In answer to the question How many legs does a horse have, if you call a tail a leg? Abraham Lincoln is said to have replied Four. Whatever you call it a tail is not a leg. In a recent op-ed at at The New Republic Richard Posner calls what we’re going through a depression and almost gets the seriousness of our circumstances right:
Efforts to curb increased entitlement spending can be complemented by closing tax loopholes, some of which are as enormous as they are unjustified, notably the deduction for mortgage interest. Half the adult population, moreover, pays no income tax. Everyone with an income should pay income tax equal to a modest percentage of his income.
So the deficit, politics aside, should be manageable. But it’s worth pointing out that anything that takes money out of the economy, such as reducing federal spending or increasing federal taxes, will exacerbate the current depression. Consumers will have less money to spend, and this will discourage employers from hiring. So the reforms that I have been discussing should be phased in gradually over a period of years.
Read the whole thing. The one thing he doesn’t take into account is cash flow. Just in order to stabilize our current fiscal mess we need some combination of $600 billion per year in additional revenues or cuts in expenditures and the longer we wait the higher that number will grow. The absolute size of the debt matters because we’re paying interest on it and, while the rate we’re currently paying is at historic lows, it won’t be forever and, when it grows, interest on the debt can easily dwarf Social Security, Medicare, and the military as an expense item. Primary default is something we need to worry about.
There are no prospects for our growing faster than we incur debt without serious fiscal adjustments and there are no realistic prospects for serious fiscal adjustments. We’re thrashing around now like a tarpon on a gaff trying to avoid serious fiscal adjustments.
There are solutions. For example, rather than borrowing the money we use to pay the deficit we could simply conjure it out of thin air. That would have implications of its own.