Posts tagged with: deficit

Over at Think Christian I take a look at the looming fiscal “cliff,” which we are being told from every conceivable quarter represents a significant danger to America’s fragile economic recovery:

But apart from the numbers themselves, the framing of the issue by politicians and pundits ought to give us pause. The idea that returning deficit spending to 2008 levels represents a “cliff” is not just political hyperbole. It reveals something deeply broken about not only our political system, but even more of our cultural expectations. As long as we continue to expect politicians to deliver programs and policies that are not sustainable, they will continue to promise them, and what is perhaps even worse, they will continue to try to make good on them, no matter the cost to current and future generations.

Today over at CNN Money, Paul R. La Monica tries to rein in some of the hype (HT: The Transom):

Yes, we all have the fiscal cliff on the brain. Wall Street is anxious. CEOs and labor leaders have headed to Washington to try and convince President Obama that the consequences of falling over the fiscal cliff would be dire. But is the fiscal cliff panic just a wee bit overdone?

La Monica’s answer isn’t an unqualified “yes,” but his piece does give some insights as to some of the political reasons for exaggerating the potential impact of sequestration.

Why do democracies struggle with debt? One reason, as John Coleman notes, is that one of the problems is that debt is essentially an intergenerational wealth transfer:
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Congress insults our intelligence when it tells us that Chinese currency games are to blame for our trade deficit with that country and unemployment in our own. Legislators might as well propose a fleet of men-o’-war to navigate the globe and collect all its gold: economics is not a zero-sum game.

An exchange on yesterday’s Laura Ingraham Show frames the debate nicely. The host asked Ted Cruz, the conservative Texan running for U.S. Senate, what he thought about the Chinese trade question. Said Cruz, “I think we need to be vigorous in dealing with China, but I think it’s a mistake to try to start a trade war with them.”

“The trade war is on, and we’re losing it,” Ingraham responded. “[China is] subverting the principles of free trade.”

We blockaded the ports of the Barbary pirates when they subverted the principles of free trade — is Ingraham looking for a similar response now? No, she wants weenier measures: just some punitive sanctions here and there to whip China back into shape (because those always work).

Conservatives who are looking through the Mercantilist spyglass have got to put it down, because it distorts economics in the same way Marxism does. Economic growth and expansion of the labor market don’t come by the redistribution of wealth; they come by allowing man to exercise his creative talents, to innovate, to produce.

Protectionists also tend to ignore the inverse relationship between the trade deficit and the inflow of capital to a country. We are a nation of entrepreneurs, and entrepreneurs require investment. All business requires investment. If it’s Chinese investment, then Chinese investors see long term value in the U.S. economy. Sorry I’m not sorry about that.

Our leaders do the country a disservice by proclaiming that unemployment is caused by a trade deficit, and that a build-up of retaliatory tariffs is the way to fix the trade deficit. And they do other countries a disservice also, because U.S. protectionism hurts our trade partners (or potential trade partners). Holding back U.S. economic progress by artificially retaining manufacturing jobs, for example, means that workers in China or Vietnam are denied employment opportunities. It’s mindless selfishness.

Over at ThinkChristian, I take the opportunity to sketch “what a comprehensive Christian response to the crisis of public and private debt might look like.” I focus “on five main areas: the individual, familial, ecclesial, economic, and political.” This is a brief and preliminary set of questions and observations.

But even so, I think even just provisional attempts to evaluate our values shows us that “the problems we face are far more than political – and far deeper than merely political solutions can hope to solve.”

I had the pleasure of appearing on Relevant Radio last Friday to talk to Sheila Liaugminas on her show, “A Closer Look.” I discussed the idea of “intergenerational justice,” a term favored by evangelicals (Roman Catholics tend to talk about “intergenerational solidarity”), and how that concept relates to much of today’s discussion about the federal budget.

One thing you hear from many is that we need a “both/and” solution: we need to both cut spending and raise revenue in order to close the annual deficits. I’m not really convinced of this, in part because the federal government has historically shown that increased revenue always results in increased spending. The government spends what it takes in, with a little bit more to boot. There has to be something structural and meaningful to stop this from continuing to happen, especially since we can’t count on the political culture to do so itself. Whether that structural obstacle is a balanced budget amendment or some other kind of binding agreement, something like that has to be put in place.

I don’t think it’s fair on the other side, though, to say that closing some tax loopholes, making tax avoidance more difficult, and simplifying the tax code is tantamount to “raising taxes” either. So in that sense there might be a case for raising revenues in this limited sense if it gets the tax system focused on what it is supposed to do (raise revenues) rather than using it as a tool for rent-seeking, social engineering, and pandering to special interests.

What’s more important than the question of revenues vs. cuts, however, is recognizing that the size of the federal government has stayed about roughly constant when you look at it in terms of tax receipts relative to GDP. Anthony Davies does a nice job illustrating this. He points out that the government basically takes in amounts roughly equal to 18% of GDP (+/- 2%). So that’s essentially what the government needs to learn to live on. By contrast, we’re spending about 24% of GDP this year, and that number only goes higher as entitlement promises come due.

So how about this for a both/and solution: we cut spending to get within a couple of percentage points of 18% of GDP and we focus on tax policies that will grow GDP in a sustainable way in the longer term.

Blog author: eamyx
Thursday, July 14, 2011
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Back in February 2008, then candidate for president Barack Obama addressed a crowd at a General Motors Assembly Plant in Janesville, Wis. He said,

…I am my brother’s keeper; I am my sister’s keeper– that makes this country work. It’s what allows us to pursue out individual dreams, yet still come together as a single American family. E pluribus Unum. Out of many, one.

It is ironic that Obama preached a “we’re-in-this-together” economic philosophy yet three years later, Main Street is carrying Washington’s debt burden.

Debt negotiations are currently at a deadlock in Washington over taxes. President Obama doesn’t want to follow through with $4 trillion in spending cuts without a $1 trillion tax increase, while Senate Democrats are asking for a whopping $2 trillion in new taxes. Democrats also do not want to sacrifice entitlement programs. Top leaders worry they will not be able to reach a deal in time to avoid a government default. With the predicted default deadline of August 2 creeping around the corner and unemployment on the rise at 9.2 percent, citizens feel a sense of urgency about the debt crisis.

When Obama said “I am my brother’s keeper,” what did he really mean? If the government is to act as our brother’s keeper, this means it should be accepting responsibility for the welfare of all citizens. Raising taxes to cover up Washington’s nasty spending habits is certainly not accepting any responsibility.

If the government was really acting in the best interest of its citizens, it would stop raising taxes. According to the Tax Foundation, Americans will need to work from January 1 to April 12 before they have earned enough to pay off their taxes. Tax increases may seem like a quick way to reduce the deficit as opposed to spending cuts alone, but the bottom line is that Washington has a spending problem, not a revenue problem. A Goldman Sachs report found that tax increases usually fail to correct fiscal imbalances and are damaging to economic growth while spending cuts correct fiscal imbalances and boost growth. Milton Friedman explains in his essay titled Fallacy: Government Spending and Deficits Stimulate the Economy why government spending does not mean “stimulus”:

Getting the extra taxes, however, requires raising the rate of taxation. As a result, the taxpayer gets to keep less of each dollar earned or received as a return on investment, which reduces his or her incentive to work and to save. The resulting reduction in effort or in savings is a hidden cost of the extra spending. Far from being a stimulus to the economy, extra spending financed through higher taxes is a drag on the economy.

The $2 trillion tax increase Senate Democrats are pushing has the potential to suffocate economic growth and job creation, which would not be good news for 14 million unemployed Americans. Today, the Great Recession now has more idle workers than the Great Depression. An article in The Fiscal Times claims the employment level is nowhere near where it should be for a typical recovery:

In a typical recovery, we would have had several hundred thousand more hires per month than we are seeing now—this despite unprecedented fiscal and monetary stimulus (including the rescue of the automobile industry, whose collapse would likely have lost a million jobs).

If spending binges don’t work for a family, why would they work for a government? When a family spends more than they are making, the only sensible solution would be to cut spending. Bureaucrats should take House Minority Leader Eric Cantor’s advice and be willing to share the sacrifice:

Everyone understands that Washington has been on a spending binge of late and we’ve got to start spending money the way taxpayers are right now and that’s learning how to do more with less.

The debt crisis is not just an economic hazard but a prodigious moral issue of poor stewardship as explained in an Acton commentary by Jordan Ballor and Ray Nothstine titled The Fiscal Responsibility of Mall Rats and Bureaucrats:

Responsible stewardship of one’s material resources is a consistent and recurring biblical theme. At the conclusion of a parable on stewardship, Jesus said, “Whoever can be trusted with very little can also be trusted with much, and whoever is dishonest with very little will also be dishonest with much” (Luke 16:10 NIV). We shouldn’t be duped into granting the use of greater and greater portions of our paychecks to a federal government that has been unfaithful with what it has already claimed.

Our economy will continue to hobble along until Washington is willing to truly act as a brother’s keeper in showing that it too can share the sacrifices necessary for getting spending under control. Until then, we will pay the price for Washington’s fiscal irresponsibility and millions of Americans will continue to struggle.

The curious alignment of Good Friday and Earth Day last week sparked much reflection about the relationship between the natural world and religious faith, but the previous forty days also manifested a noteworthy confluence of worldly and otherworldly concerns. The season of Lent occasioned a host of religious voices to speak out not simply about spiritual hunger, but about material needs too, as political debates in the nation’s capital and around the country focused on what to do about federal spending.

As I explore in an “On the Square” feature at the First Things site today, such discussions “often generate more heat than light.” In “Budget Cuts of Biblical Proportions,” I note the recent formation of a “Circle of Protection” around “programs that meet the essential needs of hungry and poor people at home and abroad.” I also highlight “A Call for Intergenerational Justice: A Christian Proposal for the American Debt Crisis,” which I consider a “valiant attempt to elevate the debate.” If the point of the Call was to raise the discourse to more adult levels, then I think it must be judged a success (insofar as it has had any broader impact). Last week’s roundtable discussion at AEI attests to this, I think.

In the final analysis, however, I judge the Call to suffer the same fate as these other similar campaigns: “Instead of focusing on ways to empower other institutions and levels of government and galvanize them to relieve the burden of the federal government, these efforts simply feed into the fundamentally false dilemma of federal action or no action at all.”

One of the basic problems is that we no longer agree as a society what government is for, what the telos or purpose of the institution of the state is. I argue that we need to reconsider the basic purposes of government, which will then provide us with a framework for prioritizing certain kinds of spending. I also argue that the strategy to pursue where the true costs of government have been hidden by deficit spending and when there is a system that has been “trying to do too much for too many for too long” is to work to privatize and localize, rather than to nationalize and centralize.

This kind of strategy really does offer an alternative to the “lazy” and “unimaginative” options of simply raising taxes (on the rich, the middle class, or both) or cutting spending. Michael Gerson recently said that across-the-board and “indiscriminate cuts are an abdication of governing.” On this view, then, cutting spending and retaining relative spending priorities is not a viable option.

An illusion behind all of these Christian campaigns on the budget crisis is the idea that we can skip over these questions and still have something worthwhile to contribute to the national discussion. This error lies in the belief, as the Princeton ethicist Paul Ramsey put it,

that there is such a thing as hybrid or satyrlike statements of moral fact within the scope of prophecy and precise preaching, and within the competence of Christian deliberation as such, or the deliberations of Christians as such. Statements of moral fact would melt together moral judgments and fact verdicts, principle and application, into something else that is somehow neither and both.

The mistaken impression is that so long as particular programs or policies aren’t explicitly identified in these calls then we are still operating within the legitimate realm of principle rather than making prudential judgments about specifics.

Gerson also says, “Serving the public interest requires a determination of what works and what doesn’t. This is one of the primary duties of those in government.” This underscores one of the sticking points that arose from our discussion of the Call last week. There is a great deal loaded into the term “effective” in the document. One person’s “effective” program is another’s wasteful and superfluous expenditure. Every interest group contends that its programs are the ones that are essential and indispensable. Everyone has their own favorite projects. So again, I ask, what makes a program effective? The Call doesn’t help us here.

So the dynamic of our situation is this: we no longer agree about what the good society looks like, or what government’s role at various levels is relative to that goal, and so we can no longer agree on ways to progress towards that goal. Forming “circles of protection” and calling for intergenerational justice will simply continue to nibble at the edges of and paper over these more fundamental problems until such time as we can begin to answer some of these questions. In the case of the budget this means getting back to basics. But more fundamentally it means agreeing about where we ought to be going.

Thus, writes C. S. Lewis, “Progress means getting nearer the place you want to be.” The question really comes down to where we want to be and what it will look like when we get there; and on that we don’t all agree.

In this week’s Acton Commentary, “Do Less with Less: What the History of Federal Debt and Tax Leverage Teaches,” I reflect on how the federal government has lived beyond its means for decades. This reality is especially important to recognize as we approach Tax Day this year as well as in the context of debates about how to address the public debt crisis.

There are many who think we need to raise taxes in order to close the historic levels of deficit spending. In theory I would consider raising taxes as a viable option, or at least preferable to continued deficit spending, since it would at least make the real cost of government more visible. Roughly 40% of what the government spent last year was beyond what it took in.

But without structural connections between increased taxes and balancing the budget, there’s nothing at all to give us hope that the government wouldn’t simply continue to leverage the greater revenue into greater deficit spending. In this vein I note the conclusions recently updated by Richard Vedder and Stephen Moore, that “over the entire post World War II era through 2009 each dollar of new tax revenue was associated with $1.17 of new spending. Politicians spend the money as fast as it comes in—and a little bit more.”

Calvin College philosophy professor James K. A. Smith doesn’t take this reality into account, I don’t think, when he recently argued that the current situation calls for raising taxes, both on the rich and the middle-class. Thus, he writes,

But only a lazy, unimaginative take on this would assume that “low taxes” is a given. So sure, one strategy to reduce debt would be to slash spending, which inevitably happens on the backs of the poor and vulnerable, particularly women and children.

The alternative to such an unattractive option as Smith sees it is to raise taxes, particularly on the rich. Smith thus points to the idea that America needs to adopt a “graduated tax like most other North American countries.”

The fact is, though, that the US already has a progressive tax system, and indeed places a much higher relative burden on the top decile of household incomes than other developed nations.

One of the next big fights will be over raising the debt ceiling, as Smith points out. Perhaps we can link balanced budgets with increases on the debt ceiling (something more feasible than passing a balanced budget amendment). The idea would be that we only increase the debt ceiling on the condition balancing the annual budget, and that we only think about raising taxes to balance that budget if we actually commit to balancing it.

Simply raising taxes won’t do anything but give the federal government more money to leverage into higher levels of deficit spending.

A commentary by Acton Research Director Samuel Gregg titled “Deficit Denial, American Style” which was published in Acton News & Commentary on March 9th appeared today in the Detroit News as “It’s time to curb welfare growth” and was also picked up by RealClearPolitics. Gregg provides an enlightening examination on the growth of the welfare system, and with our current budget problems, the need to also reform it:

If, however, the results of a much-discussed Wall St Journal-NBC News poll released on March 2 indicate what Americans really think about fiscal issues, then much of the country is clearly in denial – i.e., refusing to acknowledge truth – about what America needs to do if it doesn’t want to go the way of many Western European nations.

While the poll reveals considerable concern about government debt, it also underscores how unwilling many Americans are to reduce those welfare programs that, in the long-term, are central to the deficit-problem.

Here are the raw facts. America’s federal social security program has become the largest government pension scheme in the world in terms of sheer dollars. It is also by far the federal budget’s single greatest expenditure item.

According to the Office of Management and Budget, “human services” ― Social Security; Medicare; Health-expenditures; Education, Training, Employment, and Social Services; Veterans benefits; and the euphemistically-named “Income Security” (i.e., unemployment-benefits) ― were consuming 4 percent of America’s GDP in 1949. By 1976, this figure had increased to 11.7 percent. In 2009, it was consuming 15.3 percent of GDP.

During the same period, human services began consuming a steadily-increasing size of federal government expenditures. In 1967, human services spending was 32.6 percent of the federal budget. By 2009, this figure had increased to 61.3 percent. It is predicted to rise to 67 percent by 2016. In 2010, 75 percent of human services spending was on Social Security, Medicare, and Income Security ― in short, the core welfare state.

These disturbing numbers make it clear any serious federal deficit reduction must involve spending-cuts to federal welfare programs. That doesn’t mean other areas of government-spending should be immune from cuts. But the deficit simply can’t be properly addressed without a serious willingness to reduce welfare-expenditures.

The original Acton commentary by Samuel Gregg can be read in full here.

A new commentary from Acton Research Director Samuel Gregg. Sign up here to get the latest opinion pieces delivered to your email inbox on Wednesday with the free weekly Acton News & Commentary.

Deficit Denial, American-Style

By Samuel Gregg

Until recently it was thought the primary message of the 2010 Congressional election was that Americans were fed up with successive governments’ willingness to run up deficit-after-deficit and their associated refusal to seriously restrain public spending.

If, however, the results of a much-discussed Wall St Journal-NBC News poll released on March 2 indicate what Americans really think about fiscal issues, then much of the country is clearly in denial – i.e., refusing to acknowledge truth – about what America needs to do if it doesn’t want to go the way of many Western European nations.

While the poll reveals considerable concern about government debt, it also underscores how unwilling many Americans are to reduce those welfare programs that, in the long-term, are central to the deficit-problem.

Here are the raw facts. America’s federal social security program has become the largest government pension scheme in the world in terms of sheer dollars. It is also by far the federal budget’s single greatest expenditure item.

According to the Office of Management and Budget, “human services” ― Social Security; Medicare; Health-expenditures; Education, Training, Employment, and Social Services; Veterans benefits; and the euphemistically-named “Income Security” (i.e., unemployment-benefits) ― were consuming 4 percent of America’s GDP in 1949. By 1976, this figure had increased to 11.7 percent. In 2009, it was consuming 15.3 percent of GDP.

During the same period, human services began consuming a steadily-increasing size of federal government expenditures. In 1967, human services spending was 32.6 percent of the federal budget. By 2009, this figure had increased to 61.3 percent. It is predicted to rise to 67 percent by 2016. In 2010, 75 percent of human services spending was on Social Security, Medicare, and Income Security ― in short, the core welfare state.

These disturbing numbers make it clear any serious federal deficit reduction must involve spending-cuts to federal welfare programs. That doesn’t mean other areas of government-spending should be immune from cuts. But the deficit simply can’t be properly addressed without a serious willingness to reduce welfare-expenditures.

And yet despite all the passionate rhetoric from Americans about the need to diminish government-spending, the Wall St Journal-NBC News poll suggests that fewer than 25 percent of Americans favor cutbacks to Social Security or Medicare as deficit-reduction measures. As the Wall St Journal’s own commentators noted: “Even tea party supporters, by a nearly 2-to-1 margin, declared significant cuts to Social Security ‘unacceptable.’

Unacceptable? Think about that word. Do large numbers of Americans really believe there is something morally evil about significant reductions to welfare-spending under any circumstances? Since when – apart from Greece and other models of fiscal rectitude – have welfare payments assumed the status of an absolute right subject to no qualification? Have we really gone so far down the path of economic-Europeanization?

Granted, the same poll suggests much larger numbers of Americans are willing to raise the retirement age to 69 and means-test social security. But is that the best Americans are willing to do?

Spain’s unreconstructed-1960s-lefty Socialist government has just lifted Spain’s retirement-age to 67. Unsurprisingly, that won’t fully kick-in until 2027, long after Spain’s political class and their tame voting constituencies have met their Maker and no longer need to live off their children’s futures. But can Americans who proclaim their attachment to free enterprise and personal responsibility really do no better than left-wing Western Europeans?

Back in 2007, the journalist Robert J. Samuelson summarized the situation perfectly. “Most Americans,” he wrote, “don’t want to admit that they are current or prospective welfare recipients. They prefer to think that they automatically deserve whatever they’ve been promised simply because the promises were made. Americans do not want to pose the basic questions, and their political leaders mirror that reluctance. This makes the welfare state immovable and the budget situation intractable.”

Presidential campaigns are invariably accompanied by a great deal of posturing. It would be helpful, however, if some serious candidates for the nation’s highest office in 2012 – Republican or Democrat – would use their moment in the spotlight to educate Americans about what’s at stake.

One former American vice-president once reportedly insisted, “Deficits don’t matter.” Unfortunately, there is mounting proof he was wrong. After examining data on 44 countries over approximately 200 years, two economists recently found evidence suggesting that developed nations with gross public debt levels exceeding 90 percent of GDP (i.e., America) find that their medium-growth rates fall by one percent, while average growth declines by an even greater proportion.

That’s worrying because while deficit-cutting matters, wealth-creation matters even more if we are to dig ourselves out of our fiscal hole. America now seriously risks seeing its burgeoning welfare costs suffocating the productive sector of the economy that makes social welfare possible in the first place.

Incidentally, it won’t be the rich who suffer. It will be the poor. In their laudable concern for the weakest among us, Americans ought to remember that and start matching political rhetoric with consistent fiscal action.

Dr. Samuel Gregg is Research Director at the Acton Institute. He has authored several books including On Ordered Liberty, his prize-winning The Commercial Society, and Wilhelm Röpke’s Political Economy.