This posting is the first of a two-part series. This post addresses what Washington is getting wrong and how they can actually achieve real "balance". My next post is about what likely needs to be happen to ultimately get there.
In Washington, a debate is raging about how to get beyond the "Fiscal Cliff". The Republicans and Democrats say they want the same thing, only they have different ideas of how to get there. John Boehner wants to limit impending tax increases and have more spending "cuts" (Please note the quotes. They're not really cuts. We'll get to that later.) and the Obama administration and Dems want more tax increases and virtually no net spending "cuts". Both sides claim to want a "balanced" solution. The problem is they're balancing the wrong thing and in doing so they're simply piling on more of what got us here in the first place.
You see when they are talking about "balance", what both sides are really talking about is taxing more and spending more. To be sure, there are no real cuts in spending being negotiated. All they are talking about is what to do with proposed -- explosive -- future spending and all they are negotiating is whether we limit that explosion in spending by a miniscule amount or limit that explosion by just a tiny amount. Either way you still have an explosion of spending and by taxing and spending they are doing exactly what blew up the national debt over the past 40 years.
Now, I know some of you may be saying, "How can that be? We've had multiple tax cuts over that 40 years. Look, Reagan cut taxes, Bush cut taxes. Heck even Bill Clinton had a huge tax cut." While that may seemingly be a valid statement, the reality is that in 1970 the per-person tax burden in the US in inflation-adjusted real 2012 dollars was just $5911.81, but in 2012 that amount had jumped to $7859.28. The per-person tax burden was $1947.47 or 33% higher -- in real dollars -- in 2012 than in 1970. (BTW, a vast majority of this additional tax burden was bore by those mean old, nasty, upper-income folks.)
The next obvious question is how can we be in such a big hole if per-person taxes have gone up by that much? The answer is that while taxes climbed higher during that period, spending absolutely exploded over those 4 decades. Our government started spending like a kid in a candy store with their parent's no-limit American Express Centurion Black card. In inflation-adjusted real 2012 dollars spending per-person was $6098.93 in 1970. You may note that this is not all that much above per-person taxation for that year. That's pretty sustainable, you might say and you would be right. The major malfunction, however, is that 4 decades later our government is spending a whopping $12,083.00 per person! That's nearly a 100% increase. Spending is double what it was in 1970! Our government has greedily ballooned, doing nothing less than gorging itself to a gargantuan size over that period.
When people say that we have a revenue problem, look at it...no we don't. Our per-person revenue has INCREASED BY 33% in the past 40 years. During that same time, though, per-person spending has skyrocketed by 100%! SPENDING IS THE PROBLEM!!! And what is the one thing that is being absolutely avoided here? That's right...spending.
We've been taxing and spending our way to oblivion over these past 40 years. We've run that misguided course to our imminent peril..to the "cliff" as it were. One would think the logical thing to do would be to get ourselves back into a real balance by counter-acting what has put us into this mess and implementing a low-tax and real spending-reduction based fiscal consolidation. Yet what is the plan of the geniuses in Washington? More taxing and more spending...precisely what got us here...and both sides are pushing this as a solution. Unbelievable! BTW, low-tax and real spending-reduction based fiscal consolidation is exactly what the strongest economies in Europe have been doing over the past 15 years -- including Germany...you know, the ones bailing the other collapsing economies out.
Now some will make the argument that the goal is to simply get spending down to a certain percentage of GDP. I ask, why? I understand that GDP growth greatly influences revenue, but why does it have anything to do with spending? Does a 4% annual growth in real GDP mean our borders are 4% larger? Does it mean our population has grown by 4% in one year? No and other than inflation which is accounted for in real GDP growth, those are the only two things that directly and organically tie to how much we spend as a nation. Everything else is just finding new ways to spend money.
You could make a serious and possibly valid argument that spending growth should rightfully be counter-cyclical to GDP growth since in periods of slow economic growth or contraction more people may access safety-net programs, but if that's the case then there should be real cuts when the economy is good. That hasn't happened though. Over that 40+ year period, with all the economic ups and downs, there has only been one year in which spending has actually been cut year-over-year. In that year spending went down by 1.75%. Of course the year before spending had gone up an incredible 17.9% for a two-year net increase of 8% per year rendering that single year reduction useless.
The only thing that tying spending to GDP growth does is to promote the irresponsible mind-set of "if you got it, spend it". If Washington had shown more maturity than a 9 year-old over the past 40 years, here's where we would be: If we had maintained our historical revenue growth and kept it the same as the numbers shown above and the only change we made was to have tied our average spending growth to a very reasonable benchmark of population growth plus inflation since 1970, we would not have a $16 trillion debt. Instead we would have a SURPLUS of $16 trillion which would be growing annually at a trillion dollars a year. Are you part of the 99% and mad as hell? Consider this...had we done this, an alternative option would be to have a national debt of $0.00, no annual deficits and the only people having to pay any individual taxes would be the top 1%. Both you and the others in the 99% would pay no income tax at all...ever. Our economy would be booming by freeing up an additional trillion dollars of annual private stimulus...EVERY YEAR! You should note that what the Obama administration says is the worst economic catastrophe in 70 years warranted only a single $800 billion "stimulus" spread over two years. Imagine what a trillion dollars per year would do to our economy. Forget unemployment, we would have to be importing workers. Wages would be high, driven by pure demand.
Now when it comes to taxation, I'm no Grover Nordquist disciple. I want a small, limited and more localized government, but I do understand that ALL tax rates are temporary and that there is a time to raise taxes. Unfortunately for Washington. that time is when -- pulling numbers out of a hat -- unemployment is < 4%, GDP growth is > 5% and/or inflation > 5%. At that point the economy may need to have some wind taken out of it's sails by raising rates. Besides, that creates the space to allow for stimulative tax cuts during future downturns. However the time to do it is absolutely NOT when unemployment is near 8%, GDP growth is barely clawing out an increase of a dismal 2% and last month's consumer price index report showed deflation in prices. All raising taxes will do now is draw investment income out of the system in an effort to punish the wealthy for succeeding and cutting off the nose to spite the face. The jobless 99% will be at the bar when it opens at 2 PM saying, "Hey we lost 4 million more jobs, but we sure gave it to those rich guys, didn't we!"
So there they are in Washington giving lip service to "balance" while pretending the past 40 years didn't happen, not learning a single lesson from it and ignoring what truly needs balancing out. They'll blame supply-side economics and talk a Keynesian solution even though at best our economy was a supply-side/Keynesian hybrid with Keynesian spending an ever present, potent poison. I have a better idea though, Washington. How about you do something different and actually look at what the problem is this time. How about you stop what you've been doing for the past 40+ years and balance out all that damage you guys have managed to inflict on the nation before we all go over the real cliff? Guys, if you want to talk balance, OK...let's really talk balance.
Note: So why am I constraining this view to only the past 40 years? The frank answer is to cut some of you off at the pass. I purposely chose 1970 as a staring point because A) 1970 is a nice round number, B) it is also after the complete implementation of all the Great Society programs and C) I don't want to give anybody the ammunition of pointing to those programs -- as poorly conceived as some of them may be -- and saying "What, you want to take away granny's health care???"