Fiscal Cliff Arithmetic: How It All Adds Up, Or Doesn't
On Monday, I looked at the president and the budget talks. What Mr. Obama has been saying comes down to politics and arithmetic -- and it doesn't add up. Here's why:
During the last election, Mr. Obama’s position on our deficit crisis came down to 1) more domestic spending, even radically more, 2) don’t touch entitlements, 3) tax the rich.
And so, with spending now at 25% of GDP and, according to the Congressional Budget Office, headed to 46% of GDP by 2050 even if there is not a single addition to the list of government programs, the only action that the president has said we need is to up the very taxes that are most destructive to economic growth (see http://tinyurl.com/ctuk2o8). Maybe you can find someone who believes the deficit can be closed without strong economic growth. I’ve never found such a person.
Democrats answer that we need all that spending to stimulate the economy at a time of nearly zero growth. But there is increasing scholarship that points to spending as part of our growth problem, with spending at the levels of GDP we are seeing now depressing growth (see http://tinyurl.com/cy7aag5).
But even setting aside what will increase or depress growth, increasing top marginal tax rates is a futile budget strategy. Since the end of the World War II, the top rate has been as high as 90% of income and as low as 28%, but high or low, the percent of GDP that the Federal government has collected has rarely deviated more than a percentage point of GDP over or under 19% (see http://tinyurl.com/bof4h6g) .
The budget is simply “arithmetic” Bill Clinton told the nation during his Democratic National Convention speech. So here are the simple facts of current arithmetic. You can’t reduce the federal deficit unless you 1) cut current and future domestic spending, 2) cut unfunded liabilities in entitlements and 3) boost growth.
This is why House Republicans must hold the line on marginal tax rate increases. Some say the administration has a mandate and the GOP must bend. But House Republicans won their majority this year at least as convincingly as Mr. Obama won the presidency. History is full of long thin lines that held in the heat of conflict and turned the tides of battles. With federal spending now way over its historic level of 19% of GDP, is it plausible that domestic spending cannot be reduced?
Today’s budget battle is not about just politics but about the future of the nation. Already we are hearing talk of America’s decline around the world and even from Russia (see http://tinyurl.com/cu53syu). Will a budget deal include real reductions in real domestic spending? Whatever the posturing of Democrats like Howard Dean or the president, without a spending solution, no deal is a real deal. Just look at the arithmetic.