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If you want to lower the deficit...
David Leonhardt, New York Times columnist and reporter
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TEXT OF COMMENTARY
Kai Ryssdal: President Obama made another plug for his $50 billion infrastructure program today. That's the one that nobody in the White House wants to call an economic stimulus program. Mostly because of the political agita over how much the government ought to be spending to create jobs and what might that do to the budget deficit?
Commentator David Leonhardt says the whole conversation about the deficit needs to change before we're going to get anywhere.
David Leonhardt: Let's face it -- a lot of the talk about the deficit ends up being pretty vague. Politicians want to cut spending, but they don't say which spending. They want fundamental tax reform, but they don't explain how that will bring down the deficit.
So here's a little rule: If you want to be taken seriously when you rail against the deficit, you need to support one of the following four policies. Better yet, support more than one.
Ready for the four? One, cuts to Medicare. Two, cuts to Social Security. Three, military cuts. Four, tax increases. Any budget expert will tell you that we simply cannot fix the deficit without doing at least one of those four.
The Congressional Budget Office projects that by the year 2035, the annual deficit will be almost $2 trillion. Let's imagine that we make big cuts to every government program that's not our list of the big four -- bigger cuts than Ronald Reagan made -- to things like education and transportation. How much money might that save? Only about $100 billion. You can even double that figure and assume truly radical cuts. Even then you have saved a measly 10 percent of the projected deficit in the year 2035.
The reason is that these programs make up only a modest share of government. The three biggest programs -- by far -- are Medicare, Social Security and the military.
But we can do something about those programs. We can clamp down on Medicare spending that hasn't been shown to make people healthier. We can raise the retirement age for Social Security. We can reduce wasteful military spending; though, by itself, that won't be enough. And we can definitely raise taxes. As a share of GDP, taxes are now at their lowest level since 1951.
What we cannot do is just wish the deficit away. We've promised ourselves more government that we've paid for, and that can't continue.
So which of the big four do you choose?
Ryssdal: David Leonhardt writes The Economic Scene column for The New York Times. If you've got ideas for cutting the deficit, give 'em a try on our website. We've got a budgeting game called Budget Hero.
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@Tony Shepps It is a right wing myth that tax cuts pay for themselves and lead to higher revenues.
The historical evidence is that lower taxes lead to lower revenues. And, when Clinton raised the top tax rates, the economy boomed despite what Republicans predicted. Reagan cut taxes and exploded the deficit. Bush I raised them a bit, cut the deficit a bit, but got dumped. Clinton raised them much more and got a huge surplus. Bush II massively cut them and got 7 of the 8 largest deficits in history, until his Recession gave Obama a huge hit. Please note, also, that the largest deficit reduction in history happened between 2009 and 2010, and that Obama's health care reform is, according to the CBO, going to cut the deficit by trillions of dollars over the long term.
In theory, tax cuts might lead to higher revenues if we were on the downward slope of the Laffer curve, but the empirical evidence (Barro, 1997 for the Reagan cuts even!!!) is that we aren't.
Moreover, assuming leisure is a normal good, a lower tax rate might lead to less work, not more. Yes, the substitution effect leads you to do more work because leisure is now more expensive (taking a day off costs you more because you lose less income to taxes) and people substitute from a more expensive good to a less expensive good.
BUT leisure being a normal good, when income increases, people buy more of it (the income effect). So a tax cut will only lead to more work being done and more potential tax revenue if the substitution effect is greater than the income effect.
That's Econ 201 where things get more complicated and more realistic. Econ 101 doesn't cut it for real world analysis.
The reality is many of our leaders, government and industry, made promises based on the work of others. Government leaders don't even know what it takes to create real wealth. They bet on the ever expanding growth we could not sustain to bail us out from over spending and over promising. Financial leaders have subverted the system to extract wealth and create bubbles in order to perpetuate the myth of growth which was illusion at best, and fraudulent at worst.
We need to get real and constrain social economic system to grow at the rate of real productivity and wealth gains. We also need to acknowledge where that growth comes from, the average working person, to remedy false expectations. Main Street and the growth it can deliver has to be the constraint and real driver for a healthy economic future. We can't survive as a society on transfer of wealth and expending wealth we do not have, nor rates of growth we can achieve in the real economy. Play the fools game long enough and the fool dies!
Since taxes as a share of GDP are at their lowest level in 59 years, then we can probably bare higher taxes. But instead of increasing taxes on buying or working, I propose a VNAT Tax and an EI Tax as palatable rational responsible new taxes.
VNAT: That's a Value NOT Added Tax. The “taxable events†would be any time value is transferred inequitably. Some examples: You charge $6 for a bucket of popcorn at your movie theater; it costs you $1 to produce. That is probably a smart business move. You are required to pay a VNAT tax of $1 which is 20% of the ($6-$1). You buy a million marbles for $10000 and then sell them for $25000. Good for you! But the $15000 profit is subject to income tax AND a VNAT.
EI Tax: That's an Ecologic Impact Tax. Some examples: That box of 100 Styrofoam coffee cups costs $4; each will be used for 5 minutes and then be waste for 500 years. (They are handy, though.) The box is EI Taxed $1. You buy a $10 box of disposable AA batteries for the Wii remotes, because the rechargeable ones are a pain in the neck. I agree. The box is EI Taxed $1.
David Leonhardt talks economic (and mathematical) nonsense claiming that cutting Social Security is a path to reducing the Federal debt. Social Security is running a surplus and is fully funded through 2037. Got that? A surplus.
You cannot reduce deficits by cutting programs which generate surpluses. That's economic absurdity.
I say we cut Medicaid to any illegal immigrants - double check their "credentials." Just because they crossed the border before they had a child doesn't mean they should have their child's medical coverage taken care of.
And cutting the pay of the rich in half - NOBODY need to make more than 150,000 a year! Absolutely nobody. Whatever they make over that should automatically go into the deficit.
The entire Soc. Sec. system needs to be reformed, nay, replaced, as many other countries have done, very successfully. Sweeping audits of all gum'ment, including DoD along with the streamlining of the exploding bureaucracy would yield billions in savings without loss of services. Replacing a tax system skewed so badly that half of the people make no meaningful contribution would increase revenues without screwing employers, especially small businesses, more than they already are. The FairTax does that. All of this, however, is academic without the collective will of those we entrust with power to take those steps. Perhaps after 2 November, we'll start seeing that happen.
Although military spending is a huge issue in the world, we can't live without a military?I mean yes we need to get out of places that we no longer need to be in such as Aphghanistan and Iraq. I also think that we should tax the upper-class. I also think that we should stop giving foreign aid to other countries knowing it will take years to get the loan back. But we should not cut Social Security and Medicare since they are self paid by the government an citizens of the United States.
"So which of the big four do you choose?" Really, the answer is obvious: we must do all four.
Look at the deficit this way: (1) we spent more than we had, which is (by definition) irresponsible, and (2) anyone who got any of that spending got more than they should have, therefore (3) everyone must ear the burden of returning to a sane budgeting process. NOW.
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