Economist Dan Mitchell gave two outstanding presentations via teleconference technology this past week, on Wednesday, Feb. 12, to an audience on Maui and the other on Friday, Feb. 14, on Oahu. Both events were sponsored by the Grassroot Institute of Hawaii.
Communicating with us from Washington, D.C., Mitchell explained the strengths and weaknesses of various types of government spending caps, and outlined which ones likely would work best for Hawaii, where the state’s unfunded liabilities over the next 30 years have reliably been estimated at $88 billion.
Highly recommended viewing, and a full transcript follows.
2-14-20 Dan Mitchell presentation
Keli’i Akina: Aloha, and welcome to the Grassroot Institute. Today is February 14th, which is Valentine’s Day, so happy Valentine’s to everyone. I’m Keli’i Akina, president of the Grassroot Institute. We’re delighted to be here at the Pacific Club communicating with our dear friend Dan Mitchell, who’s in Washington, D.C., today.
First, let me tell you what we’re going to talk about. The event today is entitled “Tailspin: How to defuse Hawaii’s $88 billion time bomb.” There’s a time bomb. Did you know that over the past several years, the rate of government spending in the state of Hawaii has been twice the growth of the economy? The rate of government spending has been growing at twice the growth of the economy. One of the consequences is that cost of living has skyrocketed here. We have record numbers of people leaving the state of Hawaii, which is a very sad thing. You’ve seen that documented in our program, “Why are People Leaving Hawaii?”
One of the problems we have today is unfunded liabilities. You know that, if you’ve been following Grassroot Institute, when it comes to our public pension program, the Employee Retirement System, we are currently unfunded to the tune of 20 — excuse me — to the tune of $14 billion. It just went up. $14 billion. That’s what we owe our pensioners, and we don’t have that much money.
In terms of their healthcare, we owe them $12.2 billion, and we don’t have the money for that. We are unfunded, in terms of our liabilities for public servants, to the tune of $26.2 billion. Now, that may shock you, but recently the figures have come out that will allow us to calculate exactly how much unfunded liability there is in other areas of government. When it comes to infrastructure, we owe $47.2 billion over the next 30 years, to which we are committed and which we must spend, but we don’t have it.
Add other costs — I’m going to give you a figure now, which is the basis for today ‘s presentation. Our state government in Hawaii currently owes, for the next 30 years, $88 billion that we do not have. Can you imagine that? The cost of government is extraordinary. It raises several questions, like what should happen if there’s a dip in the stock market that’s very significant? What if we see something happen that we’ve seen in recent long-term recessions?
More than that, what happens to the taxpayers, who are shrinking in number here in the state of Hawaii, who have to pay for all of this? That’s why the Grassroot Institute seeks best-practice solutions.
One of the scholars who has been studying this is Dan Mitchell. Dan Mitchell is the co-founder of the Center for Freedom and Prosperity in Washington, D.C., and we’ll be bringing him on board in just a moment.
He’s one of the nation’s leading experts on tax reform, international tax competition and the economic burden of government spending. He’s worked as an economist for U.S. Sen. Bob Packwood and the U.S. Senate Finance Committee. He was director of tax and budget policy at Citizens for a Sound Economy.
Now, many of you may know Dan Mitchell because he’s been published widely in newspapers and magazines and journals. He’s a frequent television guest. He’s given speeches throughout the United States and more than 50 countries. We recently featured him on Grassroot Institute’s ThinkTech Hawaii program. Mitchell has a Ph.D. in Economics from George Mason University, and he took classes from the late Nobel Prize-winning economist James Buchanan.
I want you to welcome with me here, from Washington, D.C., to the beautiful state of Hawaii, Dan Mitchell. Dan, welcome aboard. Thanks for joining us today.
Keli‘i Akina: Dan, Aloha. Tell us a little bit about where you’re sitting today and what the weather’s like there in Washington, D.C.
Dan Mitchell: I wish I was out there, because the weather here is probably about 35 degrees, so it’s cold, but at least it’s not raining which it was all week. The Hawaii wet weather must be much nicer.
Akina: I want to thank you for accommodating us today with the teleconference, and I’m documenting in front of everybody that we owe you a trip to Hawaii. How does that sound, Dan?
Mitchell: All right. I’m looking forward to it.
Akina: Very good. Maybe what we’ll do is we’ll bring you back to sit down with our governor and our Legislature and do a seminar or a consultation. Sound good?
Mitchell: All right. I’m game.
Akina: Dan, tell us just at the outset, before we get into your presentation, a little bit about your background and how it is that you have the expertise to address the problem that we’re facing in Hawaii of unfunded liabilities.
Mitchell: For the last 35 years, I’ve been working on fiscal policy issues mostly at the national level in Washington, but also dealing with many states and several dozen foreign countries. What I have found is that the problems you describe in Hawaii are very widely shared by all sorts of jurisdictions all over the world.
The real challenge is not so much red ink. That’s the symptom of the problem. The real problem is that politicians for years and years and years, will let government grow faster than the private sector, and that inevitably produces a very bad outcome. The solution, as I’ll talk about, is simply to reverse that bad trend line.
Akina: That sounds good, and it’s a simple solution, but I’m sure you’ve got some other detail with that. And I like the fact that you mentioned that at the heart of the problem is that government spending is faster than economic growth.
I’m going to give you the next 25 to 30 minutes, Dan, and you can give your presentation. And then we’re going to invite the audience to come up and ask questions and interact with you. How does that sound? Sound good, Dan?
Mitchell: Great to me.
Akina: OK. Take it away.
Mitchell: All right, let me pull my presentation up on to the screen here.
Akina: Nice set of books behind you.
Mitchell: Yes. Most of them haven’t been read yet, unfortunately.
Akina: OK. Here we are. we see your presentation. Go ahead.
Mitchell: OK. Let me get right into it. I’ll start by giving a little bit of an economics lesson. This is a point here, on this first slide, that it shouldn’t matter whether you even had a Marxist or Keynesian economist in front of you. There are two factors of production, labor and capital.
Now, the Marxist and the Socialists think government should be allocating labor and capital, but the point I want to stress is that every school of thought, every economic theory agrees, that the only way you get more economic growth is either with more labor, more capital or by using your existing labor and capital more productively.
Now, why does this matter? Because if you look at how long it takes to double your GDP, if you only have 1% growth, like say maybe France or Italy, that’s the bottom bar, it takes you 70 years to double your GDP. But if you’re like Hongkong or Singapore, historically, and you’re getting 5%, 6%, 7% growth, you can double your GDP in as little as 10 years. And if you’re like the United States, historically, where we had 3%, 3.5%, 4% growth, you can double your GDP in about 20 years.
Economic growth matters, and here’s a real-world example: The orange line is U.S. per-capita GDP; the blue line is Mexican per-capita GDP. All I did was, I took the U.S. economy in 1895, and I simply assumed or calculated what would have happened if the U.S. grew one percentage point less each year. If that had happened, we would almost be as poor as Mexico today. So 1% economic growth doesn’t sound like much, but if it’s sustained over a long period of time, it has a huge impact on living standards.
Now, what about looking forward, and what if we take a smaller increment. What if the economy simply grows two tenths of 1% faster? Well, that might not make a big difference if you’re only planning on sticking around for one year. But after 25 years, which isn’t that long, you’re talking about $53,000 of additional economic output per person, and by the 25th year, that’s nearly $4,500 for every man, woman and child in the country.
I’m going to make the point about having a smaller burden of government spending. Why do I want that? Because when you have a smaller government, you’re leaving more labor and capital in the private sector, where it’s more likely to generate the faster growth that’ll make us all more prosperous in the long run. In other words, all I’m really doing is telling a story that it’s better to Hong Kong than it is to be Greece.
With that bit of background, let’s now talk about the policy issue here. Now, I’m going to talk about fiscal policy, which is the last item on this list, but I want to make sure everyone understands that’s just one of the levers that government can use. There’s monetary policy, trade policy, regulatory policy, rule of law … all sorts of things matter. When we’re talking about fiscal policy, we’re not even talking about taxes, really, except indirectly, in this presentation. We’re simply talking about the spending side of the fiscal equation.
As I start talking about fiscal policy, I want to make a point that might seem controversial, which is to talk about government debt and deficits. What is it about red ink that’s bad? Well, some people say, “Well, it crowds out private investment, pushes up interest rates.” I don’t disagree with that. It’s definitely not good for that reason. Other people say, “Well, if you have too much red ink, eventually you’ll be like Greece, where people simply don’t trust that you can pay back your bonds.” That’s the sustainability problem, and I don’t disagree with that, either.
But I want to make the point that what really matters, what we really need to understand, is that red ink is the symptom, not the actual disease.
The disease is that government is growing too fast. More specifically, if you want to put it in a formula, you have to look at what’s the long-run trend line? How fast is the burden of government growing relative to the private sector? If government is growing too fast — in other words, the underlying disease is getting worse — guess what? You’re either going to have higher debt, higher taxes or some combination. Or if you’re Argentina, you might even print money to finance your government.
In other words, if government is growing, there’s going to be automatically some negative consequence, whether it’s, again, the taxes, the red ink, the unfunded liabilities, the monetary instability. You have to get control of government at the core. All fiscal policies usually stem from government being too big.
Then we have to ask ourselves the question, “What do we do to achieve good policy?”
Can we elect good, honest, well-intentioned lawmakers? Well, I hope so. Can we have a constitutional system that just, by definition, handcuffs government so that the budget can’t get involved in some areas of the economy? That’s what our Founding Fathers had in mind, but that hasn’t really been a constraint on government ever since the New Deal.
Well, what about balanced budget rules? Are those the right thing? Well, here’s another area where I think I’m going to say something that some people might not agree with: I don’t think balanced budget rules by themselves are terribly effective or useful.
The real-world examples I’ll give you are: Look at California, Illinois and New Jersey. They all have balanced-budget requirements. Does that stop them from having lots of debt, high taxes and big government? No. There are anti-deficit rules, the so-called “Maastricht Criteria” in the European Union. Does that stop big government, high taxes and lots of red ink in France, Spain, Italy and Greece? No. [It doesn’t.] Here’s the fundamental problem why balanced-budget rules by themselves are not sufficient for good policy.
You have something in economics and public finance tied to the economy: the boom-bust cycle. Whether it’s a big boom and a big bust or simply a little boom and a little bust, the reality is that revenues rise and fall with the business cycles. Now, when you have a balanced-budget rule, what does this mean? It means that when there’s a recession and revenues are flat or even going down, all of a sudden the balanced-budget rule is telling the politicians that they have to cut spending, when they don’t want to.
Akina: Well, Dan I’m going to step in for a second on that point.
Akina: We couldn’t agree with you more about the ineffectiveness of balanced-budget rules. But here in Hawaii we have something called a “spending cap.” The problem with the spending cap, as illustrated in our State of the Union address by our governor quite recently, is that at any given time, the Legislature can vote to override the spending cap. That’s the case currently with the proposed budget changes from our governor.
Could you comment a little bit more about the relationship between budget balancing and spending caps? Go ahead.
Mitchell: OK. Well, actually, I’m getting to [it]. I have slides specifically on this issue, but I want to make sure I gave people a good grounding on the topic here. Let me just point out what I call the “ratchet effect.” I’ll skip ahead to this slide here, looking at the federal government’s annual revenue change.
Now, think about it from the perspective of a politician. When the economy is growing, you can increase spending, sometimes by more than 10% a year. But when the economy is in a recession, you might have to cut government spending, and that is simply not politically sustainable. It’s what economists call “procyclical.”
Here’s a chart that Joe (Joe Kent, executive vice president of the Grassroot Institute of Hawaii) sent me about Hawaii’s fiscal policy. The revenues are the blue line. You can see that when we had the recession last decade, or I guess the end of the previous decade, … you see revenue went down. Well, politicians don’t like to cut spending when there’s a recession, but that’s what balanced budget rules do. This is why spending caps are the right solution.
I’ll say something right at the start. I believe in smaller government. I want a spending cap that slowly reduces the burden of government spending relative to GDP. But you could have a spending cap that simply keeps the government at the same size. The problem that Hawaii has, the problem we have in Washington, the problem in so many places around the world, is that governments are growing faster than the private economy.
So whether or not your goal is to simply keep things where they are now, or whether your goal is to shrink government, a spending cap does the job. It’s just a question of where you set it. I call this my Golden Rule: The private sector should grow faster than the government. That’s when you have a spending cap where government grows slower than the private economy.
Here are just some examples of countries that have had success with it, but I want to talk about the jurisdictions that have it, and then talk about specifically Hawaii.
They have one in Hong Kong. Obviously, Hong Kong has been very economically successful. Let’s knock on wood that Beijing doesn’t ruin everything there. Switzerland, I think, has the best example of a spending cap. And we’ve had spending caps on a portion of the budget of Washington. But the problem is the politicians just waive them, they override them, which is the same problem that you have in Hawaii.
The best example in the United States is the Taxpayer Bill of Rights in Colorado. That’s what Hawaii should be copying. That was imposed by the voters back in 1992, and it lets government only grow at the rate of population plus inflation.
Now, let’s get to Hawaii, which I know you were anxious for me to get to. The good news, sort of, is that there is a spending cap in the state Constitution.
The bad news is it allows the government to grow at the rate of personal income rather than the rate of population plus inflation, which is normally a smaller amount. But what’s even worse, if you look further into Section 7.9 of the Constitution, you’ll see the escape clause: The escape clause is two-thirds of a vote of the members of the Legislature. They can routinely, and they do routinely, waive the spending cap requirement.
That escape clause, especially in a state where one party dominates the government, basically means that your spending cap isn’t very effective at all. What makes it different than Colorado is [that] in Colorado — I mean, Colorado has become somewhat of a blue state. But the only way under the TABOR [Taxpayer Bill of Rights] Rules that you can bust the spending cap is the politicians have to go to the voters and ask for permission, and the voters, in almost all cases, say no.
I guess what the underlying message that I’m giving you is, [is] that you want a spending cap like Colorado. Now, you can set it so the government grows at population plus inflation; you can set it so it grows at personal income, which I think is too much. But the main thing is the only escape clause should be a vote of the people. That’s what works very successfully.
Akina: Dan, I just want to interject here and ask our audience a question, and we’ll try to put your face back on so that we can see your reaction. I want to ask you and the audience here: How many of us knew that our state Legislature can override the spending cap? [Many hands are raised.] OK, you’ve got a smart audience. It only takes two-thirds of the state Legislature, and of course, we know that the state Legislature is dominated by one party. But Dan, I’m going to let you continue. Go ahead.
Mitchell: OK, now am I on the screen or is my presentation on the screen?
Akina: Your beautiful face is there, Dan.
Mitchell: OK. Well, there’s definitely conflicting judgments on that issue —
Akina: Happy Valentine’s Day to you. OK …
Mitchell: What I want to do is — this simply explains there are different types of rules for how fast spending can grow — but I’m just going to flash through on the screen a whole bunch of citations from different studies, because these studies are all done by left-leaning international bureaucracies, like the International Monetary Fund and the Organisation for Economic Cooperation and Development, and the European Central Bank.
I’m not going to read these because it’ll be too boring, but basically the IMF and the OECD, they both have these big giant economics departments filled with people that are concerned about long-run fiscal sustainability. Now, they like much bigger government than I like, but what’s interesting is that when the IMF and the OECD examined different fiscal rules around the world, they basically concluded that the only thing that works is what they call an “expenditure rule.”
Now, an expenditure rule is simply a spending cap. That’s just the sort of wonky public finance definition of it. I’m showing you these different citations that, again, they’re too boring to read. But if anybody wants them, I’m sure I can share the presentation.
These IMF studies, these OECD studies, they all say the same thing because they understand [that] because of this ratchet effect with revenues being very cyclical with the economy, that a balanced budget rule just doesn’t work overtime to constrain government. It winds up, instead, creating a ratchet effect where government gets bigger. Every time there’s a recession, they wind up resetting the baseline with higher taxes to fund bigger government.
Whereas expenditure rules — here’s the simple thing to understand: Let’s say you have a 2% spending cap. If your economy is in a recession and your revenues are dropping 5%, you can still increase government spending 2%, so politics is like that. When the economy is growing and revenues are expanding, maybe 8%, you could still only increase spending by 2%. The real key to spending caps is not so much what happens in a recession, it’s making sure politicians can’t spend the windfall whenever there’s a growing economy. That’s where governments get in trouble.
The reason Greece got in trouble is they were increasing government too fast when the economy was growing, and then when they had the financial crisis — Great Recession — that’s when all of a sudden their fiscal situation turned upside down. Again, I’m not expecting anybody to read all these boring studies. …
By the way, one of the IMF studies is a new one that I literally just got in my email just three days ago. Now, I’ll make one final comment here. Maybe two final comments.
We all know that Keynesian economists say that [when] there’s a recession, that government should spend money. They think that stimulates the economy. I don’t agree with them, but the great thing about a spending cap, as I just pointed out, is you can actually still increase government spending during a downtime — at the rate of the spending cap.
Again, and here’s where the Keynesians should agree with us, or at least John Maynard Keynes and his writings agreed with us: Don’t let them spend lots of money when the economy is growing. In effect, you want the economic growth to create a windfall that would result in stabilizing government finances, not encouraging more government spending.
I’ll shut up with some warning things. First of all, we know from real-world experience that governments like having these escape clauses. We know that governments also have ways of getting around spending caps. They can vote for future spending, like promises to state government workers for big lavish retirement benefits, and if those don’t actually increase the budget in the current year, they can get away with that.
Having a spending cap — I’m not going to try to tell anyone it solves every problem. It’s like putting locks on your doors and bars on your window in a crime-ridden neighborhood. It doesn’t mean you’ll never get a burglar. It simply makes it harder for them to do the wrong thing.
There’s also the “public choice” problem. This is, I think, very fundamental. Certainly in Washington, it’s the challenge I have. How do you get politicians who benefit from the current system to vote to tie their own hands? Now, we got around that in Switzerland and in Colorado because the voters imposed it by a referendum. Another problem is, What about local and regional governments? In Switzerland and Colorado, the spending caps, for the most part, apply to local governments.
Then, of course, there’s another issue, which is: Does a spending cap apply to all types of spending? A lot of politicians and some jurisdictions want to always have exemptions from the spending cap.
Here’s the bottom line: We have to first identify the correct problem, which is government growing too fast. Second, we have to come up with a solution to bend the cost curve of government down. That’s the spending cap. Of course, our fundamental challenge is: How do we get the politicians to do it? Thank you.
Akina: Give a big hand to Dan Mitchell. That’s great.
Akina: Well, I found that a very informative presentation and very well put together, especially some of the key points that Dan brought across. I hope you enjoyed that as well. We’d love to hear your questions. Dan is available now to interact directly with you, if you just come to the microphone over here.
First, we have Professor Ken Schoolland, professor of economics at Hawaii Pacific University. Ken, come and step up to the microphone a little bit here. Go ahead and ask your question. By the way, do you and Dan know each other already?
Ken Schoolland: Yes, yes. We’re brothers of a different mother, actually.
Akina: All right. Well, that’s great to hear.
Schoolland: Good to see you, Dan.
Mitchell: And how are you?
Schoolland: He’s one who participates with Li’s summer conferences in China every year at Northeastern University in Shenyang. (Li Schoolland, Ken’s wife.)
I’ve heard that most states have fiscal notes so that when they pass legislation, they have economists evaluate what’s going to be the cost of that. And it’s my understanding that Hawaii is one of the few states that doesn’t have fiscal notes every time they pass legislation.
I one time asked [U.S. Sen.] Brian Schatz — he was [Hawaii] lieutenant governor at the time — shouldn’t we have that, and he says, “No, it would be too expensive to hire eight or nine economists to evaluate the cost of these things.” What’s the effect of fiscal notes as a requirement for legislation?
Akina: Dan, let me throw in with that also that the Grassroot Institute not only promotes the idea of fiscal notes, we’re encouraging our Legislature to come up with a concept of economic impact whenever a bill that costs money is proposed. Dan, what are your thoughts?
Mitchell: We have the equivalent of this in Washington with the Joint Committee on Taxation for revenue estimates and the Congressional Budget Office for spending estimates. It’s a good idea, especially if you have truly dispassionate and neutral budget geeks doing the number crunching. We have had a problem in Washington, and you should be wary of this, that if you have a left-of-center government setting up some economic body to do this kind of work, what happens if they hire a bunch of left-of-center economists? You get garbage, in garbage out.
It’s a good idea, but it’s absolutely critical to understand that personnel is policy. I would not want to stack that kind of commission or body with supply-siders, but I don’t want it being stacked with a bunch of Bernie Sanders acolytes or something like that.
Akina: Very good. Thank you for that question. And by the way, Dan, you point something out very important. Even if we have the correct structure and require fiscal notes on all bills that will cost the taxpayer money, it all depends upon who’s putting that information together, and that’s why there has to be an independent voice.
Lauren, who works in the dark recesses of one of the largest banks here, you’ve got the microphone. Aloha.
Lauren: Thanks for doing this talk for us. I find the public choice problem to be the most vexing. Can you speak a little bit more about the success that Colorado and I think it was Switzerland, you mentioned? How big by voter referendum?
Mitchell: Yes. Switzerland it was by a vote of 84.7% in a referendum in 2001. They imposed what they call a “debt break” but it’s really a spending cap and it works the same as Colorado’s. I confess I don’t know what the margin was in Colorado when they imposed theirs in 1992, but ever since Colorado imposed their spending cap, it has been the fastest-growing state in the nation in terms of per-capita personal income.
Again, what makes them successful is they got around the public choice problem. And by the way, for our people in the audience who don’t know what public choice is, that’s just a school of thought in academic economics, where you analyze the incentive structure for politicians and bureaucrats and just different people in government. The basic insight of public choice is that politicians — surprise, surprise — look out for their own self-interest just like bureaucracies look out for their own self-interest.
It’s a common-sense thing, but it was actually not very common until professor Jim Buchanan got his Nobel Prize for writing about it. Anyhow, the way you get around the public choice problem, at least in the two places that I think have the best spending caps, Switzerland and Colorado, they got around it with a vote of the people. How you do it in a place like Washington, D.C., where there’s not a referendum, I don’t know.
How would you do it, let’s say in a state like California, they have referendums. But California has become so left-wing they would probably vote for the opposite of a spending cap; they would vote for automatic tax increases or something like that. The public choice problem is real. If I had the answer to it, I would already be doing it in Washington. Unfortunately, I don’t have the answer.
Akina: Well, as anyone else comes up to the microphone, I’ll only add this comment, Dan, that that’s precisely our problem. There’s no lack of knowledge here in our state of the best solutions, because you yourself have provided some of that information, our legislators are regularly provided with best practices, but the political will needs to be there for the people, and that’s the real challenge we face. Let me give that microphone over to Sean Mitsui.
Sean Mitsui: Hi Dan. It’s Sean here. My question: In your mind, are there any exceptions to busting out of the spending cap during the time of emergency or crises? If so, how would you properly structure a proper spending cap?
Mitchell: Well, I got this question from Maui two days ago, and I confess I should have looked up the answer, because I imagine there must be some sort of escape clause in the Swiss debt break, but I don’t know what it is. What would happen if, say, Germany and Italy and France all wanted to invade? I assume the Swiss government would have the flexibility to do a big military mobilization and expenditures, but that’s a question where I have to dig up the answer on that.
Since I have the floor for a minute, let me say something in response to the issue of: We have the expertise, but how do we get the lawmakers to do it? One of the reasons I cited all those OECD and IMF studies is because the IMF and the OECD are not my friends. They are not small-government advocates. Instead, they simply are our budget geeks.
I think that if there are well-intentioned, honest people on the left in Hawaii, if we show them the studies from the IMF and the OECD and say, “Look, this was not something that was dreamed up by a bunch of the Rotarians and small-government conservatives. Here are left-leaning international bureaucracies where you have big giant economics departments crunching all sorts of numbers and they are the ones who also agree on spending caps.” It’s not an issue that an honest, reasonable person on the left should disagree with.
Akina: Very good, Dan, and I think that’s the hope we have at the Grassroot Institute, that good research, good data can make a difference. There’s somebody who’s helping us with that, one of our scholars, professor of political economy at the University of Hawaii, Kate Zhou. Kate, you have a question?
Kate Zhou: I was told there is a safety net from the government for emergencies, like money set aside. But when this money is set aside, when [an] emergency occurs, sometimes the government [has] already finished using the money. I was thinking about …
Akina: Rainy day funds. We call them rainy day funds.
Zhou: Yes, rainy day funds. I will not try to make a bad decision into a good one. [There] in D.C., maybe you can help us, because right now, I got a lot of report from China about this terrible virus in my hometown Wuhan. A lot of people, including myself, donate a lot of money to the Red Cross, and the Red Cross [has] received close to $5 billion USD. They have not finished using [it], because they don’t have a volunteer to help them to put [the] money where the real need is. So they [gave] the money back to the government.
Right now, it’d be great [since] you’re in DC, [for you to] advocate [something that] encourages private donations and private initiatives, both from companies and from individuals … and the government can match it as an emergency fund, because I’m thinking about Hawaii. Hawaii right now is one of the seven cities in the United States that can receive foreigners. I think that pretty soon we’re going to face a crisis. Are we going to use government money to quarantine a lot of people? Where are the facilities? How can we do that?
So I think that maybe we can use Hawaii as a very good example to use both nonprofit organizations, charity organizations, churches, to be participating actively in this [effort]. Using Hawaii [as a] model, maybe you can introduce [this] to China [during] at this time. Maybe they may listen, because people are really mad. The angry people are no longer afraid of the government anymore. Thank you.
Akina: Kate, thank you very much. Dan, any comments you have?
Mitchell: Well, I’m certainly not a public health expert so I can’t comment or speculate in any informed way on potential issues in terms of the coronavirus and things like that, but I guess this does come back to the notion that, if there is a genuine emergency, then you — and this is a challenge — if there’s a genuine emergency, some sort of escape clause is probably desirable.
Now, in the state of Colorado, if there’s a sudden emergency, how quickly can you put something on the ballot to get around it? I’ll be the first one to confess, we don’t necessarily have great answers to every single issue here. One thing we know for sure: The status quo is a recipe for gradual economic decline, gradual loss of competitiveness, an exodus of young people from the state, an ever-rising tax burden.
So we know in very concrete terms, if we leave the status quo, bad things will happen. We can speculate that maybe a spending cap might not deal with an emergency perfectly, but that’s all theory. The real problem is right in front of us, and that’s the fiscal crisis.
Akina: Very good. We have Mark Coleman, director of communications for us at Grassroot Institute. Mark?
Mark Coleman: Hey, Dan. We spoke on the phone, I think, or at least emailed each other. That was nice to meet you. A point of clarification about Hawaii: We do have that public choice theory, because to have a change in our Constitution, which is where this would have to occur, it has to be an amendment … submitted by a legislator. We have no initiative or referendum in the state, so there you would have that public choice problem, convincing someone and the Legislature to actually pass that bill.
The other thing that occurred to me was, while you were talking about these left-of-center, big government international organizations, agreeing with the concept of a useful spending cap, why would they agree? They might conclude that that works best, but why would they think that’s a good idea, if they’re left-of-center? If you get what I’m trying to ask.
Mitchell: Even the IMF and the OECD, they obviously don’t want countries to become like Greece, because then they’re responsible for trying to put together bailouts and things like that. I think [with] the IMF and OECD, … the difference between what they advocate and what I advocate is they would probably want a spending cap of 5% growth, maybe something equivalent to the growth of personal income in a state.
They actually probably would like the spending cap in Hawaii’s Constitution; they would just want it to be enforceable, whereas I would want a spending cap more like Colorado, where it’s limited to population plus inflation or even lower. It’s sort of the difference between Singapore and Sweden. Singapore and Sweden are both fiscally responsible jurisdictions. They both have balanced budgets, for the most part. They both have fiscal stability, for the most part. The difference is that in Singapore, government only consumes 18% of GDP, and in Switzerland, it consumes 50% of GDP.
They make a decision in Sweden [for] that very big government, but they actually pay for it, and they have it properly designed. They make a decision for small government in Singapore, and they keep it stable there as well. I prefer the Singapore model. The IMF and OECD might prefer the Swedish model, but both are stable, fiscally well-designed systems where government over the long-run doesn’t grow faster than the private sector.
If you went to the lawmakers in the state Legislature, they would probably want to have something equivalent to the spending cap that currently exists, because that allows them to spend more money. But the key thing is they have to put in the enforcement mechanism. That’s the big giant gaping hole in the current system in Hawaii.
Coleman: Which would be putting it to the vote of the voters.
Mitchell: That’s how they solve the problem in Colorado.
Coleman: Thanks a lot.
Akina: Thank you, Dan. We have another question over here. Go ahead and come to the microphone. Delighted you’re joining us today.
Lynn: Thank you.
Akina: Lynn, who’s in financial services. Go ahead.
Lynn: My question you may not or probably won’t be able to answer. But my concern is, so you talk about public choice, and if we don’t teach at the school level [for] people to think about their governments in this sense, which I think that we have issues — and I apologize for any teachers here that are part of state of Hawaii government, as unions — but how do we get these changes accomplished? For us, the government employees and especially at the school level, are teaching our children to think a certain way, and it’s very hard to change that once it’s embedded in you.
Akina: Good question. Dan?
Mitchell: It’s a good question and one that probably involves a lot more brainpower that I can bring to the table here. I do worry. I share the concern that we do have, not the teachers on the front line, but the teacher union bureaucracy and public school district bureaucracy, they tend to be very left-leaning, and so we get a bit of a biased curriculum. In some areas, there’s a total absence, almost, of teaching economics, although if they taught economics, they’d probably teach bad Keynesian economics.
I suppose I could just pull into my bag of tricks and say the solution is school choice, and I certainly agree that’s a very good approach to improving education. If we wind up raising generations of children, who as adults think that government is basically free, then we have much bigger problems of whether or not there’s a spending cap.
Akina: Very good. Now we move into our show called “Ask an economist.” If you woke up this morning, and you looked in the mirror and you had an economics question — we have an economist here, and I think we have an economist who wants to ask an economist a question. Ken, go ahead, anything for an economist?
Schoolland?: I can’t tell you how thrilled I am to have you here, Dan. Because I use so much of his stuff from his website and from his lectures and so on in my classes all the time. A lot of your slides and everything, I refer to my students, too. So please look up his website. What is your website, by the way?
Mitchell: It’s called International Liberty, but the simple thing, I could give you the whole URL: DanielJMitchell.wordpress.com. But just go to any search engine and type in Dan Mitchell blog. It’s the first thing that comes up, and you can get it by email every single day, for free, of course. I write about not just fiscal issues, but lots of different issues, and I’ve written probably 30 columns over the years on spending caps, all sorts of details about what’s happening in different countries in different states.
Schoolland: Great, and it pops up on Facebook all the time, too. By the way, you mentioned these five areas of evaluation of an economy for economic performance, and one of those was regulatory control. We have as the biggest issue here … a huge cost is of the Jones Act. I’m wondering if you have any comment about the Jones Act, its impact on cabotage rules that raise the cost of living as the hidden tax. Maybe you’ve got a comment about all the hidden taxes that are part of your analysis as well.
Mitchell: The Jones Act, I assume a lot of people in Hawaii would be familiar with it. If you’re getting something shipped to you from California, it has to be on an American ship with an American crew, assuming that is not stopping to a foreign port, and that basically means that the cost of shipping is going to be far higher than if you just had it in a competitive marketplace.
That’s why, whether you’re talking about Puerto Rico which is a U.S. jurisdiction, or whether you’re talking about Hawaii, places that are away from the mainland have a much higher cost of living because of the Jones Act. Literally, you have a situation where sometimes it’s cheaper to ship something to another country, use that as a way stop, and then have it go to Hawaii or Puerto Rico and still be cheaper than the unionized shipping industry in the United States.
Akina: Well, with that, let’s give a hand to Dan.
Akina: If you like what Dan said today, remember, just Google Dan Mitchell blog. He writes something in his blog every day, something so that you can grow in your economics knowledge. I’m just delighted. Dan, one of my biggest takeaways today is very simple, and the simpler it is, the more profound it is: We have got to stop government spending to bring it down to a reasonable level. That’s something that we’ve just got to do. You did your part and brought to us the best practice based on research. Now we’ve got to go out and do our part and tell our public officials this is what to do. Dan, thanks again, we’ll give you another big hand and say aloha. Bye-bye.
Akina: Well, everyone, thank you so much for being here at the Grassroot Institute of Hawaii. We’re just delighted. Before you leave, if you’re here for the first time, please leave us your comments, and fill out one of these comment forms and you can sign up for our newsletters and other information. Stick around, we’re a little ahead of schedule, so enjoy a little more to eat, and some friendship and fellowship. Aloha.
Crowd: Thank you. Happy Valentine’s Day.
Akina: Happy Valentine’s Day.