Jay Reding.com

Setting The Fiscal Record Straight

Since I’m still arse-deep in midterms, I missed this excellent piece on the national debt which liberals love to flog as another example of why Bush is so evil. Now, like Megan McArdle, I’m no fan of the Bush Administrations profligate spending policies. I’m much more towards the “let’s drown government in the bathtub” wing than I am towards the “let’s spend like a liberal and call it ‘compassionate conservatism'” wing. As far as I’m concerned, the Bush Administration’s domestic policies have been a mixed bag at best: tax cuts good, spending like a drunken sailor bad. However, McArdle puts some very badly-needed perspective on the idea that our fiscal situation is somehow incomprehensibly dire:

Yes, my friends, that’s right . . . in five years of fiscal mismanagement, the Bush administration has driven us from debt at German levels to a national debt that is . . . 3% of GDP less than Germany’s. Wait, that’s not right. He’s driven us from 13th place in the OECD debt rankings to . . . 15th place. Okay, but look what that means! We’ve gone from a national debt that was a sane, manageable 34% of GDP, to an unsustainable . . . 37% of GDP.

One could argue, of course, that it is moving in the wrong direction, unlike, say, Ireland or Finland. But lots of countries are moving in the wrong direction: France, the UK, Germany, and Japan, to name just a few, have all seen increases in national debt bigger than ours as a percentage of GDP. That’s partly fiscal profligacy, and partly the fact that a smartly growing economy, such as we’ve enjoyed, makes the debt of previous years relatively smaller. Thus the Bush administration has only seen national debt grow by a small amount on its watch, despite running annual budget deficits in the 2-4% range. Yet somehow it is only ever the American budget deficit which is about to bring the national economy to a crashing halt.

That is why it doesn’t make much sense to me to ask about the “trillions worth of debt” we have accumulated. I mean, I’ve accumulated a substantial amount of debt since I was 4. This doesn’t mean I was richer when my income was 25 cents a week. According to the Office of Management and Budget, the amount of debt held by the public has gone from 26% in 1973 to roughly 40% of GDP in 2005–a big increase, but not as big as that implied by “trillions and trillions!”

That reasoning is exactly why even as a fiscal conservative, I don’t get worked up about the national debt. For one, the more important factor is growth: a growing economy will obviate need for making drastic changes now, and the US economy is still more stable than anyone’s. The idea that your grandchildren will all be living on bread crumbs because we spend all the money now is ridiculous mainly due to the fact that the economy is not a zero sum game. The left seems to have trouble with this concept, as it seems to be the tottering foundation upon which their whole economic castle lies. There isn’t a finite amount of wealth, and the amount of debt we have now may be insignificant later on.

McArdle also explains why repealing the Bush tax cuts would be only as likely to do as much good as pissing in the wind, and is quite likely to be more like shooting ourselves in the foot:

If you think that the Bush tax cuts were a gargantuan bonanza to America’s wealthy, it’s a little disquieting to realize that closing the Social Security gap would require an additional tax increase on the top fifth of earners that would be 30% bigger than the Bush tax cuts.

And that’s if you assume that a hefty tax increase wouldn’t cause a single person to work less. I’m no supply-sider, but I accept that there is a decent amount of deadweight loss from taxation. When you raise taxes, some people work less, or arrange to have more of their income in tax advantaged forms (like capital gains, or tax free benefits), or they disappear into the “gray market” of all-cash work. With a tax increase of that size, I’d expect that such losses would reduce the projected revenue increase by somewhere in the neighbourhood of 10-20% . . . meaning that the tax increase required to actually cover Social Security benefits would have to be bigger still.

The problem we have isn’t too low rates of taxation, it’s the huge liabilities generated by our entitlement programs. Social Security and Medicare will bankrupt this country long before any other problems our economy faces presents much of any threat — yet the left has absolutely no desire to touch those particular sacred cows. The Democrats killed any kind of meaningful Social Security reform, and nobody has the cojones to attack the systemic problems with Medicare — and nobody will until the collapse is already well underway.

That doesn’t mean that the Bush Administration should get a free pass on spending, as their spending habits have been simply atrocious. However, at the same time, raising taxes for the purposes of paying down the debt is a complete waste of time, and wouldn’t produce enough returns to justify their economic costs. Moreover, any party that demands the fiscally ruinous idea of mandatory government-paid health care doesn’t have any right to complain about spending in the first place…

5 responses to “Setting The Fiscal Record Straight”

  1. Justin says:

    The idea that your grandchildren will all be living on bread crumbs because we spend all the money now is ridiculous mainly due to the fact that the economy is not a zero sum game.

    Huh, really? Because I was pretty sure that printing your own money was still pretty much against the law.

    The reason that liberals treat the economy as a zero-sum system is because an economy, by definition, is a zero-sum system. At any one time there’s a finite amount of wealth represented in the economy. Exchanges of wealth between actors within the system, by definition, can’t raise the total wealth of the system. It’s as ridiculous as trying to lift yourself in the air by pulling up on your shoes.

    The problem we have isn’t too low rates of taxation, it’s the huge liabilities generated by our entitlement programs. Social Security and Medicare will bankrupt this country long before any other problems our economy faces presents much of any threat

    If debt isn’t a problem, then why are these liabilities an issue? We’ll just go into debt to pay the bills. Debt isn’t a big deal to you, so where’s the issue?

    I mean, when you say “bankrupt the country”, what do you mean exactly? How could it get any more bankrupted than where we are now, where our spending exceeds revenue by billions every year?

    If debt isn’t an issue, what’s the difference between 200 billion deficits every year and 400 billion every year? Or 1 trillion? Or 100 trillion?

    The Democrats killed any kind of meaningful Social Security reform

    Paranoid delusion. The Republicans have control of both houses of Congress, remember? The people that stood in the way of your attempt to dismantle – excuse me, “reform” – the most successful federal program since the Post Office were 100% Republican. Democrats had no power to oppose.

  2. Mark says:

    Your premise here, that economic growth will cancel out the devastating effects of long-term debt, negates your sky-is-falling propaganda about the doomsday of Social Security and Medicare, whose impending bankruptcy is built on a prediction of 1.7% annual economic growth averages between now and 2050. Not likely. You’ve effectively cancelled out your fire-and-brimstone conclusion about Social Security and Medicare with the very logic you persuasively employed through the bulk of your post.

  3. Jay Reding says:

    Your premise here, that economic growth will cancel out the devastating effects of long-term debt, negates your sky-is-falling propaganda about the doomsday of Social Security and Medicare, whose impending bankruptcy is built on a prediction of 1.7% annual economic growth averages between now and 2050. Not likely. You’ve effectively cancelled out your fire-and-brimstone conclusion about Social Security and Medicare with the very logic you persuasively employed through the bulk of your post.

    No, that is not the case. Ms. McArdle already dealt with that issue:

    That’s just social security. And social security is our manageable problem. During the same time period, using very conservative assumptions (lifespans don’t increase dramatically; the growth of health care costs relative to GDP declines, suddenly and for no apparent reason, to less than half of its historical rate), the cost of these two programmes is predicted to roughly triple, at which time they will consume 12% of GDP.

    There is no reasonable economic analysis which suggests that the situation with Social Security and Medicare won’t be anything less than disastrous within the next 10-20 years.

    Furthermore, the 1.7% isn’t what was predicted for the rate of GDP growth, it’s what was predicted for the rate of productivity growth in the intermediate assumption set. (http://www.ssa.gov/OACT/TRSUM/trsummary.html) McArdle is quite right in pointing out that the assumptions about lifespans and overall costs are likely too optimistic, and the overall expense will only get greater.

    We can’t grow our way out of the entitlement trap in a population that’s increasingly skewing older – the demographics just don’t give us that option.

  4. reactionary ray says:

    House Minority Leader Nancy Pelosi has been all over the place talking about what Democrats will do after they win Nov. 7. But it’s hard to take her seriously when she promises to “jump-start our economy and reform our economic policy . . . to address the needs of working families.”

    Huh?

    “Jump-start the economy”? That’s what President Bush did in 2003, when he pushed through bold, broad tax cuts to end a slump that began in 2000 under a Democratic administration.

    Since the cuts took effect, the economy has added $1.26 trillion in real output, $14.4 trillion in net wealth and 5.8 million new jobs, while productivity has grown 10% and business investment 24%. Since 2000, total consumer spending has risen $1 trillion — nearly $8,000 per household — after adjusting for inflation. The Dow Jones industrial average is hitting new highs.

    Then there’s the budget deficit, which the Congressional Budget Office reckons will come in around $250 billion. By our calculations, that’s about 1.9% of total output. In early 2004, when Bush vowed to halve the shortfall, it stood at 3.6% of GDP.

    The fact is — and we’re dealing with facts here, not fantasies — this economy has done better than anyone expected, especially given the mammoth hits it took in the months just before and after Bush took over in January 2001. Democrats know this full well, despite their rhetoric.

    They know that nearly $7 trillion in wealth was washed away by the stock market’s collapse in 2000 and 2001. They also know that business investment essentially collapsed for three years as a result of that market meltdown and 9/11.

    And yet, as noted in a new report from Congress’ Joint Economic Committee, ours has outperformed every other major industrial economy since 2001. Reason: tax cuts and low interest rates.

    What do the Democrats promise to do about all this prosperity? They’ll let the tax cuts lapse, socking millions with billions of dollars in higher levies. They’ll raise the minimum wage, hurting the working poor and those with the fewest skills and the least education. And they’ll extend jobless benefits, a move that in the past has kept unemployment high (but which today, at 4.6%, is below the average of the last 40 years).

    They’ll also try to impose new regulations across the economy on everything from energy to broadband, punishing industries they don’t like and subsidizing those they do.

    Worst of all, they’ll do nothing — absolutely nothing — to stop the growth in entitlement spending that will start to engulf the treasury beginning in 2009. Their solution as always: more taxes.

    And this is just what they’ll admit to. Who knows what else is in store.

    Thats not me but investor’s buisness daily’s editorial, sounds fairly accurate, but if we have to argue whether the economy is a zero-sum gain or a dynamic market then this will not really persuade anyone on these pages.

  5. Justin says:

    “Since the cuts took effect, the economy has added $1.26 trillion in real output, $14.4 trillion in net wealth and 5.8 million new jobs, while productivity has grown 10% and business investment 24%. Since 2000, total consumer spending has risen $1 trillion — nearly $8,000 per household — after adjusting for inflation. The Dow Jones industrial average is hitting new highs.”

    Too bad the vast majority of that growth is at the top. That’s the problem (or for Republicans, the advantage) with aggregate figures – all to easy to conceal the actual patterns of wealth distribution.

    So the rich got a lot richer. Who cares?