A large number of Democrats voted with Republicans in the House yesterday to pass a two-week spending bill that includes $4 billion in cuts compared to what Obama requested. This is a modest victory for the GOP since they can truthfully claim that they are on target to impose the equivalent of $100 billion of cuts over a full fiscal year.

And it appears the Senate will go along with the House proposal, as reported in today’s Washington Post:

The deal, which eliminates dozens of earmarks and a handful of little-known programs that President Obama has identified as unnecessary, sailed through the House on a 335 to 91 vote. Senate Majority Leader Harry M. Reid (D‑Nev.), who initially resisted including any cuts in a short-term funding extension, predicted that it will pass that chamber as early as Wednesday.

Some people correctly note that a $4 billion cut is trivial since government spending has ballooned by $2 trillion during the Bush-Obama spending binge — especially since at least some of the supposed spending cut is based on the dishonest Washington practice of measuring “cuts” on the basis of how much Obama wanted to spend rather than nominal changes from one year to the next. Nonetheless, it is a very positive development that the conversation has shifted from “how much should spending be increased?” to “how much should spending be cut?”

That being said, the battle is far from over. Indeed, the GOP began the 1995 shutdown fight in good shape. As I explained in a recent National Review article, a significant number of congressional Democrats sided with Republicans and it appeared that Clinton was on the defensive.

But GOPers ultimately did not get everything they wanted that year, in part because Clinton and the Democrats were able to regroup when the government was temporarily re-opened for a three-week period. Democrats today presumably view the current two-week agreement as a similar opportunity to make a short-term tactical retreat in hopes of winning bigger battles in the future (not just the fight over FY2011 spending levels, but also the upcoming FY2012 budget resolution debate and the debt limit conflict in June or July).

In other words, Republicans should be very careful about having their energy dissipated by a series of diversionary battles over short-run spending bills. At the very least, they need to insist that all such bills include pro-rated spending cuts to fulfill their promise of reducing Obama’s request by $100 billion.

At some point, perhaps when the two-week agreement expires, Democrats will balk at that tiny level of fiscal discipline. And if Republicans also hold firm, this means a government shutdown. Obama and Reid will imply this is somehow the fault of the GOP, but the Washington Post story suggests that recycling the 1995 strategy may not be very successful for the left:

Republicans bore the brunt of the blame that time. A Washington Post poll released this week suggested that this time, voters would apportion fault about equally to both parties. What has changed? The state of the economy is far more precarious than it was in the mid-1990s, the deficit is 10 times as large, and the public’s confidence in elected officials is even lower.

…But if the politics of a shutdown are in many ways more treacherous than they were in 1995, the actual effects of one would probably be less disruptive. Indeed, so many things have now been declared essential services that the government might “shut down” without most Americans noticing much difference. As happened in 1995, air traffic controllers would still watch the skies. And a wider swath of military, diplomatic and national security personnel would stay on the job to deal with concerns in a post‑9/​11 world.

…Therein lies the paradox under all the talk of a shutdown. Privately, some Democrats say they fear that a closure that barely affects the daily lives of most Americans could bolster conservatives’ argument that much of what the government does is unnecessary.

The final sentence of this excerpt is key. Would anybody (other than interest groups with snouts in federal trough) notice or care if the Department of Housing and Urban Development was shut down? Is anybody going to lose sleep if the Department of Energy is in hibernation?

In other words, a “government shutdown” would reveal that most of the “non-essential” parts of government are not necessary in the short run or the long run.

This is why Republicans, if they are reasonably astute, hold the upper hand in the current negotiations. They should speak softly and sound reasonable, but carry the big stick of a shutdown in order to ensure that the spending cut target for FY2011 spending is not eroded. And if they prevail, that will have a very positive carryover effect on the looming fights on the FY2012 budget resolution as well as the debt limit.

One final comment about the Washington Post report. The story asserts that Clinton had fiscal credibility because he imposed a tax increase in 1993. But as I have already explained, that tax increase was a miserable failure and even Clinton’s own OMB forecast, made 18 months after the tax increase was adopted, showed permanent deficits of more than $200 billion.

A Government Accountability Office report on duplicative federal programs is prima facie evidence that the government is a bloated mess. For example, there are 82 federal programs involved in teacher quality, 80 programs involved in economic development, and over 100 programs involved in surface transportation.

Sen. Tom Coburn (R‑OK) summed it up best in his press release on the GAO report:

This report confirms what most Americans assume about their government. We are spending trillions of dollars every year and nobody knows what we are doing. The executive branch doesn’t know. The congressional branch doesn’t know. Nobody knows.

Nobody knows because no human being could possibly keep sufficient tabs on thousands of programs in a $3.8 trillion federal budget. Compounding the problem is the fact that policymakers devote much of their time to fundraising, campaigning, and other distracting activities.

The report’s takeaway, therefore, should be that the federal government’s scope needs to be drastically curtailed. Unfortunately, a typical response to the report has been to cite it as further evidence that policymakers must “eliminate waste” and “make government more efficient.” Coburn says “This report also shows we could save taxpayers hundreds of billions of dollars every year without cutting services. And, in many cases, smart consolidations will improve service.”

No, no, no.

Most of the “services” discussed in the report need to be eliminated, not consolidated. Turning 82 teacher quality programs into, say, 10 doesn’t change the fact that the federal government should not be involved in education in the first place. (Not to mention that the federal government’s involvement in education has been a failure.)

Throughout the decades, numerous efforts have been undertaken to clean up the federal bureaucracy (e.g., Hoover Commission, Grace Commission, and Al Gore’s “Reinventing Government”). None of these house cleaning endeavors curbed the federal government’s expansion, let alone tamed the bureaucratic wilds.

James Madison wrote in Federalist 45 that the powers delegated to the federal government by the Constitution “are few and defined.” However, the federal government gradually assumed powers that are now many and undefined. Excessive bureaucracy is a natural, and inevitable, result. Thus, those policymakers who are sincerely concerned with bureaucratic duplication and waste should focus their efforts on reinstituting limits on the government’s capacity to spend. Policymakers who pretend otherwise are just wasting their time — and that of taxpayers.

Yesterday, the Senate Finance and House Energy & Commerce committees released a joint report on the costs that ObamaCare’s Medicaid mandate will impose on states. That report, which is based on other reports, likely understates the cost of that unfunded mandate.

In a new Cato Working Paper, “Estimating ObamaCare’s Effect on State Medicaid Expenditure Growth,” senior fellow Jagadeesh Gokhale constructed cost projections for the five largest states — California, Florida, Illinois, New York, and Texas — which account for 40 percent of the nation’s population. Gokhale carefully decomposed and organized micro-data and state-specific administrative data on Medicaid eligibility, enrollments, benefit recipiency, and average benefits per recipient. Gokhale found much larger cost burdens than the committees’ projections. 

For example, Gokhale projects that ObamaCare will force Florida to spend an additional $20.4 billion between 2014 and 2023. That is almost double the committees’ estimate of an additional $12.9 billion in spending by Florida between 2013 to 2023.

Here’s a new mini-documentary from the Center for Freedom and Prosperity, narrated by Natasha Montague of Americans for Tax Reform, that explains why the process of tax competition is a critical constraint on the propensity of governments to over-tax and over-spend.

The issue is very simple. When labor and capital have the ability to escape bad policy by moving across borders, politicians are more likely to realize that it is foolish to impose high tax rates. And they oftentimes compete for jobs and investment by lowering tax rates. This virtuous form of rivalry helps explain why so many nations in recent years have lowered tax rates and adopted simple and fair flat tax systems.

Another great feature of the video is the series of quotes from winners of the Nobel Prize. These economists all recognize competition between governments is just as desirable as competition between banks, pet stores, and supermarkets.

The video also discusses how politicians are attacking tax competition. It mentions a privacy-eroding scheme concocted by governors to tax out-of-state purchases (how dare consumers buy online and avoid state sales tax!).

And it also discusses a very destructive tax harmonization effort by a Paris-based bureaucracy (the Organization for Economic Cooperation and Development, subsidized with American tax dollars!), which would undermine fiscal sovereignty by punishing jurisdictions that adopt pro-growth tax systems that attract labor and capital.

The issues discussed in this video generally don’t get a lot of attention, but they are critical for the long-run battle to restrain government. Please share widely.

P.S. This speech by Florida’s new Governor is a good example of how tax competition encourages policy makers to do the right thing.

The New York Times reports:

Seeking to appease disgruntled governors, President Obama plans to announce on Monday that he supports amending the 2010 health care law to allow states to opt out of its most burdensome requirements three years earlier than currently permitted.

It’s significant that the president is finally acknowledging that ObamaCare is unworkable and will impose enormous burdens on the states. Or is he?

A closer look shows that the president is not lifting the burdensome requirements ObamaCare imposes on states. All he’s doing is proposing to move up, from 2017 to 2014, the date on which states can apply for federal permission to impose a different but equivalently or more coercive plan to expand health insurance coverage. Here’s what the Times says about the legislation Obama will reportedly endorse, which was introduced by Sens. Ron Wyden (D‑OR) and Scott Brown (R‑MA):

The legislation would allow states to opt out earlier from various requirements if they could demonstrate that other methods would allow them to cover as many people, with insurance that is as comprehensive and affordable, as provided by the new law. The changes also must not increase the federal deficit.

If states can meet those standards, they can ask to circumvent minimum benefit levels, structural requirements for insurance exchanges and the mandates that most individuals obtain coverage and that employers provide it. Washington would then help finance a state’s individualized health care system with federal money that would otherwise be spent there on insurance subsidies and tax credits.

So states can “opt out” of ObamaCare’s individual mandate if they cover as many people, with as many benefits, and as many government subsidies, as ObamaCare would. The Times quotes “administration officials” on how states might do that:

The administration officials said the so-called state innovation waivers in the Wyden-Brown bill might allow a state to experiment with ways to entice people to obtain insurance rather than requiring them to buy policies. It also might allow interested states to establish a single-payer system in which the government is the sole insurer. Gov. Peter Shumlin, a newly elected Democrat in Vermont, is pursuing such a proposal.

No such state plan can make a dent in the federal laws that are fueling the relentless growth in the cost of health care (see Medicare, the federal tax treatment of health care, etc.). Therefore, the only way that states could cover as many people as ObamaCare does is by using ObamaCare’s tactic of forcing people to buy exorbitantly costly health insurance. And if they’re not going to use an individual mandate, the only remaining option is a single-payer health care system.

President Obama’s move is not about giving states more flexibility. It’s about moving the nation even faster toward his ideal of a Canadian- or British-style single-payer health care system.

Sooner or later, there will be a giant battle in Washington over the value-added tax. The people who want bigger government (and the people who are willing to surrender to big government) understand that a new source of tax revenue is needed to turn the United States into a European-style social welfare state. But that’s exactly why the VAT is a terrible idea.

I explain why in a column for Reuters. The entire thing is worth reading, but here’s an excerpt of some key points.

Many Washington insiders are claiming that America needs a value-added tax (VAT) to get rid of red ink. …And President Obama says that a VAT is “something that has worked for other countries.” Every single one of these assertions is demonstrably false. …One of the many problems with a VAT is that it is a hidden levy. …VATs are imposed at each stage of the production process and thus get embedded in the price of goods. And because the VAT is hidden from consumers, politicians find they are an easy source of new revenue – which is one reason why the average VAT rate in Europe is now more than 20 percent! …Western European nations first began imposing VATs about 40 years ago, and the result has been bigger government, permanent deficits and more debt. According to the Economist Intelligence Unit, public debt is equal to 74 percent of GDP in Western Europe, compared to 64 percent of GDP in the United States (and the gap was much bigger before the Bush-Obama spending spree doubled America’s debt burden). The most important comparison is not debt, but rather the burden of government spending. …you don’t cure an alcoholic by giving him keys to a liquor store, you don’t promote fiscal responsibility by giving government a new source of revenue. …To be sure, we would have a better tax system if proponents got rid of the income tax and replaced it with a VAT. But that’s not what’s being discussed. At best, some proponents claim we could reduce other taxes in exchange for a VAT. Once again, though, the evidence from Europe shows this is a naive hope. The tax burden on personal and corporate income is much higher today than it was in the pre-VAT era. …When President Obama said the VAT is “something that has worked for other countries,” he should have specified that the tax is good for the politicians of those nations, but not for the people. The political elite got more money that they use to buy votes, and they got a new tax code, enabling them to auction off loopholes to special interest groups.

You can see some amusing — but also painfully accurate — cartoons about the VAT by clicking here, here, and here.

For further information on why the VAT is a horrible proposal, including lots of specific numbers and comparisons between the United States and Western Europe, here’s a video from the Center for Freedom and Prosperity.

This weekend I opened The Washington Post to find the editors arguing that Congress should cut federal subsidies to the Corporation for Public Broadcasting, the Institute of Peace, and the National Endowment of the Arts, and George F. Will arguing that Congress should preserve federal subsidies to Teach for America.

Weird.