James Pethokoukis

Politics and policy from inside Washington

U.S. federal debt now bigger than entire U.S. economy

Jun 27, 2011 19:03 UTC

A scary chart from the Bank for International Settlements looking at the rise in government debt around the world since Lehman exploded:

And here is a breakout of those numbers:

 

Why the GOP shouldn’t go wobbly on taxes

Jun 27, 2011 17:59 UTC

It’s up to House Speaker John Boehner now. Democrats, the media and Wall Street will be pounding him to agree to raise taxes as part of a debt ceiling deal. But now is no time for Republicans to go wobbly. Here’s why the GOP should stick to its guns until Aug. 2 – and beyond if necessary:

1. The last thing the economy needs is a tax hike. If the economy was too weak to absorb a tax hike last December – when the White House and Congress agreed to extend all the Bush tax cuts for two more years –  its health is even worse today. The economy grew at just a 1.9 percent pace in the first quarter, and many economists now think it might grow just 2.0 percent in the second quarter – or even less. This should be a red flag to Washington. New research from the Federal Reserve finds that that since 1947, when two-quarter annualized real GDP growth falls below 2 percent, recession follows within a year 48 percent of the time. (And when year-over-year real GDP growth falls below 2 percent, recession follows within a year 70 percent of the time.)

 

In other words, the economic recovery is sputtering with stall speed fast approaching. Now would be a terrible time to penalize investors and business, both big and small, with new taxes.

2. Tax revenue isn’t the problem. Spending is. The recent Congressional Budget Office budget outlook was illustrative. The CBO forecast to note is its “alternative fiscal scenario” which “incorporates several changes to current law that are widely expected to occur or that would modify some provisions that might be difficult to sustain for a long period.”

By 2021, the the CBO says, the annual budget deficit would be 7.5 percent of GDP and by 2035 a truly monstrous 15.5 percent. Throughout this period, tax revenue would be 18.4 percent, right around the historical average. But spending would be 25.9 percent in 2021, 33.9 percent in 2035 vs. an average of roughly 21 percent. It’s spending that’s way out of whack, not revenue.

But let’s say all the Bush tax cuts were left to expire, as was AMT relief. Assuming no economic fallout, according to the CBO, revenue would be 23.2 percent of GDP by 2035. Three problems here: a) even with all those tax increases, the annual budget deficit would still be nearly an unsustainable 10.7 percent of GDP in 2035; b)  the U.S. tax code has never generated that level of revenue and almost certainly can’t without a value-added tax; and c) there would be tremendous economic fallout. Axing all the Bush tax cuts would chop three percentage points off GDP growth, according to Goldman Sachs, certainly sending America back into recession. Tax revenue would again plummet.

And as bad as those numbers are, they don’t fully take into account the economic impact of all that debt. When the CBO does makes those calculations, total debt as a share of output is not 187 percent of GDP – the number you frequently see in media accounts – but rather 250 percent of GDP since economic growth would slow sharply due to debt overload. And more than likely the economy would suffer a debt crisis long before 2035 came around.

3. The key to boosting tax revenue is faster economic growth. A team of economists from the American Enterprise Institute recently fashioned a debt-reduction plan that would raise tax revenue to a long-term level of 19.9 percent of GDP. That’s pretty high when you consider there have only been three years in U.S. history that have seen a higher tax burden. Its tax plan:

To achieve this goal, the income tax system would be replaced by a progressive consumption tax, in the form of a Bradford X tax. To address environmental externalities in a more cost‐effective and market‐based manner, energy subsidies, tax credits, and regulations would be replaced by a carbon tax.

But the AEI team also notes that such a tax plan would more than likely boost growth:

Economic simulations have repeatedly indicated that replacing the income tax system with a consumption tax can boost economic growth, although the magnitude of the gains depends on the assumptions that are made and on the detailed provisions of the consumption tax. One widely cited study estimates a 6.4 percent gain in long‐run output from the adoption of an X tax.

Our plan also reduces transfer payments to the elderly, which should further increase private saving and long‐run growth. These growth effects have not been taken into account in the estimation of our plan. Accounting for them suggests that actual revenue requirements are lower than those stated above. For example, if our plan increases long‐run output by even 5 percent and if government spending does not increase in response to the expansion of output, then the actual long‐run revenue requirement will be 19.0, rather than 19.9, percent of GDP.

Revenue of 19.0 percent of GDP happens to be the same revenue requirement of Rep. Paul Ryan’s Path to Prosperity debt-reduction plan. And tax reform isn’t the only thing that can boost economic growth. Increasing high-skill immigration, implementing regulatory reform, and raisng productivity in education, government and healthcare could pump up economy-wide  GDP growth by at least a full percentage point, according to McKinsey Global Insitute.

Bottom line: Higher taxes would hurt the economy, wouldn’t solve the debt problem and aren’t really needed anyway.

 

COMMENT

“1. The last thing the economy needs is a tax hike.”

Au Contraire.

Raising taxes on the Rich & Corporate worked like a charm for both Presidents FDR and WJC. It all depends what you do with the money.

The periods of greatest economic prosperity in this country occurred when the top federal personal income tax BRACKETS were at 81%, 85%, and even 91%, while the top corporate federal income tax BRACKET was at 50%, AND after the top federal income tax brackets were raised on the Rich & Corporate.

~

“2. Tax revenue isn’t the problem. Spending is.”

Wrong.

According to the independent non-partisan Congressional Budget Office, the vast overwhelming majority of our current federal deficits and debt, as well as our medium-term projected future federal deficits and debt, are from the massive drop in federal income tax revenue as a direct result of the numerous rounds of massive tax cuts for the Rich & Corporate enacted during the previous administration.

Not even close.

Posted by JoeFriday | Report as abusive

Does Pelosi want a debt ceiling crisis?

Jun 27, 2011 15:36 UTC

After watching Nancy Pelosi on Sunday, Jonathan Chait speculates that she just might:

Think through what happens if the government defaults on its debt. You have an economic crisis. People get mad at House Republicans, which helps Obama, but the economy also teeters, which ultimately hurts Obama but does not hurt House Democrats very much. Indeed, a default crisis would seem to increase the chances of the 2012 elections producing a Republican president and a Democratic House. I suspect Pelosi knows that.

Granted, this is a highly cynical view of Pelosi. But I would guess many members of Congress care more about keeping their seat and expanding their influence vs.  a member of their party winning the White House. And if the economy has to suffer in the process, so be it.  I will also add that GOP leaders on Capitol Hill think a debt crisis would definitely hurt the party — just like a government shutdown — not to mention the economy.

Already the media is framing Eric Cantor’s departure from the budget talks as a case of Rs putting the interests of the rich and oil companies ahead of that of the average American. And the White House seems to think playing the populist, class-warfare card is a winning strategy. So it seems that both Pelosi and Obama want to push this to the wall.

COMMENT

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More evidence Medicare is a bad deal for younger Americans

Jun 27, 2011 14:39 UTC

A stunning table by healthcare economist John Goodman:

Goodman then explains why the twentysomethings take the hit:

No money has been saved. No investments have been made. No cash has been stashed away in bank vaults. Today’s payroll tax payments are being spent to pay medical bills for today’s retirees. And if any surplus materializes, it’s spent on other government programs. As a result, when today’s workers reach the eligibility age of 65, they will be able to get benefits only if future taxpayers pay (higher) taxes to support them.

Just as Bernie Madoff was able to offer early investors above-market returns, early retirees got a bonanza from Social Security and Medicare. That’s the way chain-letter finance works. But in the long run, there’s no free lunch. That’s why things look so dismal for young people entering the labor market today.

 

COMMENT

” And if any surplus materializes, it’s spent on other government programs.”

Yeah, see that’s the part I’ve got a real problem with. I’m willing to chip in what is a relative pittance, to help out the old, sick, & infirm. It’d be nice if it was there for me when I got there, but I’m hoping not to have to ever find out. When that $$ is taken out of my checks, or when I’m self-employed and I pay voluntarily- I’m paying it SPECIFICALLY for MEDICAID. Not so the gov’t can raid the fund to do… whatever it is that the gov’t does. (bail out their banker friends, whatever).
This is a non-partisan post. Heck, it’s an anti-partisan post. The ass-end’s of crooks & liars fill most seats on both sides of the aisle.

Posted by dXm | Report as abusive

Rep. Dave Camp battles the tax hikers

Jun 27, 2011 14:25 UTC

Great WSJ interview with House Ways and Means Chairman Dave Camp,  a Michigan Republican.  A few of the better bits (but please read it all):

A short-term debt ceiling extension?

There’s talk of a short-term extension while these discussions continue. I think that’s not a good idea, because it doesn’t give you the certainty. Ideally, you’d like to get that settled, and not have it be continually a hanging-over issue.

Can we get the budget to balance without tax increases?

The House-passed budget does that, gets to primary balance. … What we want to do is not have higher revenues. Because the issue is who’s going to pay them. Their idea is always, quote unquote, “rich people over $250,000.” Half of that, as we know, is small business, which is the very sector we need to see some growth in.

What is the least damaging place to raise taxes>

I can’t think of a least damaging place. The approach they’re looking at is not just on what they call high income. They also want to sort of pluck out various provisions of the tax code and simply end them, not really with an eye to what this means to our competitiveness in a global economy. That, I think, is a very dangerous prospect.

Taxing investors and entrepreneurs and small business is no way to boost economic growth. And U.S. economic policy is so sub-optimized for growth that we could generate more revenue by expanding the pie, not raising the tax burden.  That should be the focus on government policy.

 

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