More About Addressing the Long-Term Budget Gap

October 22, 2010

My colleague Gerald Prante wrote yesterday about the ever-rising debate on how to confront our federal government’s increasingly dire fiscal situation. People are starting to see the seriousness of the situation: for example, a recent Gallup poll found that a huge majority of Americans (77% to 18%) of all political stripes (Republicans 86%, Independents 77%, Democrats 69%) agree that Social Security and Medicare will cause major economic problems going forward, although respondents opposed any solution to fix it (cutting benefits opposed 31% to 66%; raising taxes opposed 42% to 56%).

Gerald yesterday rightly notes that central to the debate is whether or not “starve the beast” will reduce spending. Anecdotal evidence during the Reagan (+22%) and Bush II (+60%) era proved to me that starving the federal government of additional revenue will not induce spending restraint. Gerald says that to the extent that increased revenues (aka, “feed the beast”) reduces deficits significantly (he gives the example of raising taxes by $1, of which 99 cents goes to deficit reduction), it produces a better result than the status quo.

One can be skeptical of that, since it depends on if and where you think a negative impact from higher spending is outweighed by the deficit reduction. Nevertheless, Gerald leaves out a more probable scenario: that increasing revenues by $1 will increase spending by more than a dollar. Since “starve the beast” is no constraint on spending, and we spend more than a dollar per dollar of revenue now, I don’t see why future tax increases will be treated any differently. We’ve all heard stories of windfalls and subsidies inducing irresponsible behavior. If you haven’t, here are some classics.) I think it’s likely that feed the beast won’t reduce the deficit at all; for that, we need serious spending restraints.

Spending and cost-benefit of services need to be the metric, not just revenue. Otherwise, one would wrongly conclude that the federal government has gotten “smaller” since 2007 and especially under President Obama because revenues have dropped sharply during that period. One day, sooner rather than later, we’re going to need entitlement reform and tax reform and spending reform. Our current tax system looks like Swiss cheese and our current spending commitments are not sustainable. And everyone needs to be at the table and engaged when we do it.


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