INSIGHTS: GOVERNMENT-SPENDING LIMITS PROTECT AGAINST INVASION OF TAXMEN
By Guest Columnist Jesse Hathaway:
Managing Editor of the Budget and Tax News for the Heartland Institute.
Reprinted with permission.
Once again the Taxmen come to collect your hard earned dollar.
No one knows exactly from where they come, but they descend like a horde of locusts, consuming resources people have labored all year to gather. Tasked with serving the “collective,” they take our resources without providing anything in return and then return from wherever they came.
Who are they? They’re the taxmen, and they’re coming to take your money.
Instead of setting the taxmen free to scour taxpayers’ wallets for increasingly more money, state lawmakers should limit how much the government can spend and demand accountability.
In some states, such as Alaska, lawmakers are doing just that. In February, Alaskan lawmakers proposed revising the state government’s existing limits on spending. The proposal would require caps on government-spending hikes to be adjusted for economic and demographic factors, such as population increases and monetary inflation rates caused by the Federal Reserve.
According to the National Association of State Budget Officers, a nonpartisan professional association of state finance officers, state governments spent about $1.9 trillion in fiscal year 2016, which amounts to $5,887 for every man, woman and child in America. Additionally, state government spending has increased every single year since 2012.
In 2016, state government spending grew 4% compared with spending in 2015. Of that spending bloat, transportation infrastructure spending hikes were the biggest consumer of government funds financed with in-state taxpayer money. Entitlement spending was the biggest consumer of all funds available to state governments, including taxpayer money provided by the federal government.
More government spending means less consumer spending and economic growth. Every dollar spent by the government is a dollar taken from taxpayers, who would otherwise use that dollar on something they want now or save the money for later.
Government spending increases often require government-taxation increases, creating a feedback loop. The more the government spends, the more the government must tax. The more the government taxes, the less money people have to spend on things that are not taxes.
The government continuously expands, crowding out better uses of people’s money. Slowing government’s growth allows the private-sector economy to have a chance to grow faster than the government, thereby reducing the size of government in a proportional sense.
However, spending caps don’t just reduce the relative proportion of government spending; they also reduce spending in real terms. University of California-Santa Barbara economics professor Henning Bohn and Robert Inman, a professor at the prestigious Wharton School at the University of Pennsylvania, used government data from 47 states to search for a link between enforced government-spending restraints and states’ fiscal health(nber.org). Unsurprisingly, Bohn and Inman found state governments that are required to spend within their means are less likely to spend money they don’t have.
“After controlling for other possible economic and political determinants of state deficit behavior, our analysis concludes that tight end-of-year statutory and constitutional balanced budget requirements act as a significant constraint on state general fund deficits,” Bohn and Inman wrote. “States facing tight balanced-budget constraints run general fund surpluses which are, on average, about $100 per capita larger than surpluses found in states facing only soft constraints.
“Further, replacing a soft constraint by a tight constraint reduces the average annual probability of running a deficit in a sample state from (26% to 11%). When we examine the composition of state budgets, we find that the increased surpluses induced by tight constraints are associated with reduced current spending rather than increased taxes.”
It is in government’s nature to increase its power over people’s lives, but spending caps can keep the beast on a chain, preventing it from gobbling up everything in sight and keeping government consumption at manageable levels.
By enacting free-market policies, making their states conducive to economic activity and constraining spending, state lawmakers can work to put government back in its place, benefiting consumers and taxpayers alike by freeing up resources to be used on things they want, instead of government bureaucrats’ salaries.
ON THE ECONOMY: DOCTOR MY EYES
By John Dunham:
Managing Partner, John Dunham & Associates
Doctor, my eyes have seen the years and the slow parade of fears without crying. Now I want to understand. I have done all that I could, to see the evil and the good without hiding. You must help me if you can. Doctor, my eyes! Tell me what is wrong! Was I unwise to leave them open for so long. So laments Jackson Brown in his 1972 song that eventually reached number 8 on the Billboard charts.
The song is a pessimistic and melancholy lament from a singer who endured life’s hardships, but in doing so had been rendered unable to feel anything. Now that the Republicans have failed in replacing Obamacare, the song should probably be renamed Nurse Practitioner my Eyes, as the American health care system continues its downward spiral away from family physicians toward more clinics and emergency room visits. Yes more and more people have some sort of coverage, but when insurance does not insure anything and when nobody accepts it, can it really be called insurance anymore.
One thing that is amazing about health care is that, in spite of the fact that seemingly everyone in the country hates the system, it is coming to dominate the economy. Based on data from the Centers for Medicare and Medicaid Services, health care spending accounted for just about 5 percent of spending in the economy in 1960, and was up to nearly 18 percent by 2015, the last year for which data were available. This means that in real terms health care spending had grown by 354 percent. Most of this was paid for health care services where spending increased by 351 percent; however, government spending on health care administration and services (not including for example public health expenditures and investments) was up by a whopping 692 percent, and accounted for nearly 1.5 percent of overall GDP.
Today (well in 2015), spending on health care services, including public health services, amounted to nearly $10,000 per individual. This is up by over 700 percent in real terms since JFK was President. The so called Affordable Care Act (or Obamacare) did not do much to change the growth. In real terms between 2015 and 2019 – the year Obamacare went into effect – per capita real expenses on health care were up by 9 percent in real terms, meaning that health care costs rose 9 percent faster than inflation over the period. Put this another way, about 20 percent of the entire growth in GDP between 2010 and 2015 was due to higher prices for health care either due to Obamacare mandates, reduced competition, or many of the other problems that have been cited with the program.
What does this mean for real people? Since 2010 when Obamacare was passed, health care expenses per person are up by $1,898. Considering that the median personal income in the country in 2015 was just $30,240, these health care cost increases were equal to 6.3 percent of overall income. This is almost exactly the same percent as the growth in real income between 2010 and 2015, so every bit of the increase in personal income over those 5 years was taken up by higher health care expenses. Obamacare literally sucked all of the earnings out of the economy.
With health care taking a larger and larger share of personal, business and government spending, there is little left for anything else. Spending on food, vacations, education, transportation, everything else has had to come from savings or from borrowing. No wonder consumer debt payments (as a percentage of income) have risen by 10 percent during the same period and that savings rates have not come up since the end of the recession.
The bottom line from all of these statistics is that the American health care system is a big deal, and in spite of partisan efforts by both Democrats and Republicans, it is broken. Speaker Ryan may have failed in his attempt to replace Obamacare with another government dominated health care structure, but even had he done so, it is unlikely that it would have had a large effect on making the system more efficient and effective. It is going to take more than a partisan effort to fix the system, but from a simple economic perspective, any market where buyers and sellers are artificially separated by a complex system of regulations and third-party payers, is doomed to failure. This was how the economy in the Soviet Union worked, and how the Venezuelan and North Korean economy work today. It is interesting to see how similar medicine in America is to the market for clothing or food in a command economy.
Maybe the politicians have done all that they could, to see the evil and the good, but what is more likely true, it that a regulatory structure that changes the entire nature of how we think about insurance will be necessary. Until real market price signals can be used to determine the true supply and demand for health care we are destined to continue to see higher prices, poorer service, and unsatisfied consumers and producers.
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