Yesterday, a Bloomberg editorial looked at the fiscal challenges facing the federal government. While the editorial was fairly solid in a number of ways, it also had a number of errors and misstatements that should be corrected.
First, however, the Bloomberg editorial deserves praise for its recognition of fiscal and political reality: namely, that if either Obama or Romney wish to cut the size of our deficits in a meaningful way, yet also take reforms to entitlements off the table, tax revenue increases will be required to make up the difference. However, the editorial fails to mention that the Romney campaign is very willing to reform Medicaid. Since the program makes up nearly ten percent of the federal budget, reducing this spending will have a measurable impact on future deficits.
The editorial’s next error is to say that tax increases on the middle class are necessary to bring the budget to “primary balance,” meaning that the budget is in balance if one ignores interest payments on the debt. It also says it is a “canard” that tax cuts would stimulate enough growth to eliminate the deficit. These two statements are canards in and of themselves. For example, bringing the budget to “primary balance” means deficits of over $500 billion and growing. Such massive deficits, larger than any in American history prior to Fiscal Year 2008, would be unsustainable if consistent economic growth fails to materialize, especially if interest rates climb as expected later this decade and the national debt grows between now and when “primary balance” is achieved.
Regarding the tax cut claim by Bloomberg, I challenge the editorial staff to name one prominent person who thinks the deficit can be eliminated through tax cuts. While loophole elimination and rate reductions, as well as a broadening of the tax base, would do a great deal to cut the deficit, balancing the budget solely through economic growth is somewhere between highly improbable and impossible. Bloomberg is right to note this, but incorrect to pretend it’s a common view.
Two final issues with the Bloomberg editorial: first, it says that the “imbalance” between low levels of tax revenue and increased reliance on safety-net programs has “produce[d] budget-busting deficits.” While it is accurate to note that food stamps and other programs are at record levels of participation, and tax revenues are near record lows, the fact is that Social Security, Medicare, defense spending, and interest payments on the debt total nearly 70 percent of the budget. Even if tax revenue were one-third higher (near the record high levels seen in the late 1990s), and food stamp participation were zero, for example, we’d still be running a deficit of several hundred billion dollars in fiscal year 2012. The deficit problem facing America is not a matter of a few safety-net programs and low tax revenues; as the editorial noted elsewhere, it is Social Security and Medicare that are the biggest “budget-busters” in the federal budget.
Last, the editorial hits Romney for proposing tax changes that would, according to the Tax Policy Center, increase taxes on middle-class and low-income earners. Considering that the bottom 20 percent of Americans have an effective federal tax rate of 1 percent but receive education, border protection, and other benefits at the expense of top earners who pay in some cases 1,500 times as much in taxes, is Bloomberg saying low-income earners already pay too much in taxes? Furthermore, considering that Romney’s plan — center-right though it is — would increase economic growth, it certainly is arguable that the greater tax burden on non-wealthy earners would be more than offset by increased earnings as the American economy finally shakes off its Bush/Obama-created lethargy.
Neither the President nor Mitt Romney has a plan to balance the budget within a single term, which is something this country desperately needs. Bloomberg is right to call both campaigns out on the disconnects between campaign promises and financial reality. However, Bloomberg should also not undercut its own case by forgetting some basic math and economic realities.