Sydney M. Williams
Thought of the Day
“Deficits and Debt Limit Options”
September 18, 2017
“The purpose of government is to enable the people of a nation to live in safety
and happiness. Government exists for the interests of the governed, not for the governors.”
Thomas Jefferson (1743-1826)
A recent front-page article in The New York Times dealt with the fate of yellow-cab drivers in New York. The reporter, Winnie Hu, provided a heart-breaking look at those (mostly immigrants) who bought medallions at high prices before Uber and others entered the market, and who are now suffering from fewer riders and lower prices for medallions. She did not write of the role government played, in limiting the number of medallions, which artificially inflated their price and which helped cause the upsurge in unconventional competition. She did not write of creative destruction, where new technology drives out the old, and without which our economy and productivity would stagnate. And, she did not point out the options consumers now have – more competition and greater flexibility.
Governments are facing financial crises. Debt is high, and growing. Deficits are expanding. Yet, our infrastructure needs repair and/or replacement, and our defense needs are not being met. Eleemosynary institutions that rely on government support are facing hard times. There are many reasons for this situation, but the gist is that unionized government workers, entitlements, and the bureaucracies to support them, limit options. Mandatory spending on welfare programs has risen inexorably. Union demands, especially at the state and local levels are untenable. Revenues have not kept pace. The solution lies not in more taxes, but in more robust economic growth.
Demographics add to the problem. As a nation, we are aging. In 2015, 15% of the population was 65 and older, up about three percentage points from 2000. In 2030, that number, according to the U.S. Census Bureau, is expected to be 21%. At the same time, the working-age population (18 to 64) is expected to decline from 62% to 58%. In other words, demands on government for retirement and health benefits will increase, while the number of working taxpayers decreases.
We can persist along the current path: borrowing more heavily, increasing taxes, and cutting “discretionary” spending, while increasing deficits and debt. Or we can try to extricate ourselves by changing direction: We can rein in mandatory spending (i.e. entitlements), temper union demands and employ tax and regulatory reform to let the economy grow more quickly.
We don’t need so-called “budget-neutral” tax cuts. We need tax cuts that spur economic growth – simplification and lower nominal rates. While The New York Times contemptuously decried Mr. Trump’s tax reform proposal, saying it favors the wealthy, they were disingenuous. He does want to cut corporate tax rates from 35% to 15%. He also does want to cut personal income tax rates, including those for the top brackets. But he has recommended disallowing many deductions, such as state and local income taxes – a favorite of coastal liberals. The Times knows this, and they know that that would negatively impact their wealthy and elitist readership. A million-dollar wage earner in New York City would lose $127,000 in tax deductions. A California resident, with the same income, would lose $133,000 in tax deductions. Their objections have nothing to do with equality or fairness. Their objections are self-serving. There is, though, a hitch on the President’s proposal – ironically, one noted by conservatives, not liberals. What, for example, would prevent the very wealthy from declaring themselves one-person S-Corporations, so to qualify as a corporate taxpayer? Congress needs to ensure that mom-and-pop businesses can benefit, without the system being abused by “big-bucks” earners in high-income-tax state venues – individuals who can afford high-priced lawyers and accountants.
As for regulatory reform, President Trump has made a good start. He has unwound many of the regulations President Obama imposed on the economy through executive actions. But more needs to be done. We need regulations, but, when they serve the bureaucrats who administer them (providing assured employment at good wages) at the expense of the people and economic growth, they must be removed or relaxed.
Over the past decade, the good news is that we did not go into depression, as some feared in the wake of the credit debacle of 2007-2009. The bad news is that economic growth, coming out of recession, was the slowest in recent history. When President Obama assumed the Presidency in early 2009, one of the first decisions he made was to form a bi-partisan commission to recommend fiscal stimulus. The Simpson-Bowles Commission was formed in 2010 and reported back about a year later. Their recommendations were ignored by the President and Congress. Tax and regulatory reform were not to be. So, the only game in town became the Federal Reserve, which cut Fed Fund rates to zero, and then instituted a program of repurchasing government and agency debt (quantitative easing) – which caused their balance sheet to expand more than four-fold, and which allowed long rates to remain historically low.
In many respects, the Fed’s actions succeeded: The recession did not deepen; in fact, it improved. The stock market went up three-fold from its bottom. Credit spreads tightened and commercial real-estate cap rates fell. But, we were left with double the national debt and artificially low interest rates, which mask debt’s true cost; GDP growth has been one full percentage point below historic levels. Workforce participation is at the lowest levels in forty years. Income inequality has risen. Wages are stagnant. Labor productivity, according to the Bureau of Labor Statistics, is less than one quarter of the average for the past 40 years. Identity politics have created the greatest societal division since the 1960s. And now the Fed must normalize interest rates and unwind its balance sheet. Rising rates will pressure an already extended budget.
Staying on the current glide, the Country faces reduced options. Slow economic growth reduces tax receipts. With mandatory items consuming ever-larger portions of the budget, spending cuts will have to continue to come from infrastructure, housing, science, the arts, foreign aid, the environment, and defense and homeland security. If we want to keep our options open, we will have to restore some semblance of financial order and increase economic growth. Else, deficits and debt will dictate options.
As Thomas Jefferson noted years ago, the purpose of government is to serve the needs of the people, to provide for their security and to ensure their happiness – not to provide cradle to grave care, and not to do those things we can do for ourselves. We are not the youthful nation we were then. We are mature and we are aging. But we are also the sole democratic guarantor of world peace, which means we need a strong military. Our aging population means there will be greater demand for healthcare and pension accounts. Technology and globalization bring enormous rewards, but they also bring competition and the challenge of “creative destruction.” We face risks, not only natural ones, but from terrorists and nations that would do us harm. Governments must be run in a fiscally responsible way, so that we will have options to confront threats and to assess opportunities when and wherever they occur.