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.
I am always fascinated at how people who are extremely smart think that layfolk simply don't understand the current budget mess we're in. Newsflash: People understand the current budget mess we're in. Anyone with a basic lesson in arithmetic understands the mess we're in. No one here needs convincing of the current budget mess we're in. Who needed convincing are those who call themselves our intellectual betters.
Reply to this commentLinkReport AbuseChris,
I disagree with that...I don't think most Americans care about the budget mess. That's why it's more important to talk about tax cuts rather harp on the budget and deficits and the debt. Taxes are the big government actions that people see.
McCain ran as a deficit hawk, while Obama said tax cuts as much as possible. McCain couldn't even take Virginia and NC.
Reply to this commentLinkReport AbuseYes, us lay-folk certainly do understand the problem, apparently much better than those we put into a position of power.
They tell us they are the one, they promise us to solve the problem, they get into a position of power and they want more of our money. We can never give enough to satisfy the never ending thirst emanating from Washington.
The burden falls on the working poor and the middle class. Washington drives the middle class into the working poor with their unhindered taxing.
They raise taxes every day, not just on our work; new taxes on food, drink, entertainment, gas, automobiles, clothing and on and on. Hidden and individually minor, but they add up and they are a new tax.
This is what needs to stop. Democrats refuse to stop, that is the only way they get votes is to purchase the vote. Republicans play the same game but behind the scenes.
The current congressional crop needs to be harvested and a new crop brought in with term limits (3 terms-Congress, 1 term Senate), fewer benefits, more restrictions and less pay. Without this restraint, they will crush us as a country. Vote them out in 2012, 2014, and on until they are all gone.
Reply to this commentLinkReport AbuseTaxes are at a 50 year low in the US... have low taxes translated into more jobs? Did the Bush tax cuts translate into more jobs, or simply higher profits for the wealthiest among us? We can't cut taxes any more and continue to invest in the future, and if we don't invest, as a nation, in our future... we will be left behind by countries that do.
Sure, Americans hear 'tax cut' and 'more jobs' and it resonates more than when they hear 'deficit reduction' and 'budget deals' ... but that doesn't mean that somehow tax cuts get you more jobs or deficit reduction... because they don't.
Reply to this commentLinkReport AbuseShow where higher taxes have lead to deficit reduction and job growth.
Start with Europe, and their constant double digit unemployment and massive deficits.
This notion that we are undertaxed is absurd. The notion that the defict has to do with a lack of tax revenue is a fantasy.
Reply to this commentLinkReport AbuseTax collection is at a 50 year low, thanks to the recession.
But tax rates are at or near record highs. (Yes they were higher in the 50's, but so were deductions.)
Reply to this commentLinkReport AbuseI'm going to have to take the third road here gentlemen,
It's not that Americans don't understand, it's that they don't care.
Apathy rules - as long as you don't interrupt my Casey Anthony coverage or my fast food glutton-fest, I don't care if the country burns around us.
Personally, I am stocking up on canned goods and shotgun shells.
Reply to this commentLinkReport Abuse;)
I actually agree with Talesin as an addendum to my own point. The apathy arises because people understand the debt situation. They're apathetic because they send men to Washington to solve the problem. The men in Washington suddenly discover the pleasures of the office and make things worse for their own gain. Americans become more apathetic at the end result.
Reply to this commentLinkReport AbuseAmen when it comes to growth being a key component to any victorious GOP strategy and an absolute requirement for any way out of the growing debt crisis.
Reply to this commentLinkReport AbuseThe projected growth claims being made by the Obama administration are especially ludicrous given what it has already done to stymie growth and the depressive effects that will become more and more pronounced as Obamacare and new financial regulations steadily strangle the economy.
Throw in Obama's continual threats to raise taxes and you have a formula for the kind of systemic stagnation that has plagued Europe for years.
None of this should come as a surprise. Obama has never been interested in dynamic growth; only redistribution. The surprising thing is that so many people who should have known better actually expected positive things out a Keynesian stimulus bill that principally served to remove a trillion dollars from the private economy and re-direct it to the bottomless swamp of government.
What we need is an approach that would simultaneously shrink the size of government in both real terms and relative to the GDP, while boosting GDP itself with reforms designed to free market forces. At a minimum, such reforms would include elimination of capital gains and corporate taxes; simplification of a tax structure that would both abandon social engineering -- including progressivity -- and encourage initiative, entrepreneurship and business expansion; and a sharp reduction of excessive regulations that waste private resources and sap economic vitality.
In other words, less Keynes and Marx and more Adam Smith.
What we need is massive de-regulation, but under another name. (Why not play the "let's control the language so that we can control the dialogue" game?) "Regulation simplification." Who could be against regulation simplification? It's still regulation (De-R~ suggest that the result is no regulation), but simpler. Who doesn't like simpler regulations (other than academics and Dem office holders)?
Reply to this commentLinkReport AbuseThere is already a time-tested, politically useful phrase available for reducing regulations and that is "cutting red tape."
Reply to this commentLinkReport AbuseAs in, "Government red tape is strangling small businesses," "Government red tape is choking the economy," "There's so much government red tape it would stretch from here to the moon and back," and "Obama's idea for growing the economy comes down hiring to hiring thousands of bureaucrats, supplying each one of them with a mile of red tape, and sending them to your door to tell you, 'We're from the government and we're here to help."
The poison in the well is the well-cultivated perception that higher taxes are for other people to pay. No one says "we all have to pay more"; they say "we can make the other guy pay more."
Politicians love this -- not only do they get to fan the flames of class hatred, but they also get to hand-pick who gets stuck with the tab. Oh, and spend gobs of OPM.
If we had a flat tax politicians seeking reelection would waste no time limiting spending. Instead, we get this shell game -- which will not change until voting and taxpaying are brought back into alignment.
No chance they'll ever fix that.
Reply to this commentLinkReport AbuseToo many people feed at the public trough. When we add up Government employees, Medicare and Medicaid enrollees, Social Security and SSI beneficiaries, Earned Income and Child Tax Credit recipients, it is apparent that far more than half of us put into our pockets money taken from the minority. The minority wants to stop this, but the majority has too much at stake. One ardent libertarian friend of mine (a recent retiree) became enraged when the Republican Governor of Michigan moved to impose a State Income tax on his state employee pension. He knows the state needs the money - he just thinks it should come out of someone else's pocket.
Reply to this commentLinkReport AbuseAnyone who receives more from the govt than they pay in taxes, should not have the priviledge of voting.
Reply to this commentLinkReport AbuseThis is why in the early days of this nation, voting was limited to property owners. They wanted to make sure that you had a vested interest in electing the right people, not so that you would vote for the candidates who gave out the most entitlements.
Reply to this commentLinkReport AbuseLets face it, the promises can't be kept and the once most powerful economic engine called the baby boomers are now becoming the most powerful liability at the rate of 10,000 a day.Will they have the wisdom to realize this? Say tuned.
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