Charlie Arlinghaus

August 21, 2013

As originally published in the New Hampshire Union Leader

Both the state and the country can better focus their efforts on budgets and economic development by following the example and the reasoning of that bastion of conservative economics called Sweden.

In the face of economic crisis, advocates of what they call “stimulus” suggest it is the only alternative to the horrible-sounding “austerity” — as if our only two choices are to give ourselves completely to bureaucrats and administrators to spend as they wish or to subsist on bread and water.

The finance minister of Sweden chose to reject both choices. Anders Borg of Sweden’s right-of-center Moderate Party looks like American magician Penn Jilette, complete with ponytail and earring. But he sounds like Milton Friedman (to be fair, on economics, so does the libertarian-minded Jilette).

While most of Southern Europe got into trouble following the advice of professional advice-givers like the International Monetary Fund, Sweden chose to focus on jobs. According to Borg, “we can see that very little of the stimulus went to the economy. But they are stuck with the debt.” Sweden chose to permanently cut taxes to bring its economy back. Their goal was to create a climate to attract business owners and entrepreneurs.

“Ownership is a production factor. Entrepreneurs are a production factor,” Borg noted. “It is problematic if you drive out entrepreneurs from your country because they are the source of job creation.”

Sweden cut taxes four times (and has proposed a fifth cut this week). After a 20 percent cut in its corporate tax rates, Sweden’s top rate is about half of ours.

The results are worth noting. Sweden’s economic growth has been dramatically higher than the rest of the Euro region’s despite labor costs that, while lower than the European average, are 20 percent higher than in Germany and 40 percent higher than in the United States. In the last two years, the Swedish Kroner has gained 35 percent compared to the Euro.

Borg doesn’t see growth and tax cuts as inconsistent with fighting deficits. His advice to “keep dealing with the deficit because deficits destroy everything else” is consistent with their experience. Swedish debt has declined by 50 percent as a share of the economy during a time when U.S. debt has more than doubled by the same measure.

This idea is neither new nor exclusively Swedish. After the relatively anemic growth of the 1950s and early 1960s, President Kennedy proposed a permanent cut to income tax and corporate tax rates in the United States. Kennedy said “every dollar that is released from taxation that is spent or invested will help create a new job and a new salary. And these new jobs and new salaries can create other jobs and other salaries and more growth for an expanding American economy.”

Kennedy specifically touted his 25 percent cut to the top rate as a means to turn budgetary deficits into budgetary surpluses. In fact, income tax collections went up by 85 percent in the first five years after the cuts came into effect. Real economic growth was twice the post-war average during the nine-year boom that followed.

What the Democratic Party’s Kennedy and the Moderate Party’s Borg have in common is a focus on job growth. More jobs for more people is a better stimulus than any plan to give this department or that commission some spending that was denied in the last budget debate.
At the federal level, this means taxes should go down, not up. At the state level, it means fewer programs and fewer regulations. The most innovative program is one that reduces barriers to entrepreneurs and job creators investing their own money here instead of somewhere else.

Charlie Arlinghaus

July 24, 2013

As originally published in the New Hampshire Union Leader

The hardest thing for any government to do is to pay attention to the long term. The system creates incentives for politicians to focus on short term solutions and ignore long term outlooks. The inability to look beyond this morning’s political fight defines the dysfunctional entity that passes for a federal government but has also crept into our state politics as well.

Policy is made by elected officials, usually in two year increments. Whether the particular elected official serves for just two years or longer, he or she is nonetheless focused on the next biennial election. Things that will turn out beneficial five or six years from now are of less interest.

The federal budget is case study in short term thinking. Every federally elected official believes that the United States should balance its budget. But there is no actual requirement to balance the budget so they don’t. As a result the country’s debt has grown every year since 1957 — growing from $5.8 trillion to $16.9 trillion just in the last twelve years.

Automatic spending reductions were enacted because no elected officials could possibly withstand the electoral onslaught of any reduction in the growth of spending. Mind you, the reduced increases (or automatic cuts depending on your perspective) wouldn’t come anywhere close to balancing the budget. Nonetheless they were portrayed as draconian austerity which no politician could withstand.

The benefits of balancing the budget would accrue over time as they kept us from a fate similar to some European nations whose fiscal house has collapsed. That sort of benefit is long term and subtle. The pain of even the smallest reductions is considered too much to openly advocate. So an automatic reduction is crafted that politicians can all be annoyed with but that does their job for them.

At the state level, we don’t have any such option. The federal politicians are incapable of balancing the budget because they don’t have to. At the state level, we have to. We may not shrug our shoulders and run a deficit. The budget must balance. But even in that construct, some decisions are passed off.

An example of what we can’t avoid was the 2011 state budget. One elected official explained to me “we spent every dime had. We just didn’t spend any we didn’t have.”

Whatever cuts were made, were dictated not by a policy choice but budget necessity. There was an argument over whether revenue projections were set high enough (the final budget was as close to spot on as they come). However, once that number was determined every dime was spent and no more.

Previous budgets had been at higher levels through the introduction of borrowing and two federal bailout programs for state budgets. Those sources were gone and the budget had to come back to reality. Many politicians knew they would be politically attacked for it and they were. But the new balance formed the basis of the next budget too.

There are two areas, though, were the incentives don’t align: state debt and infrastructure.

The state’s debt skyrocketed in the period from 2007-2011 after having been steady for more than a decade under governors of both parties. The debt explosion saw the state’s debt climb from $654 million to $939 million in just four years. New Hampshire’s debt is still good by national standards and the growth has slowed since. But it was easier for some politicians to borrow money than to not spend it. New Hampshire should guard against that Washington mentality.

Transportation spending is also an incentive problem. In general terms, we don’t raise enough money to pay for maintaining the current system of roads. Pavement conditions deteriorate more and more each year (replacing costs a lot more than maintaining) and our bridges were rated 41^st worst in the country by the libertarian Reason Foundation.

Gas tax receipts are almost identical to what they were 10 years ago before adjusting for inflation even though spending increased 72%. Gimmicks have made up the difference – the turnpike paid $100 million to the highway fund for a few miles of highway and accelerated the payments over a few years. In addition, a temporary and regressive motor vehicle surcharge plus a one-time federal stimulus grant plugged holes temporarily.

The difficulty is that bridges last 75 to 100 years and no one can campaign on “we completed routine maintenance that will extend the bridge’s life to 2040.” It benefits some guy running 30 years from now but does nothing for me.

Sound fiscal management is boring and boring doesn’t win elections. I wish it did.