Math vs. Myth

by Michael D. Tanner at http://www.cato.org

This article appeared in the National Review (Online) on October 19, 2011.

It is a medical truism that if you get the diagnosis wrong, the treatment will be wrong. The same holds true with Washington budgeting. Unfortunately, as we prepare for yet more debates over budgeting, spending, and stimulus, we can expect to once again enter a fact-free debate.

Among the most common myths:

1. Republicans have slashed government spending. While there are political reasons for both Democrats and Republicans to pretend that we've entered a new age of austerity, it's not even close to true. According to figures released last week by the Treasury Department, federal spending this year is up by roughly 5 percent over the same period last year. That's a $120 billion increase in just the first nine months of this year. That's right: Despite a near shutdown of the government and "holding the debt ceiling hostage," government spending is still increasing. And not surprisingly, we are borrowing more money in order to fund it. The deficit is already $23.5 billion higher this year — with three months still to go. As a result, our national debt continues to grow. This month it will close in on $15 trillion. Throw in the unfunded liabilities of Social Security and Medicare, and our real indebtedness tops $120 trillion and rising. If Keynesian-style stimulus worked, we should be swimming in jobs.

2. States are firing teachers and firefighters because they are broke. Washington has to help. That's the logic behind the president's plan for $35 billion in additional federal aid to the states, a bill that the Senate is expected to vote on this week. In reality, however, state government spending has also been rising, up more than 10 percent in the past two years. And while some of that represents a pass-through of federal aid from earlier stimulus bills, state general-fund spending rose 5.2 percent this year. If state governments are laying off teachers and firefighters, it's because they are failing to manage their priorities, not because they don't have any money.

3. We have a revenue problem. Yes, tax revenues are low today by historic standards, in part because of the recession and in part because of the Bush tax cuts. But this is a temporary phenomenon. According to the Congressional Budget Office, even if the entirety of the Bush tax cuts were made permanent and the Alternative Minimum Tax (AMT) repealed, tax revenue would rise to more than 20 percent of GDP by 2020. That's roughly two percentage points of GDP above the historic average. If taxes will bring in more revenue than usual, how is it that we are still projecting huge future deficits? Simple, spending is expected to rise even faster. In 2020, federal spending is estimated to be roughly 25 percent of GDP, roughly four percentage points higher than historic averages, and seven points higher than it was under President Clinton. So, which side of the ledger has a problem?

4. We can solve our problems by taxing the rich and closing corporate loopholes. Set aside the question of whether higher taxes on the rich would stifle economic growth and job creation. There is simply no way to raise enough money to cover our deficits by taxing the rich. As the president would say, "It's math." This year, we will run a deficit of roughly $1.3 trillion. Eliminating the tax break for corporate jets, a prime Democratic talking point, would raise roughly $300 million this year. Yes, that's million with an "m." Ending tax breaks for oil and gas companies, another frequent Democratic target, would bring in somewhat more, nearly $4 billion per year. And, the big enchilada, the Democrats' proposed 5.6 percent surtax on "millionaires and billionaires," would raise an average of $45.3 billion in additional revenue per year. Therefore, if the Democrats were able to get every penny that they want, they would raise all of $49.6 billion per year, leaving us with a budget deficit this year of only $1.25 trillion.

5. We can balance the budget by cutting "fraud, waste, and abuse." This is the Republican flip side of the Democrats' reliance on higher taxes, a way to avoid making tough choices about cutting defense and reforming entitlements. Total domestic discretionary spending — everything from the Department of Education to the Department of Commerce, from the FBI to the FDA — amounted to roughly $650 billion this year. If we simply abolished all of those programs, the muscle and bone as well as the fat, we would still have a $650 billion budget deficit. That is not to say that we shouldn't cut everywhere we can, but to spend too much time searching for "fraud, waste, and abuse" is to pluck out a splinter while the patient is bleeding to death.

With any addiction, the first step to recovery is to admit that you have a problem. Washington remains addicted to spending. It is time for Congress to get honest about that and stop hiding behind these budget myths. Maybe then, we can begin the path to economic recovery.