• Tag Archives deficit
  • We’re on the Precipice of an Economic Crisis–and Everyone Knows It’s Coming

    Writing about federal spending last week, I shared five charts illustrating how the process works and what’s causing America’s fiscal problems.

    Most importantly, I showed that the ever-increasing burden of federal spending is almost entirely the result of domestic spending increasing much faster than what would be needed to keep pace with inflation.

    And when I further sliced and diced the numbers, I showed that outlays for entitlements (programs such as Social SecurityMedicareMedicaid, and Obamacare) were the real problem.

    Let’s elaborate.

    John Cogan, writing for the Wall Street Journalsummarizes our current predicament.

    Since the end of World War II, federal tax revenue has grown 15% faster than national income—while federal spending has grown 50% faster. …all—yes, all—of the increase in federal spending relative to GDP over the past seven decades is attributable to entitlement spending. Since the late 1940s, entitlement claims on the nation’s output of goods and services have risen from less than 4% to 14%. …If you’re seeking the reason for the federal government’s chronic budget deficits and crushing national debt, look no further than entitlement programs. …entitlement spending accounts for nearly two-thirds of federal spending. …What about the future? Social Security and Medicare expenditures are accelerating now that baby boomers have begun to collect their government-financed retirement and health-care benefits. If left unchecked, these programs will push government spending to levels never seen during peacetime. Financing this spending will require either record levels of taxation or debt.

    Here’s a chart from his column. Only instead of looking at inflation-adjusted growth of past spending, he looks at what will happen to future entitlement spending, measured as a share of economic output.

    And he concludes with a very dismal point.

    …restraint is not possible without presidential leadership. Unfortunately, President Trump has failed to step up.

    I largely agree. Trump has nominally endorsed some reforms, but the White House hasn’t expended the slightest bit of effort to fix any of the entitlement programs.

    Now let’s see what another expert has to say on the topic. Brian Riedl of the Manhattan Institute paints a rather gloomy picture in an article for National Review.

    …the $82 trillion avalanche of Social Security and Medicare deficits that will come over the next three decades elicits a collective shrug. Future historians—and taxpayers—are unlikely to forgive our casual indifference to what has been called “the most predictable economic crisis in history.” …Between 2008 and 2030, 74 million Americans born between 1946 and 1964—or 10,000 per day—will retire into Social Security and Medicare. And despite trust-fund accounting games, all spending will be financed by current taxpayers. That was all right in 1960, when five workers supported each retiree. The ratio has since fallen below three-to-one today, on its way to two-to-one by the 2030s. …These demographic challenges are worsened by rising health-care costs and repeated benefit expansions from Congress. Today’s typical retiring couple has paid $140,000 into Medicare and will receive $420,000 in benefits (in net present value)… Most Social Security recipients also come out ahead. In other words, seniors are not merely getting back what they paid in. …the spending avalanche has already begun. Since 2008—when the first Baby Boomers qualified for early retirement—Social Security and Medicare have accounted for 72 percent of all inflation-adjusted federal-spending growth (with other health entitlements responsible for the rest). …

    Brian speculates on what will happen if politicians kick the can down the road.

    …something has to give. Will it be responsible policy changes now, or a Greek-style crisis of debt and taxes later? …Restructuring cannot wait. Every year of delay sees 4 million more Baby Boomers retire and get locked into benefits that will be difficult to alter… Unless Washington reins in Social Security and Medicare, no tax cuts can be sustained over the long run. Ultimately, the math always wins. …Frédéric Bastiat long ago observed that “government is the great fiction through which everybody endeavors to live at the expense of everybody else.” Reality will soon fall like an anvil on Generation X and Millennials, as they find themselves on the wrong side of the largest intergenerational wealth transfer in world history.

    Not exactly a cause for optimism!

    Last but not least, Charles Hughes writes on the looming entitlement crisis for E21.

    Medicare and Social Security already account for roughly two-fifths of all federal outlays, and they will account for a growing share of the federal budget over the coming decade. …Entitlement spending growth is a major reason that budget deficits are projected to surge over the next decade. …The unsustainable nature of these programs mean that some reforms will have to be implemented: the only questions are when and what kind of changes will be made. The longer these reforms are put off, the inevitable changes will by necessity be larger and more abrupt. …Without real reform, the important task of placing entitlement programs back on a sustainable trajectory will be left for later generations—at which point the country will be farther down this unsustainable path.

    By the way, it’s not just libertarians and conservatives who recognize there is a problem.

    There have been several proposals from centrists and bipartisan groups to address the problem, such as the Simpson-Bowles plan, the Debt Reduction Task Force, and Obama’s Fiscal Commission.

    For what it’s worth, I’m not a big fan of these initiatives since they include big tax increases. And oftentimes, they even propose the wrong kind of entitlement reform.

    Heck, even folks on the left recognize there’s a problem. Paul Krugman correctly notes that America is facing a massive demographic shift that will lead to much higher levels of spending. And he admits that entitlement spending is driving the budget further into the red. That’s a welcome acknowledgment of reality.

    Sadly, he concludes that we should somehow fix this spending problem with tax hikes.

    That hasn’t worked for Europe, though, so it’s silly to think that same tax-and-spend approach will work for the United States.

    I’ll close by also offering some friendly criticism of conservatives and libertarians. If you read what Cogan, Riedl, and Hughes wrote, they all stated that entitlement programs were a problem in part because they would produce rising levels of red ink.

    It’s certainly true that deficits and debt will increase in the absence of genuine entitlement reform, but what irks me about this rhetoric is that a focus on red ink might lead some people to conclude that rising levels of entitlements somehow wouldn’t be a problem if matched by big tax hikes.

    Wrong. Tax-financed spending diverts resources from the private economy, just as debt-financed spending diverts resources from the private economy.

    In other words, the real problem is spending, not how it’s financed.

    I’m almost tempted to give all of them the Bob Dole Award.

    P.S. For more on America’s built-in entitlement crisis, click hereherehere, and here.

    Reprinted from International Liberty.


    Daniel J. Mitchell

    Daniel J. Mitchell is a Washington-based economist who specializes in fiscal policy, particularly tax reform, international tax competition, and the economic burden of government spending. He also serves on the editorial board of the Cayman Financial Review.

    This article was originally published on FEE.org. Read the original article.



  • Yes, You Can Be for Lower Taxes and Smaller Deficits

     

    One needn’t support the recently-enacted tax legislation to be disturbed by the tenor of much criticism of it. Many opponents, and indeed some press reporting, took for granted that if one voted for a significant tax cut after having expressed longstanding concerns about federal deficits, one must be an irredeemable hypocrite. But lower taxes and smaller deficits can coexist.

    Some examples of the criticism: Neera Tanden wrote in NBC news of the “staggering hypocrisy” inherent in passing “shameful tax cut legislation” after sponsors had previously warned of a “forthcoming debt crisis.” Robert Schlesinger opined in US News & World Report that the legislation suggested “an incredible case of cognitive dissonance or simple breathtaking hypocrisy and/or duplicity.” Ezra Klein fumed at Vox that lawmakers who supported the bill were “nihilists.”

    This refrain was repeated on editorial pages nationwide: you could be for deficit reduction, or alternatively, you could be for tax cuts. Only a nihilist hypocrite could possibly have taken both positions.

    The Case for Lower Taxes and Smaller Deficits

    Beyond its closed-mindedness, this outpouring of indignation was all premised on a mistaken foundational assumption. It is entirely possible to be for both lower taxes and smaller deficits. In fact, I would argue this was not only possible but that it represented the most responsible policy position given the projections lawmakers faced when the tax bill was debated. (Disclaimer: the following should not be misinterpreted as necessarily an endorsement of the specific tax legislation, nor of prioritizing tax relief over fiscal consolidation.)

    When the tax bill was debated, lawmakers faced baseline budget projections that looked like this:

    Everything on this graph is shown as a percentage of GDP, so in effect, this shows how both federal spending and (to a lesser extent) revenue collections are growing faster than our economic output. Beyond the time window shown here, the long-term fiscal picture looked even worse. Spending would continue to rise dramatically faster than our ability to finance it, threatening escalating deficits in the decades ahead.

    The graph also shows that undertaxation is not the cause of this fiscal gap. Over the next decade, tax burdens were actually projected to be higher than the historical average and to increase gradually faster than our economic capacity.

    This was not and is not a stable situation. Taxing and spending as a share of our economy cannot keep increasing forever. (Actually, there is a theoretical sense in which we can spend more than 100% of our economic output if all spending takes the form of domestic income transfers. In other words, we could theoretically tax people several times the amount of their income, provided that we simultaneously write government checks that give it all back to them.

    However, this is neither practicable nor politically feasible. In the real world, we must moderate both our tax and spending growth. Fixing this problem within historical political norms would mean cutting future spending growth substantially – but importantly, also lowering some future tax growth, even as projected deficits are reduced.

    In other words, the baseline budget picture was such that there was no contradiction between reducing projected deficits and lowering projected tax collections. Indeed, that is exactly what a solution consistent with historical experience would require.

    The Case against Lower Taxes and Smaller Deficits

    Now, there is a standpoint from which it would be inconsistent to claim support for both lower taxes and smaller deficits – specifically if one argued that projected spending growth must never be slowed. Some progressives seek not only to preserve currently projected spending growth but to add enormously to it.

    In this mindset, deficits could only be closed if tax collections rise faster than projected. Importantly, this would still not produce a stable budget situation because tax collections would need to grow much faster than Americans’ ability to pay them. Nevertheless, some advocates effectively take this policy position.

    But those who voted for the tax bill are not generally guilty of this. To the contrary, those members have repeatedly been assailed for their allegedly heartless determination to cut spending. House Speaker Paul Ryan has even been depicted — in one particularly revolting ad a few years ago — as dumping an innocent grandmother out of her wheelchair over a cliff, because of his efforts to address rising entitlement spending. And just a few months before their tax vote, lawmakers were attacked for supposedly taking away people’s health care because of their efforts to tackle hundreds of billions of dollars in projected spending growth under the ACA.

    Credit and Criticism Where It’s Due

    It is legitimate to oppose legislation to slow the growth of federal spending, if one believes that spending is needed. But one cannot fairly attack legislators who try to address runaway spending growth, and then later assail those same legislators as hypocrites for widening the deficit.

    Now, it is fair to criticize sponsors of deficit-widening legislation for denying they are increasing the debt. There has been a regrettable amount of such denial, where the public would have been better served to hear arguments as to why the benefits of tax cuts outweighed the downside of a debt increase.

    One can simply assume growth-stimulation effects under which tax cuts do not add to long-term debt, but non-partisan scorekeepers widely reject them — in the same way they rejected assumptions crafted during the last administration to conclude additional stimulus spending could pay for itself. Advocates should acknowledge adverse fiscal consequences of any legislation under consideration, even as they argue for its passage.

    The bottom line is this: prior to the tax legislation, lawmakers faced projections in which both tax burdens and spending patterns exceeded historical norms and were projected to rise still further, driven principally by growth in the major federal health entitlements and Social Security. The merits of this specific tax bill aside, a responsible and sustainable fiscal policy would reduce both projected spending and deficits substantially, while also slowing tax growth somewhat, and ensuring that neither taxes nor spending ultimately grow faster than our ability to finance them.

    Recognizing these realities involves no hypocrisy, but attacking lawmakers for fiscal recklessness — just a few months after taking political advantage of their efforts to rein in part of the federal spending explosion — most certainly does.

    Reprinted from Economics 21.


    Charles Blahous

    Charles Blahous is a senior research fellow for the Mercatus Center, a research fellow for the Hoover Institution, a public trustee for Social Security and Medicare, and a contributor to e21.

    This article was originally published on FEE.org. Read the original article.




  • Should Taxpayers Be Fleeced Forever Because of the Deficit?

    Should Taxpayers Be Fleeced Forever Because of the Deficit?

    As anyone could have predicted, after President Trump released his tax proposal last week the response from the left was a familiar one about “tax cuts we can’t afford” and “mountains of debt” that will supposedly result from reduced penalties placed on work, investment, corporate profits, and of course, death.

    So while the left acted as expected, the truly unfortunate part of this story is that Republicans and conservatives responded to the criticism of Trump’s proposal in a similarly predictable fashion.

    The Ongoing Debate



    The Republicans said what they always say, that tax cuts will author booming growth and will lead to higher federal revenues. This included Treasury Secretary Steven Mnuchin who, as if coached by GOP automatons, responded that the “tax plan will pay for itself with economic growth.”

    And then, right on cue, deficit scolds from the Republican side of the aisle, including Douglas Holtz-Eakin, expressed skepticism that the proposed cuts would raise “$2 trillion in revenue.” Meanwhile, Greg Mankiw questioned the GOP math, telling the New York Times that according to accepted wisdom only “one-third of the cost of tax cuts is recouped via faster economic growth.”

    With the tax cut debate, nothing ever changes.

    Focus on the Spending

    Lost on many Republicans is that the moment they start talking about revenues they concede the taxation argument to the Democrats. And this is true even though their oft-stated statistics are correct.

    As the 1920s, 1960s, 1980s, late 1990s (capital gains cuts in ’97), and 2003 (income, capital gains cuts) reveal rather clearly, reduced penalties on work and investment lead to more taxable economic activity that leads to higher federal revenues. Ok, but federal revenues are not the point, and tax cuts are certainly not a “cost.”

    When Republicans talk about how much the treasury will collect they concede to the Democrats that we have a revenue problem that requires a taxation answer, as opposed to one of too much spending. Sorry, but government spends too much. It’s as simple as that.

    Seemingly forgotten by Republicans and conservatives long ago is that with government spending, it’s not their money. In that very real sense, all government spending is deficit spending.

    For governments to spend, they must tax or borrow precious resources from the private sector only to hand them over to Paul Ryan, Nancy Pelosi and Donald Trump, rather than intrepid investors putting more capital to work, or allowing those who earned the money to actually keep it.

    Reducing all of this to what’s basic, what would voters prefer? A balanced budget annually of $4 trillion, or $1 trillion in annual deficits based on $1.5 trillion in spending? This is not a trick question. It’s easy.

    The spending is the problem.

    Deficits Don’t Really Matter

    At least when governments borrow on our backs they’re paying for the right to waste resources we produce. So if the economy-sapping waste is going to happen, better for government to pay interest back to investors rather than simply confiscate the wealth with taxes.

    To state, what should be obvious is that budget deficits really don’t matter. No one is forcing investors or central banks to buy debt that is only attractive insofar as productive Americans are being fleeced.

    Republicans and conservatives who focus on deficits are wasting brain space on what is an accounting abstraction.They need to tape a note to their mirrors, reminding themselves that when politicians spend at the expense of the people’s freedom—and to the detriment of experimentation in healthcare advances, transportation advances, and technological innovation that would render WiFi an antique—they’re being wasteful with our money.

    When governments spend, we the taxpayers naturally have less to spend, and of even greater importance, less to save and invest.

    Real Cuts; Less Rhetoric

    Considering all of the above, Republicans invariably miss that it’s a very good thing when governments collect less revenue. Indeed, that should be the goal of tax cuts; to reduce the amount that the treasury takes in each year.

    Politicians can only waste precious resources insofar as we allow them to, so if Republicans want to live up to their lofty rhetoric about freedom, they should talk about tax cuts that reduce revenues as a feature of tax reform, not a bug.

    The above also speaks to another problem tied to the Republican approach to reduced taxation: They justify their actions by saying that economic growth will be the result. It’s fair to say that when work and investment are less restricted, we gain greater access to both. These arguments are true, but so what?

    Republicans should be for tax cuts even if they were proven to stagger economic growth because the core argument should always be about freedom. It’s through hard work that Americans express themselves and the fruits of their labor should not be taken from them without consent.

    Of course, there are always the deficit scolds who talk ad infinitum about “budget shortfalls,” debt as “far as the eye can see,” and “unfunded liabilities” that will soon enough, even making the most laughable prediction, “Make America Greece.”

    As much as the left confidently predicts global doom if we don’t do anything about an allegedly warming planet, so do the misguided “deficit hawks” on the right regularly inform us that America is doomed to follow in Greece’s footsteps if we don’t reduce the deficits. This silly argument fails in two ways.

    First, a focus on deficits once again places the taxation and spending argument squarely on the turf of the left. They’ll gladly discuss what isn’t a revenue problem as though it is.

    But the bigger problem with this mindless argument concerns something economists bereft of market knowledge seemingly miss all the time: rising revenues are what enable ever-growing federal “deficits.”

    The paradoxical truth missed by a right blinded by false balance is that real-world investors are always willing to buy debt that is backed by ever-increasing wealth creation and produced by the most productive people on earth.

    Of course that’s why actual tax cuts large enough to reduce federal revenues would be so wondrous for the confused hawks. When revenues into the treasury decrease, and continue decreasing, so will the relative willingness of investors to buy treasury debt. A benefit of the latter will be that the deficit hawks, who’ve been predicting doom for decades, will finally (one can hope) disappear into their campus and think tank cubicles never to be heard from again.

    The main point is, of course, that taxes are way too high. Taxes should ideally be so low that federal revenues plummet. Wouldn’t it be a nice change to see Republicans promote tax relief that penalizes American workers less while also reining in politicians?

    One can dream, but if history has proven itself to be any sort of indicator, Republicans are set to resume yet another debate about growth and revenues that will hand the terms of the debate over to the left on a silver platter. For all politicians, regardless of party alliance, freedom is always an afterthought.


    John Tamny

    John Tamny is a Forbes contributor, editor of RealClearMarkets, a senior fellow in economics at Reason, and a senior economic adviser to Toreador Research & Trading. He’s the author of the 2016 book Who Needs the Fed? (Encounter), along with Popular Economics (Regnery Publishing, 2015).

    This article was originally published on FEE.org. Read the original article.