Busting the budget myths
Let’s banish the budget fictions of left and right.
The supercommittee — the 12 members of Congress charged with devising a plan to close mammoth deficits — cannot succeed without public support for its proposals. And public opinion won’t come along if it embraces fairy tales.
The conservatives’ fiction is: We can reduce deficits and cut taxes by eliminating “wasteful spending.”
The liberals’ fiction is: We can subdue deficits and raise social spending by taxing “the rich” and shrinking the bloated Pentagon.
You will notice one similarity. Both suggest that reducing deficits involves little real pain. No one, after all, favors “wasteful spending.” Similarly, taxing “the rich” doesn’t threaten most people who aren’t rich. Liberals and conservatives alike can reconcile all good things: fiscal rectitude (for both), tax cuts (for conservatives) and high social spending (for liberals). I wish it were so.
Before explaining why, here’s a caveat. Liberal and conservative budget experts generally don’t endorse these myths. No one who studies the budget could. Still, politicians and partisan propagandists popularize them.
Start with conservatives. Where exactly is all the waste?
True, many government programs deserve the ax. I’ve railed against some for years: farm subsidies (food would be produced without them); Amtrak (it is non-essential transportation); public broadcasting and culture subsidies (these are unaffordable frills); community development block grants (they generally don’t enrich poor communities).
Entitlements — mainly Social Security and Medicare — should be trimmed. I’ve also made that a crusade. We need higher eligibility ages to reflect longer life expectancies. Wealthier retirees should receive less Social Security and pay more for Medicare.
But plausible savings don’t match conservative rhetoric. All the suspect “discretionary” programs come to tens of billions, not hundreds of billions. Culture subsidies total about $1 billion annually; community block grants in 2010 were $4 billion. Meanwhile, total federal spending was $3.5 trillion. Do conservatives really want to eliminate the national parks? The FBI? Highways? Food inspections?
Social Security and Medicare savings could be greater. In 2010, these programs cost $1.2 trillion. But there’s a catch. Savings from lower individual benefits will be offset by more beneficiaries: retiring baby boomers. By 2025, Medicare and Social Security enrollment will rise 50 percent from 2010.
Next, the liberal fiction. Contrary to liberal dogma, the rich already pay plenty of taxes. Indeed, they pay for government. In 2007, the richest 1 percent of Americans paid 28 percent of all federal taxes; the richest 10 percent (including the 1 percent) paid 55 percent.
For most millionaires, federal tax rates — the share of income taxed — exceed 30 percent. Some rich have lower rates. Raising these rates is justified but wouldn’t balance the budget. The plan by Senate Majority Leader Harry Reid for a 5.6 percentage point surtax on incomes exceeding $1 million would raise an estimated $453 billion over 10 years. Deficits over the decade are realistically projected at $8.5 trillion.
As for the Pentagon, the military was cut sharply after the Cold War. Combat forces are half to two-thirds of 1990 levels. Defense spending as a share of national income is headed toward its lowest level since 1940.
What liberals don’t say is this: Unless Social Security and Medicare benefits — the bulk of the budget — are reduced, we face three dismal choices. Huge, unsustainable deficits. Massive tax increases on the middle class, as high as 50 percent over 10 to 15 years. Or draconian cuts in the discretionary programs that liberals accuse conservatives of wanting to gut.
Since 1971, federal spending has averaged 21 percent of national income (gross domestic product). Even with aggressive cuts, spending may never again fall this low. The reason: the surge in retirees. Meanwhile, taxes averaged 18 percent of GDP over those years, leaving average annual deficits of 3 percent. The take-away for both liberals and conservatives is repugnant: They need to identify the most justifiable spending cuts — lots of them — and the least damaging tax increases, which will still be sizable.
They need to come clean with reality. For years, they’ve exuded self-serving platitudes. Conservatives should acknowledge that Big Government is a permanent part of the social fabric and that much of what it does is popular. It needs to be financed. Liberals should concede that Big Government can become so big that its crushing taxes weaken the middle class and economic growth. Government then promotes conflict and degrades social justice.
The supercommittee cannot solve America’s budget problems with one sweeping plan. It cannot remedy runaway health costs or streamline the complex income tax. These large tasks will be left to the next president and Congress. But it can elevate popular understanding by proposing a plan justified by a vision of government’s collective responsibilities and the public’s reciprocal obligations.