Necessary and Sufficient
Back in 2008 I wrote a PJM piece Good News and Bad News about the US Budget. Every time we hit the budget debates, I end up thinking about it again, because there is a simple and extremely basic arithmetical fact that I pointed out there that politicians and others don't get: it's not the taxes, or even the tax rates, that are the issue.
Here's what I concluded:
.... wherever you start, so long as spending isn’t growing as fast as the economy is growing on average over a long time, you will eventually come back to a surplus.
The bad news is, basically, that no one will tell you this. All politicians talk about the deficit — but that doesn’t stop each Congress member, from the rawest newly elected one to the speaker and the Senate leadership, from talking about the priority of their special project, which just coincidentally benefits their district and their big contributors. Add in entitlement programs, which seem to grow without bounds because there’s always someone — like AARP, not to name names — who wants to increase the spending on their particular group. The result is that government spending, over time, seems always to grow faster than the economy that supports it.
What’s more, no tax increase can keep this from happening. Tax the relatively few rich; you still can’t tax them more than 100 percent, and if spending grows faster than GDP, it will eventually overwhelm whatever taxes you can levy. Tax the many poor, and you get the same result — except you’ll be voted out of office first, because there are a lot more poor people than rich people. And it still won’t matter, because you cannot make revenues grow faster than the economy forever.
So the real bad news is that this is a mathematical fact: over the long term, government spending cannot grow faster than GDP forever. If you want more money for government programs, you eventually have to make sure the economy is growing faster than spending is. Of course, this has been a part of government programs since John Maynard Keynes: “In the long run, we’re all dead.” Many of the New Deal and Great Society programs depended, essentially, on the assumption that the people making the promises would be safely buried before the real costs came due.
If someone is trying to tell you something else, they either haven’t figured out the arithmetic, or they’re trying to put something over on you.
In the current budget debate, we can see this very clearly: the current Democrat talking point is "tax breaks for corporate jets" and now they added yachts. The actual amount of money involved is trivial, and we know that the last time they tried that "luxury tax" trick, they just put so many blue collar workers out of work that unemployment cost more than the tax actually raised; the tax only lasted a couple of years before Congress was compelled to drop it. Of course, they also regularly mention the "highest two percent" and "millionaires and billionaires" but it comes down to various, sometimes hare-brained, ideas to add more government revenue.
The fact is that revenue can't solve the problem. The Obama plans uniformly have spending growing faster than GDP; there is no condition under which that can reduce the deficit or provide money to pay down debt. What can solve the problem is for spending to grow more slowly than GDP. The only solution is to have
- GDP growing, the faster the better
- Spending growing more slowly than GDP.
If someone tries to tell you something else, they're either fools or con men looking for the next mark.