While I continue to struggle to write my post about why we should be balancing the federal budget, Edward Conard has an op-ed in the Wall Street Journal, urging reduced federal spending:
Trade deficits and the mistaken belief that they chiefly fund business investment have led to a debt-fueled increase in American consumption. This surging consumption contributed to the 2008 financial crisis and unsustainable federal deficit spending while doing little to boost domestic production. It has left voters addicted to deficit-financed consumption and determined to stick someone else with the bill.
Unless the U.S. begins painful fiscal consolidation—unlike anything it has undertaken before—it will inevitably face slower long-term growth.
There is empirical evidence for that in the form of a well-known study by Ken Rogoff and Carmen Reinhart. Contrary to the assertions of those who favor increased federal spending without regard to how much we borrow, that study has not been reputed—even the scholars who identified mathematical errors in the study do not claim to have refuted it.
There’s a lot more in Mr. Conard’s op-ed, particularly about trade deficits. Here are some eye-opening statistics:
Federal government spending has risen from 19% of GDP before the 2008 financial crisis to more than 23% today, while taxes have remained at a lower-than-average 17% of GDP. Publicly held federal debt has grown from 35% to 100% of GDP and that share will continue to rise according to the Congressional Budget Office. The future will likely be worse than CBO’s forecast, which assumes no budget-busting recessions.
Fiscal deficits have surpassed an unprecedented 6% of GDP during a period of economic expansion. Debt-financed consumption now devours savings that otherwise would have funded business investment.
That trade deficits do not result in increased investment is not the only mistake we have been making. Reductions in the personal income tax rates for the highest income earners does not produce increased business investment, either. Consider this chart:
The cuts in the personal income tax rates during President Trump’s first term took place in 2018. Do you see a strong persistent increase in business investment? Me, neither.
I don’t believe I need to document that consumer spending has increased or the effects that increased consumer spending has had on inflation, hurting the lowest income earners.
So, what does that leave us? Cutting spending and increasing taxes. As I’ve said before, spending money we don’t have is a lot more fun than making up for it.
Trump promised a lot fo tax cuts. It will take a lot of spending cuts and/or new revenue to make that, even more to cut into our debt. Not seeing how it all works out. The most recent claim they made was that the tariffs would raise $600 billion/year. Our total imports are about $4trillion/year. That would mean tariffs of about 15% on everything. So first, we actually have trade surpluses with a lot fo countries, including the EU. If we suddenly put tariffs on everyone just to make money have to think we see them reciprocated and see growth slow. Second, if we actually raise that much money from tariffs it kind of suggests that the new jobs this was supposed to generate arent really arriving. (Think we have to assume at this point that DOGE isn’t really a serious attempt at anything.)
Steve
I agree more revenue from taxes are necessary. But the question is which taxes.
The necessary revenues can be raised from a consumption tax; which seems to be where the administration is heading (a tariff is a consumption tax on foreign made goods and services). For example, a 10% tariff on all imports raises $400 billion / year.
A consumption tax also has the benefit of discouraging consumption in an economy which is over-consuming.
The last bucket will be interest rates; the interest on the debt is 18% of government expenditures. Like it or not, interest rates need to and will go lower for solvency reasons; and it will either occur due to a slowdown in the economy or by policy fiat (yield curve control).
Me, either.
I have favored replacing the personal income tax with a prebated consumption tax for decades (prebates do be calculated on a graduated basis). I recognize that would play hob with state and local finances. Something would need to be done about that.
We live in a stratified society. I’ve purchased nothing new save socks and briefs in fifty years.
I consider tariffs a wonderfully progressive tax. Double them.
I suspect you’ve bought food, too.
“I consider tariffs a wonderfully progressive tax.”
They are regressive.
Steve
Fundamentally, Americans want a lot of government benefits but want someone else to pay for them. Politicians respond to the incentives that creates.
Personally, I find Andy’s comment the most cogent.
I blame politicians for having no balls. But I blame voters as the root cause. We consume, consume, consume. We want government to bail us out at every turn. We engage in beggar thy neighbor trade or border policy so we can buy 65 inch TV’s or tomatoes cheaper. We vote for politicians who simply promise to give us benefits…………..on (these days) “billionaires” “corporations” nickel. We are not civically engaged. We don’t understand basic finance. How many people know, that at all levels, government spending is 45% of GDP? Isn’t that enough claim on the productive entity known as the United States. According to Democrats: No.
We have dug a big whole. There is only one way out: growth and spending restraint. If DOGE has shown us anything, it is that the Democrat party is the party of spend, spend, spend. Cut nothing. The link shows Joe Biden’s spending spree. Next years spending runs 7% up year over year.
People say they are baffled by Trump. I say bullshit. He knows: growth and spending constraint. He has precious few allies in this. Zero Democrats. Not enough Republicans.
You know how this ends, right, people? Inflate your way out of debt. Joe Biden was just the test run. a 20% increase in the price level. All Trump is trying to do is increase domestic output as an offset. People whine about tariffs as a tax. Well, you can take that tax, or you can take your tax as inflation. At least we get production and income in the second scenario.
This is going to be hard, folks. Detox.
https://www.cato.org/blog/century-federal-spending-1925-2025