There’s a secret solution to deficits and debt. Republicans rarely talk about it, and Democrats avoid it like the plague. As a result, it remains a secret from the voting public—especially during political campaign season—and the two parties keep presenting us with the same, tired old false dilemma of “cutting spending” or “increasing tax rates.”
Yes, it’s a false dilemma, because there really is a third solution to deficits and debt. You may already know what it is. Here’s a simple fill-in-the-blank quiz, which should be easy for anyone who’s read a few articles in this blog:
The three different ways to fix the so-called problem of deficits and debt are:
1. Increase tax rates.
2. Cut spending.
or ...
3. ______________.
Before revealing the answer, I’ll comment briefly on the two choices that comprise the false dilemma.
Increase tax rates
Democrats love to focus on this half of the false dilemma. Although I do think it’s possible for tax rates to be too low, that’s not the case today. The federal government’s “take” is 18% of GDP; that’s not too little, that’s very close to the decades-long historical norm. (The government’s 21% “take” during the late 1990s was a short-term blip, properly corrected by the 2001 tax rate cuts.) So what if spending is higher than 18% of GDP? If we are spending it productively, it’s money well spent. (Reducing embassies’ vulnerability to terrorist bombs is just one example of productive spending—and, as I’ve said before, productive spending pays for itself in future benefits, so it doesn’t matter if it’s funded by selling more T-bonds to the public.) Higher tax rates than we have today divert a higher portion of the private sector’s energy to tax avoidance activities, legal and illegal; the resultant effect on the tax base is not productive, and that’s why I am against the Democrats’ half of the false dilemma.
Cut spending
Republicans occasionally talk about growth, but mostly love to focus instead on spending cuts, the other half of the false dilemma. Although I am personally in favor of cutting wasteful spending—every bit as much as I’m in favor of motherhood and apple pie—there’s a big difference between “cutting wasteful spending” versus just “cutting spending.” It’s the difference between trimming your fingernail with a small clipper, versus chopping your finger off with a meat cleaver. The latter is what we did in the mid 1990s, when we fed bipartisan surplus-mania by making big cuts in national security spending. (The surpluses started in ’96; the bleeding started in ’98, when Al Qaeda blew up our unprotected embassies in Kenya and Tanzania—unprotected due to budget constraints that enhanced the surplus we thought we loved so much.) That’s what tends to happen when we “cut spending,” and that’s why I remain very skeptical about the Republicans’ half of the false dilemma. [What about cutting pure waste? I'm in favor of it as long as every dollar of wasteful spending cut is matched by a dollar of tax cuts.]
Summary of the false dilemma
False fear of deficits creates an unnecessary desire to eliminate them. Republicans usually propose “spending cuts”; Democrats usually propose “tax increases.” It's no wonder voters are left with the false impression that spending cuts or tax hikes are the only two choices for achieving the elusive condition called "fiscal responsibility."
Choice 3, the big secret
“Grow the economy.” That’s the choice we rarely if ever hear about, especially during political campaigns. [It’s more accurate to say “grow the economy at least as fast as the debt grows”—but political campaigns rely on sound bites and bumpersticker-length slogans, and we’ll be lucky to see the three-word version in anyone's talking points any time soon, let alone the fully-qualified version.]
“Growing the economy” means “creating more and better jobs that yield higher and higher pay.” Growth is the third way to “fix” deficits and debt, and it’s a much better fix than spending cuts or tax rate hikes, for a number of reasons. "Fiscal responsibility"—a term nobody takes the time to define today—could at long last take on a very precise definition that would force both sides to bring economic growth into the debate:
Fiscal responsibility - The fiscal budget which results in no increase and no decrease in the ratio of debt to Gross Domestic Product.
Nonetheless, growth remains the well-kept secret. Republicans mention it only rarely, usually opting instead to talk about spending cuts. Democrats almost never mention growth; they'd rather focus on tax hikes for the undefined "rich" (...don't tax you, don't tax me, tax the guy behind that tree). Just listen to the speeches; "growth" is barely in anyone's vocabulary.
October Surprise 2006
How about we give our politicians a nice little October Surprise this year? Why don’t we give them the quiz above, and see how many of them can fill in the blank correctly—then elaborate about (a) what they’ve done about it already, and (b) what they propose for the future?
My guess, based on my experience, is that Republicans will tend to be much more willing and able to address the growth question than the Democrats. There are exceptions on both sides, of course—but the point is, We need to start asking them about it if we want to start hearing something besides "cut spending" or "increase taxes."
A quick reminder
Here’s a graphic, in case you need to remind anyone why growth is so important to the debate. This is an 8% annual growth scenario for GDP and debt, illustrating that the debt could grow by ten trillion dollars in a decade without affecting our debt burden (ratio of debt to GDP). Feel free to copy it and use it as you see fit.
[Growth of 8% nominal is within a point of today's rate, by the way.]
The next graphic below shows how economic growth (or contraction) almost always dictates which direction tax receipts will go.
Finally, the graphic below shows when deficits are okay, as well as the gloomier scenarios when surpluses are necessary. I hope I never see any of the last three scenarios come about, but the principle of holding debt-to-GDP constant is the same.
Once again: Why don’t we give our politicians an October Surprise of our own this year? Let’s start asking them about growth; some will have good answers, others will stutter like Porky Pig, but in either case, it would make the campaign more fun for us voters, wouldn't it? If nothing else, it would give us (and them) some good practice for the presidential campaign coming up in a sixteen months.
