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.
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Comments:
Jan '11
Re: Fiscal Cliff Arithmetic: How It All Adds Up, Or Doesn't
Democrats only see two terms in the fiscal equation: taxes and spending. They refuse to acknowledge the importance of growth. They think that anyone who doesn't want to tax rich people must (obviously!) be prejudiced against poor people, and want the rich to keep their money.
No.
The purpose of a tax cut is to help rich people put their money in circulation, where we can benefit from it. When rich people sit on their money, it doesn't do me any good. I want the rich people to feel free to spend it. I want them to be eager to spend it. I want them to put their money in motion.
And how do the Democrats think they can motivate rich people to put their money in circulation? Joe Biden argues that it's the "patriotic" thing to do. -- Hey Joe, how's that argument working?
Sep '10
Re: Fiscal Cliff Arithmetic: How It All Adds Up, Or Doesn't
Unless I am more out of touch with reality than I think the current debate is about putting $8T more on the CC or $6T. How either position can be thought of as fiscally responsible when there is more than $16T already on the card does not strike me as sane. When one stops to consider that both sides posture as if there will not be another economic down turn in the next decade the insanity of the situation becomes more apparent. The fiscal projections are obviously pure fiction. Why is anyone taking either side seriously?
Aug '10
Re: Fiscal Cliff Arithmetic: How It All Adds Up, Or Doesn't
Clark Judge:
There's a deeper problem than mere spending. It's possible the economy is unable to grow faster because debt has risen to the point where it prevents the productive use of the underlying assets. When economic growth is predicated on debt growth, but the productive assets (or good credit) pledged against debt are already encumbered by previous debt, then economic growth will stall.
In other words, reducing taxes, spending, the deficit, entitlements, etc is insufficient for the task of generating growth. Relative debt levels need to be reduced before new capital can be utilized.
This requires deleveraging, which the private sector has already begun. But Fed monetary policies, and Keynesian spending fiscal policies, are fighting this correction.
Mar '11
Re: Fiscal Cliff Arithmetic: How It All Adds Up, Or Doesn't
The unmentioned, scary point behind this article:
Using the 19% of GDP figure, if spending were to just stay the same--roughly 3.94 trillion (a miracle, I know), the USA would have to get to a GDP of . . . wait for it . . . 20.73 trillion before revenue would reach the 3.94 number!!! Currently, we're at a GDP of about 15.3. That's an increase in GDP of 1/3 for those keeping score at home.
For historical perspective, it took 7 years, 2005-2012, 11.7-15.3 trillion, for the USA to increase GDP by 1/3. And you may think: balance the budget in 7 years? That sounds pretty good. Yes, except for the fact in those 7 years we'd add to the National Debt because we'd be falling short every year until the 7th year. So, the Debt wouldn't be 16 trillion, it'd be more like 21 by the time we got there.
And this is with the budget staying exactly where it is!!!
The kind of tax system we have doesn't matter because nobody truly understands how much spending we're gonna have to reduce in this country.
Jul '11
Re: Fiscal Cliff Arithmetic: How It All Adds Up, Or Doesn't
It's not even the argument that increased taxation reduces economic growth, which it does. It's not even that increased debt slows economic growth because of all the capital tied up in debt instruments. It's that no matter how high the tax rate goes, even over 100% for incomes over 250K/annum, you would still not pay off a single year's projected deficit - not even by half.
The rest of the argument or discussion about what's right or wrong in terms of rates, fairness, etc., is really pointless, because the issue is, and always will be until we address it: Spending. Unless and until Republicans start hammering this home, every day, as far and as wide as they can broadcast this information, we will never, ever, see a reduction in the size of government, a government that has grown so large as to stifle the growth it says it needs to keep growing at unprecedented levels.
There's a negative feedback loop here, one that needs to be cut at the source.