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Archive for July 15th, 2011

At his press conference today, President Obama repeatedly said that a “balanced approach” is needed to deal with the fiscal situation.

The White House has obviously poll-tested and focus-grouped that phrase. But just because it’s gimmicky, that doesn’t mean balance is a bad idea. So I’ve decided to take the President’s challenge.

I want to know why America’s fiscal situation is so out of whack. I’m willing to take a dispassionate look at the numbers. And if those figures show that the President is right, and that “unaffordable tax cuts” have caused higher deficits, then I’m willing to support higher revenues (after all, I am a pragmatic, middle-of-the-road guy).

My first step was to go the White House website and track down the historical data from the President’s Office of Management and Budget.

Those numbers show that federal spending, on average, consumed 19.8 percent of GDP from 1950-2000.

Tax revenues, by contrast, have consumed an average of 18 percent of GDP.

If my math is correct, that means deficits averaged almost 2 percent of GDP over that period.

To determine why deficits are higher today than that long-run average, I decided to look at what spending and revenues will be over the next 5-10 years. I could have picked this year, but that seemed unfair since the economy is still weak, which causes abnormally high spending and unusually low revenue.

Moreover, the spending figures would be artificially high because of wars that we are told are soon coming to an end.

Additionally, everyone is talking about 10-year plans, not fixing the problem overnight, so looking at the 5-10 year figures makes sense.

And, to expose any smoke-and-mirrors by the GOP, I also will assume the 2001 and 2003 tax cuts are made permanent. That way, we’ll know the degree to which Bush’s tax cuts are responsible for additional red ink.

So I went to the Congressional Budget Office and found the relevant data (Tables 1.1 and 1.2, along with Table 1.7).

I discovered that tax revenues between 2016 and 2021 will average about 18.2 percent of GDP. And that’s assuming, as just noted, the 2001 and 2003 tax cuts are made permanent.

I also found that the burden of federal spending will average about 23.6 percent of GDP during that same period.

So let’s see what we should do if we want to satisfy the President’s demand for a balanced approach…hmm…

Tax revenues will be 18.2 percent of GDP, slightly higher than their historical average of 18.0 percent of economic output. So we can safely conclude that revenues in general (and “unaffordable tax cuts” in particular) are not responsible for higher levels of red ink.

Now let’s look at the outlay side of the fiscal ledger. Federal spending is projected to consume about 23.6 percent of GDP, substantially higher than the long-run average of 19.8 percent of economic output.

In other words, if we want to assign blame for higher deficits, the increase in federal spending deserves more than 100 percent of that blame.

Which implies, if we want to be balanced, that spending restraint should be more than 100 percent of the solution.

Here’s a chart based on those OMB and CBO numbers.

By the way, lest anyone think that I cherry picked historical data, I deliberately decided not to use 1946-2010 data, which would have made my point even stronger. Over that longer period of time, revenues average 17.7 percent of GDP and spending averaged 19.7 percent of GDP.

However you slice the numbers, America’s fiscal policy problem is too much spending. The solution, as I explain here, is to limit the growth of the federal budget.

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In my speeches, especially when talking about the fiscal crisis in Europe (or the future fiscal crisis in America), I often warn that the welfare state reaches a point-of-no-return when the number of people riding in the wagon begins to outnumber the number of people pulling the wagon.

To be more specific, if more than 50 percent of the population is dependent on government (employed in the bureaucracy, living off welfare, receiving pensions, etc), it becomes rather difficult to form a coalition to fix the mess. This may explain why Greek politicians have resisted significant reforms, even though the nation faces a fiscal death spiral.

But you don’t need me to explain this relationship. One of our Cato interns, Silvia Morandotti, used her artistic skills to create two images (click pictures for better resolution) that show what a welfare state looks like when it first begins and what it eventually becomes.

These images are remarkably accurate. The welfare state starts with small programs targeted at a handful of genuinely needy people. But as  politicians figure out the electoral benefits of expanding programs and people figure out the that they can let others work on their behalf, the ratio of producers to consumers begins to worsen.

Eventually, even though the moochers and looters should realize that it is not in their interest to over-burden the people pulling the wagon, the entire system breaks down.

Then things get really interesting. Small nations such as Greece can rely on permanent bailouts from bigger countries and the IMF, but sooner or later, as larger nations begin to go bankrupt, that approach won’t be feasible.

I often conclude my speeches by joking with the audience that it’s time to stock up on canned goods, bottled water, and ammo. Many people, I’m finding, don’t think that line very funny.

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I was thinking of titling this post “The Thrilla on the Hilla,” but I wasn’t sure anybody would understand the Muhammad Ali-Joe Frazier reference.

All you really need to know is that I will be debating Kevin Williamson of National Review next Monday on the topic: “The No-Tax-Hike Pledge: Does It Help or Hurt the Fight for Smaller Government?”

This event will be at Noon, on Capitol Hill, and is open to the public and free of charge. But you need to register today, and I’m told there is a midday deadline.

Kevin will be arguing that a no-tax-hike position is misguided, and he has already thrown down the gauntlet. Since I represent the side of truth and justice, I will hold my fire and try to save his soul on Monday.

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