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A 15% society?

Chris Farrell Jul 29, 2011

The curtain can’t go down fast enough on the summer theater of the absurd over the federal debt and deficit in Washington D.C. The apocalyptic wrangling is dispiriting. Investors are edgy. And the economy is weakening and the unemployment rate remains high.

For insight rather than posturing we turned to Richard Green. He’s an economist, director of University of Southern California’s Lusk Center for Real Estate, and a blogger.

Richard Green: The US faces three issues–very short term, short term, and long term. In the very short term, we must, of course, get a debt ceiling passed. Simon Johnson says the impact of not passing a debt ceiling would be calamitous, and I think he would be right. Think about what happened the morning of September 15, 2008, when Lehman Brothers collapsed, and you will get an idea of the minimum amount of damage government missed payments might do.

In the short term, belt tightening does not seem like a particularly good idea either. The GDP numbers that came out today were just awful. Part of the reason for this was weakness in federal spending in the first quarter and in state and local spending for the first half of this year.

But over the long term, our fiscal decisions must be based on the kind of society we want to be. Over the long term, federal revenues as a share of GDP have averaged around 18 percent. Currently, federal revenues as a share of GDP are about 15 percent. Some of the difference arises from lower tax collections because of the recession, but most is the result of the Bush Tax cuts. Obama cut taxes even more (yes, he has cut taxes–payroll tax reduction, housing tax credit, etc.).

The question is, do we want to be a 15 percent society? I guess the Teapartiers would say yes. But this would not just mean that we need to do things like slowly extend the retirement age and bend the cost curve on health care–it would mean that to reach long run sustainability, we would have to cut current benefit levels substantially, particularly since the elderly are an increasing share of the population.

Even Paul Ryan’s budget plan presumes revenues would increase to 19 percent of GDP–it just doesn’t specify how to get there. Personally, I think we can afford to spend even more on the sick and the elderly (and children), but we need to be willing to pay for it. For the time being, I would be happy to return to the long-term revenue average.

If we follow the 15 percent path, we will be kicking grandmothers out of their wheelchairs. We will be allowing children to be malnourished. This is not demagoguery. This is the cost of not being willing to tax ourselves at the level we have for many years.

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