Since I’ve written before about Canada’s remarkable period of fiscal restraint during the 1990s, I am very pleased to see that the establishment press is finally giving some attention to what our northern neighbors did to reduce the burden of government spending.

Here are some key passages from a Reuters story.

“Everyone wants to know how we did it,” said political economist Brian Lee Crowley, head of the Ottawa-based think tank Macdonald-Laurier Institute, who has examined the lessons of the 1990s. But to win its budget wars, Canada first had to realize how dire its situation was and then dramatically shrink the size of government rather than just limit the pace of spending growth. It would eventually oversee the biggest reduction in Canadian government spending since demobilization after World War Two. …The turnaround began with Chretien’s arrival as prime minister in November 1993, when his Liberal Party – in some ways Canada’s equivalent of the Democrats in the U.S. – swept to victory with a strong majority. The new government took one look at the dreadful state of the books and decided to act. “I said to myself, I will do it. I might be prime minister for only one term, but I will do it,” said Chretien. …The Liberals thought their first, rushed budget – delivered in February 1994, three months after taking office, was tough. It reformed unemployment insurance entitlements, and cut defense and foreign aid… The upstart Reform Party, then the main national opposition party, had campaigned on “zero-in-three” – balance the budget in three years. “We were always trying to go faster,” said Reform’s leader at the time, Preston Manning. …The Liberals were stung by the criticism and, at first reluctantly but then with gusto, they got out the chain saws. …Cutting government spending programs went against the Liberal grain. Contrary to the Reform Party, the Liberals saw a more important role for government. Paul Martin now has a lasting reputation as the finance minister who slayed Canada’s deficit, but the conversion from spender to cutter was painful. His father, also called Paul, had helped create Medicare, Canada’s publicly funded health care system, and suddenly here was Paul Junior contemplating massive cuts.

This is a remarkable story. My only real quibble is that the fiscal restraint actually started the year before the Liberal Party took power, as the chart (click to enlarge) illustrates.

But the key thing to understand is that Canada enjoyed a five-year period when government spending increased by an average of only 1 percent each year.

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It is not necessarily true that as goes the Euro, so goes the Dollar, but as goes the EU, so goes the US is as certain as the rising (or setting) sun. At least, if American fiscal policy continues to emulate that of the European spendthrifts.  The EU heads of state had marathon, round-the-clock meetings in Brussels last week, and inked a plan to finesse a Greek default (which is an eventual certainty) in a way that doesn’t immediately plunge the rest of Europe into a financial hell, and quite possibly drag America along with it.  Under the best of circumstances, the picture remains bleak.  Market analysts who focus on short-term stock market movements responded with sighs of relief.

The Germans, understandably, wanted those who have loaned Greece money (primarily, the European banks) to take a loss of about half of the value of their loans in order to ease the extremis in which Greece finds herself.  France, whose banks are holding a lot of Greece’s debt, preferred to rely more heavily on a pumped up bailout fund to ease the burden on Athens.  Given that the German taxpayer is certain to be the biggest funder of the proposed additional bailout, it is not hard to understand the rising tensions on the continent.

One can’t blame the banks for their reluctance to dance at this party.  Based on commitments the EU countries made, to keep their debt to no more than 60% of GDP and their deficits to no more than 3% over the prior year, Europe’s banks became major financiers of the new Euro countries.  But many of the European countries that were financially irresponsible prior to the advent of the Euro had no intention of changing their ways subsequent to exchanging their old currencies for the new Euro.  Greece flat out misrepresented its financial condition when it applied to become a member of the Euro Zone.

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The Congressional Budget Office has just released the update to its Economic and Budget Outlook.

There are several things from this new report that probably deserve commentary, including a new estimate that unemployment will “remain above 8 percent until 2014.”

This certainly doesn’t reflect well on the Obama White House, which claimed that flushing $800 billion down the Washington rathole would prevent the joblessness rate from ever climbing above 8 percent.

Not that I have any faith in CBO estimates. After all, those bureaucrats still embrace Keynesian economics.

But this post is not about the backwards economics at CBO. Instead, I want to look at the new budget forecast and see what degree of fiscal discipline is necessary to get rid of red ink.

The first thing I did was to look at CBO’s revenue forecast, which can be found in table 1-2. But CBO assumes the 2001 and 2003 tax cuts will expire at the end of 2012, as well as other automatic tax hikes for 2013. So I went to table 1-8 and got the projections for those tax provisions and backed them out of the baseline forecast.

That gave me a no-tax-hike forecast for the next 10 years, which shows that revenues will grow, on average, slightly faster than 6.6 percent annually. Or, for those who like actual numbers, revenues will climb from a bit over $2.3 trillion this year to almost $4.4 trillion in 2021.

Something else we know from CBO’s budget forecast is that spending this year (fiscal year 2011) is projected to be a bit below $3.6 trillion.

So if we know that tax revenues will be $4.4 trillion in 2021 (and that’s without any tax hike), and we know that spending is about $3.6 trillion today, then even those of us who hate math can probably figure out that we can balance the budget by 2021 so long as government spending does not increase by more than $800 billion during the next 10 years.

Yes, you read that correctly.

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“Men of experience succeed even better than those who have theory without experience…If, then, a man has the theory without the experience, and recognizes the universal but does not know the individual included in this, he will often fail to cure; for it is the individual that is to be cured.” –Aristotle

Aristotle’s wise words from 2,500 years ago gives us the precise reason why the president’s statist economic policies are failing miserably. Keynesian economists like New York Times columnist and Nobel Prize winner Paul Krugman believe that during times of economic slowdown, it is the government’s responsibility to jump start the economy and spur economic growth by the government itself spending large sums of borrowed money – usually on make work public works projects. The theory goes that when the government spends large sums of money during a slowdown, this will somehow motivate businesses and consumers to spend money as well.

Two years after the president’s ’stimulus’ plan, with consumer confidence at all time lows and with unemployment at 9.2% and rising, the plan has obviously been a failure. That is why it is difficult to understand why someone of Krugman’s stature, as late as July of  this year, would argue for more stimulus spending and downplay the need to address our massive national debt when it’s obvious that the stimulus package has failed:

“What I keep hearing from Washington is one of two arguments: either (1) the stimulus has failed, unemployment is still rising, so we shouldn’t do any more, or (2) the stimulus has succeeded, G.D.P. is growing, so we don’t need to do any more. The truth, which is that the stimulus was too little of a good thing — that it helped, but it wasn’t big enough — seems to be too complicated for an era of sound-bite politics.’

“So no, I mean, the deficit doesn’t matter. The economy matters. And that’s why somehow or other, Obama has got to get jobs being created.”

Again:

“Men of experience succeed even better than those who have theory without experience”

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From the Associated Press:

President Obama and the first lady boarded Air Force One at Andrews Air Force Base late Sunday to begin a six-day trip to Europe. Their first stop is Ireland, and the president will also meet with leaders in Britain, France and Poland.

Just a year ago, the Obama Administration was on the verge of converting America into a European style social-welfare state. The President had pushed up federal, state and local deficit spending to 41% of our gross-domestic-product (GDP), a level not seen since World War II. He passed healthcare legislation nationalizing 1/6 of the American economy and his Congressional majority was on the threshold of enacting labor and environmental regulations that would have collectivized broad swaths of American production and employment.

Then Greece and a number of other European nations suffered credit rating down-grades, soon followed by debt defaults and economic collapse. Today America stands at the precipice of its own collapse; either halt deficit spending or risk the financial collapse of our nation.

Barak Obama, during his Presidential bid, campaigned across Europe to symbolically express his solidarity with their economic social-welfare model by stating: “In America, there’s a failure to appreciate Europe’s leading role in the world.” Once elected, President Obama partnered with European nations on a multi-trillion dollar government spending initiative in hopes of generating a multiple of economic growth.

Unfortunately for America, Greece and the other deficit spenders, the spending was squandered on bureaucratic overhead and crony projects. Now that lenders are demanding repayment, many countries are being forced to default on payment.

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Recently, Portugal officially requested a $116 billion bailout from the European Union and the International Monetary Fund. This makes Portugal the third European nation to seek such a bailout in the past year (Greece got $157 billion; Ireland $122 billion). What most people don’t realize is that the U.S. is the largest contributor to the IMF. Therefore, U.S. taxpayers are paying for Portugal’s bailout which – like the earlier bailouts of Greece and Ireland – was caused by too much government spending and borrowing.

Last year, here at BigGovernment.com I warned how the Obama Administration was making a Greek bailout more likely by agreeing in advance that U.S. taxpayers would help foot the bill. Later, the IMF set up a $356 billion bailout fund for European governments with the consent of the Obama Administration– even though the fund will likely cost U.S. taxpayers between $50-100 billion and possibly more – all without a Congressional vote or consultation.

On April 29, 2010, Rep. Mike Pence (R-IN) and I wrote a letter to Treasury Secretary Tim Geithner warning of the dangers of U.S. participation in a Greek bailout. “The Obama Administration needs to understand that bailing out Greece will not solve Greece’s problems,” I said at the time. “It will only create a moral hazard that gets America more involved in the gathering storm of European bailouts.” That storm has since consumed Ireland and Portugal and others may be on the way.

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Can you hear that great sucking sound? It’s the sound of government shrinking around the world, as Portugal just joined Greece, Ireland and soon many others in acknowledging they are bankrupt and asking their European brethren for a bail-out. What is frightening to the big government advocates is this collapse was caused by a doubling of Portugal’s borrowing costs in just three weeks. The klaxon horns are going off in Europe and America; cut deficit spending or be destroyed by rising interest rates.

Over the last two decades, governments in Europe and the United States have been massively using taxpayer subsidies to sponsor favoured industries, under the smoke screen of National Industrial Policy. The theory, developed by Harvard economist and former Secretary of Labor in the Clinton Administration, Robert Reich, stated that governments must “deliberately and strategically” speed the movement of capital and labor into “higher-valued production” or suffer social decline; with infant mortality rates rising and employment and life expectancy falling. Reich championed National Industrial Policy planners would more efficiently allocate capital and labor resources to satisfy consumer demand than large corporations who inefficiently use marketing to bend customer demand to their needs. He claimed it was the duty of government to induce through direct subsidies and worker retraining grants uncompetitive companies to scrap production and steer investment in industries of the future.

Europe adopted National Industrial Policy through the introduction of the Euro currency and banking deregulation. Southern European countries like Portugal, Italy, Greece and Spain got low-interest German and French bank loans to scrap supposedly uncompetitive local manufacturing and “cushion” the transition of workers into leisure services and retirement housing development. Germany and France got elimination of competition and export growth to Southern Europe. Europeans were ecstatic for 15 years; the South had a real estate and banking boom, the North had a manufacturing and banking boom.

The U.S. adopted a National Industrial Policy during the Clinton Administration in 1999 by tying bank deregulation to a colossal expansion of the Community Reinvestment Act. The big banks got unlimited ability for multi-state banking and abolition of the 1933 Glass–Steagall Act prohibitions against banks engaging in high risk securities and derivative trading for their own accounts. Planners got huge quota requirements for loans to inter-city and rural communities. President Clinton hailed that the signing of the Gramm-Leach-Bliley Act “establishes the principles that, as we expand the powers of banks, we will expand the reach of the [Community Reinvestment] Act”.

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America faces a fiscal crisis. The burden of federal spending has doubled during the Bush-Obama years, a $2 trillion increase in just 10 years. But that’s just the tip of the proverbial iceberg. Because of demographic changes and poorly designed entitlement programs, the federal budget is going to consume larger and larger shares of America’s economic output in coming decades.

For all intents and purposes, the United States appears doomed to become a bankrupt welfare state like Greece.

But we can save ourselves. A previous video showed how both Ronald Reagan and Bill Clinton achieved positive fiscal changes by limiting the growth of federal spending, with particular emphasis on reductions in the burden of domestic spending. This new video from the Center for Freedom and Prosperity provides examples from other nations to show that good fiscal policy is possible if politicians simply limit the growth of government.

These success stories from Canada, Ireland, Slovakia, and New Zealand share one common characteristic. By freezing or sharply constraining the growth of government outlays, nations were able to rapidly shrinking the economic burden of government, as measured by comparing the size of the budget to overall economic output.

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Thanks to decades of reckless spending by European welfare states, the newspapers are filled with headlines about debt, default, contagion, and bankruptcy.

We know that Greece and Ireland already have received direct bailouts, and other European welfare states are getting indirect bailouts from the European Central Bank, which is vying with the Federal Reserve in a contest to see which central bank can win the “Most Likely to Appease the Political Class” Award.

But which nation will be the next domino to fall? Who will get the next direct bailout?

Some people think total government debt is the key variable, and there’s been a lot of talk that debt levels of 90 percent of GDP represent some sort of fiscal Maginot Line. Once nations get above that level, there’s a risk of some sort of crisis.

But that’s not necessarily a good rule of thumb. This chart, based on 2010 data from the Economist Intelligence Unit (which can be viewed with a very user-friendly map), shows that Japan’s debt is nearly 200 percent of GDP, yet Japanese debt is considered very safe, based on the market for credit default swaps, which measures the cost of insuring debt. Indeed, only U.S. debt is seen as a better bet.

Interest payments on debt may be a better gauge of a nation’s fiscal health. The next chart (2011 data) shows the same countries, and the two nations with the highest interest costs, Greece and Ireland, already have been bailed out. Interestingly, Japan is in the best shape, even though it has the biggest debt. This shows why interest rates are very important. If investors think a nation is safe, they don’t require high interest rates to compensate them for the risk of default (fears of future inflation also can play a role, since investors don’t like getting repaid with devalued currency).

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From the Associated Press:

Europe struggled mightily Friday to keep the debt crisis from engulfing country after country. Portugal passed austerity measuresto fend off the speculative trades pushing it toward a bailout and Ireland rushed to negotiate its own imminent rescue.

As Portugal and Spain insisted they will not seek outside help, creating an eery sense of deja-vu for investors, Europe braced for what seems inevitable—more expensive bailouts.

The Portuguese Parliament approved an unpopular debt-reducing package, including tax hikes and cuts in pay and welfare benefits. But while that helped to avoid a sharper deterioration in bond markets, the sense among analysts was that the move had only bought a little time.

Adding to the pressure, Ireland’s major banks were hit with credit downgrades—one to junk bond status—as speculation mounted that the EU-IMF bailout of Ireland, to be revealed within days, would require investors to take losses, a possibility earlier denied by officials.

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On today’s edition of Coffee and Markets, Brad Jackson and Francis Cianfrocca discuss the fiscal status of states, and the Irish bailout.

We’re brought to you as always by BigGovernment and Stephen Clouse and Associates. If you’d like to email us, you can do so at coffee[at]newledger.com. We hope you enjoy the show.

Related Links:

Ailing Ireland Accepts Bailout
State Tests Limits of Spending Cuts

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In the vernacular of financial commentary, “PIGS” is the term recently coined by the financial markets to refer to sovereign countries whose economies are virtually bankrupt and whose bonds are virtually worthless. These are the basket cases of the international economic system — Portugal, Italy, Greece and Spain.  Recent evidence suggests that the fiscally irresponsible PIGS may soon have a new applicant for membership in their club.  Membership in this particular club is somewhat reminiscent of Groucho Marx’s famous remark that “I wouldn’t belong to any club that would have me for a member.” The new expanded club’s acronym is shaping up to be (you guessed it) USPIGS.  No, the United States is not about to go bankrupt.  Not yet, anyway. We are, however, pursuing the very same types of vast spending policies that brought the PIGS of Europe face to face with that real possibility.

What have we done recently to be considered for membership in this club of dubious distinction?  Last week, government budget personnel revised their estimate of when Social Security would begin running in the red from 2017 to, essentially, “right away.”  Yes, Social Security is broke…right now!  So much for government estimates.

The announcement of this distressing news was, it appears, kept well under wraps until Nancy Pelosi and Harry Reid along with a shamelessly compliant Democratic Congress safely ramrodded Obamacare, with its astonishing price tag, into law. The entitlement sinkhole just got an order of magnitude bigger.  “But,” one might ask,  “haven’t we been accumulating all the excess funds paid into Social Security all these years in a special trust fund.”  Well, not exactly.  In fact, not even almost exactly.  You see, the government has been vacuuming out the excess cash as soon as it comes in and spending the money (the money we all paid in) to pay the government’s current bills.  The trust-fund cash has been replaced all this time with IOU’s (that’s internal Treasury debt), which are now being called to meet current payment obligations.  These IOU’s are being replaced, of course, with even more IOU’s but this time there is no more cash to divert from payroll taxes to fund government operations. We have to borrow more.

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Today, in 1937, the Irish Free State adopted a new constitution and evolved into a new nation, Ireland.

Today, in 1922, the Irish Free State was born. (Full independence would come in 1937.)