Economic freedom hit a record high in 2019—but then came 2020. That’s when government shutdowns limited economic freedom, with devasting impacts to people’s lives and livelihoods.
According to the 2021 Economic Freedom of the World Report, which measures economic freedom according to a number of economic variables, the global average for economic freedom hit a new high at 7.04 out of 10 in 2019, the most recent comprehensive data. But that’s going to fall in 2020 data from COVID-related restrictions and sky-high government spending.
Let’s first consider the benefits of economic freedom.
The top quarter freest nations have annual GDP per person over $50,000 (purchasing power adjusted), compared to under $6,000 in the quarter least free nations. The average income of the poorest 10% in the freest nations is more than $14,000, compared to the least free nations at under $1,600. In the least free nations, one out of every three people lives in extreme poverty ($1.90 a day) compared to less than 1% in the most-free nations.
And economically free nations have increased life expectancy, better health care, more educational achievement, and higher levels of happiness. Research has shown that happiness is driven even more by economic freedom than the increased prosperity it generates. People care about self-sufficiency, and the opportunities to attain it are more plentiful in places with more economic freedom.
During the financial crisis of 2007-2008, economic freedom declined globally. Governments responded with increased spending (as they would later respond to the COVID-19 pandemic), though with noticeable differences between advanced and emerging economies. For example, from 2007 to 2010, advanced global spending increased by 16% compared to 53% in other economies.
As the financial crisis receded, economic freedom recovered and moved to new heights. In 2007, the average economic freedom score was at its highest level ever, 6.90. It fell to 6.86 in 2009 as governments expanded their powers and spending in response to the crisis. By 2011 it had recovered to 6.93, edging out the score at the beginning of the crisis, and continued to increase.
Global growth resumed as economic freedom recovered.
While comprehensive 2020 data aren’t available yet, fiscal projections by the International Monetary Fund (IMF) indicate economic freedom took a huge hit from the extraordinary actions by governments.
Excessive government spending reduces economic freedom by crowding out people’s decisions in the productive private sector. To fund deficits now or later, governments consider raising taxes or just printing more money. Unfortunately, these actions make the problem worse, especially to the neediest among us, as the answer should be more opportunities to prosper through less spending—the true burden of government.
The IMF’s data show advanced economies being more profligate than other economies in spending this time around. Average spending increased by 28% between 2019 and 2021 in advanced economies while developing economies lagged at 12% for a world average of 21%.
Overall, government deficits increased by 280% in the advanced world, and 71% elsewhere, doubling global deficits. Gross government debt rose from 104% of GDP to 123% in advanced economies and from 54% to 64% elsewhere. These results threaten human flourishing worldwide.
In the U.S., America had a record low poverty rate and record high median household income in 2019. This was a result of increased economic freedom from the last administration’s deregulatory and tax cutting efforts. The unemployment rate reached new lows for almost every demographic and the overall rate was at 3.5% in February 2020.
As shutdowns happened across the country, the national unemployment rate skyrocketed to 14.8% in April 2020 and remains higher at 5.2% today. And many of those who have a job have seen their purchasing power fall due to higher inflation. Costly shutdowns and excessive spending have hit Americans’ lives and livelihoods hard, and these will have long-lasting effects.
Clearly, control by government through shutdowns over the last year caused much economic destruction. The already-passed $6 trillion in spending since the shutdown recession started is more spending than every economy except the U.S. and China. And this excess spending already contributed to a tripling of the deficit to $3.1 trillion in 2020.
After the Biden administration passed its excessive $1.9 trillion American Rescue Plan Act, it’s calling for an additional $6 trillion in “infrastructure” proposals (something Americans can’t afford).
Fortunately, we have a sound blueprint of what works well for increased opportunities to let people prosper: economic freedom through free-market capitalism. We need more of it now.
These data provide overwhelming evidence that the Texas Model of inclusive institutions with a relatively low tax-and-spend burden, no individual income tax, and sensible regulation provides an institutional framework supporting more job growth, higher wages, lower income inequality, and less poverty than in comparable states and the U.S., in most cases. Other states and D.C. would be wise to consider adopting Texas’s inclusive economic and political institutions that champion individual liberty, free enterprise, and personal responsibility. This is a path to providing an economic environment that allows entrepreneurs the greatest opportunity to thrive and for prosperity to be generated for the greatest number of people, especially the neediest among us.
Despite this success, improvements are needed to keep the Texas Model competitive and create even more opportunities for all to flourish. These improvements to Texas’s institutional framework include limiting the growth in government spending at all levels, eliminating the state’s onerous burdens of property and franchise taxes, reducing barriers to international trade, relieving people from burdensome occupational licenses, and reforming safety nets.
Even with these needed improvements, the historical data overwhelmingly show it has not been a miracle in Texas, but rather abundant prosperity generated by Texans from a proven institutional framework called the Texas Model.
OVERVIEW: Governments’ forced business closures and mandates in response to COVID-19 since March 2020 resulted in much economic destruction during the “shutdown recession.” A return to normal is essential for the recovery of economic growth and, more importantly, for the flourishing of people’s lives and livelihoods. However, more government
intervention in response to the Delta variant and reckless fiscal and monetary policies out of D.C. are hindering the recovery. The labor market has been improving more slowly than expected even though Congress has authorized
$6 trillion since the pandemic started and may soon authorize another $6 trillion, while the Federal Reserve has doubled its balance sheet to $8.4 trillion. The federal unemployment “bonuses,” which finally ended recently, and even more
in handouts, which have reduced incentives to work, resulted in the record high number of job openings exceeding the number of unemployed and added to the recovery’s uncertainty. Instead, we need a pro-growth approach.
Overview: The COVID-19 pandemic and forced business closures by state and local governments over the last year left much economic destruction. Many Americans have been recovering as we near herd immunity and states reopen, but fiscal and monetary policies out of D.C. are distorting economic activity and the labor market. For example, the labor market has been improving at a slower pace in recent months, even as there has been at least $6 trillion in passed or proposed bills during the first 100 days of the Biden administration. The federal unemployment “bonuses” and even more in handouts have reduced incentives to work, resulting in a similar number of unemployed as the record high of 9.2 million job openings. Although the economy has withstood these headwinds for now, a pro-growth approach is necessary.
At $6 trillion, President Joe Biden’s first budget calls for an unprecedented level of federal spending. Republican members of Congress who criticize the president’s plan are understandably reminded by Democrats that the GOP did not do much to resist—and even contributed to—excessive government spending during President Donald Trump’s time in office. During those four years, rampant spending led to nearly $8 trillion in more federal debt, though this included pandemic-related funding approved with bipartisan support. Still, this represents a 40% jump in mortgaging the future of ourselves, our kids, and our grandkids. It’s time for responsible budgeting at every level of government.
Republicans in Washington don’t have much of a leg to stand on when it comes to criticizing the profligacy of congressional Democrats and the Biden administration. But Republicans in many state capitals across the country, however, do. That’s because Republican governors and lawmakers in several states are getting government spending under control by passing conservative budgets which remain below population growth plus inflation. North Carolina is among the most prominent examples of this phenomenon—but is not the only one.
Since Republicans took control of the North Carolina General Assembly for the first time in a century a decade ago, they have kept growth in state spending on a conservative budget trajectory that keeps government growth within the average taxpayer’s ability to fund it. Since 2013, North Carolina state spending has grown by an average of 2.24% annually, which is below the population growth plus inflation rate of 2.58%.
By keeping the rise in state spending below a conservative budget limit for so many years, North Carolina lawmakers have been able to return billions of dollars to taxpayers over the past decade while realizing repeated budget surpluses. The income tax rate reduction approved nearly a decade ago continues to pay dividends for taxpayers and it may soon be improved upon. North Carolina lawmakers — led by Republican Senators Paul Newton, Bill Rabon, and Warren Daniel — proposed new legislation in April, which was approved with bipartisan support in the North Carolina Senate on June 9, that would enact the next round of income tax rate reduction.
“We have large cash reserves and we have yet another budget surplus for the sixth and seventh years,” Senator Paul Newton, Finance Committee Co-Chairman, said at a May 25 press conference. “The Republican philosophy, when government takes too much money from the people, is to give it back in the form of tax relief. In our view, it’s never, never the government’s money, it’s the people’s money. So we are proposing yet another tax cut because we believe people spend their money better than government does.”
By continuing to pass conservative budgets, North Carolina lawmakers have made the Tar Heel State one where lawmakers are leading by example, demonstrating for federal lawmakers that government spending restraint is both achievable and politically advantageous. Other states where lawmakers are also passing conservative budgets include Tennessee, Texas, Florida, Montana, and Iowa.
In neighboring Tennessee, lawmakers needed to make sure their new budget, enacted earlier this spring, stayed below $42.8 billion so as to pass a conservative budget. The new state budget signed into law by Governor Bill Lee (R) spends a total of $42.6 billion. By only increasing the state budget by 2.08% year over year, Tennessee lawmakers, like their counterparts in North Carolina and other states, have made sure that state spending does not exceed the average taxpayer’s ability to pay for it, thereby mitigating the threat of future tax increases or budget adjustments.
Tennessee isn’t the only no-income-tax state where lawmakers are doing of good job of keeping government spending in check. Texas is also leading by example. Not only have Texas lawmakers once again approved a new conservative budget, they used the 2021 session to approve legislation, Senate Bill 1336, that will strengthen the state’s spending cap, ensuring fiscal responsibility for years to come. Likewise, a constitutional amendment introduced by North Carolina legislators in April, referred to as the Taxpayer Bill of Rights, if enacted, would implement a similar state spending limit in North Carolina.
North Carolina lawmakers are now working to enact a new conservative budget that provides further tax relief. Those who want to continue the sustainable budgeting of recent years received good news in early June as legislative leaders from both chambers of the General Assembly announced a consensus spending figure that, if the new budget does not exceed it, would have state spending continue to grow slower than the combined rate of population growth plus inflation. More recently, the North Carolina Senate unveiled its version of the budget, which, in addition to spending less than the figure agreed to with the House in early June, cuts the personal income tax rate from 5.25% to 3.99% while phasing out the corporate income tax by 2028. That budget was approved with a bipartisan, veto-proof majority in the North Carolina Senate on June 24.
“We are pleased to see that the fiscal restraint the General Assembly has shown over the last ten years will continue,” said Brian Balfour, senior vice president of research at the John Locke Foundation, a Raleigh-based think tank. “It’s a strategy we would like to see added to the state constitution in the Taxpayer Bill of Rights.”
Based on federal spending trends and the new proposals coming out of Congress, it may seem like no one in Washington is interested in reining in the growth of government spending and ballooning federal debt. Yet lawmakers in states across the country, including North Carolina, Tennessee, and Texas, the world’s ninth-largest economy, are showing that government spending can be brought under control. There needs to be more lawmakers willing to do so.
North Carolinians are fortunate to have leadership in the General Assembly with such courage and will, who are showing the nation what conservative budgeting looks like. In doing so, they are benefitting North Carolina taxpayers while providing a model for lawmakers in other states and in Washington to emulate.
Patrick Gleason is vice president of Americans for Tax Reform, a taxpayer advocacy organization founded in 1985 at the request of President Ronald Reagan, and is a senior fellow at the Beacon Center of Tennessee, a Nashville-based think tank. Vance Ginn, Ph.D., is chief economist at the Texas Public Policy Foundation based in Austin, Texas, and he is the former chief economist of the White House’s Office of Management and Budget during the Trump administration.
The document below is the lesson that I teach at TPPF and others on economics and the importance of institutions. Please provide feedback. Thanks!
Texas’s economy is improving after the destruction from the pandemic and forced business shutdowns. The opening of the economy on March 10, 2021, helped bring some normalcy as many return to work, excessive government restrictions cease, and civil society improves. This normalcy is supported by wins regarding fiscal and regulatory policy and paths to opportunity by the 87th Texas Legislature during the recently completed session, and more successes may be realized during the special session called by Governor Greg Abbott. A key initiative will be to promote more pro-growth policies that reduce spending, taxing, and regulating in order to increase prosperity and withstand Washington’s anti-growth policies.
Peanut butter and jelly. Fred Astaire and Ginger Rogers. Budget limits and budget cuts. Some things just pair perfectly together.
Here at the Texas Public Policy Foundation, I’m sometimes asked why my focus lately has been on budget limits—as seen in our Conservative Texas Budget (the model for which has been adopted by other states) and our Responsible American Budget. Both of these set hard maximum limits for what can be considered as conservative, “no government growth” budgets.
A state or national budget should grow less than the simple formula of population growth plus inflation. Beyond that, budget writers truly are increasing the size and scope of government, which crowds out the average American’s opportunities to prosper.
But why am I not talking more about budget cuts, I’ve been asked. I am! If I had my way, the federal budget would be about a quarter of its size. The actual budget proposal I worked on during my year at the White House (for FY 2021) proposed a record of $4.6 trillion in less national debt over a decade, made most of the Trump tax cuts permanent, and would have balanced the budget over time.
The truth is that budget limits and budget cuts aren’t mutually exclusive—they’re a perfect pairing. Budget limits tell budget writers, “This much, and no further.” Budget cuts are an opportunity for those writers to demonstrate real fiscal conservatism by reducing the size and scope of government.
And over time, budget limits will cut the budget as a share of the nation’s Gross Domestic Product (GDP), because the GDP tends to grow faster than population-plus-inflation.
At the national level, the U.S. budget picture would be much improved if the federal government had spent no more than population-plus-inflation since 2000. Instead of increasing our national debt by $16.2 trillion in that time, we would instead have seen a surplus of $2.6 trillion.
Budget cuts—which could have been achieved by, say, sticking with the welfare reforms enacted in 1996—would make that picture even brighter.
Here’s what we know: Irresponsible government spending damages the productive private sector through redistribution of resources, higher taxes, higher price inflation, and higher interest rates, reducing Americans’ real incomes, job opportunities, and prosperity.
Budget limits and budget cuts are both ways to attack government spending—from different directions. Both are useful; both are needed. Supporting budget limits doesn’t mean supporting more spending; limits and cuts can be embraced at the same time and for the same purpose—to allow more Americans the freedom to prosper.
This table provides a comparison of initial appropriations for the 2020-21 budget from the Legislative Budget Board’s (LBB) Fiscal Size-Up and for the 2022-23 budget as noted in the conference committee report for SB 1 General Appropriations Act. We compare the budget with the Foundation’s Conservative Texas Budget (CTB) limits based on on a 5% increase in population growth plus inflation.
We exclude from the 2020-21 budget the $8.3 billion in mostly federal funds for one-time Hurricane Harvey recovery expenses and the $5 billion in general revenue funds for a 7-cent tax rate compression of school district M&O property taxes in HB 3 from the 2019 session. Likewise, we exclude from the 2022-23 budget the $6.1 billion in general revenue funds to maintain last session’s property tax relief—which without this allocation would result in a 7-cent tax rate hike in those property taxes and likely more spending. And we will exclude one-time distributions of federal funds related to the pandemic. Not including these types of one-time funds is necessary for budget transparency and for not inappropriately inflating the baseline budget allowing excessive appropriations later. We also exclude the $410.2 million in all funds for Article X that Gov. Greg Abbott vetoed, and he will likely include in a special session.
The 2022-23 Texas budget is well below the CTB limits in state funds and all funds, and leaves $11.6 billion in the rainy day fund. Excluding the $6.1 billion to stop a massive property tax hike, general revenue funds decline by 3.1% and state funds are up by only 0.7%. Including it, state funds are about $725 million below the CTB. And all funds, which is the full footprint of the taxpayer’s burden to fund state government appropriations, is up 3% to $242 billion, which compared with population growth plus inflation is 2-percentage points lower and $4.8 billion less.
The growth of initial appropriations, on average, has now been well below the average taxpayer’s ability to pay for them over the last four budgets, which was directly after the Foundation created the CTB in 2015.
The Texas Legislature’s practice of fiscal restraint while meeting the needs of the state is good news for Texans. And much of the CTB was passed into statute as the Legislature strengthened the state’s spending limit by expanding the base to all general revenue funds and changed the growth limit to population growth times inflation while increasing the threshold to exceed it to a three-fifths majority in each chamber. After the Foundation has worked toward this statutory change for multiple sessions, this is a huge feat that will have long-lasting benefits to Texans.
We encourage Gov. Greg Abbott to build on these policy wins and more by providing paths for more fiscal gains—such as substantial property tax reductions and improved local revenue limitations—in a special session.
Full article with figures.
Price inflation in May 2021 was up 5% over May of 2020. At this pace, the general level of prices will double in less than 15 years. The last time inflation was running this high was in 2008, when gasoline first breached $4 a gallon. And inflation expectations for the next year have reached a record high.
But what did we expect when the government created trillions of dollars and forced people to stay home from work? The Federal Reserve’s balance sheet has exploded by 100% to more than $8 trillion since last year; it was the perfect recipe for inflation with more money supplied than goods and services available to buy.
There have been red flags for months, with businesses announcing that they are raising prices.
Proctor & Gamble manufactures hundreds of products across dozens of brands from diapers to detergents. General Mills makes various foodstuffs from cereals to soups and pastries to pizzas. Hormel also sells various food products. Whirlpool manufactures appliances. Texas’s own Kimberly-Clark makes tissues and paper towels, among other products. Tempur Sealy sells bedding.
Americans use or consume products from these businesses every day, and those companies are all raising their prices, which hurts consumers’ purchasing power. Grocery stores and restaurants across the country have been raising prices as well.
But why these sudden price increases? Businesses are facing higher costs. Commodity prices are climbing quickly, as are wages due to labor shortages.
The contention that current inflation numbers are skewed because of “base-effects” from the early months of the pandemic is incomplete. The consumer price index (CPI) in May 2020 (the lowest point of pandemic-era prices) was just 1% below the CPI’s then-record high in February 2020, which has been eclipsed since August 2020. So, the base-effects argument does not explain a 5% annual increase.
Inflation is a tax, pure and simple, but not an explicit tax. Instead, it robs you of your purchasing power subtly and silently so that most people are none the wiser. It is not accomplished expressly through legislation, but through the sophisticated maneuvers of the Fed, giving inflation an air of mystery.
In reality, there is nothing mysterious about inflation. When the Fed creates money faster than the economy grows, then prices will tend to rise. That is why there is also no end in sight to this inflationary wave. The Fed continues to target historically low interest rates by creating money every month at an annual pace of more than $1.4 trillion, far faster than the economy is growing. The result is real wealth being taken from you—taxation without representation.
Nevertheless, it is surprisingly easy to stop inflation.
Ending inflation only requires the Fed to cease flooding the economy with money. If the Fed slows its money creation, though, then Congress cannot use inflation to finance the nation’s deficits, which seems to be Congress’s favorite way to spend.
Conversely, if Congress were to achieve a balanced budget through sound fiscal policy, then the Fed could return to its original mission of price stability, and not worry about backstopping massive federal deficits with newly created money.
This could be more quickly be achieved by implementing the Texas Public Policy Foundation’s Responsible American Budget, which sets a total budget limit at no more than the average taxpayer’s ability to pay for it as measured by population growth plus inflation. While this would not completely solve the problem of inflation, a journey of a thousand miles begins with a single step, and this will point the country in the right direction.
We must not let the best be the enemy of the good; something must be done sooner rather than later to stop the current runaway spending in Congress.
For example: Senators in Congress have recently reached a tentative bipartisan “infrastructure” deal to spend another $579 billion without raising taxes—or more accurately, without explicitly raising taxes. The spending will be financed with bonds purchased by the Fed, which means through the implicit tax of inflation. That $579 billion will still be collected, but not through so obvious a mechanism as the IRS.
No, inflation is too subtle, silent, and sophisticated for that.
Soon, every Texan will have more opportunity to pursue their dreams, to learn new skills, and to thrive. The Texas Public Policy Foundation’s Opportunity Project supported and tracked important legislation that improved workforce development, removed governmental barriers, and reformed safety net programs—all of which will make Texas a more prosperous state.
The 87th Texas Legislature recently ended sine die with several key victories for Texans—even as the ultimate grade is “incomplete,” with a looming special session to finalize missed opportunities. Among other things, lawmakers made strides toward helping those on the verge of falling through the cracks of society or those already in them. We at the Foundation call these efforts the Opportunity Project, whereby Texans are helping our fellow Texans with a hand up instead of a hand-out.
First, legislators successfully implemented programs to assist Texans with strengthening their chances to gain training, experience, and education that provide them with valuable tools for their careers. These tools help keep them from falling through the cracks by empowering them with skills and knowledge that offer them more opportunities to flourish.
For Texas to live up to its reputation as a business-friendly state, as well as to protect its liberties and prosperity in the long term, employers need to be able to develop the talents of Texans within their communities quickly and effectively. Texas workers in the hard-hit service sector could benefit
from learning new skills to fill specialized roles in IT, manufacturing, construction, and health care. Thanks to Texas Sen. Paul Bettencourt’s and state Rep. John Raney’s HB 4361, more (and more diverse) skills training programs can be launched at community colleges and public universities. The bill allows for more participation by the private sector—the employers who know what they need in the workforce, and are willing to help make it happen.
Another bill, SB 1615 expands Goodwill Adult Charters and creates a new subchapter, thanks to Sen. Bettencourt and Rep. Gary VanDeaver. Specifically, this bill provides adult students with an opportunity to earn a high school diploma and an industry certification simultaneously.
Sen. Angela Paxton’s and Rep. Harold Dutton’s SB 346 enables charter schools to apply for Jobs and Education for Texans (JET) grant program funding. This bill would simply enable charter schools to have access to the same resources as other public schools, for the benefit of their students and for our state’s economic competitiveness.
Representatives Jim Murphy and Tom Oliverson along with Senators Bettencourt and Chuy Hinojosa championed HB 3767 which establishes the Tri-Agency Workforce Commission on a permanent basis. This bill includes data-sharing provisions to improve transparency and accountability.
Next, legislators accomplished the removal of certain government barriers.
Sen. Nathan Johnson and Rep. James White accomplished passing SB 181 that helps in the criminal justice reform space by re-instating a driver’s license to Texans exiting the criminal justice system conditioned on certain criteria. This is a good measure to help get these individuals back to work.
Rep. Scott Sanford and Sen. Royce West propelled HB 569, also known as the Bonton Farms bill, through the legislature to the Governor’s desk. The bill requires a credit per day of confinement toward outstanding fines or costs in a misdemeanor case after the commission of the misdemeanor. This legislation helps reduce in–court costs and fines so that individuals reentering society have better opportunities for self-sufficiency.
Rep. Brad Buckley’s HB 139 provides license reciprocity for military members, veterans, and their spouses so they will not be forced to go through a new licensing process for an occupation when they move to Texas from another state.
Finally, Texas legislators made multiple safety net reforms.
The supplemental nutrition assistance program’s (SNAP) certification process received much needed reform thanks to Sen. Charles Perry and Rep. Armondo Walle. Their efforts culminated in SB 224, which streamlines SNAP’s certification process by reducing the amount of paperwork required for applicants 60 year or older and the disabled.
Moreover, Rep. Tan Parker’s and Sen. Drew Springer’s HB 1516 was another successful safety net reform effort that requires routine third-party efficiency audits of the temporary assistance to needy families program (TANF). It requires that these audits determine whether scarce taxpayer dollars for TANF are being used for their intended purpose or for unrelated budget designations.
SB 1138 requires a study of the of eligibility requirements, results, and resources for the purpose of streamlining most safety net programs, thanks to Sen. Bryan Hughes and Rep. Candy Noble. It also requires that the study assess the cost of the programs and bureaucracy to taxpayers compared to the benefits recipients and taxpayers receive.
There is a need to improve Texas’s inclusive institutional framework for increased job creation and more involvement by civil society that supports the dignity of work, permanent self-sufficiency, and paths to prosperity. The Foundation will continue this effort through the Opportunity Project.
The COVID-19 pandemic and forced business closures by state and local governments over the last year left much economic destruction. Many Americans have been recovering as we near herd immunity and states reopen, but fiscal and monetary policies out of D.C. are distorting economic activity and the labor market. For example, the labor market has been improving more slowly in recent months even as Congress recently passed the American Rescue Plan Act (ARPA), which led to fewer people wanting to work due to more unemployment “bonuses”—up to $1,200 per month—and even more in handouts. This has contributed to a record high of 9.3 million job openings with a similar number unemployed. Fortunately, the economy continues to withstand these headwinds for now, which is why a pro-growth approach is necessary.
Sound fiscal policy must begin with spending restraint. Gov. Kim Reynolds and the Republican-led Iowa Legislature continued to follow pro-growth fiscal conservatism during the most recently concluded session.
The Legislature passed an $8.1 billion FY 2022 state budget, which provided an estimated $1 billion in tax relief to taxpayers instead of growing government. This brings the budget well under the average taxpayer’s ability to pay for it, as measured by the Tax Education Foundation’s Conservative Iowa Budget, which sets a maximum threshold based on population growth plus inflation.
This budget is $290.7 million more than the FY 2021 budget. The $8.1 billion budget is over $4 million more than what Reynolds initially proposed. Nevertheless, Iowa’s fiscal house is in good standing.
The budget spends 97.66% of projected revenues for FY 2022, leaving a projected $385.8 million surplus. There is plenty of money available for a rainy day, including a combined $817.9 million in the Cash Reserve Fund and the Economic Emergency Fund and $316.4 million in the Taxpayer Relief Fund.
Reynolds and conservatives are criticized by many progressives and liberals who argue that areas of the state budget are underfunded, especially public education and health care (DHS), which includes Medicaid. However, this does not mean that spending has declined.
From 2013 to 2020, Iowa’s budget has grown 1.6 times faster than population growth plus inflation. Last year’s budget (FY 2021), which passed during the pandemic, was considered a “status quo” budget, with spending only slightly higher than the previous year. This is hardly austerity-style budgeting and only in government can slowing the growth of spending be considered a “cut.”
Public education (pre-k-12, community colleges and higher education) and health care consume 79.9% of the budget. In FY 1995, both were just 47.2% of total spending, so their share of spending is up nearly 70% since then. State aid to schools continues to be the largest appropriation at $3.4 billion, and added with funding to other payments to public education, is 54% of the budget. The health care budget is more than $2 billion.
The growing cost of both public education and health care should concern policymakers. The rapid increase in spending on these programs is on autopilot and is crowding out other budget priorities along with the private sector through higher taxes. Structural reforms to these programs are needed.
Spending restraint is the cornerstone for sound fiscal policy, and thereby helps keep taxes in check. A priority for the governor was making Iowa’s tax code and economy more competitive, while the Legislature provided much needed tax relief.
In part, this tax reform repealed the state’s stringent income tax triggers, which will allow the top rate to fall to 6.5% in 2023. This will provide greater tax certainty and create an opportunity for future tax rate reductions. Also, Iowa’s obsolete inheritance tax will be phased-out over a five-year period. The county mental health property tax levy will be phased out, as well.
As a result of prudent spending, the Iowa Legislature can consider further tax reform during the next legislative session. Tax reform in Iowa is far from complete and both individual and corporate tax rates need to be lowered and ultimately eliminated.
If policymakers want to seriously reduce tax rates, allowing for more money to stay with families, and make the tax code more competitive with other states, spending must be prioritized and limited.
Spending discipline is vital, and the Iowa Code limits spending to 99% of projected revenues. Strengthening the spending limitation by placing it in the state Constitution and limiting spending to population growth plus inflation, as outlined in the Conservative Iowa Budget, would better match the average taxpayer’s ability to pay for it every session.
The actions by Gov. Reynolds and the Iowa Legislature offer a clear contrast to President Joe Biden (and Democrats in Washington), who in his first 100 days in office has passed or proposed $6 trillion in new spending.
Fortunately, Iowa provides an example of responsible budgeting to federal policymakers and state legislators to provide more opportunity for people to flourish.
Texans will benefit from the policy wins achieved in the 87th Texas Legislature. Among other things, lawmakers:
Passed a Conservative Texas Budget
Strengthened spending limits
Maintained property tax relief
Improved taxpayer protections
Reduced regulatory barriers
The Texas budget, SB 1, came in below the Conservative Texas Budget—in fact, it is about $5 billion below the ceiling the Texas Public Policy Foundation set after excluding the $6.1 billion to maintain the property tax relief from last session. Great credit is due for Senator Jane Nelson and Representative Greg Bonnen because Texans simply cannot afford to pay for out-of-control spending.
Fortunately, measures to address future spending were addressed, too. SB 1336 by Senator Kelly Hancock was sent to the Governor’s desk. This makes much of the Conservative Texas Budget statute by limiting lawmakers from increasing the budget by more than population growth and inflation.
Following the 2019 Session, many local governments sought to bypass the 3.5% limit on property tax growth by taking on more debt in the form of certificates of obligation. This debt would then be passed on to taxpayers. HB 1869 by Representative Dustin Burrows clarifies the definition of debt and reduces this practice for taxing entities.
Local governments also sought to use the “disaster” loophole in 2020 to raise property taxes by 8%. Senator Paul Bettencourt filed SB 1427 which clarifies the types of disasters that can be used to bypass the 3.5% property tax rate limit—COVID-19 was NOT one of the disasters.
Additional bills that expanded on property tax reforms from the 2019 Session were SB 1438 and SB 1449 by Senator Paul Bettencourt. The first would clarify tax rate adjustments and the second would raise the income threshold from personal property from $500 to $2,500 which cuts taxes for small businesses.
On the regulatory side, there were several wins like HB 1560 by Representative Craig Goldman which cuts back on occupational licenses and cuts regulations. HB 139 by Representative Brad Buckley provides license reciprocity for military members, veterans, and their spouses so they will not be forced to go through a new licensing process for an occupation when they move to Texas from another state. Finally, there was SB 424 by Senator Juan “Chuy” Hinojosa which reduces regulatory penalties against small businesses for first time violations.
President Biden finally released his FY22 budget proposal on a Friday afternoon before a long Memorial Day weekend. This was good timing for the White House because it helps hide how irresponsible his budget is for America. But Americans know better, and his budget should be rejected and replaced with one that follows a responsible, pro-growth path forward.
During my year as the chief economist of the White House’s OMB during the Trump administration, I helped determine the economic assumptions and other key decisions in the President’s last FY21 budget. We advocated for a path toward more free market capitalism-supporting robust economic assumptions.
This policy forecast included faster economic growth resulting from making almost all of the Trump tax cuts permanent, further deregulations, and fiscal restraint of nearly $5 trillion in savings over a decade to balance the budget and to support opportunities for Americans. The path built on what was already working—an agenda that helped America reach a record low poverty rate and a record high in real median household income in 2019.
As someone who has worked at a think tank in Austin, Texas for years, I’ve seen the gains made by the Texas Model—no personal income tax and relatively lower government spending, taxing, and regulations, which contributes to more economic freedom, lower cost-of-living, and greater human flourishing compared to most states. Alternatively, California has taken a different approach—with now the second-highest personal income tax rate, stricter regulations, and substantially more spending that crowds out economic activity and destroys prosperity.
Given our system of federalism that was designed to produce a laboratory of competition among states, we can clearly see that the Texas Model works well over time, compared to states like California.
The Trump administration learned from the more fiscally responsible states, and used the Texas approach when it came to criminal justice reform, deregulation, lower taxes and proposed spending restraint, which resulted in substantial, tangible economic gains. Unfortunately, the Biden administration is following the folly of the big-government California model—which demonstrably doesn’t work.
There are at least three ways that President Biden’s first budget is irresponsible. First, Biden’s $6 trillion budget sends us down the road toward socialism.
The increase in the budget from the pre-pandemic baseline FY20 budget of $4.81 trillion shows that Biden’s budget is 25% higher. If Biden’s budget was limited to the average taxpayer’s ability to pay for it, as measured by population growth plus inflation of 1.37% in the Foundation’s Responsible American Budget, then taxpayers would foot the bill for a maximum of $4.88 trillion. The president’s budget is $1 trillion, or 23%, more than this metric, meaning that his budget proposal takes ownership of more means of production throughout economy and livelihoods (which is the definition of socialism).
The excess spending continues over time as the budget expands by $69 trillion over a decade, increasing the national debt by 50% or by $14.5 trillion, and results in the debt owed by each American rising by 50%, to about $120,000. The American Jobs Plan would add $529 billion and the American Families Plan adds $270 billion. These expansions of government are really anti-jobs, anti-families, and anti-American, as this is a road without a good destination.
Second, the Biden budget makes flawed economic assumptions.
As someone who helped determine the economic assumptions in President Trump’s final budget, I understand how there are many variables underlying the president’s budget. It’s not an exact science, but it’s important to do your due diligence.
An unlikely economic assumption in Biden’s budget is that real gross domestic product keeps increasing over time, despite the substantial tax hikes of more than $3 trillion. Additionally, the administration is acknowledging its proposals are more about socially engineering society to its preferred outcomes rather than achieving more economic prosperity. Economic growth in his budget is just 3.2% in 2022 and just 2% in 2023 after rampant government spending, with less growth thereafter. These growth rates are substantially less than the post-WWII average of 3% and lower than the three pre-pandemic Trump years. In short, the economic assumptions are weak even given a Keynesian view that government spending drives more growth, which I don’t share.
And even those growth rates are optimistic as higher taxes slow growth, just as substantially higher debt from the excessive spending does. Higher debt means either interest rates will have to rise as more debt is issued or the Federal Reserve will have to continue monetizing it and bring about inflation, which also contributes to higher interest rates.
Currently, inflation is about 4% (at an annualized rate), and will likely stay that high. It could even increase with the large increases in the money supply and the continued purchases by the Fed of $120 billion in Treasury securities monthly. Again, Biden’s budget fails again as it assumes inflation is only 1.8% in 2021 and plateaus at 2.3% starting in 2025, which is unlikely given the situation.
Meanwhile, the 10-year Treasury note rate is about 1.6%, but the proposed budget has it at only 1.2% for this year and rising to only 2.8% by 2031. With $14.5 trillion added to the debt (including net interest rising from $345 billion to $883 billion in 2031) and the probable higher inflation that will need to be subdued with less money creation and resulting higher interest rates, we could see much higher interest rates than what his budget assumes. This would result in even less economic growth than what’s in Biden’s budget, thereby increasing the number on welfare programs, which will itself drive up government spending. This will also influence other budget items.
Assuming lower interest rates in the Trump budget made more sense, given we were putting the budget on a path toward balancing over time. But the Biden budget maintains deficits of more than $1.3 trillion every year, with the deficit-to-GDP ratio only going down to 4.2% in 2029, which is well above the historical rate of 3%.
This brings us to the third way that Biden’s budget is irresponsible: It mortgages ours and our kids’ and grandkids’ futures.
Irresponsible government spending causing massive deficits along with rising net interest over time will cost us more and reduce opportunities for good-paying jobs, affordable credit, and a lower cost-of-living. It will also raise interest rates, resulting in lower real incomes and fewer job opportunities.
Fortunately, we know that the pre-pandemic policy approach taken by President Trump supported record levels of human flourishing. Congress should have done a better job of reining in government spending, and the administration could have touted spending restraint more. But even then, the growth in spending wasn’t at the level proposed by Biden. If Congress had controlled its spending, then the deficit, interest rates, inflation, and trade deficits would likely have been lower. Those goals are still worth pursuing.
That’s why TPPF created the Responsible American Budget, which is supported by many policymakers, economists, and thought leaders. It sets a maximum threshold for the federal budget every year based on the average taxpayer’s ability to pay for it (based on population growth plus inflation). This is supported by research on fiscal rules that have worked well in other countries and states, including Texas, Montana, Iowa, and Alaska.
By rejecting President Biden’s irresponsible budget proposal and instead incorporating the RAB in the budget process, Congress could enact a budget that meets the needs of the country without excessively burdening American families. The budget is already far too big; its size and scope are well above what our Founding Fathers imagined, which is why fat should be cut and the budget growth should be limited to the RAB, which will leave more money with families and allow entrepreneurs to build on the success of free-market capitalism.
Join us in ending the days of fiscal insanity in D.C. and replacing it with fiscal responsibility.
The very popular narrative is that Republicans only care about budget deficits and the spiraling national debt when Democrats are in charge. Writing in the Washington Post’s “The Fix” column, J.M. Rieger says that “Republican mea culpas on the national debt follow years of demands for spending cuts to reduce the debt.”
But I was there in the Trump White House, in the Office of Management and Budget. The truth is that the President’s FY 2021 federal budget proposed a record of $4.6 trillion in less national debt over a decade, made most of the Trump tax cuts permanent, and would have balanced the budget over time.
In my work since then at the Texas Public Policy Foundation, we have helped other states move toward our model of a Conservative Texas Budget, and now—working with the Republican Study Committee and many others—we’re doing the same for the gargantuan federal budget. The proposed path to bring fiscal sanity back to Washington, D.C. is the Responsible American Budget.
Here’s what we know: Irresponsible government spending damages the productive private sector through redistribution of resources, higher taxes, higher price inflation, and higher interest rates, reducing Americans’ real incomes, job opportunities, and prosperity.
At the state level, Texas has addressed this with the Conservative Texas Budget. Its main premise is that government shouldn’t grow any faster than the average taxpayer’s ability to pay for it. To provide a bright line marking the limit, we use a proven, simple formula: population growth plus inflation.
This simple formula provides a view of the budget from the taxpayers’ perspective, which is essential given the government has no money but rather collects taxes from us to fund limited roles given to the federal government.
By combining the fact that Texas has an increase of about 1,000 new Texans per day and Texans’ wages are correlated with price inflation, more people and higher wages can support more government provisions, as necessary. This doesn’t mean that government must grow by this simple formula but rather this is the maximum growth each year to avoid further burdening Texans.
As Milton Friedman noted, “the true burden of government is not how much it taxes, but by how much it spends.” Any growth in government spending that exceeds our simple formula represents the kind of growth that means a heavier burden on taxpayers.
That kind of expansion is bad for working families, who pay a larger portion of their income in state and local taxes. In Texas, we have successfully kept the state’s budget below the CTB limits, on average, for the last three legislative sessions, and look to do so again during the current session.
While there have been several attempts to reduce the excessive growth of federal spending in the U.S., these attempts have had limited success, if any, as indicated by the $28 trillion—and quickly rising—national debt and its $350 billion—and skyrocketing—interest payments.
And despite the attempts by the Trump administration to rein in excessive government spending, Congress wasn’t interested and ran up massive spending that led to annual deficits. And then any movement toward reducing it was negated by the COVID-19 pandemic and ensuing fiscal profligacy. It led to appropriations outside of the normal federal budget process of at least $6 trillion over a decade during the Trump and Biden administrations. While some of these appropriations may have been necessary, it clearly made the fiscal path substantially worse.
In addition, the Biden administration has proposed the American Jobs Plan and the American Families Plan that would increase spending by more than $4 trillion over a decade, bringing this administration’s passed or proposed spending to $6 trillion in just the first 100 days.
Clearly, it’s time for fiscal sanity.
Based on the fiscal problems facing the U.S., the federal government needs an annual budget benchmark. We offer such a benchmark in the form of the Responsible American Budget (RAB). The RAB provides a maximum threshold to freeze real (inflation-adjusted) per capita spending, which is simply a limit based on population growth plus inflation.
What would this look like? According to our calculations, a RAB for fiscal year 2022 would be no higher than $4.88 trillion, representing a 1.37% increase over FY 2021, excluding the extraordinary pandemic-related expenditures to not inappropriately inflate the baseline budget to allow for excessive spending later.
The costly effects of these fiscal and subsequent monetary policy excesses challenge Americans’ opportunities to improve their communities’ as well as their future by owning a business, having the dignity of work, saving for a rainy day, and donating to institutions throughout civil society.
The RAB’s spending restraint and its fiscal benefits would allow for a more inclusive institutional framework that supports more freedom for people to choose their destiny and more opportunities to flourish.
Irresponsible government spending damages the productive private sector through redistribution of resources, higher taxes, higher price inflation, and higher interest rates, reducing Americans’ real incomes, job opportunities, and prosperity.
While there have been multiple attempts to reduce the excessive growth of federal spending in the U.S., these attempts have had limited success, if any, as noted by the $28 trillion—and quickly rising—national debt and its $350 billion—and skyrocketing—interest payments.
There is debate about whether deficits matter, and these days many from across the political spectrum suggest that they do not; they are partially correct. The part of fiscal policy that matters to our daily lives is government spending, which is the fundamental source of higher taxes, more regulations, higher debt, and more crowding out of the productive private sector.
Given these challenges, the time is now to address excessive government spending, and we need to promote sound fiscal rules that make the budget tangible for Americans to understand and to hold elected officials accountable for excessive spending. A bold way to do this is provided by the Foundation’s Responsible American Budget.
Read paper here.
The economic policies of the Biden administration—Bidenomics—is conspicuously marked by lofty rhetoric, grand promises, and the best of intentions. It espouses helping the poorest among us, along with amorphous but attractive values like “fairness.” But the results of these policies do not live up to their intentions. Here are just a few examples.
The American Relief Plan does not provide relief for Americans. Instead, it threatens states’ sovereignty and prevents Americans from receiving tax relief.
The American Jobs Plan does not create jobs, but green-energy flimflams. It stifles real job creation through perverse incentives and burdensome regulations. The expansion of unemployment payments is contributing to 6 million fewer jobs, because many people are making more on unemployment than they did while working.
The American Family Plan does not strengthen families, but government dependency. It weakens families by making people reliant on federal programs instead of each other. It also provides health care subsidies without accounting for income, meaning that the very wealthy can receive taxpayer-subsidized health insurance.
The idea of fairness has taken a conspicuous role in the current administration’s agenda, yet its proposed tax changes will result in lower wages, fewer jobs, and less savings, burdens which will fall disproportionately on low-income households.
Inside this Trojan Horse of fairness, Bidenomics seeks higher marginal tax rates on wages, dividends, and corporate income, along with higher death taxes, taxes on unrealized capital gains, taxes on retirement savings, and more.
Infrastructure is a key pillar of Bidenomics, but not the infrastructure you’re probably thinking of. The administration’s proposal allocates only a few percent of its infrastructure dollars to roads, bridges, electrical grids, water and sewer mains, etc. It pours money into green-energy boondoggles, and even seeks to bulldoze highways in perfect condition if they are too close to minority neighborhoods, among other outlandish plans.
To pay for record-breaking spending, Bidenomics relies on funding from the federal reserve, a surefire way to produce inflation. Nothing in this life is free, and we are witnessing those trillions of dollars in government spending fuel rising prices. Inflation is decreasing real wages, particularly among low- and moderate-income households. The very people whom these policies are supposed to help are instead being undermined economically.
If these policies worked only half as well as the names of the bills imply, economic growth would be breaking records, and no one would remain in poverty. Instead, these policies are holding back the recovery like a choke collar, and welfare rolls are swelling. Real private GDP is still about $200 billion below Q4-2019 levels, despite pouring previously unimagined quantities of money into the economy.
We should not be surprised by these results; the policies of Bidenomics—higher marginal tax rates, more government spending and regulation, excessive money creation—have been tried before and found wanting. Nevertheless, many so-called experts continue to push this agenda.
The experts were expecting almost a million jobs in the last jobs report, but we saw only a quarter of that. The experts were expecting 3.6% inflation, but we saw 4.2%. The experts were expecting Keynesianism to revive the economy, but we are seeing the economy sputter. When it comes to Bidenomics, the experts seem to be always wrong but never in doubt.
An activist in economist’s clothing favorably characterized Bidenomics as “heads down, block out the noise, deliver timely help to the American people.” They have their “heads down” alright—like an ostrich with its head in the sand, oblivious to empirical evidence all around. And what is characterized as “noise” is not irrelevant distraction, but the practical feedback that should inform policy decisions. Lastly, the “timely help” is late to the game, with funds allocated in March not actually being spent or sent out to Americans until July.
It is reminiscent of the funding for “shovel-ready jobs” described in the 2009 rescue packages. Even former President Obama admitted that the funds he authorized took years to be spent, arriving far too late to achieve their stated objective.
While some economic policies, good and bad, take years to bear fruit, we are seeing the effects of Bidenomics sooner rather than later. Those effects do not at all match the goals and intentions of the policies, so we must judge according to effects, not the intentions. As the aphorism says, you shall know a tree by its fruit.
To learn more about Bidenomics, click here.
Texas looks to receive $41 billion in taxpayer money provided by Congress in the $1.9 trillion American Relief Plan Act (ARPA). With $31 billion being sent to the state, this is 25% of the state’s annual budget. This excessive spending in D.C. has become the norm and now they’re trying to push their profligate spending onto Texas.
We must not let that happen, and here’s how to stop it.
ARPA funds to Texas include $11.2 billion already released to public schools. Soon, there will be $10 billion for local governments and $4 billion for only water, sewage, and broadband projects. And $15.8 billion in more flexible funding will head to the state in one payment, since Texas’s unemployment rate is more than 2 percentage points above the pre-pandemic rate.
Not only are these funds adding to the skyrocketing national debt, but they’re also more than what Texas needs. The state and local governments already have balanced budgets or surpluses. And to make matters worse, these funds come with strings attached which jeopardize state sovereignty and our republic’s future.
The U.S. Treasury recently released guidance (a Fact Sheet) for the restrictions on how state and local governments can use the ARPA funds. There will now be a 60-day period for public comments on this guidance before additional clarity will be provided.
In the meantime, it appears that the state cannot use these funds for deposits into pension funds or for direct or indirect state tax cuts, except for special cases that don’t seem to apply in Texas, even though cuts by state or local governments seem legitimate and advisable.
The tangle of strings attached to this ARPA money makes it almost impossible to shrink government. Furthermore, states with respectable fiscal track records, like Texas, are being punished while irresponsible state and local governments, like California and Austin, are being rewarded.
Given the strings attached, if the state accepts ARPA funds, Texas’ approach should be a pro-growth, long-term strategy to strengthen the state while assisting struggling Texans still affected by the pandemic and the shutdowns.
The strategy should strive to return these funds to taxpayers by reducing and keeping taxes lower than otherwise, funding only one-time expenditures, and rejecting all or most ARPA funds with strings attached.
This strategy would help avoid expanding government, reduce the impact on state sovereignty, mitigate the rising burden of the federal government’s high spending and debt, and provide relief to families.
Texas would recover faster, and would better withstand the Biden administration’s onerous policies by using the $15.8 billion in more flexible funding on the following options to Keep Texas Texan.
We should allocate $9 billion for federal unemployment trust fund loans and replenish the state unemployment fund to avoid massive tax hikes that would be needed to fund these.
We should use $5.1 billion in ARPA funds directly or those swapped out with state general revenue to complete the border wall and add border security to provide relief of the border crisis and stop using state taxpayer dollars every biennium for this purpose.
And with property taxes continuing to climb, we should use the other $1.7 billion to provide a 2-cent compression of local school M&O property taxes for additional tax relief this session. Adding the extra $3 billion that Comptroller Glenn Hegar recently announced is available would mean there’s an opportunity to provide a 5.5-cent compression. Since these are technically local taxes, this could be a way to navigate around the unwise restrictions imposed by D.C.
These expenditures should be done in a way that ensures accountability and transparency to taxpayers.
There should be no ARPA funds for ongoing expenses to avoid fiscal cliffs that led to problems a decade ago, when Democrats argued there were “cuts” to public education when Obama’s one-time “stimulus” funds ran out. And these funds should be placed in a separate budget article from the base budget like the Foundation’s Conservative Texas Budget does. And spending should be posted on the Comptroller’s or Legislative Budget Board’s website.
There are other good ideas on how to use ARPA funds, but they may be restricted because of the many strings attached, which is why there should be more clarity from the Treasury. Thus, with so many hoops to jump through, Texas should strongly consider rejecting some or all the funds.
Particularly those with strings attached that would weaken the state’s fiscal and economic situation by creating fiscal cliffs in subsequent sessions, eliminating tax relief opportunities through December 31, 2024, and more. Rejecting ARPA funds would also give Texas an opportunity to help provide relief from the Biden administration’s gambit to bankrupt America with $6 trillion either passed or proposed in legislation during his first 100 days in office.
Texas is a sovereign state. It’s time D.C. recognizes that.
Texas looks to receive roughly $40 billion in taxpayer money provided by Congress through the American Rescue Plan Act (ARPA). This includes $11.2 billion already released to public schools and soon to be released $10 billion to local governments and $4 billion to infrastructure projects (i.e., only water, sewage, and broadband projects). And $15.8 billion in more flexible funding to the state in one payment given Texas’s unemployment rate is more than 2 percentage points above the pre-pandemic rate.
Approach Given Restrictions
The U.S. Treasury recently released guidance (Fact Sheet) for the restrictions on how state and local governments can use the ARPA funds. There will now be a 60-day period for public comments on these restrictions before additional clarity will be provided. In the meantime, it appears that the state cannot use these funds for deposits into pension funds or direct or indirect state tax cuts, except for special cases that don’t seem to apply in Texas while local tax cuts by state or local governments seem legitimate and advisable. Given strings attached, if the state accepts ARPA funds, there should be a pro-growth, long-term strategy to strengthen Texas while assisting struggling Texans from the pandemic and shutdowns.
The strategy should strive to return these funds to taxpayers by reducing and keeping taxes lower than otherwise, funding only one-time expenditures, and rejecting all or most ARPA funds with strings attached. This strategy would help avoid expanding government, reduce the impact on state sovereignty, mitigate the rising burden of the federal government’s high spending and debt, and provide relief to families. Texas would recover faster and better withstand the Biden administration’s onerous policies by using the $15.8 billion in more flexible funding on the following options to Keep Texas Texan.
If Texas accepts some or all the funds, consider the following:
Provide Texans with Relief
$9 billion for federal unemployment trust fund loan and replenish state fund to avoid tax hike.
$5.1 billion for border wall completion and border security to provide relief of border crisis.
$1.7 billion for a 2-cent compression of local school M&O property taxes to provide relief.
Ensure Accountability and Transparency
No ARPA funds for ongoing expenses to avoid fiscal cliffs (e.g., pub ed “cuts” after ARRA).
Place funds in separate Article from base budget like TPPF’s Conservative TX Budget
Publish receipts and outlays of funds on Comptroller’s or LBB’s website.
Replace general revenue with federal funds for only one-time items.
Support Reform—May be restricted but possibly by swapping general revenue appropriations
Fund Other Post-Employment Benefits (OPEB) with reforms for sustainability.
Swap with GR to pay down state debt with a high interest rate.
Use to fund defined-contribution retirement accounts or similar reforms for new employees.
Swap with GR to fund expanded special education microgrants created during COVID.
Swap with GR to fund market-based healthcare with direct primary care and other options.
Texas should consider rejecting some or all the funds, particularly those with strings attached that could create fiscal cliffs in subsequent sessions, eliminate tax relief opportunities through December 31, 2024, generate school finance problems, and more.
Many Americans are recovering from the recession that began in March 2020 due to the COVID-19 pandemic and forced business closures by state and local governments. The economic expansion that began in the second half of 2020 continued in the first quarter of 2021 as many of those governments removed or reduced restrictions on the private sector. However, employment has slowed lately as some governments are still imposing restrictions and the federal government continues giving unemployment ‘bonuses,’ causing many people to choose unemployment over work. This has created a record number of 8.1 million unfilled job openings. Nevertheless, the economy is still growing, and more pro-growth policies should be implemented to support the tangible prosperity experienced until March 2020.
More in the brief below:
By Vance Ginn, Ph.D. and Quinn Townsend
Families in Alaska, whether in good or bad economic times, practice responsible, priority-based budgeting. They must make decisions, often difficult ones, on how best to spend their hard-earned dollars. The same is true for small business owners who must prioritize their spending to keep their doors open, meet payroll, and provide for themselves.
Alaska’s government should do the same, and even more so given it’s not their money.
The way to do this is for the state to practice priority-based budgeting, whereby legislators take a close look at how every taxpayer dollar is spent. By doing so, state officials can allocate funding so that it doesn’t exceed the state’s ability to pay for it, as appropriately measured by population growth plus inflation.
Considering Alaska budget trends over the last two decades, there has been an improvement since 2016. During the period from 2001 to 2015, the average annual budget increased by 9.9%, which was three times faster than population growth plus inflation. Since then, the budget has declined annually by 7.3%, on average, while this key measure increased by just 1.6%, meaning that the recent growth of state government has helped to correct for prior excesses.
From 2001 to 2021, the budget grew on an average annual basis by 4.7%, which was nearly double that of population growth plus inflation. The excesses in the earlier period compounded over time to result in an inflation-adjusted state budget per capita in FY21 that is 10.9%, or $601 million, more than this key metric.
Some in Alaska have argued that there is no more fat to trim from the budget, that the state has cut everything it can since the highest spending years. But because the enacted budget, year after year, allocates more state funds than the state is able to sustain, it’s clear that difficult decisions are necessary. Just like a family or business prioritizes their budget based on necessities before wants, Alaska must be responsible and do the same.
This is why a fiscal rule of a responsible spending limit on state funds in Alaska is essential. This can be achieved by capping state appropriations to growing no more than population growth plus inflation every year.
As noted above, if the budget had matched population growth plus inflation over the last two decades, the state could have saved about $800 per Alaskan this year. This means the state would be budgeting about $600 million less in FY21 thereby helping to avoid its current attempt to dig itself out of a fiscal crisis and would probably not have drained its savings accounts either.
But we can’t change the past, only learn from our mistakes and do better. Much better. This will take responsibility and discipline, two things common to Alaskans.
Alaska Policy Forum’s Responsible Alaska Budget sets the maximum threshold on state appropriations based on population growth plus inflation over the last year, similar to what a meaningful spending cap should do.
Specifically, our maximum threshold on FY22 state appropriations is $6.18 billion after an increase of 0.92%. Achieving this feat and working to increase the budget less than this amount will help immensely in reducing the cost of funding government.
History has demonstrated that governments cannot spend and tax their way to prosperity. Alaska’s spending over the past two decades has proven that.
Policymakers should consider Alaska Policy Forum’s Responsible Alaska Budget and work to further limit spending. Keeping spending levels lower will not only serve Alaskans’ interests, but it will also make Alaska more economically competitive so that residents have more opportunities to achieve their hopes and dreams.
Vance Ginn, Ph.D., is chief economist at the Texas Public Policy Foundation based in Austin, Texas. He is the former chief economist of the White House’s Office of Management and Budget (OMB) during the Trump administration.
Quinn Townsend is the Policy Manager at Alaska Policy Forum based in Anchorage, Alaska. Previously, Quinn worked as the Economic Research Analyst at The Buckeye Institute. She completed her M.S. in Resource Economics and Management at West Virginia University.
The substantially weaker than expected U.S. jobs report was unfortunate for struggling Americans, but it should have been expected given the disastrous policy out of D.C. Fortunately, states can fix it.
Milton Friedman said that if the federal government oversaw the Sahara Desert, within five years there would be a shortage of sand. So inefficient and feckless is D.C. that we should never underestimate its ability to ruin good times and make bad times worse.
The 2020 recession and the current anemic recovery are a prime example.
State government-imposed shutdowns destroyed the greatest American economy in recent memory. Sure, the novel coronavirus played a role, but it was primarily imprudent policies which annihilated the best labor market in over half a century. On top of wounding that labor market so severely, the federal government then proceeded to poison the patient, ensuring a languid recovery.
The poison of choice? “Bonuses” for the unemployed.
At first glance, this hardly seems like an economic sedative. Why would it be harmful to help the unemployed? If anything, it sounds humane. The unemployed need assistance until they can find another job, and unemployment insurance (UI) payments partially or completely fills that temporary need, especially for those with little or no savings.
While that is true, new UI bonuses by the federal government haven’t been humane.
UI payments normally provide about half of what you earned while employed. However, in 2020—amid all the other decisions in D.C.—the federal government initiated a weekly bonus of $600 to everyone on unemployment. There were numerous reasons given for this enhancement, but they were all rather nebulous.
The actual effect was more people became unemployed and stayed unemployed.
Adding a weekly bonus to UI payments on top of what the unemployed already receive from the state frequently created the bizarre scenario wherein a person received more on unemployment than while working. Between April and July of 2020, 69% of those who lost their jobs had higher after-tax income on unemployment. (UI payments are not subject to Social Security tax, Medicare tax, nor income tax in some states.) Half of the unemployed were receiving at least 134% of what they earned while working.
If you are receiving more on unemployment than you did while working, why would you go back to your job? It’s one thing to expect people to be rational, but another to expect them to be saints.
Even after the $600 weekly bonus expired, D.C. instituted a $400 bonus, and now a $300 bonus. While the deleterious effects of the bonus have diminished with its size, the negative effect on unemployment is still potent. Some 6 million people are staying on unemployment because of all the government handouts they receive.
And although the businesses that didn’t fold during the lockdowns are finally able to reopen their doors with the lifting of government lockdowns in some states, those businesses are struggling to find people willing to work.
Unlike before the government shutdowns when the economy was roaring and businesses could not find enough workers because commerce was so busy, now businesses are contending with Uncle Sam’s generous handouts—an uphill battle to be sure.
There is now a chronic labor shortage of almost 7 million workers (and that number is rising) amidst massive unemployment. The incompetence of the federal government was worse than Milton Friedman predicted—in less than a year, it has produced this surreal and terrible scenario.
At least two states are telling D.C. that enough is enough. Montana Gov. Greg Gianforte will no longer accept the UI bonuses starting in June. And South Carolina Gov. Henry McMaster will do the same starting this week. However, these funds shouldn’t be used as a bonus to incentivize people to work as proposed in Montana, because nothing is free—whether it be handouts or precedence.
But regarding rejecting this federal expansion into the economic livelihood of Texas, Gov. Greg Abbott should do the same.
Texas currently has almost 1 million unemployed people—nearly twice the number from February 2020 before the pandemic—despite hundreds of thousands of unfilled job openings statewide. If the governor cancelled the federal unemployment bonuses, it would help alleviate this situation by removing the artificial incentive to remain unemployed.
This would not impact regular state-provided UI payments, so those who are truly struggling to find work will still receive those payments.
Opening the great state of Texas was the right decision, but it means little to businesses and economic prosperity if businesses are unable to find workers. Rolling back these injudicious UI bonuses will eliminate a reason for too many not to work and help Texas flourish once again while providing yet another model for the country.
A recent Wall Street Journal article claimed “U.S. Debt Is at a Record High, but the Risk Calculus Is Changing.” But is that calculus really changing? According to some, the government can borrow and print all the money it wants without repercussions.
Modern Monetary Theory (MMT) advances the puerile notion that we have somehow moved beyond the antiquated restriction of scarcity under which our ancestors labored. This thinking is reminiscent of the childish fantasy that our actions will not have consequences, but realities like scarcity are inescapable.
What adherents of MMT have really done is determined their socialist agenda and then reconstructed the policy tools available to support the agenda. It’s a sneaky move but one not based on reality nor economics.
But our point is not to counter every flaw of MMT, but rather to note that similar bad economics is snake oil sold to us by those who supposedly have “better” economic theories.
The notion being peddled today is that D.C. can spend trillions of taxpayer dollars, run up massive deficits, fund most of it by the Federal Reserve through money creation, and voilà, no inflation—reminiscent of a bad magic trick. A growing body of political activists in economists’ clothing subscribe to this view. Inflation has become a dirty word, unbefitting modern discourse among intellectuals.
But ask yourself: Am I paying more for food and gasoline? Are home and rent prices going up, and property taxes with them? Are cars more expensive? Is lumber more expensive?
It seems everything is getting more expensive, and that is price inflation—a rise in the general price level of a basket of goods and services. But what exactly causes it?
You’ll hear all kinds of explanations. Some have blamed greedy businesses for raising their prices. Some have blamed grasping unions for demanding higher wages. Some have blamed the consumer-at-large for being a spendthrift.
Yes, businessmen are greedy—everyone is. Yes, unions are grasping—everyone is. Yes, the consumer is a spendthrift—everyone is. But they don’t cause inflation.
Inflation originates in one place: behind the façade of a Greek temple on Constitution Avenue in Washington, D.C.—at the Federal Reserve.
The Fed can create money out of nothing—or more technically, create money out of government debt. Only the Fed can churn out unlimited money, and that is why only it can cause inflation. Businessmen, consumers, unions, and investors do not have this magical printing press and so they cannot cause inflation.
But why does creating money cause inflation? Wouldn’t we be better off if we all had more money?
Imagine that Santa Claus writes you a check for Christmas equal to the amount of money you already have. You now have twice as much money! But imagine Santa does the same thing for everyone else. Shortly thereafter, the price of nearly everything you purchase would be about twice as expensive because there’s too much money chasing too few goods.
That is inflation—and the Fed has been playing Santa Claus.
As the big spenders in D.C. take the country further into debt, the Fed has been there to write trillion dollar checks to pay for it. Normally, the government would have to borrow money from the public—which doesn’t cause inflation but does crowd out private sector activity. But for more than a year now, the Fed has kept its printing press in overdrive, thereby artificially holding down interest rates and distorting economic activity.
Initially, this appears to create an economic boom, as everyone thinks he’s better off with his government “stimulus” check and increased spending. But remember that nothing is free in a world of scarcity. Everyone discovers that others also have more money, and that prices are rising as more dollars chase fewer goods and services.
This inflation also acts as a tax on us as it reduces our purchasing power. Put simply, government uses inflation to confiscate a portion of your savings and your wealth.
If inflation averages just 2% per year (the Federal Reserve’s target), the government will have confiscated about half the value of your liquid wealth in just 36 years. For context, one measure of general price inflation was 2.6% for the 12 months through March 2021, but 4.1% in the first quarter of 2021 based on another measure. At a 4% average annual rate, the hidden tax of inflation will seize half of your money’s purchasing power in a mere 18 years.
Perhaps the Federal Reserve is not playing Santa Claus, but the Grinch. Instead of the massive spending boondoggles by the Biden administration and resulting costly repercussions, we need rules that limit excessive government spending and excessive money creation.
Texas will likely receive roughly $40 billion in taxpayer money provided by Congress through the American Rescue Plan Act (ARPA) for a number of budget areas: roughly $12 billion to public schools, $10 billion to local governments, and $4 billion to infrastructure projects (i.e., water, sewage, and broadband). Texas looks to also receive $17 billion in more flexible funding to state government.
Approach Depends on Restrictions
There are restrictions on how state and local governments can use the ARPA funds, but we will not know details on these restrictions until the U.S. Treasury issues guidance. Generally, these restrictions include using the funds for direct or indirect cuts to state taxes or deposits into pension funds. Given these restrictions, if the state is going to accept these funds, the best approach would be to follow a pro-growth, long-term strategy to provide relief to Texans from the struggles imposed by COVID-19 and shutdowns.
The chosen strategy should keep taxes lower than otherwise, reduce government debt obligations, fund only one-time expenditures, and reject all or most funds with strings attached to avoid expanding government and to reduce the impact on the country’s high spending and debt burdening America. Doing so will help provide relief from the effects of the pandemic and associated shutdowns. Using this strategy would help Texas recover faster and better withstand the onerous policies by the Biden administration to Keep Texas Texan by considering the following options for the $17 billion in more flexible funding.
If Texas accepts some or all the funds, the following uses should be considered:
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Vance Ginn, Ph.D.