by Yuval Levin
There are two must-read pieces on the budget crisis today (and Doug Holtz-Eakin’s post below makes three).
First, if you haven’t read Lawrence Lindsey’s sobering dose of reality in today’s Wall Street Journal yet, do. As he points out, the numbers thrown around in our debt-ceiling and budget debate—grim and daunting as they are—are based on interest-rate and growth assumptions that are likely to be far off the mark. Our real deficit and debt problem is therefore a good bit larger than we tend to think. As Lindsey writes:
At present, the average cost of Treasury borrowing is 2.5%. The average over the last two decades was 5.7%. Should we ramp up to the higher number, annual interest expenses would be roughly $420 billion higher in 2014 and $700 billion higher in 2020. The 10-year rise in interest expense would be $4.9 trillion higher under “normalized” rates than under the current cost of borrowing. Compare that to the $2 trillion estimate of what the current talks about long-term deficit reduction may produce, and it becomes obvious that the gains from the current deficit-reduction efforts could be wiped out by normalization in the bond market.
But it gets worse:
The second reason for concern is that official growth forecasts are much higher than what the academic consensus believes we should expect after a financial crisis. That consensus holds that economies tend to return to trend growth of about 2.5%, without ever recapturing what was lost in the downturn. But the president’s budget of February 2011 projects economic growth of 4% in 2012, 4.5% in 2013, and 4.2% in 2014. That budget also estimates that the 10-year budget cost of missing the growth estimate by just one point for one year is $750 billion. So, if we just grow at trend those three years, we will miss the president’s forecast by a cumulative 5.2 percentage points and—using the numbers provided in his budget—incur additional debt of $4 trillion. That is the equivalent of all of the 10-year savings in Congressman Paul Ryan’s budget, passed by the House in April, or in the Bowles-Simpson budget plan.
Add to that the CBO’s vast underestimation of the cost of Obamacare, and you’re looking at a problem on a scale that dwarfs even the scary numbers we have all been trying to wrap our heads around this year. As Lindsey puts it, “Underestimating the long-term budget situation is an old game in Washington. But never have the numbers been this large.”
The Democrats think they can address these problems by raising taxes. But today’s second must-read op-ed, this one from James Pethokoukis of Reuters, helps us see why a tax increase is the last thing the economy needs.
Both make a case that Republicans should be making more often and more forcefully: The path out of our troubles requires spending cuts, and especially entitlement reform, but above all it requires growth. Without dramatically improved economic growth, no amount of austerity could help us avert a fiscal catastrophe, let alone improve the economic state of the average family. How to achieve dramatically improved economic growth is, of course, no simple question. But we can be pretty sure that tax increases on investors and job creators are not the way.
Republicans should champion a wholesale tax reform that includes the elimination of most tax preferences to make a significant rate reduction possible. Such a reform could also yield some modest additional federal revenue (and the growth it could enable could too). But they should adamantly oppose targeted tax increases intended to stoke class resentment that end up raising yet more obstacles to productivity and prosperity.