Our more important issues are a combination of (1) too little private sector growth, (2) expensive and underfunded entitlement benefits, and (3) a bad government habit of not setting aside rainy day funds during good times to be spent later when times are tough.
If we tackled the above issues, especially the ongoing neglect by our elected officials to deal with the ridiculous fiscal irresponsibility of governments (i.e., cities, counties, states, and the national government), we would immediately restore fiscal sanity. And if we did that, our confidence in the future would grow, and strong economic and employment growth would resume. It would take some time to get our financial house in order, of course, but at least we'd be on the right road.
{NOTE: The above serious economic issues will not be addressed successfully by politicians maligning those private sector "fat cats" who invest MOM style, take entrepreneurial risks, create businesses, work hard, become successful business builders and gain personal wealth in the process of doing so. In fact, we need more fat cats. Many more.}
However, it appears that today many of our fellow Americans (including many Republicans, Democrats and Independents) won't take the time required to understand the fundamental differences between the workings and virtues of self reliant free market capitalism compared to government dependent socialism. And that's a very real problem.
Put simply, we didn't get to where we are through entitlements or guarantees. We got here by working hard, taking chances and through free market capitalism with all its good and bad effects. In any event, we're the most free and most prosperous nation in the history of the world today. Maybe we should figure out why before we give up on our American way.
Washington Isn't Spending Too Much is an editorial by Austan Goolsbee, former chairman of President Obama's Council of Economic Advisers.
We'll analyze both the good and bad of what he's saying, but first let's quote him:
"Again and again they (Republicans) noted that spending under President Obama rose to 25% of the economy in 2009, the highest in decades and well over the 20%-21% norm of the last 30 years.
To hear the GOP candidates tell it, this fact explains the deficit, explains America's long-run fiscal problem, and explains why new taxes cannot be tolerated. Congressional Republicans have the same outlook. The deficit is up thanks to government spending, so we must cut spending right now in every form.
Yet the long-run fiscal problem facing the country—which is real—has almost nothing to do with the reasons that the deficit is currently large or that spending is abnormally high. They are high for the same reason taxes are abnormally low: because of the economic downturn. We should debate the real issues, not try to pretend the recession never happened. . . .
Most of the increase in the deficit during a downturn doesn't come from new policies in Washington. The deficit rises because both spending and taxes automatically adjust when the economy struggles. Unemployment insurance payments rise and more people qualify for Medicaid and food stamps. Incomes fall so people pay less taxes.
It's completely normal that spending rises during big downturns. The government's share of the economy jumped significantly during the big recessions in the 1970s and '80s. As the economy grows back to health, the government share of the economy will fall (and many analysts forecast just that for the coming year).
The same dynamic applies to tax revenues. . . .
The nonpartisan Tax Policy Center's data predict that in 2011 taxes will have fallen more as a share of national income than during almost any other comparable period in U.S. history (including under Ronald Reagan) and may hit their lowest level since World War II: 14.4% of GDP, compared with the more than 18% average of the last 30 years. Individual income taxes may hit their lowest level as a share of income since 1950 and corporate income taxes the lowest since 1936.
The deficit shot up in basically equal measure from taxes falling and spending rising. Spending rose to 25% of GDP from 20.5% in the recession and soon it will fall back down. Taxes fell to 14.5% of GDP from 18.5% and will also return to more normal levels.
The true fiscal challenge is 10, 20 and 30 years down the road. An aging population and rising health-care costs mean that spending will rise again and imply a larger size of government than we have ever had but with all the growth coming from entitlements—while projected federal revenues as a percentage of GDP after the rate cuts of the 2000s will likely remain below even historic levels of 18%.
To hear the Republican candidates, you would think our problems were about discretionary spending running wild. Yet, if you take out the aging of the population and health-care cost increases, government spending is going to shrink over the next decade. A cap on government spending at past levels and a balanced-budget constitutional amendment would force huge cuts to Social Security and Medicare.
So let's talk about the trade-off between new revenues versus cuts to entitlements. We have known about that issue for decades. We also know it would be much easier to address if the economy were growing again."
Here's my take on the Goolsbee editorial. He's right on three points.
(1) Today's level of government spending isn't our most serious problem.
(2) We're getting older, and the cost of our entitlement programs represents a most serious long term issue which must be addressed.
(3) IF the U.S. economy were to somehow resume growth at historical rates, government spending to GDP would decrease sharply and tax receipts would increase sharply as well. As a result, budget deficits would shrink considerably.
But that's a very big IF. The best bet is that growth isn't likely to approach historical rates anytime soon, and that deficits will remain quite high.
In round numbers, federal government spending is now roughly 25% of GDP, and government income is roughly 15% of GDP. That's a gap of 10% compared to a 2% gap when times were deemed to be good. Of course, times aren't good. And they aren't likely to get that way anytime soon.
And when they were good, much of that strength was due to borrowed money before the bubble burst. So we're not going back there anytime soon, even when economic growth resumes at a steady pace.
Mr. Goolsbee is certainly correct when he says that government spending necessarily increases when tax receipts decline. Expenditures on things such as unemployment benefits, medicaid and food stamps cause that to happen.
That cyclical increase in government spending means that government spending is different than spending by individuals and households during recessionary times.
Thus, a shrinking economy has a double whammy impact. The government brings in fewer taxes due to less household income and consumer spending. At the same time, it creates a need for greater government spending due to cyclical factors such as increased unemployment benefits and such.
Of course, non-cyclical spending such as social security, medicare and such doesn't change significantly due to a shrinking or growing economy.
So getting government spending down as a percentage of GDP requires two things; (1) a growing economy with accompanying employment, investment and consumer spending growth which reduces cyclical payments to households such as unemployment benefits, and (2) a reduction in entitlement spending as a percentage of GDP.
Getting revenue up as a percentage of GDP requires both #1 and #2 above as well, albeit with a much heavier emphasis on #1. Private sector growth is the absolute key, as always.
To reiterate, and unlike individuals and households, a growing economy should result in not only more revenues for the government, but also fewer expenditures by the government.
What Goolsbee doesn't address at all is HOW to get revenues up from 15% to 20% and how to get spending down from 25% to 20%, thus bringing the federal budget into balance. (I suspect he'd like to see huge tax increases over time. My view is that would stifle future economic growth.)
In my opinion, getting the nation's fiscal budget into balance requires both a focus on private sector economic growth and a reduction in entitlement spending. It also suggests that we adopt a rainy day saving mentality and approach in both good and bad times.
When times are good, we need to play squirrel and save for a rainy day. Create and save some surplus, in other words. Thus, in good times revenues should exceed expenditures by at least 2% of GDP annually. That way we could afford all the extra government spending when times became tough again.
If we did that, our fiscal troubles would be well on their way to being over. But as long as we continue to run fiscal deficits in both good and hard times, there's little hope for fiscal sanity taking hold.
Thanks. Bob.
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