On Wednesday, the federal government’s total debt exceeded fifteen trillion dollars. That’s $48,000 in debt per citizen and over $133,000 in debt per taxpayer. Adding in all U.S. debt, including personal (mortgages, credit cards, student loans), plus government at all levels, the debt is approaching an incomprehensible $55 trillion, representing almost $661,000 per American family.
If you want to see just how literally big these numbers are, take a look at this screen shot from USDebtClock.org taken a couple of seconds after the fateful $15 trillion national debt was reached.
As Stein’s law says, “If something cannot go on forever, it will stop.” The question is how.
I fear to learn the answer, not least because in this high-stakes game of musical chairs, the Democrats want to keep the music playing while Republicans alternate between feckless and spineless despite a 2010 election that should have given them some backbone.
As economist Brian Wesbury states, “Cutting spending is the most important thing Congress can do to boost economic growth, create jobs and lift stock markets to new highs.”
But in Congress and the “Super Committee,” Republicans are walking away from pledges not to raise taxes in a poorly conceived desire to cooperate with Democrats. When will Republicans realize that the public is awake and that good policy is, at long last, good politics? When will they realize that acting like Democrats is what has cost the GOP electoral success for the past decade, if not the past century?
It could be that Republicans are trying to appear willing to accept modest tax increases in return for tax rate cut permanence and entitlement reform, knowing that Democrats will refuse to accept the offer, thus placing Democrats in the role of obstructionists. But Republicans are simply not that smart, and in the meantime they’re playing right into Democrat hands.
After all, Republicans now seem to be offering tax increases (in the form of reduced deductions for upper-income earners) in return for extending the Bush tax rate cuts. But those cuts are likely to be extended by Congress in any case. Republicans can then make them permanent by electoral success in 2012 without having to cave in to John Kerry and friends. In the meantime, all the recent headlines from the Super Committee are about the size of tax increases, with nary a mention of spending cuts.
The key to fixing our economic problems is the realization that our federal government’s deficits and debt are caused by a spending problem — and only a spending problem. Brian Wesbury uses a few simple data points to make this clear: “Federal spending increased from 18% of GDP in 1965 to 23% in 1982. During that time, stock prices went nowhere, P-E ratios fell, unemployment rose and the economy suffered. From 1982 to 2000, government spending was cut back to 18.5% of GDP. Stocks soared, unemployment plummeted and the economy boomed. Since 2000, as government spending shot up again, the economy has suffered, unemployment has climbed and stocks have flat-lined again.”
On Tuesday, Congressional Budget Office (CBO) director before a Senate committee that while the roughly $800 billion spent on the “stimulus” created an initial boost to GDP, the level of GDP will “be a little lower at the end (of the decade)” than it would have been without stimulus. It’s the economic equivalent of a hangover — after a party that wasn’t very much fun to begin with. He also conceded Senator Jeff Sessions’ (R-AL) point that ongoing interest payments on the stimulus’s deficits would create a “continual negative” and a “continuing drag” on GDP “if no other action were taken.”
Elmendorf, who has been willing to speak the economic truth more often than other high-ranking DC functionaries, is nevertheless stuck in the CBO’s world of static modeling and Keynesian thinking. CBO’s policy analyses systematically understate the benefits of tax cuts and the damage of excessive spending, including transfer payments.
Therefore, while Elmendorf’s testimony acknowledges the likelihood of a weak economy for a prolonged period, including an “unemployment rate close to 9 percent through the end of 2012,” his policy prescriptions have superficial short-term appeal but miss the big picture. Bastiat would say that the CBO’s suggestions represent the work of a “bad economist,” one who anticipates that which is seen but ignores that which is not seen.
In particular, the CBO favors reducing payroll taxes and “providing aid to the unemployed” over reducing tax rates on corporate income and repatriated earnings from foreign divisions of American companies. It’s true that the first two policies might give a short-term boost to economic activity — though even that is not demonstrated by evidence. However, reducing income or payroll taxes is only effective if the reductions are perceived to be permanent, or at least long lasting. The ad hoc tinkering with rates we’ve seen so far will not boost employment because companies aren’t looking to hire someone for just a year or two; they look at the expected long-term total cost of an employee.
Similarly, aid to the unemployed is not a strategy for economic growth. After all, if you subsidize something, you get more of it. Beyond that obvious maxim, however, take this idea to its logical conclusion: if the best way to create economic growth were unemployment checks, then shouldn’t we aim to have as many unemployed people as possible and send them free money, mined from rich veins deep in Big Rock Candy Mountain?
The insanity of the CBO’s approach shows in a chart in which they suggest, much as Nancy Pelosi has, that increasing unemployment benefits is the biggest employment booster of all their policy suggestions. Any economic model paradigm that can reach this conclusion should be jettisoned without further ado — but won’t be because this Keynesian approach is the keystone holding up the rotting edifice of big, Progressive government against the weight of decades of failure.
On the other hand, reducing corporate tax rates and allowing a trillion dollars of capital to return to our shores are precisely the foundation on which long-term business investment could be built. (An income repatriation “holiday” is not without critics, even on the right, some of whom prefer a permanent change in taxation of U.S. companies’ foreign-earned income.)
If you’re a corporation or entrepreneur with cash sitting idle in bank accounts earning zero percent interest, you are motivated to do something to generate returns on that capital. The way to do that is to grow your business by a combination of hiring and increasing productivity.
You’ll be deterred from doing so if the risks are so high that simple preservation of capital is more attractive than your risk-adjusted returns of doing business. And few things increase those risks more than a government that tries to borrow its way to prosperity while implementing economic policies with short-term benefits but long-term costs. We have a government addicted to the rush of redistributing the earnings of Americans (whether working today or not yet born) while ignoring the DTs the rest of us suffer for their profligacy.
Despite how obvious it is to any businessman that long-term incentives for growth and capital formation are the key to economic success, the CBO estimates that cutting corporate income taxes will generate only one sixth as many jobs as raising unemployment benefits (per dollar cost to the government.) Again, any government operating on a model that could reach this conclusion is so economically ignorant it’s remarkable we’re not in even worse shape than we are.
To be fair, Mr. Elmendorf points out that his policy suggestions “might be considered to promote economic growth and increase employment in the near term.” But thinking near term is exactly what has gotten us into this mess. And unless we do in fact live on Big Rock Candy Mountain, it’s time — far past time — to start thinking about economic policies for the long-term and the real world.
The real world is now a $15 trillion federal debt and a Republican Party — as represented by its negotiators on the “Super Committee” — drifting toward Democratic positions, just as efforts at “bipartisanship” always do. It’s time to put our foot down, to scream from the rooftops that we have a spending problem, not a revenue problem, that we are stunting long-term growth by focusing on short-term false solutions due to lack of political courage and economic wisdom.
In terms of both economics and politics, no deal is better than a bad deal when it comes to the not-so-Super Committee and Republican votes in Congress. Economically, as Wesbury makes clear, “every extra dollar of tax revenue the Committee might agree to, will limit spending reductions.… No agreement and a complete breakdown of the committee — which forces automatic sequestration — is better for the economy than a compromise that includes large tax hikes.”
And politically, it’s time for Republicans to recognize that voters want authenticity. Few things will bode better for GOP electoral hopes than their being authentic, consistent champions of cutting budgets. Good policy will be good politics a year from now. Republican Super Committee members Jeb Hensarling (TX) and Pat Toomey (PA) need to back away from “getting along” for its own sake, stand up for economic rationality, and remind the world that the spending-addicted Democrats’ only answer — just like the answer from almost every addict — is to inject more drugs rather than to get our nation into a desperately needed fiscal 12-step plan.