The Micawber Economy

In David Copperfield Charles Dickens’s character Mr. Micawber said

Annual income twenty pounds, annual expenditure nineteen [pounds] nineteen [shillings] and six [pence], result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

160 years later that’s still the case.

The editors of the Wall Street Journal observe about taxes and the federal deficit:

Spending rose only 3% overall for the year, according to the CBO gnomes. Federal outlays climbed by some $130 billion to $3.982 trillion. Three percent is probably more than most of our readers received in raises, but by federal standards it’s penurious. Some of the big outlays were, as ever, for the three giant entitlements—3% for Social Security, 4% for Medicare, and 2% for Medicaid as the pace of new enrollments slowed under the Affordable Care Act.

The biggest single spending increase was 45% for education thanks to an upward revision of $39 billion in the “estimated net subsidy costs of loans and loan guarantees issued in prior years.” In plainer English, the Obama Administration low-balled the costs of nationalizing student loans. Tens of thousands of borrowers are defaulting on their student debt, and the taxpayer tab is coming due.

Our problem is that national income is rising at less than 2% per year while federal spending is rising at 3% per year. It doesn’t take a lot of math to tell you that’s a problem. There are only a handful of strategies for coping with the matter:

• We can just issue ourselves credit, i.e. we’ll “borrow”. That’s what we’ll do. That will continue a positive feedback loop reducing economic growth.
• Extract more income from the private sector. That will reduce private sector economic growth.
• Cut spending. As you can see when constraining the increase in spending to just a little more than twice the increase in income is considered a great triumph, that’s difficult to do, particularly as we place increased demands on the federal government. How do you cut defense spending when you’re fighting a half dozen different wars and preparing to fight more?

In optimization theory you optimize a process by focusing on the segments of the process where there’s the most to optimize. Health care spending is growing faster than any other budget component. If the Obama Administration had focused, as President Clinton used to say “like a laser beam”, on constraining health care spending, there might have been a chance of controlling federal spending. It elected to increase health care insurance coverage instead.

Increasing marginal tax rates, extremely unlikely when Republicans control the Congress and the White House, won’t necessarily remedy the problem. For that you need to increase the effective tax rates and those have proven even more resistant to increase than the nominal rates.

So we’ll continue to issue ourselves credit, hoping that there isn’t a flight from the dollar, and reduce our potential for economic growth, wage growth, and employment.

Result misery.