Overview

• Texans for Fiscal Responsibility provided a three-step process to eliminate all property taxes over the next decade by simply limiting government spending at the state and local levels of government and returning surplus collected taxpayer dollars to taxpayers.
  
• Unfortunately, the Texas House’s budget substantially increases all funds appropriations in the proposed 2024-25 budget above the 2022-23 budget by 14.3% to $302.7 billion, and by 9.8% to $290.7 billion (excluding the $12 billion in new property tax relief). Likewise, the Texas House increases state funds appropriations by 21.5% to $202.0 billion, and by 14.3% to $190.0 billion excluding the new property tax relief.
  
• These increases in appropriations would be better allocated to new property tax relief, primarily through compression of school district maintenance and operations property taxes. This would create a path to eliminating these property taxes, thereby giving Texans more of the right to own their property instead of perpetually renting from the government.

Originally posted at Texans for Fiscal Responsibility. 

​Key Point: Average weekly earnings are now down for 23 straight months year-over-year as inflation keeps roaring. But there’s hope if we give free-market capitalism a chance to let people prosper. 

​Overview: The government failures that drove the “shutdown recession,” high inflation, and weak economic growth over the last three years continue to plague Americans. This includes excessive federal spending leading to massive cumulative deficit spending of $7.6 trillion since January 2020 to reach $31.6 trillion in national debt—about $250,000 owed per taxpayer. This has created a fight between the Biden administration and House Republicans over the debt ceiling, as raising it must come with spending restraint. And more inflation is on the horizon as the Federal Reserve recently increased its balance sheet and the government creates rampant moral hazard by insuring what appears to be all deposits at big banks. The solution to these problems are pro-growth policies of shrinking government back to its constitutional roles.
 
Labor Market: The Bureau of Labor Statistic recently released its U.S. jobs report for February 2023. After substantial revisions in the previous report which likely indicate bias in these data for a while, there were some signs of strength while others suggest weakness.
 
The establishment survey shows there were +311,000 (+2.9%) net nonfarm jobs added in February to 155.4 million employees, with +265,000 (+3.0%) added in the private sector and +46,000 (+1.9%) jobs added in the government sector. Most of the private sector jobs were added in the sectors of leisure and hospitality (+105,000), private education and health services (+74,000), and retail trade (+50,100), which the first two sectors also led over the last 12 months; information (-25,000), manufacturing (-4,000), utilities (-1,100), and financial activities (-1,000) had net job declines last month and only retail trade (-2,300) declined over the last year.
 
The household survey had another increase of +177,000 jobs to 160.3 million employed. There have been declines in net jobs in four of the last 11 months for a total increase of +2 million since March 2022, which is about half of the +3.9 million net jobs per the establishment survey. The official U3 unemployment rate rose to 3.6% and the broader U6 underutilization rate rose to 6.8%. Since February 2020 before the shutdown recession, the prime age (25-54 years old) employment-population ratio is flat at 80.5%, prime-age labor force participation rate was 0.1-percentage point higher at 83.1%, and the total labor-force participation rate was 0.8-percentage-point lower at 62.5%with millions of people out of the labor force thereby holding the U3 unemployment rate artificially low
 
But challenges remain for Americans as inflation-adjusted average weekly earnings were down -1.9% over the last year for the 23rd straight month.
 
Economic Growth: The U.S. Bureau of Economic Analysis’ recently released the 2nd estimate for economic output for Q4:2022. The following table provides data over time for real total gross domestic product (GDP), measured in chained 2012 dollars, and real private GDP, which excludes government consumption expenditures and gross investment. And most of the estimates for Q4:2022 and growth in 2022 were revised lower, providing more evidence that 2022 was a very weak year if not a recession.

​Economic activity has had booms and busts thereafter because of inappropriately imposed government COVID-related restrictions in response to the pandemic and poor fiscal policies that severely hurt people’s ability to exchange and work.
Since 2021, the growth in nominal total GDP, measured in current dollars, was dominated by inflation, which distorts economic activity. The GDP implicit price deflator was +6.1% for Q4-over-Q4 2021, representing half of the +12.2% increase in nominal total GDP. This inflation measure was +9.1% in Q2:2022—the highest since Q1:1981—for a +8.5% increase in nominal total GDP that quarter. This made two consecutive declines in real total (and private) GDP, providing a criterion to date recessions every time since at least 1950. In Q3:2022, nominal total GDP was +7.6% and GDP inflation was +4.4% for the +3.2% increase in real total GDP. But if inflation had been as high as it was in the prior two quarters or had the contribution of net exports of goods and services (driven by natural gas exports to Europe) not been 2.9%, real total GDP would have either declined or been essentially flat for a third straight quarter.

In Q4:2022, there was a similar story of weakness as nominal total GDP was +6.6% and GDP inflation was +3.9% for the +2.7% increase in real total GDP. But if you consider the +2.7% real total GDP growth was driven by contributions of volatile inventories (+1.5pp), government spending (+0.6pp), and next exports (+0.5pp) which total +2.6pp, the actual growth is quite tepid like it was in Q3:2022. For all of 2022, real total GDP growth is reported +2.1% year-over-year but measured by Q4-over-Q4 the growth rate was only +0.9%, which was the slowest Q4-over-Q4 growth for a year since 2009 (last part of Great Recession).

The Atlanta Fed’s early GDPNow projection on March 24, 2023 for real total GDP growth in Q1:2023 was +3.2% based on the latest data available.

​The table above also shows the last expansion from June 2009 to February 2020. A reason for slower real private GDP growth in the latter period is due to higher deficit-spending, contributing to crowding-out of the productive private sector. Congress’ excessive spending thereafter led to a massive increase in the national debt by nearly +$7 trillion that would have led to higher market interest rates. This is yet another example of how there is always an excessive government spending problem as noted in the following figure with federal spending and tax receipts as a share of GDP no matter if there are higher or lower tax rates. 

​But the Fed monetized much of the new debt to keep rates artificially lower thereby creating higher inflation as there has been too much money chasing too few goods and services as production has been overregulated and overtaxed and workers have been given too many handouts. The Fed’s balance sheet exploded from about $4 trillion, when it was already bloated after the Great Recession, to nearly $9 trillion and is down only about 2.6% since the record high in April 2022 after rising nearly $400 billion in March 2023. The Fed will need to cut its balance sheet (total assets over time) more aggressively if it is to stop manipulating so many markets (see figure below with types of assets on its balance sheet) and persistently tame inflation, which there’s likely a need for deflation for a while given the rampant inflation over the last two years. 

​The resulting inflation measured by the consumer price index (CPI) has cooled some from the peak of +9.1% in June 2022 but remains hot at +6.0% in February 2023 over the last year, which remains near 40-year highs along with other key measures of inflation. After adjusting total earnings in the private sector for CPI inflation, real total earnings are up by only +2.2% since February 2020 as the shutdown recession took a huge hit on total earnings and then higher inflation hindered increased purchasing power.

Just as inflation is always and everywhere a monetary phenomenon, deficits and taxes are always and everywhere a spending problem. The figure by David Boaz at Cato Institute shows how this problem is from both Republicans and Democrats.
​
As the federal debt far exceeds U.S. GDP, America needs a fiscal rule like the Responsible American Budget (RAB) with a maximum spending limit based on population growth plus inflation. If Congress had followed this approach from 2003 to 2022, the figure below shows tax receipts, spending, and spending adjusted for only population growth plus chained-CPI inflation. Instead of an (updated) $19.0 trillion national debt increase, there could have been only a $500 billion debt increase for a $18.5 trillion swing in a positive direction that would have substantially reduced the cost of this debt to Americans. The Republican Study Committee recently noted the strength of this type of fiscal rule in its FY 2023 “Blueprint to Save America.” And to top this off, the Federal Reserve should follow a monetary rule so that the costly discretion stops creating booms and busts.

​Bottom Line: My expectation is that stagflation will continue along with the a deeper recession this year given the “zombie economy” and the unraveling of the banking sector which will hit main street. Instead of passing massive spending bills, the path forward should include pro-growth policies that get government out of the way rather than the progressive policies of more spending, regulating, and taxing. The time is now for limited government with sound fiscal and monetary policy that provides more opportunities for people to work and have more paths out of poverty.
 
Recommendations:

• Set a pro-growth policy path with less spending, regulating, and taxing at all levels of government.
  
• Reject new spending packages that America cannot afford nor needs; pass the RAB instead.
  
• Impose strict monetary rule with the Fed having a much smaller balance sheet and a much higher federal funds rate target until we End the Fed.
  
• Enact return-to-work policies.

With a debt ceiling fight and bank failures, Congress’ day of reckoning to spend less is now.

Inflation is sky-high, purchasing power is sinking, 60% of Americans live paycheck to paycheck, and credit card debt is soaring to nearly $1 trillion.

To make matters worse, between the fourth quarter of 2021 to the fourth quarter of 2022, U.S. real GDP grew by just 0.9%, the slowest growth in a “recovery” since at least 2009 amid the Great Recession.

The more the federal budget deficit grows because of excessive government spending, the more the budget is crowded out from funding legislative priorities. In turn, Congress is forced to find ways to pay for interest on the debt, which will soon exceed $1 trillion.

It’s not just the budget that’s getting crowded out; productive activity in the private sector fueled by entrepreneurs is stifled due to too much money chasing too few goods and services at the hands of tyranny imposed by big government.

The underlying culprits to these economic catastrophes are reckless, weaponized government spending, often funding tyranny against Americans, and the Federal Reserve holding a bloated balance sheet. This excess national debt and money printing contributed to the latest closure of Silicon Valley Bank and will have further consequences.

These government failures should be addressed by Congress spending less. This should include reducing federal funds sent to states. Not only do federal funds diminish federalism by making states dependent on the federal government but it also comes with massive red tape.

The U.S. system of federalism provides a unique laboratory of competition to see what works across the states. This is best observed and encouraged by letting states be as independent as possible. Considering that federal deficits are expected to increase by an average of $2 trillion annually over the next decade, states would be wise to prepare for fewer federal funds as Congress’ purse strings will tighten.

According to Congressman Chip Roy (R-TX) in a recent interview, another major way the government drives up spending is by hiding behind so-called mandatory expenditures such as Medicare and Social Security, and discretionary spending, which is funding tyranny through the weaponization of bureaucrats.

“We have to commit to not funding tyranny such as the IRS going after minorities and poor people,” said Congressman Roy. “Why should we fund the FBI labeling Scott Smith, a man who stood up for his daughter being sexually assaulted to her school board, a domestic terrorist? Likewise, military funding should go toward making us a strong defense, not to ensuring that recruits ‘stay woke’ and never say ‘sir’ or ‘ma’am.’”

While it’s politically popular for the government to honor its commitments like Social Security and Medicare for current retirees, mandatory spending is excessive and needs reforms to remain solvent over time. Cutting non-defense discretionary spending–including abolishing Departments of Education and Energy–to pre-Covid levels, would mean saving $3 trillion over the next decade.

But both Republicans and Democrats have to work at this as they’re equally culpable of driving up spending under many administrations. And these expenditure savings need to be closer to $8 trillion to stabilize the debt to output level per the Committee for a Responsible Federal Budget.

In addition to tightening up federal funds sent to states and mandatory expenses, the government should consider adopting a Responsible American Budget, similar to what’s been practiced in Texas, Florida, and Tennessee, that’s helping their economies thrive.

This would require adopting some sort of fiscal rule like a spending cap, but as Congressman Roy emphasized, without passing exceptions that would render the rule irrelevant.

If such a rule based on the maximum growth rate of population growth plus inflation, which represents what the average taxpayer can afford, had been in place, then we would have accrued $500 billion in new debt rather than $19 trillion over the last 20 years.

Returning the federal government to its constitutional role of preserving liberty is key to economic growth.

The surest way to suffocate the productive private sector from innovating and Americans from prospering is to let spending increases continue. This is the biggest threat to the American dream today, which younger generations are already counting dead as they’ve seen such poor economic growth in their lifetimes.

If the future of the nation and opportunities for upcoming generations is important, the government must earn Americans’ trust by spending less, reforming mandatory programs, cutting federal bureaucracy, and promoting other pro-growth policies.

​As Congressman Roy shared, “I didn’t inherit a free country to pass down an unfree one. We have to fight.”

Originally posted at The Daily Caller. 

​Louisiana is one of the most federally dependent states in the country, ranking 10th in a recent analysis.

The personal finance website WalletHub released a report Wednesday that ranked states’ dependency on the federal government based on three metrics: return on taxes paid to the federal government, share of federal jobs, and federal funding as a share of state revenue.

The study ranked Louisiana in 10th overall with a score of 57.46, though the state government’s dependency ranked third. Residents’ dependency was ranked 22nd.

Vance Ginn, chief economist at the Pelican Institute, told The Center Square much of Louisiana’s dependency derives from the state’s high poverty rate — 19.6% in 2022 — and the federal funds from various programs that flow into the state as a result.


​Forty-four percent of all state funding in Louisiana comes from Congress, and the Pelican Institute is working on “finding ways for Louisiana to have a comeback” that boosts businesses and employment, which in turn reduces poverty.

“Louisiana is overly dependent on the federal government and the way to reduce that depends on getting more Louisianans back to work,” he said. “The way to get people back to work is removing barriers in the private sector, restraining government spending, providing tax relief, and reducing regulations.”

The WalletHub analysis shows only state governments in Alaska and Wyoming receive more funding as a share of state revenues than Louisiana.

Neighboring Mississippi ranked third overall in the study, while Arkansas was ranked 28th and Texas 29th.

Other states in the top 10 most dependent on federal funding include Alaska in first, followed by West Virginia, Mississippi, Kentucky, New Mexico, Wyoming, South Carolina, Arizona, and Montana.

New Jersey was ranked as the least dependent state, followed by Washington, Utah, Kansas, Illinois, California, Massachusetts, Iowa, Delaware, Nevada, and Colorado.

The analysis also derived an average ranking for red and blue states, based on how residents voted in the 2020 presidential election.

Democratic states produced an average ranking of 30.68, compared to the average ranking of 20.32 in Republican states, suggesting Republican states are generally more dependent than Democratic states.

The study also examined how tax rates factor into the equation.

Louisiana fell into the “high dependency, low tax” category, with a tax rate that’s ranked 25th in the country.

Other analysis compared gross domestic product per capita compared to dependency on the federal government, and WalletHub placed Louisiana in the “high dependency, low GDP” category with a GDP per capita ranking of 40th.

Originally published at The Center Square. 

​On today's episode of the "Let People Prosper" show, which was recorded on March 6, 2023, I'm honored to be joined by Dr. Arthur Laffer, legendary economist and 2019 recipient of the Presidential Medal of Freedom.

We discuss:

1. How raising income taxes disincentivizes work and productivity, slows growth, lowers tax collections (the Laffer Curve), and more in his latest book Taxes Have Consequences;
2. Why intellectual honesty in economics is essential no matter the politics;
3. What went into the economic policy decisions inside the White House with Nixon, Reagan, Clinton, Trump, and more. We discussed this and the need for pro-growth policies in a recent commentary at The Federalist.​

​You can watch this interview on YouTube or listen to it on Apple Podcast, Spotify, Google Podcast, or Anchor (please share, subscribe, like, and leave a 5-star rating).

​Dr. Arthur Laffer’s bio and other info (here):

• Arthur B. Laffer is the founder and chairman of Laffer Associates, an economic research and consulting firm. As a result of Dr. Laffer’s economic insight and influence in starting a worldwide tax cutting movement during the 1980s, many publications have named him “The Father of Supply Side Economics.”
• He is a founding member of the Congressional Policy Advisory Board, which assisted in forming legislation for the 105th, 106th and 107th Congress. Dr. Laffer served as a member of President Reagan’s Economic Policy Advisory Board for both of his two terms.
• In March 1999, he was noted by Time Magazine as one of “the Century’s Greatest Minds” for his invention of the Laffer curve, which has been called one of “a few of the advances that powered this extraordinary century.”
• He has received many awards for his economic research including two Graham and Dodd Awards from the Financial Analyst Federation. He graduated from Yale with a Bachelor’s degree in economics in 1963 and received both his MBA and Ph.D. in economics from Stanford University.

For thoughtful economic insights, media interviews, speeches, blog posts, research, and more at my website: https://www.vanceginn.com/.

It was a pleasure to help write this report with the Pelican Institute for Public Policy! Check it out.

​Today, the Pelican Institute for Public Policy released “Louisiana’s Comeback Agenda,” a bold vision for policy change in Louisiana and a statewide campaign to support the effort. The agenda is intended to serve as a guide for lawmakers, candidates, and community leaders to spark discussion and debate toward proven policies to bring jobs and opportunity to Louisiana.

“Poor public policy decisions have caused Louisiana families to suffer for too long, and yet our southern neighbors like Texas, Florida, Tennessee, and North Carolina are thriving,” said Daniel Erspamer, CEO of the Pelican Institute. “Given our unmatched natural resources and cultural assets, Louisiana should be an economic powerhouse, and with the right policy decisions moving forward, it can be.” 

Louisiana’s Comeback Agenda focuses on six priority policy areas, outlining specific problems and offering specific solutions: 

• Modernize Tax Policy & Budget Responsibility
• Give Every Kid A School That Fits
• Enhance Public Safety
• Create Jobs and Opportunity for All
• Embrace Technology and Spur Innovation
• Reduce Regulatory Barriers

The plan was released just before the gubernatorial forum at the Pelican Institute’s annual Solutions Summit, where candidates were asked questions that dealt with the policy issues outlined in the plan. 

“We’ve spent months focused on finding real solutions to correct Louisiana’s poor decisions of the past and create increased opportunity for Louisiana’s people going forward,” said Erin Bendily, Vice President for Policy and Strategy at the Pelican Institute. “We’ve reviewed research, examined what other states are doing, and identified where our state can be more competitive. This agenda is the result of that work. We hope that this will help shape the policy discussions in Louisiana in the upcoming legislative session and as voters make important decisions about our state’s leadership and future this fall.” 

The agenda is the policy centerpiece of a major campaign that aims to bring transformational policy change to the Pelican State. The policy recommendations will be supported by a statewide speaking tour, an ambitious advertising campaign, grassroots activation and education, and legislative engagement and advocacy. 

“Ultimately, we want Louisiana to flourish, and the policy solutions in the Comeback Agenda are how we will get there,” said Erspamer. “The courage to make these crucial changes will require leadership, bold action, and a groundswell of support from every corner of Louisiana. Working together, we can write the next chapter of Louisiana’s story.”

You can read the full paper here.

Originally published here. 

​David is joined by former Trump-era OMB economist, Dr. Vance Ginn, to discuss the history of economic thought; the strengths and weaknesses of the classical, Chicago, and Austrian schools of thought; whether or not we need a Fed; and what to do about excess debt and economic growth. Yes, it is a busy hour, but one you will not want to miss!

Iowa’s fiscal foundation remains strong despite national economic uncertainty because of the state’s fiscal conservatism and prudent budgeting.

Governor Kim Reynolds has made Iowa a leader in conservative fiscal policy. This approach has already left more money in taxpayers’ pockets, and set the state on course to implement a low, flat income tax by 2026.

In its Fiscal Policy Report Card on America’s Governors for 2022, the Cato Institute “grades governors on their fiscal policies from a limited-​government perspective.” On this basis, Cato ranked Governor Reynolds as the best in the nation, writing that she “has been a lean budgeter and dedicated tax reformer since entering into office in 2017.”

Last year, Governor Reynolds and the Iowa legislature continued to place a priority on prudent budgeting. The $8.2 billion budget for fiscal year 2023 represented a mere 1 percent increase from the prior year. And for FY 2024, Reynolds has proposed an $8.5 billion budget, with the extra funds meant to cover the universal school-choice plan that the legislature recently passed.

Iowa’s anticipated $1.6 billion budget surplus for FY 2023 is nearly as much as the $1.9 billion surplus recorded in FY22, with another $2.2 billion surplus expected in FY 2024. The state should have $895.2 million in reserve funds in FY 2023 and $962.5 million in FY 2024 — the statutory maximum for those years. The state’s Taxpayer Relief Fund — the fund into which excess tax revenue is placed so that it can be returned to taxpayers by the legislature — was worth $1.1 billion in FY 2022, and is on track to grow to $2.7 billion in FY 2023 and then to $3.4 billion in FY 2024.

​In 2022, Iowa also enacted the most comprehensive income-tax-reform package in the nation. Over four years, the nine-bracket income tax will transform into a flat income tax with a 3.9 percent rate. The corporate tax has also already been reduced from 9.8 percent to 8.4 percent, and is set to gradually shrink until it reaches a flat 5.5 percent rate. These measures constitute a sound, pro-growth tax policy that will create incentives to work, save, and invest, and will make Iowa’s economy more competitive on the national stage.

Prudent budgeting is essential for ensuring that these income-tax cuts can be responsibly implemented. And on Governor Reynolds’ watch, Iowa’s tax revenues continue to grow, reducing the degree to which the tax cuts must be “paid for” through spending cuts. The most recent numbers, released in February, showed that revenues are at $35.9 million, or 5.7 percent higher than they were at the same time last fiscal year.

That said, in addition to proposing a fiscally prudent FY 2024 budget, Governor Reynolds is also proposing to rein in Iowa’s administrative state. It has been 40 years since Iowa made any major reforms to state government, and in that time the size and scope of government have increased. Reynolds is proposing to streamline the executive branch and reverse some of that growth.

C​urrently, Iowa has 37 cabinet agencies. The governor’s proposal calls for a 16-agency cabinet. She argues that government is both too big and too expensive, and streamlining it will result in more efficiency and better services for taxpayers. She estimates that if enacted, this consolidation plan would save taxpayers over $214 million in the next four years.

Although Governor Reynolds and the legislature have placed a priority on prudent budgeting, there is more that could be done. Iowa statute currently allows legislators to spend up to 99 percent of projected tax revenues. This rule should be replaced with one that would limit most spending to the rate of population growth plus inflation, which could have saved Iowans as much as $2.9 billion — or $3,700 for the average family of four — in taxes had it been in place since 2013.

Meanwhile, Governor Reynolds has already signaled that she does not want to stop at a flat income-tax rate of 3.9 percent. She has said she aims to lower the rate to a flat 2 percent, and to eventually eliminate the tax altogether while continuing to cut state-government spending.

Governor Reynolds should be applauded for putting Iowa on the path to a robust economy, and providing a model of sound fiscal policy for the federal government and other states to emulate. Now, she just has to keep at it, because there is more work still to be done.

Originally published at National Review Online. 

T​he debt ceiling standoff between President Biden and the Republican-controlled US House of Representatives indicates Republicans care about government spending and deficits again, allegedly.

But history tells a different story. 

Since 1980, the national debt has risen substantially each year, regardless of whether the presidency, House, or Senate was red or blue. 

In my recent interview with financial expert David Bahnsen, he said, “[Conservatives] are losing their moral credibility…we can’t only be fiscal conservatives when there’s a Democrat in the White House.” 

Proving Bahnsen’s point, two-thirds of the national debt was added just since 2009: $9.3 trillion during President Obama’s eight years, $7.8 trillion over President Trump’s four years (more than half of which was added during the COVID-19 pandemic and related shutdowns), and already $3.7 trillion in President Biden’s two years, with much more to come. During the Obama and Trump terms, both Republicans or Democrats controlled Congress. Neither put the breaks on borrowing.

Spending restraint is necessary. 

Spending less would help avoid default on the debt, and help reduce expected massive deficits. If deficits continue to accelerate, as the Congressional Budget Office projects with a current policy baseline, the Federal Reserve will, at some point, be forced to monetize this new debt at such a scale that the post-pandemic inflation will seem mild by comparison. Moreover, higher deficits and interest rates will result in higher net interest payments, which will soon surpass $1 trillion per year, thereby crowding out Congressional budgets and likely necessitate more spending, taxes, and inflation.

In early 2021, inflation escalated quickly after President Biden and Democrats passed the $2 trillion American Rescue Plan Act, handing out additional, unnecessary, blanket tax rebates and ratcheting up payouts to state and local governments and wasteful programs. And then there were the other costly legislative offerings of the “infrastructure” bill: the CHIPS Act, and the (inappropriately named) Inflation Reduction Act.

Then, much of this substantial new debt generated by more than $7 trillion in excessive spending since early 2020 was purchased by the Fed, more than doubling the monetary base. Burdensome regulations imposed by the Biden administration, particularly on oil and gas production, along with tax hikes, resulted in a 40-year-high inflation rate and the slowest year of economic growth during a recovery in decades. The monetary base has finally started declining – down 6.5 percent since its peak of nearly $9 trillion in April 2022–and inflation has come down slightly but remains persistently high at 6.4 percent. 

Despite President Biden’s claims in his recent State of the Union address, deficits under his administration have remained near historic highs. While it’s true that the deficit has declined, it remains well above $1 trillion, and the decline was from expiring pandemic relief measures. The Congressional Budget Office finds the deficit will remain elevated well above $1 trillion and “averages $2 trillion per year from 2024 to 2033.”

That’s far from balancing the budget or, better yet, achieving a surplus that could reduce the national debt, a feat achieved in only 6 years since 1940 (1947, 1948, 1951, 1956, 1957, and 1969). And it hasn’t been sustained in a century, since Presidents William Harding then Calvin Coolidge effectively restrained government spending. 

Cutting total spending is necessary. But trimming discretionary spending alone is not enough, as that will only temporarily address America’s fiscal crisis. To get out of this national crisis, we need perpetual spending restraint, like that championed by President Coolidge, which will require key reforms to “mandatory” programs like Social Security and Medicare. 

While a balanced budget amendment sounds good (and would be much better than our lack of a fiscal rule at the federal level today) it would likely result in rising taxes, which would be detrimental to growth and deficit-reduction efforts. A federal spending limit tackles the ultimate burden of government: spending. 

This principle works at the state level in places like Texas, where the Legislature has held the budget in check over the last decade, contributing to a $32.7 billion surplus that could provide historic tax relief. Other state think tanks are weighing this responsible-budgeting approach, limiting spending to a maximum rate of population growth plus inflation. This rate is too high now, but typically provides a stable metric that reasonably accounts for the average taxpayer’s ability to pay for government spending while growing less than the economy.

Instituting a federal spending limit would encourage Congress to narrow its scope to constitutional duties. This could be done with the Responsible American Budget, which has been supported by economists, politicians, and thought leaders, by limiting federal budget growth to correspond with population growth plus inflation.

This approach would help remove failed programs from our lives, while allowing for more free-market capitalism to support human flourishing. Had this limit been followed over the past 20 years, the US could have added just $500 billion to the national debt on a static basis, instead of the $19 trillion we got. The more likely result would have been paying down the debt, given the dynamic effects of such a pro-growth policy.

While House Republicans are trying to restrain spending for the moment, both sides of the political aisle need to encourage a bigger shift that embraces spending limits and pro-growth policies. We must cut government spending. The negotiations around raising the debt ceiling should be that opportunity to provide fiscal sanity. If not, we will have more costly consequences that Americans can’t afford.

Originally published at American Institute for Economic Research. 

​In today's episode of the "Let People Prosper" podcast, I have the honor of being joined by U.S. Congressman Chip Roy (R-TX) who shares his insights on:

• How battling cancer ignited his vigor to fight for America's freedom for his generation and future generations;
• How politicians fund the tyranny they claim to fight against; and
• His views on the current debt ceiling debate, the complications of limiting government spending, and more.

​You can watch this interview on YouTube or listen to it on Apple Podcast, Spotify, Google Podcast, or Anchor (please share, subscribe, like, and leave a 5-star rating).

Congressman Chip Roy’s bio (here):

• Congressman Chip Roy is a devoted husband and father of two currently serving his third  term in Congress representing Texas's 21st Congressional District — which includes South Austin, North San Antonio, and the Texas Hill Country.
  
• Previously, Rep. Roy served as First Assistant Attorney General of Texas under Ken Paxton, Chief of Staff to Sen. Ted Cruz, senior advisor to Texas Governor Rick Perry, Senate Judiciary Committee staff director under Sen. John Cornyn, and as a federal prosecutor.
• Prior to the public sector, he worked for nearly three years as an investment banking analyst. 
  Rep. Roy holds a B.A. and M.A from the University of Virginia and a J.D. from the University of Texas.  He serves on the House Judiciary, Rules, and Budget Committees and is the Policy Chair of the House Freedom Caucus.
• Find him on Twitter (@ChipRoyTX).

For thoughtful economic insights, media interviews, speeches, blog posts, research, and more at my website: https://www.vanceginn.com/.

​In 2021, a bipartisan coalition ended school property tax abatements for corporations and renewable energy companies. On this week’s Liberty Cafe, Vance Ginn and Tim Hardin join me to discuss how Big Government Texas Republicans are attempting to restore this program for their friends in Big Business.

Both Republicans and Democrats at the national level have put us down a path of slow growth, massive deficits, and high inflation. With a new Republican majority in the U.S. House and the daunting debt ceiling fight over the bloated $31.4 trillion national debt almost exclusively due to excessive spending, there’s a proven pro-growth, pro-liberty path.

In 2022, the U.S. had real GDP growth of just 0.9 percent (Q4-over-Q4), the highest inflation in 40 years, the highest mortgage rates in 20 years, and the worst stock market in 14 years. Average real weekly earnings have now declined year-over-year for 22 straight months. 

Fortunately, history is a good guide for how to overcome this mess. The two of us have served as chief economists at the Office of Management and Budget (OMB), though 50 years apart. One of us (Arthur Laffer, originator of the “Laffer Curve”) was the first chief economist of the OMB in the Nixon White House. The other (Vance Ginn) was the last associate director for economic policy at the OMB in the Trump White House.

While much has changed since the OMB was formed in 1970, the problems are basically the same today. There remains a lot of unjustifiable government spending, prosperity-killing taxes, unwarranted regulations, excessive liquidity, and harmful interference in international trade. But just because counterproductive economic policies have been around for a long time doesn’t mean we shouldn’t try for a better world. 

Each of the above areas is the subject of intense debate. In politics, these debates have their short-term winners and losers as judged by elections. But the principles of economics aren’t determined by votes. The remedy for economic malaise has been and is less government, not more. Free-market, pro-growth policies are the cure. 

The legacy of the 1970s is now called the era of stagflation, and the 2020s are shaping up to be known for the same, or worse. Even with 50 years of experience, many people still haven’t learned a lesson. 

During the Nixon and Ford administrations, the economy was stifled at every turn. The dollar was taken off gold and devalued, resulting in higher inflation. Then there was the imposition of wage and price controls, which did nothing to stop inflation but instead ravaged the economy. Government spending was out of control. Taxes were raised, and tariffs imposed, including a 10 percent import tax surcharge; such was the wisdom of the D.C. crowd. 

The consequences were rising inflation, stock market collapse, impeachment, and a weak economy. Then, President Jimmy Carter tried to do more of the same with the same consequences. 

There followed a true renaissance, led by President Ronald Reagan’s tax and regulatory cuts and Federal Reserve Chairman Paul Volcker’s sound monetary policy. Inflation crashed, the stock market soared, new jobs surged, and Reagan won re-election in a landslide, winning 49 states. 

And then there was the sad interlude of George H.W. Bush, who broke his promise by raising taxes, leading to a one-term presidency.

President Bill Clinton, partnering as he did with House Speaker Newt Gingrich, cut government spending by 3 percentage points of GDP, cut capital gains tax rates while exempting owner-occupied homes from this tax altogether, and finally, he and the Republicans pushed the North American Free Trade Agreement (NAFTA) through Congress. On the bad side, he raised the top two tax rates. But the spending restraint contributed to a budget surplus for four straight years. 

President George W. Bush, with a penchant for spending more and for temporary tax cuts, was followed by President Barack Obama, with a desire on steroids to spend even more, plus he nationalized health care. Stagnation took hold, and prosperity faded.

In his first two years, President Trump reversed some of the prior 16 years of bad policy with substantial tax cuts, historic deregulation, and other measures that helped get government out of the way, contributing to the lowest poverty rate and the highest real median household income on record. But with the onset of the pandemic, prosperity was cut short by the ill-advised massive spending increases and lockdowns.

Today, we’re once again mired in a sea of bad policies and bad consequences despite President Joe Biden’s self-serving narrative. With tax hikes, massive spending, oppressive energy regulations, soaring debt levels, trade protectionism, and a bloated Fed balance sheet, stagflation was given a brand-new lease on life.

We should follow the proven, pro-growth path (not currently taken) of sound money, minimal regulations, free trade, flat taxes, and most of all, spending restraint for the sake of the economy and human flourishing. It’s also great politics. With this elixir in hand, it would be springtime again in America. And that is something Americans can believe in.

Vance Ginn, Ph.D., is an economist and senior fellow at Young Americans for Liberty and previously served as the associate director for economic policy of the White House’s Office of Management and Budget from 2019 to 2020. Arthur Laffer, Ph.D., is an economist from Nashville, Tennessee, and was the first chief economist of the White House’s Office of Management and Budget.

Originally published at The Federalist. 

​Recent data from the Tax Foundation reveals that Louisiana has the highest average combined state and local sales tax rate of all the states. The bulk of this burden comes from its local taxes, the second highest in the nation.

​Pair these findings with Louisiana’s progressive income taxes of a graduated personal income tax rate of up to 4.25% and a corporate income tax rate max of 7.50%, and there’s no wonder why the Pelican State has a net out-migration problem. According to the Tax Foundation’s business tax climate index, the state ranks 12th worst in the country.

​Personal income taxes disincentivize work, and sales taxes can lead consumers to shop elsewhere and businesses to relocate. Employers and consumers want to be where they can keep more of what they earn, which helps explain why Florida, a state with no personal income taxes and a combined sales and local tax rate that’s more than 2.5-percentage points lower than Louisiana’s, had the highest net in-migration last year.

​Clearly, Louisiana’s tax code needs an overhaul if the growth and flourishing of Louisianans are priorities. But so does the state’s spending.

To start, the Pelican State could consider joining the 14 states in the flat-income tax revolution. As more states flatten or remove their personal income taxes, Louisiana’s costly progressive income taxes will become much less appealing. Moving to flat personal and corporate income taxes would be a pro-growth step forward toward the eventual greater goal of eliminating these costly taxes, helping to compete with places like Florida and Texas, both of which don’t have personal income or corporate income taxes.

Considering that the ultimate burden of government is how much it spends, reforming the tax code is just one piece of the puzzle. The excessive government spending at the state and local levels, compared with reasonable metrics like the rate of population growth plus inflation which helps measure the average taxpayer’s ability to pay for government spending, burdens Louisianans. Furthermore, Louisiana’s state and local debt is estimated to be about $7,600 per person owed by 2027, plus another nearly $28,000 per person owed in unfunded liabilities over time, so there are clearly massive barriers in the way for Louisianans to flourish.

​This is an issue because heavy spending leads to heavy burdens on state residents and decreased economic freedom, which Louisiana can’t afford to lose more of, considering how far it falls behind other states.

​Not surprisingly, Georgia, Florida, and Texas all boast lower spending than Louisiana, with improved economic freedom and poverty rates. Meanwhile, Louisiana has the highest official poverty rate in the country. The rankings for the Pelican State aren’t quite as bad as the highly progressive states of New York and California, which are hemorrhaging population to other states. Incentives matter, so people are voting with their feet to flee high cost, low freedom states.

Louisiana should start its comeback story by adopting a stronger spending limit, similar to the one recently passed in Texas. Spending caps help governments stay limited, which is imperative for states to thrive as it forces them to narrow their scope. In turn, the private sector has more elbow room to grow and people have greater ability to prosper. This would also help provide more surplus funds to put toward cutting, flattening, and eventually eliminating personal and corporate income taxes.

Louisiana has too great of a culture and too much potential for it to be squandered by burdensome spending and taxes. It’s time for serious spending restraint and major tax reforms to provide the best path forward.

​Originally published at Pelican Institute. 

​A tighter limit on state spending is a top priority for Republicans in the state House of Representatives this year, but a proposal to tie spending to gross domestic product is raising questions about whether a tighter limit will hamstring the state’s ability to fund critical services and weather future economic downturns.

Alaska already has a spending cap, enacted in 1982, based on the state’s population and inflation. But lawmakers have called it “the perfect law,” because it is so difficult -- essentially impossible -- to break. The state simply does not spend nearly as much as that limit allows for.

Now, House Republicans are indicating they favor a pair of bills that would force lawmakers to tighten the belt on the state budget even as they are considering hefty spending increases to shore up ailing services. The House Judiciary committee could advance the measures as early as Monday.

Proponents of a tighter spending cap say it will help prevent the boom-and-bust cycles that have dominated Alaska’s oil-based economy for decades. Gone will be the days, they say, when years of high oil prices are accompanied with fat budgets, and oil price crashes put the state in austerity. A spending cap will reign in the appropriators when the revenue fortunes are good, the argument goes, leaving money for years when revenue shrinks.

A new limit on state spending was part of a proposed framework for a new fiscal plan put forward by a bipartisan working group in 2021 which also listed new revenue sources and a new Permanent Fund dividend formula in its final report. Lawmakers from both parties agree that a new spending cap should be part of a fiscal plan, but they disagree on the order of business. Some think resolving the Permanent Fund dividend calculation should take precedence. Others say that new revenue streams for the state are most important. House Republicans, who dominate the chamber’s majority caucus this year, have cited a tighter spending cap as the first item they’d like to tackle.

The odds are stacked against the policy in a divided Legislature. And according to some policy analysts, that’s a good thing. Spending caps, opponents say, leave states with unwieldy budgets that cannot respond adequately to the state’s changing needs.

Still, proponents are charging ahead.

Chief among them is Sen. James Kaufman. An Anchorage Republican and retired oil and gas quality manager, he devised a new idea in 2021 to limit Alaska’s spending to a percentage of the state’s gross domestic product, excluding the public sector.

GDP measures the value of the goods and services produced in-state. While more than 20 states have some form of spending cap, none have tied their budgets to gross domestic product, a complex figure calculated by federal financial institutions.

In 2021, Alaska’s GDP was $57.3 billion, the smallest of all states except Wyoming’s and Vermont’s — two states with smaller populations than Alaska’s.

Kaufman says that the metric, rather than the more commonly used consumer price index or personal income, “is an accurate measurement of the state’s economic performance.” Excluding the public sector, which has accounted for roughly 20% of Alaska’s GDP in recent years according to data from the Federal Reserve Bank of St. Louis, puts the focus on Alaska’s private sector, dominated by resource development.

“Sometimes we have an embarrassment of riches where we have a lot of revenue come in, and the next year it can be radically different,” said Kaufman in an interview. “To try and break the boom-and-bust cycle, I started considering caps that would help that, and which caps would be the most helpful.”
Tying the state’s spending to the private sector “ensures that government does not outgrow the private sector that it is meant to support” and that the state avoids becoming overly dependent on revenue from the Permanent Fund, according to a statement accompanying the bill.
Kaufman’s policy would be based on an average of the preceding five years’ GDP. He is proposing a statutory limit set at 11.5% of that average, while a companion constitutional amendment would set the upper limit at 14%. That way, lawmakers could agree to exceed the 11.5% limit with a two-thirds majority, but would not be able to exceed the 14% ceiling.
Under the proposal, both the statutory limit and the constitutional limit would have to pass to be effective. It’s a tall order — constitutional amendments must be adopted by a two-thirds vote by both chambers of the Legislature.

It’s a tall order also for the state’s economy — of the last 20 budgets, all but three would have exceeded the proposed statutory limit. Half would have exceeded the proposed constitutional limit. Over the course of two decades, such a spending cap would have prevented the state from spending $5 billion, roughly the equivalent of an entire year’s budget.

Gov. Mike Dunleavy’s proposed spending plan for the coming fiscal year would exceed the proposed statutory limit, but remain below the proposed constitutional limit.

Dunleavy has favored a tighter cap on state spending and has proposed legislation to that effect during his first term in office, but he has yet to put forward such a bill this year.

Dunleavy spokesman Jeff Turner did not respond when asked if the governor intends to advocate for his own plan or for Kaufman’s. Instead, Turner said in an email that the governor’s office “does not comment on bills until they have passed the Legislature” because they can be substantially changed before that, and that “Dunleavy has always advocated for a plan to limit the growth of the state budget.”

Kaufman’s proposal has many exceptions: the limit would not apply to the Permanent Fund dividend, disaster relief or federal dollars, among other exceptions. But it would apply to all general fund spending on capital projects and operating expenses, which covers building and road maintenance, schools, public safety, and other programs that have seen effective cuts in recent years.

Kaufman said he settled on the 11.5% limit for the statutory proposal to match the exact level of spending in the 2022 fiscal year budget, which was shaped by low oil prices and lingering pandemic-era federal funding. Even amid these complexities, Kaufman calls it “kitchen table economics.”

‘Everybody would be worse off’
Comparing a state budget to household expenses is part of the problem, according to Bernie Gallagher, a policy analyst with the Center on Budget and Policy Priorities.

Gallagher said spending caps are inherently arbitrary and pinned to a particular moment in time. Just as Alaska’s previous spending cap proved too generous, a new spending cap could prove too onerous.

“It makes it very difficult to override that limitation when the capped amount is inadequate to meet the needs of state families or communities,” said Gallagher.

Kaufman’s efforts to design a more resilient limit to reign in Alaska’s fluctuating economy could prove to be insufficient, because GDP “is just as volatile as personal income,” Gallagher said.

“In fact, it has a slower rebound effect than personal income,” he added. “Many other states and conservative groups that do advocate for spending limits don’t use state GDP for that reason — because it’s just capturing too much.”

University of Alaska Anchorage economist Kevin Berry raised similar concerns about gross domestic product, saying it is a flawed mechanism for capping state spending, because it could exacerbate longer economic downturns, just like the one the state is currently facing.

In Alaska, where the oil industry makes up a large part of the private sector, a long-term downturn in oil prices could bring down the state’s GDP even if the population and its needs remain unchanged.

The bigger issue, Berry said, is that tying state spending to the GDP could prevent the state from responding to recessions with increased spending, as governments often do.

“What happens when the government ramps up spending, is it helps support households and support businesses and make the recession less bad,” said Berry, citing unemployment insurance as an example. “That money supports household incomes and that also leads to more revenue for businesses and prevents businesses from suffering and people going out of business. We stop the whole negative cycle that way.”

Tying spending to GDP, he said, would mean that during prolonged economic recessions, “at the same time the private sector would be struggling, the public sector would have to struggle too, so everybody would be worse off.”

Berry said that would be exacerbated by the fact that Alaska’s economy is what he called “counter-cyclical,” meaning it tends to do better when the Lower 48 economy is doing worse. Federal fiscal policy, in turn, is designed to meet the needs in the Lower 48, and sometimes works against Alaska’s interests.

“That means that federal policy is doing the opposite of what we want it to do in any given period, potentially, exacerbating our business cycle,” Berry said. During a recession, economic principles dictate that the state government might need to spend more money “to counter the cycle and smooth things out. But if you’ve got a spending cap that’s tied to GDP, we can’t do that.”

The bill makes an effort to overcome the potential problem by tying spending to a five-year average, rather than a single year. That isn’t necessarily enough, Berry said.

“The problem is, we’ve had a prolonged downturn. It’s very likely in the future at some point, we’ll have another prolonged downturn, and then we can get stuck in this trap,” he said.

‘Different things to different people’
Kaufman is a member of the Senate’s bipartisan majority, which has named improving the state’s long-term fiscal outlook as one of its priorities. But at a press conference, leaders of the caucus shrugged off Kaufman’s proposal.

“A long-term fiscal plan means different things to different people,” said Sen. Donny Olson, a Golovin Democrat who co-chairs the finance committee. Discussing a spending cap “highlights the fact that if you’re going to deal with a long-term fiscal plan, you’ve got to figure in where your new revenues are going to be coming from.”

Some Senate members appear interested in handling other elements of the state’s fiscal plan before they reconsider the spending cap.

“Before we can really, really focus on a long-term fiscal plan, we need to figure out the Permanent Fund dividend issue. That’s what we really need to do first,” said Sen. Elvi Gray-Jackson, an Anchorage Democrat.

Other senators said that a cap on spending from Alaska’s Permanent Fund revenue already in practice limits the money at the state’s disposal, thus limiting state spending. In 2018, lawmakers passed a law capping the amount that can be withdrawn from the earnings of the Permanent Fund based on the performance of the fund’s investments — or percent of market value (POMV) — to ensure that the Legislature does not overspend and deplete it over time.

“The revenue cap — the POMV law — actually provides us with a spending cap today, because it limits the revenue as long as we hold the line on that law. We still have to figure out where we spend the money but it means there’s a cap in place,” said Sen. Matt Claman, an Anchorage Democrat who chairs the Senate Judiciary committee, which is assigned to handle Kaufman’s proposal.

The proposed policy has seen more support from conservative House members who sit on the House Judiciary Committee, which is scheduled to take action on both the statutory limit and the constitutional limit on Monday. They could vote to advance the bill as is, amend it, or table it for further consideration. If the judiciary committee approves the measure, it still must pass scrutiny in the Ways and Means Committee, then the Finance Committee, before reaching the House floor.

“It’s very challenging for private enterprise to make long term decisions when there’s so much instability in policy, especially spending at the state level,” said Rep. Will Stapp, a freshman Republican from Fairbanks who is the primary sponsor for the measure in the House. “I like the fact that we are creating a link between state spending and Alaska’s private sector.”

If anything, Stapp said, his conservative colleagues wonder if the percentage limits proposed in the bill should be set even lower.

The new spending cap has backing from the right-wing Alaska Policy Forum. Vance Ginn, a Texas-based economist and fellow with the forum, told the House Judiciary committee that the measure would incentivize private sector economic growth while limiting the public sector. But Ginn appeared unfamiliar with the particulars of Alaska’s economy, including its reliance on the oil industry for revenue and the lack of broad taxes like an income tax.

Another prominent advocate for a tighter spending cap is the Alaska Chamber of Commerce, which has for several years listed the cap as the business group’s top priority.

Kati Capozzi, chamber president, said that the group’s advocacy for a new spending limit came in response to the crash in oil prices that occurred a decade ago, leading to what she called “the yoyo budget cycle,” and a perpetual fear among business owners that new taxes are on the way.

“The business community is constantly under pressure and frankly threatened that there’s going to be a tax increase every time we are unable to pay our bills. This would provide some security for the business community,” said Capozzi.

A spending cap is the “most important thing that needs to be addressed” in the state’s long-term fiscal plan, according to Capozzi, because it would provide “side rails” that would attract more investment in Alaska, by signaling to investors that a crash in oil prices would not lead to “a knee jerk reaction to go get more revenue from the business community.”

But Rep. Cliff Groh, an Anchorage Democrat who sits on the House Judiciary committee, wonders if limiting the state’s spending could hamper the business community in the long run.

“Given that corporate executives and people in charge of companies stress how much a highly qualified workforce is so important for setting up, for expanding or bringing their companies at all to a state — if the schools become crummy, the roads become crummy, and the public services are at such a low level it’s unattractive to employees — you can imagine that that can occur, that a certain improperly designed spending limit could lead to a smaller population and a smaller economy,” said Groh at a recent House Judiciary committee hearing on the measure.
Ginn responded that a review of spending caps in other states indicated that such limits force states to “really prioritize those dollars — wherever they should go — within that spending limit.”
“We need to have the least burdensome form of taxation on individuals … And a good big way to do that is to ensure that spending doesn’t go out of control so that we don’t need as many taxes,” said Ginn. “Additional spending doesn’t necessarily equal better outcomes.”
‘A red herring’Berry, the Alaska economist, said that while the GDP could be a flawed foundation for a spending cap, that doesn’t necessarily mean the idea of a stricter spending limit is bad.
“This is not to say that I’m for a spending cap or against a spending cap. I think that’s a policy choice the state needs to make. I think there’s just better ways to do it,” Berry said.
An alternative to the new mechanism would be adapting the existing spending limit to match existing revenue levels. Lawmakers are not currently considering such a proposal.
“The general idea of tying the size of government service to the demand for those services makes a lot of sense. So tying it to CPI (consumer price index) and tying it to population,” Berry said, referring to the 1982 limit. “Maybe we did set it too high, but it doesn’t require complex mechanisms to bring it down.”
Still, some economists argue that binding spending caps that tie the hands of lawmakers are never a good idea.
Gallagher, with the Center on Budget and Policy Proposals, said that experience in other states has shown that spending limits “do little or nothing to make government run any more efficiently or ensure that tax dollars are well spent. It shifts costs from states to cities and towns, which only moves the burden over to property taxes and fees.”
Gallagher said a better solution to Alaska’s spending volatility could be a progressive tax, like an income tax, that is more dependable year-after-year and ensures the burden of paying for state services does not fall disproportionately on a single group. Gallagher called that “a much more sustainable model” than Alaska’s current dependence on revenue sources that can fluctuate wildly.
“It’s a state that has massive, massive revenue volatility. Addressing that is really being lost. Addressing the spending side is actually a red herring. The real focus should be over on — are we collecting a sufficient amount for the needs of our state?” Gallagher said.
Yet more than a month into the legislative session, state lawmakers are not considering any new broad taxes. Dunleavy, a conservative Republican, has proposed shoring up state revenue by monetizing carbon through keeping trees standing and injecting carbon into the ground, in an effort to meet state needs without imposing new taxes on businesses or individuals. But skeptics say that even if that plan pans out, revenue is still years away and will hardly be enough to make up for falling oil returns in the future.
As lawmakers have debated the spending cap proposal, they have largely sidestepped questions on what would be required to meet a lower limit. Amid falling oil prices, state budgets over the past decades have translated to cuts to virtually every state service. And Alaskans are beginning to notice; private and public sector leaders have reported it is increasingly difficult to stem the tide of out-migration because state services like education, public safety and transportation infrastructure are not meeting expectations.
“One of the things that people don’t mention is a spending cap that’s binding, that requires cuts, requires identifying those cuts. So the question is, what are people talking about cutting?” Berry said.

Originally published at Anchorage Daily News. 

Key Point: The U.S. economy in 2022 had the slowest Q4-over-Q4 growth during a recovery since at least 2009 and average weekly earnings are now down for 22 straight months as inflation keeps roaring. But there’s hope if we just give free-market capitalism a chance to let people prosper. ​

Labor Market: The Bureau of Labor Statistic recently released its U.S. jobs report for January 2022. This report came with substantial revisions to seasonal adjustments and population estimates which could bias the data for a while given that the revised estimates include the much of the last three years of data that are highly volatile. And recall the recent report by the Philadelphia Fed finds that if you add up the jobs added in states in Q2:2022 there were just 10,500 net new jobs rather than more than 1 million reported.
 
The establishment survey shows there were +517,000 (+3.3%) net nonfarm jobs added in January to 155.1 million employees, with +443,000 (+3.6%) added in the private sector and +74,000 (+1.4%) jobs added in the government sector. Most of the private sector jobs were added in the sectors of leisure and hospitality (+128,000), private education and health services (+105,000), and professional and business services (+82,000), which these three sectors led over the last 12 months as well; information (-5,000) and utilities (-700) were the only net job declines over the last month and no sector had net job losses over the last year. Average hourly earnings for all employees was up by 10 cents last month to $33.03, or up by +4.4% over the last year. And average weekly earnings in the private sector increased by $13.35 last month to $1,146, or up by +4.7% over the 12 months.
 
The household survey had another large increase of +894,000 jobs added to 160.1 million employed There have been declines in net jobs in four of the last 10 months for a total increase of +1.8 million since March 2022, which is about half of the +3.6 million of the net jobs added per the establishment survey. The official U3 unemployment rate declined slightly to 3.4% which is the lowest since 1969.
 
But challenges remains as inflation-adjusted average weekly earnings were down -1.5% over the last year for the 22nd straight month, weighing on Americans budgets to make ends meet. And since February 2020 before the shutdown recession, the prime age (25-54 years old) employment-population ratio was 0.3-percentage point lower, prime-age labor force participation rate was 0.3-percentage point lower, and the total labor-force participation rate was 0.9-percentage-point lower with millions of people out of the labor force thereby holding the U3 unemployment rate much lower than otherwise.

​Economic Growth: The U.S. Bureau of Economic Analysis’ recently released the 2nd estimate for economic output for Q4:2022. The following table provides data over time for real total gross domestic product (GDP), measured in chained 2012 dollars, and real private GDP, which excludes government consumption expenditures and gross investment. And most of the estimates for Q4:2022 and growth in 2022 were revised lower, providing more evidence that 2022 was a very weak year if not a recession.

​The shutdown recession in 2020 had GDP contract at historic annualized rates because of individual responses and government-imposed shutdowns related to the COVID-19 pandemic. Economic activity has had booms and busts thereafter because of inappropriately imposed government COVID-related restrictions in response to the pandemic and poor fiscal policies that severely hurt people’s ability to exchange and work.

Since 2021, the growth in nominal total GDP, measured in current dollars, was dominated by inflation, which distorts economic activity. The GDP implicit price deflator was +6.1% for Q4-over-Q4 2021, representing half of the +12.2% increase in nominal total GDP. This inflation measure was +9.1% in Q2:2022—the highest since Q1:1981—for a +8.5% increase in nominal total GDP that quarter. This made two consecutive declines in real total (and private) GDP, providing a criterion to date recessions every time since at least 1950. In Q3:2022, nominal total GDP was +7.6% and GDP inflation was +4.4% for the +3.2% increase in real total GDP. But if inflation had been as high as it was in the prior two quarters or had the contribution of net exports of goods and services (driven by natural gas exports to Europe) not been 2.9%, real total GDP would have either declined or been essentially flat for a third straight quarter.

In Q4:2022, there was a similar story of weakness as nominal total GDP was +6.6% and GDP inflation was +3.9% for the +2.7% increase in real total GDP. But if you consider the +2.7% real total GDP growth was driven by contributions of volatile inventories (+1.5pp), government spending (+0.6pp), and next exports (+0.5pp) which total +2.6pp, the actual growth is quite tepid like it was in Q3:2022. For all of 2022, real total GDP growth is reported +2.1% year-over-year but measured by Q4-over-Q4 the growth rate was only +0.9%, which was the slowest Q4-over-Q4 growth for a year since 2009 (last part of Great Recession).

The Atlanta Fed’s early GDPNow projection on February 24, 2023 for real total GDP growth in Q1:2023 was +2.7% based on the latest data available.

​The table above also shows the last expansion from June 2009 to February 2020. A reason for slower real private GDP growth in the latter period is due to higher deficit-spending, contributing to crowding-out of the productive private sector. Congress’ excessive spending thereafter led to a massive increase in the national debt by more than +$7 trillion that would have led to higher market interest rates. This is yet another example of how there is always an excessive government spending problem as noted in the following figure with federal spending and tax receipts as a share of GDP no matter if there are higher or lower tax rates. 

​But the Fed monetized much of the new debt to keep rates artificially lower thereby creating higher inflation as there has been too much money chasing too few goods and services as production has been overregulated and overtaxed and workers have been given too many handouts. The Fed’s balance sheet exploded from about $4 trillion, when it was already bloated after the Great Recession, to nearly $9 trillion and is down only about 6.5% since the record high in April 2022. The Fed will need to cut its balance sheet (see first figure below with total assets over time) more aggressively if it is to stop manipulating so many markets (see second figure with types of assets on its balance sheet) and persistently tame inflation, which there’s likely a need for deflation for a while given the rampant inflation over the last two years. 

​The resulting inflation measured by the consumer price index (CPI) has cooled some from the peak of +9.1% in June 2022 but remains hot at +6.4% in January 2023 over the last year, which remains at a 40-year high (highest since July 1982) along with other key measures of inflation (see figure below). After adjusting total earnings in the private sector for CPI inflation, real total earnings are up by only +2.2% since February 2020 as the shutdown recession took a huge hit on total earnings and then higher inflation hindered increased purchasing power. 

​Just as inflation is always and everywhere a monetary phenomenon, deficits and taxes are always and everywhere a spending problem. The figure below (h/t David Boaz at Cato Institute) shows how this problem is from both Republicans and Democrats. 

​As the federal debt far exceeds U.S. GDP, and President Biden proposed an irresponsible FY23 budget and Congress never passed one until the ridiculous $1.7 trillion omnibus in December, America needs a fiscal rule like the Responsible American Budget (RAB) with a maximum spending limit based on population growth plus inflation. If Congress had followed this approach from 2003 to 2022, the figure below shows tax receipts, spending, and spending adjusted for only population growth plus chained-CPI inflation. Instead of an (updated) $19.0 trillion national debt increase, there could have been only a $500 billion debt increase for a $18.5 trillion swing in a positive direction that would have substantially reduced the cost of this debt to Americans. Of course, part of this includes the Great Recession and the Shutdown Recession, so these periods would have likely been good reason to exceed the limit, but regardless we would be in a much better fiscal and economic situation with this fiscal rule. The Republican Study Committee recently noted the strength of this type of fiscal rule in its FY 2023 “Blueprint to Save America.” And to top this off, the Federal Reserve should follow a monetary rule so that the costly discretion stops creating booms and busts.

​Bottom Line: While there appears to be a strengthening labor market in January, let’s see if this continues as my guess is that these were biased from the data adjustments, and we will see a weaker labor market in the months to come. My expectation is that stagflation will continue along with the a deeper recession this year given the “zombie economy” with “zombie labor” of many workers sitting on the sidelines and others are “quiet quitting” along with the failures of many “zombie firms” that live on debt. Ultimately, Americans are struggling from bad policies out of D.C.. Instead of passing massive spending bills, the path forward should include pro-growth policies. These policies ought to be similar to those that supported historic prosperity from 2017 to 2019 that get government out of the way rather than the progressive policies of more spending, regulating, and taxing. The time is now for limited government with sound fiscal and monetary policy that provides more opportunities for people to work and have more paths out of poverty.
 
Recommendations:

• Set a pro-growth policy path with less spending, regulating, and taxing at all levels of government.
• Reject new spending packages that America cannot afford nor needs; pass the RAB instead.
• Impose strict monetary rule with the Fed having a much smaller balance sheet and a much higher federal funds rate target until we End the Fed.
• Enact return-to-work policies.