. That makes the Republican House budget, which would reverse this trend, extremely important for the economic health of the country.
Both political parties deserve blame for the spending spree that's put America in a fiscal ditch. President George W. Bush was a big spender and President Obama has compounded the damage with his stimulus spending and other programs.
But the era of bipartisan big government may have come to an end. Largely thanks to Rep. Paul Ryan and the fiscal blueprint he prepared as chairman of the House Budget Committee earlier this year, the GOP has begun climbing back on the wagon of fiscal sobriety and has shown at least some willingness to restrain the growth of government.
The Ryan budget has generated considerable controversy in Washington, and it will become even more of an issue now that Mr. Ryan is Mitt Romney's running mate. So it's an appropriate time to analyze the plan and consider what it would mean for America.
Chad Crowe
The most important headline about the Ryan budget is that it limits the growth rate of federal spending, with outlays increasing by an average of 3.1% annually over the next 10 years. If spending is left on autopilot, by contrast, it would grow by 4.3% (or nearly 39% faster). If President Obama is re-elected, the burden of spending presumably will climb more rapidly.
This comes as a surprise to many people since the press is filled with stories about the Ryan budget imposing trillions of dollars of "savage" and "draconian" spending cuts. All of these stories, however, are based on Washington's misleading budget process that automatically assumes an ever-expanding government. The 4.3% "base line" increase is the benchmark for measuring "cuts"—even though spending is rising rather than falling, and it's only the rate of spending growth that is being slowed.
Even limiting spending so it grows by 3.1% per year, as Mr. Ryan proposes, quickly leads to less red ink. This is because federal tax revenues are projected by the House Budget Committee to increase 6.6% annually over the next 10 years if the House budget is approved (and this assumes the Bush tax cuts are made permanent). Since revenues would climb more than twice as fast as spending, the deficit would drop to about 1% of gross domestic product by the end of the 10-year budget window.
To balance the budget within 10 years would require that outlays grow by about 2% each year. Spending in the Ryan budget means the federal budget reaches balance in 2040. There are many who would prefer that the deficit come down more quickly, but from a jobs and growth perspective, it isn't the deficit that matters.
Rather, what matters for prosperity and living standards is the degree to which labor and capital are used productively. This is why policy makers should focus on reducing the burden of government spending as a share of GDP—leaving more resources in the private economy.
The simple way of making this happen is to follow what I've been calling the golden rule of good fiscal policy: The private sector should grow faster than the government. This is what happens with the Ryan budget. The Congressional Budget Office expects nominal economic output (before inflation) to grow about 5% each year over the next decade. So if federal spending grows 3.1% annually, the burden of federal spending slowly shrinks as a share of GDP.
According to the House Budget Committee, the federal budget would consume slightly less than 20% of economic output if the Ryan budget remained in place for 10 years. This would be remarkable progress considering that the federal government is now consuming 24% of GDP vs. Mr. Clinton's 18.2% in 2001. If Paul Ryan's policies are social Darwinism, as Mr. Obama and his allies allege, one can only speculate where Bill Clinton ranks in their estimation.
Spending restraint also creates more leeway for good tax policy. Regardless of what you think about deficits, the political reality is that it is difficult to lower tax rates if government borrowing remains at high or rising levels. If deficit spending continues at current levels, then higher tax rates are almost sure to follow. And higher tax rates can't create an environment conducive to more investment and jobs.
The Ryan budget avoids this unpleasant outcome by addressing the problem of excessive government spending. This makes it possible to extend the 2001 and 2003 tax-rate reductions. It also clears the way for other pro-growth reforms, such as Gov. Romney's proposed across-the-board 20% income tax cut, a more competitive 25% corporate tax rate, and less double-taxation of dividends and capital gains.
One of the best features of the Ryan budget is that he reforms the two big health entitlements instead of simply trying to save money. Medicaid gets block-granted to the states, building on the success of welfare reform in the 1990s. And Medicare is modernized by creating a premium-support option for people retiring in 2022 and beyond.
This is much better than the traditional Beltway approach of trying to save money with price controls on health-care providers and means testing on health-care consumers. Price controls are notoriously ineffective—because health-care providers adapt by ordering more tests and procedures—and politically unsustainable due to lobbying pressure. Means testing imposes an indirect penalty on people who save and invest during their working years. That should be a nonstarter for a political party that seeks to encourage productive behavior and discourage dependency.
But good entitlement policy also is a godsend for taxpayers, particularly in the long run. Without reform, the burden of federal spending will jump to 35% of GDP by 2040, compared to 18.75% of output under the Ryan budget.
Assuming the GOP ticket prevails in November, Mitt Romney will make the big decisions on fiscal policy. But there is no escaping the fiscal math. If Mr. Romney intends to keep his no-tax-hike promise, he has to restrain the growth of spending. This doesn't mean he has to go with every detail of the Ryan budget—but it's certainly a good place to start.
Mr. Mitchell is a senior fellow at the Cato Institute.
A version of this article appeared August 16, 2012, on page A11 in the U.S. edition of The Wall Street Journal, with the headline: What's Really in the Ryan Budget.
While I was home here in Western North Carolina today, a summer intern in our D.C. office, Ariel Cohen, spent the morning honoring the legacy of local war hero Otis Glenn.
Hundreds of Americans gathered at the Vietnam Memorial Wall in Washington D.C on Flag Day to pay tribute to their family, friends and loved ones who courageously fought in the Vietnam War. Among the names read included longtime Burke County resident and Vietnam veteran Glenn Otis.
Glenn served as a sergeant in the United States Marine Corps, where his bravery in both the battles of Khe Sanh and Con Thien earned him a Purple Heart medal. After he completed his service in 1968, Glenn received a Presidential Citation for Bravery, and then returned home to North Carolina.
Although Sgt. Glenn came home from Vietnam with no external physical wounds, the battlefields left his lungs in poor condition. His health deteriorated over time, and as a result Sgt. Glenn died in 2007 due to internal wounds from his service. Although his name is not in scripted on the Vietnam Memorial Wall, he is counted among the thousands of American patriots who gave their lives as a result of valiantly serving in Vietnam.
Otis Glenn’s wife, Judith Glenn, read her husband's name in front of the Vietnam Veteran’s Memorial Wall in 2009 and added his name to the Vietnam Honor Roll Book to serve as a permanent remembrance of his service.
Over fifty years after his homecoming, Sgt. Glenn’s name continues to be spoken at the wall. The annual Flag Day ceremony commemorates not only those who fell on the battlefield, but also those who perished as a result of war injuries once they returned home.
In 2012, 96 additional heroes were inducted into the Vietnam Honor Roll Book.
During the 1960s, much protest arose regarding whether or not the United States should actually be engaged in the war. As a result, many war heroes never received a proper homecoming or welcome from their fellow citizens. Speakers at the memorial event today called upon citizens to remember the patriotism of those who served in Vietnam as America continues to face new challenges.
THUMBS UP to U.S. Rep. Patrick McHenry for crafting a bill to help business owners that House members couldn’t refuse. His legislation to allow small businesses and entrepreneurs to raise money by securing small contributions from many sources – called “crowdfunding” – cleared the full House by a vote of 407 to 17. That’s a margin almost unheard of, given the divisiveness in Congress these days. The legislation would allow companies to raise up to $2 million, with individuals limited to investments of $10,000 or 10 percent of their annual income. Now, the Securities and Exchange Commission prohibits crowdfunding. It’s a good bill that can provide smaller companies with much-needed start-up money or operating expenses with relatively little risk to investors. We urge the Senate to give the Entrepreneur Access to Capital Act the same support as the House.
Roll Call: House Conservatives Rally Against Tax Increases
· By Jonathan Strong
· Roll Call Staff
· Nov. 4, 2011, 5:47 p.m.
Conservatives are rallying against tax increases and trying to chip away at a recent bipartisan push for the Joint Committee on Deficit Reduction to “go big.”
Rep. Patrick McHenry (R-N.C.) is circulating a letter urging the super committee not to increases taxes. The signatories include at least eight Members who signed a recent 100-Member “go big” letter to the debt panel, meaning not all of the Members from that group are ready to sign off on tax increases even in a substantial deficit reduction deal.
The move comes one day after Speaker John Boehner took a seemingly softer line on new revenues in a debt deal.
“I think there’s room for revenues. But there clearly is a limit to the revenues that may be available,” the Ohio Republican told reporters Thursday.
In the letter, McHenry says, “With current levels of taxation already limiting economic growth, we believe that marginal rates must be maintained or lowered and that repeal of any tax credit or deduction be offset with an equal or greater tax cut.”
This week, the non-partisan polling firm, Gallup, released a survey of small businesses showing that complying with government regulation is the number one problem they face. Please watch the video message below to get my take.
Don't forget to let me know what you think in the comments section below.
WASHINGTON (Dow Jones)--In a rare display of bipartisan agreement Wednesday, a U.S. House panel approved four bills that aim to make it easier for small businesses to raise money, clearing the way for the full House to vote on the measures next week.
The bills approved by the House Financial Services Committee are designed to help small businesses and startups tap sources of capital other than just banks, and remove regulations that make it hard for small-business owners to find outside investment.
If signed into law, the changes could provide a modest boost to the struggling economy by helping some smaller firms grow, though they face an uncertain path in the Senate.
"Bipartisanship is not dead," said Rep. Patrick McHenry (R., N.C.) "When we're talking about securities regulation and access to capital, we all see the same things and we can come to a consensus."
One bill, introduced by McHenry, would let people invest up to $10,000 in start-ups over the Internet--a concept called "crowd funding"---without the firm having to register first with the Securities and Exchange Commission. The total investment would be capped at $1 million generally or $2 million if issuers release annual audited financial statements.
Another bill, introduced by Majority Whip Kevin McCarthy (R., Calif.), would mandate the SEC allow small, private companies to use direct mail or advertisements to solicit private offerings from wealthy investors. The SEC currently has a "general solicitation" ban that effectively limits potential investors to those that have a pre-existing relationship with a startup, which critics see as a barrier to capital formation.
A third bill, by Rep. David Schweikert (R., Ariz.), would raise to 1,000 the number of shareholders "of record" that closely held companies can have before they are required to register with the SEC. The current threshold of 500, which has tripped up companies such as Facebook, has not been adjusted since 1964. Under Schweikert's bill, employee-held shares of startup stock would not count toward the cap.
The fourth measure, introduced by Rep. Jim Himes (D., Conn.), would increase that number of shareholders to 2,000 for small banks.
In addition to bipartisan support the bills are expected to enjoy in the full House, President Barack Obama included some of the proposals in the job-creation plan that he released last month.
The crowd funding measure had been the most contentious of the proposals and obtained support from Democrats after several amendments that would require a warning about the risk of investing in startups as well as a ban for anyone who has been found guilty of securities fraud from issuing such securities.
In addition, crowd funding websites, or the issuer, would have to provide the SEC a basic notice of the offering. The SEC would then have to make that information available to state securities regulators, who would have the authority to sue crowd-funding fraudsters.
Rep. Maxine Waters (D., Calif.), who frequently clashes with Republicans, said she was "extremely pleased" with the changes to the legislation designed to protect investors, and the discussion was far friendlier than has been the case in a panel where partisanship and acrimony are far more common.
While both sides hailed the spirit of bipartisanship, Rep. Spencer Bachus (R., Ala.), the financial services panel's chairman, took a dig at the Obama administration, invoking the federal government's investment in failed solar power company Solyndra LLC. Allowing the private sector to take the risk of investing in new firms is "a much better approach" than having such investment led by the government, he said.
In a political climate where the two parties have shown little inclination to work together to craft a job-creation strategy, there don't appear to be any similar efforts underway in the Senate. A Senate Democratic leadership aide said there were no current plans to bring up similar legislation in the Senate.
As Congress considers President Obama’s job package, one measure seems to have rare bipartisan support: a proposal to loosen some of the outdated securities regulations that hamper small businesses in raising capital.
The Obama administration, not surprisingly considering its own success in gathering small donations during his campaign for the presidency, is supporting crowdfunding, a financing model that relies on collecting small sums of money from many people over the Internet.
Crowdfunding has the sort of populist, common-sense appeal that resonates with free-market libertarians and champions of the working class. By marrying online social networks with finance, this model offers a more democratic model of finance, in which individuals can directly fund other individuals or businesses that they deem worthy, without going through a bank or Wall Street middleman.
It’s the sort of person-to-person (or P2P, in industry jargon) funding that characterized financial transactions for millennia, before our mediated, securitized financial system took hold. The popular appeal of crowdfunding can be seen in the success of sites like Kiva, a microlender, and Kickstarter, which lets people donate money to artistic ventures. In its first six years, Kiva has arranged nearly $250 million in loans from more than 600,000 individuals to microentrepreneurs around the globe. Kickstarter users are pledging funds at a rate of $2 million a week.
But let’s be clear: this is philanthropy. In the case of Kiva, lenders get their money back (assuming there is no default), but earn no interest. And beyond a few tokens of appreciation, Kickstarter members get only the satisfaction of seeing an undertaking they support come to life. That’s because if either site were to allow members to earn a return on their money, they would be subject to federal and state laws governing the sale of securities.
Under those laws, crafted largely in the 1930s, the sites would have to either limit the fund-raising to wealthy investors, who the S.E.C. deems sophisticated, or go through a registration process that would prove too costly given the small sums being sought.
For a glimpse of what is possible, look at Britain, where securities laws are helpful to crowdfunding and several start-ups are vying to be the Facebook of finance. The year-old Funding Circle, a business-lending site based in London, raises more than $2.3 million each month for small businesses from individuals who can invest as little as $30 and earn an average yield of roughly 7.3 percent after fees. Those are loans; two other start-ups are applying the model to equity shares in small companies.
In the United States, these outdated laws are cutting off a huge pool of potential capital for small, private businesses that have been all but abandoned by banks and Wall Street. The proposed crowdfunding changes would make it easier for entrepreneurs to tap ordinary investors — often customers or people in their social networks — for funds, with the promise of a return.
The Securities and Exchange Commission has been considering proposals to ease restrictions on crowdfunding. One petition, prepared in 2010 by the Sustainable Economies Law Center and, fittingly, paid for by a grass-roots crowdfunding effort, asks the S.E.C. to permit entrepreneurs to raise up to $100 per individual and an aggregate of up to $100,000 without requiring expensive registration and disclosure.
President Obama, as part of his jobs act, advocates an exemption for sums totaling up to $1 million. Representative Patrick McHenry, a Republican from North Carolina, has drafted legislation that would allow companies to obtain up to $5 million from individuals through crowdfunded ventures, with a cap of $10,000 per investor, or 10 percent of their annual incomes, whichever is smaller.
There are real concerns. The S.E.C. must balance its dual mission of facilitating investment and protecting investors, and as we all know, snake-oil salesmen are alive and well on the Internet. Furthermore, Wall Street banks are likely to fight any efforts to encourage crowdfunding because it cuts them out of the equation. But the potential rewards outweigh the risks. With such sums, the hazard to any single investor is limited. And information is more freely available today than in the 1930s, when the regulations were written.
Besides, isn’t this the type of innovation we should be encouraging? Unlike exotic derivatives and super-fast trading algorithms, crowdfunding generates capital for job-creating small businesses. As Congress debates the merits of the president’s jobs plan, a crowdfunding exemption should be given a serious hearing — and the slow-moving S.E.C. a serious prod.
Amy Cortese is the author of “Locavesting: The Revolution in Local Investing and How to Profit From It.”
Read this op-ed at the New York Times website here.
As we approach the Aug. 2 deadline for raising our debt ceiling, we must consider one of the only things both sides agree on – the national debt limit should represent our nation’s commitment to sound fiscal management of our government. Therefore, we must admit that the act of raising the debt ceiling proves that Washington has failed fiscally and economically to manage the American taxpayer’s money.
Ironically, if the United States is able to raise its ceiling, clearly the ceiling was artificial to begin with. Apparently $14.3 trillion is not America’s borrowing limit. If we do nothing, our debt is on track to soar past 80 percent of our gross domestic product (GDP), a level not seen since WWII. Should we fail to immediately institute meaningful spending cuts and policy reforms, our country is headed towards its true debt ceiling in a matter of years.
In simple terms, if we do not solve our debt problem now, raising the debt ceiling will no longer be an option in the future – a reality that faces nations like Greece and Portugal.
Our $14 trillion (and rising) national debt is not just a bill for tomorrow’s generation – it has damaging effects on today’s economic environment. The relationship between high national debt and low economic growth is not just a coincidence.
The country’s fiscal situation is, at its core, not difficult to comprehend. Even though the Administration announced the end of the recession in mid-2009, we have experienced over two years of slow economic growth and a national (and North Carolina) unemployment rate of over 9 percent. Consequently, this has caused a drop in the Federal government’s revenue. If we stop right there to consider this reality the same way any family must in order to balance its budget, the solution is simple: find ways to make do with less.
The world invests in the U.S. because we have a history of honoring our obligations, and have always had the fiscal capacity to do so. However, just this year, the Big Three credit rating agencies (Moody’s, Standard & Poor’s, and Fitch Ratings) issued warnings or negative outlooks on the AAA rating for the United States government, which influences everything from the value of the dollar to mortgage interest rates.
If we continue to allow our debt to consume our economy without producing a credible plan to balance our budget and pay our bills, we risk foreign investors becoming reluctant to buy our debt. This will cause interest rates to rise, making it harder to finance our trillion dollar deficits (which, annually, already cost taxpayers hundreds-of-billions of dollars in interest) without raising taxes and further crippling our economy.
This global impact will be felt at the local level. The cost of borrowing for families and businesses will rise, diminishing the ability of small companies to invest and grow, resulting in fewer jobs and an indefinite recovery.
This terrible scenario can be avoided, but we must be honest with ourselves and act now. The Federal government has grown to an unsustainable level, and we can’t be scared to cut programs that benefit a select few when the health of our economy hangs in the balance.
Last week, House Republicans took the lead towards restoring certainty in our economy by passing the Cut, Cap and Balance Act. I have cosponsored this legislation, which makes the real cuts and reforms needed to get the debt under control and protect the economy from a loss of our AAA credit rating. Cut, Cap and Balance will cut nearly $6 trillion from the budget over the next 10 years, place enforceable caps on federal spending, and require Congress to pass a Balanced Budget Amendment before the debt limit can be raised.
Today’s face-off over the debt ceiling is simply a warm-up for a rapidly approaching realization of our genuine debt limit, which will force the United States to restructure its debt or default, compromising our economy and future. Balancing the budget isn’t rocket science – and it’s time for Washington to stop treating it that way.
Rep. Patrick McHenry represents the 10th Congressional District in the US House.
Read this column at the Hickory Daily Record website here.
