Thursday, July 28, 2011

It's the spending, stupid!

Despite what some people say, it is the spending by our federal government that is the problem. Revenue is down temporarily due to the current economy but is expected to rebound. However,spending is up greatly - and not anticipated to go down at all. This is what is making our national debt so outrageous and pushing us to bankruptcy.

The proof is in the numbers as Chris Edwards, director of tax policy studies at Cato Institute, shows in his Monday testimony before the Senate Finance Committee. His complete remarks, charts included, is available here, but below are some highlights. I hope you'll read his comments in their entirety.

* Federal spending has soared over the past decade. As a share of gross domestic product, spending grew from 18.2 percent in fiscal 2001 to 24.1 percent by fiscal 2011. The causes of this expansion include the costs of wars, growing entitlement programs, rising spending on discretionary programs, and the 2009 economic stimulus bill.

Recent projections from the Congressional Budget Office show that without reforms spending will keep on rising for decades to come.

* Some policymakers believe that our main fiscal problem is rising debt, and they are calling for a "balanced" package of spending cuts and tax increases. But CBO projections show that the long-term debt problem is not a balanced one — it is caused by historic increases in spending, not shortages of revenues. Excessive spending is the underlying cause of the government's long-run fiscal problems.

* A decade later in fiscal 2011, revenues are down by 4.7 percentage points of GDP, while spending is up by 5.9 percentage points of GDP. However, revenues are down only temporarily due to the poor economy.

* Looking ahead, the CBO projects that with current income tax cuts in place and AMT relief extended, revenues will rise to 18.4 percent of GDP by 2021, or a bit above the normal level of recent decades. For 2035, the CBO simply fixes revenues at the same 18.4 percent, but their discussion indicates that "real bracket creep" would actually keep pushing up revenues as a share of GDP beyond 2021.

* To recap, CBO projections reveal no shortage of federal revenues in coming years. Instead, they show federal spending — which is already abnormally high — rising to unprecedented peacetime levels and the government accumulating massive debt as a result.

* Historically, America's strong growth and high living standards were built on our relatively smaller government. The ongoing surge in federal spending threatens to undo this competitive advantage that we have enjoyed in the world economy. The CBO's new projections show that federal spending will rise by about 10 percentage points of GDP by 2035. If that happens, American governments will be consuming more than half of everything produced in the nation by that year. That would doom young people to unbearable levels of taxation and a stagnant economy with fewer opportunities.

* The reality is that Washington is very poor at trying to micromanagement short-term economic performance. Its failed stimulus actions of recent years have just put the nation further into debt, which has harmed our long-term prosperity. Harvard University's Robert Barro calculated that any short term benefit that the 2009 stimulus bill may have provided from small spending multipliers is greatly outweighed by the future damage caused by higher taxes and debt.

* The government uses a "leaky bucket" when it tries to help the economy. Former Chairman of the Council of Economics Advisors, Michael Boskin, explains: "The cost to the economy of each additional tax dollar is about $1.40 to $1.50. Now that tax dollar ... is put into a bucket. Some of it leaks out in overhead, waste, and so on. In a well-managed program, the government may spend 80 or 90 cents of that dollar on achieving its goals. Inefficient programs would be much lower, $.30 or $.40 on the dollar." Texas A&M Professor Edgar Browning comes to similar conclusions about the magnitude of the government's leaky bucket: "It costs taxpayers $3 to provide a benefit worth $1 to recipients."

The larger the government grows, the leakier the bucket becomes. On the revenue side, tax distortions rise rapidly as marginal tax rates rise.18 On the spending side, funding is allocated to activities with ever lower returns as the government expands.

* Federal spending is soaring, and government debt is piling up at more than a trillion dollars a year. Official projections show rivers of red ink for years to come unless policymakers enact major budget reforms. Unless spending is cut, the United States is headed for economic ruin.

* In recent years, policymakers have put great time and effort into trying to manipulate the short-run economy. These efforts have been very unsuccessful, and the government is much further in debt as a result.

Instead, policymakers should turn their full attentions to long-run spending reforms. They should begin terminating the many unneeded and damaging federal programs that draw resources out of the private sector and sap the economy's strength

* Congress should create budget restraint mechanisms to encourage policymakers to make spending tradeoffs. ... it would be better for new budget mechanisms to target spending, not deficits. A simple mechanism would be to impose a cap of three percent on the annual growth in total federal outlays. Even that modest restraint would be enough to balance the budget in a little over a decade.

* In conclusion, cutting federal spending is the right policy to strengthen U.S. economic growth over both the short-term and longer-term horizons.

It is because of these factors that any discussion about the national debt and the debt limit must be focused upon cutting spending and bringing the overall government spending under control.

The government really doesn't need any more money - it just needs to stop spending more than it can ever expect to obtain.

1 comment:

Mad Jack said...

Truth. This entire argument leaves me cold. I've been idly watching the Moonbats and Wingnuts on the beltway howling and blathering about the economy for months, and not one of them knows what the hell they're talking about. The truth is that we can't afford it. We can not afford to fund this little pet project and that little pet project just so that some talking head can get elected.

I honestly do not believe that the economic crises will be resolved during my lifetime unless the entire country goes belly up and we start all over - with new currency and new members of government.

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