The National Debt

April 19, 2011

Paul Ryan vs. the status quoA credit-rating agency warned yesterday that the United States may not be able to make good on its debt.  The agency said the odds are one in three that the United States will lose its AAA rating in the next two years, which would make it harder for the United States to borrow money, at higher interest, triggering a catastrophic debt spiral.  NRO’s Kevin Williamson gives some good background and explanation, while NRO editor Kathryn Jean Lopez points out that if you read National Review, you would have seen this coming.

Republican Congressman Paul Ryan has proposed a serious plan to reform federal spending over the long term and bring deficits and the debt under control.  He and his colleagues worked hard on it, and from everything I’ve heard, it’s excellent.

Today I’d like to talk about the other side.  What are the alternatives to the Ryan plan?  The short answer is that the Democrats have so far been totally unserious about dealing with Washington’s spending problem and the national debt.  In fact, they’ve been worse than totally unserious:  Not only will they not solve the problem, but they keep smearing the people who are trying to solve it (for example, making it sound as if the Ryan plan would pull Medicare out from under elderly Americans, when in fact his reforms are gradual and would not affect current beneficiaries).

As you may have heard, President Obama gave a big speech last week, basically his answer to the Ryan plan.  (Obama had already proposed his own budget just a couple of months ago, but that one was so unserious about the deficit that he had to give it another try, if only for show.)  If you didn’t already listen to it or read it, I don’t recommend it—it’s more than 5,000 words, 63 paragraphs, or (on my word processor) nine pages long!

Instead, I’ve read it so you don’t have to.  The following is my summary of the speech, heavily abridged for your convenience (but also feel free to skip or skim even this and continue reading below):

¶ 1 — (empty preamble)

¶ 2 — He says that the budget debate is really about “the kind of future we want” and “the kind of country we believe in” (I can agree with that much!).

¶ 3 — (lip service to American tradition of free enterprise, self-reliance, and “a healthy skepticism of too much government”)

¶¶ 4-6 — He says, “through government, we should do together what we cannot do as well for ourselves”, including wealth redistribution.  “I’ll go further”:  America was not a great country until we started using the federal government for forced income redistribution.

¶¶ 7-8 — He admits that the national debt is a problem.

¶¶ 8-13 — (a tendentious history of deficit spending, 1980-2010, including blaming Bush again for the Obama recession, and claiming that Obama’s stimulus schemes have worked)

¶¶ 14-19 — “We have to live within our means . . . .”

¶¶ 20-21 — He argues that modern American big-government spending programs are generally popular, while voters also want their taxes to be as low as possible, creating a structural problem.

¶¶ 22-23 — He admits that we need to reform the entitlement programs, which represent a huge share of the federal budget.

¶¶ 24-31 — He smears the particular reforms proposed by the only people who have come up with any kind of plan so far for solving the deficit problem.  He maligns not only their policy proposals but also their motives.

¶¶ 32-33 — He says warm and fuzzy things about big government.

¶¶ 34-63 — He hawks his own budget plan—not the budget he proposed earlier this year, a different one.

¶ 35 — He redefines big-government spending programs as “investments in the future”.

¶¶ 36-37 — He proposes cutting spending on national defense.

¶¶ 38-40 — Either he thinks more government involvement will magically make health-care markets more efficient and reduce costs without reducing care, or he’s admitting that the government takeover necessarily means rationing care.

¶¶ 41-42 — He smears Republican reform proposals some more.

¶¶ 43-46 — He redefines tax increases as “reduc[ing] spending in the tax code”.  He proposes tax increases.  He at least claims to be in favor of making the tax code “fair and simple”, but it’s clear that he doesn’t mean a flat tax, and in fact would fiercely oppose a flat tax.

¶ 47 — He proposes “a debt failsafe” which, if the national debt hasn’t been reduced enough by 2014, will “require” Congress and the president to “come together and make up the additional savings with more spending cuts and more [tax increases].”

¶ 48 — (recap)

¶ 49 — He says that he’s sure most rich people would love to give the federal government more money; so we should force them to, just to be sure.

¶¶ 49-55 — He anticipates both real and straw-man critics of his proposal, and makes various counterarguments.  He calls the Republican reform proposals “radical”.

¶¶ 56-57 — (lip service to vigorous debate)

¶¶ 58-63 — He implies that people who disagree with him are unpatriotic or un-American.

I think that summary makes him look pretty bad, but the reality is even worse—as commentators have pointed out, he didn’t so much propose particular cuts in military spending, for example, as propose to propose some unspecified cuts at an unspecified future time.

I recommend that you read one or more of the excellent responses, commentaries, and analyses that others have produced in response to President Obama’s speech, and to the existential threat of the debt crisis.

  • Keith Hennessey has a detailed, in-depth analysis of the Obama plan (Hennessey warns that his piece is long, but hopes that it will be useful).  He notes that on various points the plan “offers no specifics”, “Details are TBD,” etc.  “There are three forces driving our long-run government spending and deficit problem: . . . .  The President’s proposal addresses none of these forces.”
  • Mark Steyn: This speech “more or less declared to the world that this administration has no plan, and has no plan to plan on getting a plan anytime soon.”
  • Jonah Goldberg: “The only good news to come from all of this is that the battle is now joined.”
  • Victor Davis Hanson: “The president gave the sort of scare speech he not long ago warned against, and blasted the income-tax rates he not long ago agreed were necessary — in a context in which he has just presented a budget with a $1.6 trillion deficit of the sort he now says is unsustainable, . . . .”
  • Mark Steyn: “Most of the ‘futures’ we’ve ‘invested’ in are already at record levels of spending.”
  • Charles Krauthammer: “The president’s speech was a prose poem to higher taxes — with every allusion to spending cuts guarded by a phalanx of impenetrable caveats.”

That’s the biggest reason to conclude that President Obama and the Democrats are totally unserious about dealing with the debt:  They make it sound as if the budget deficit could be bridged mostly, or entirely, with increased taxes on “the rich”, as opposed to cutting spending.

First, think about it in the abstract:  The amount of money the government can take from its citizens at any given time is finite—they only have so much.  The amount of money that the government might want to spend, by contrast, is theoretically infinite—you can always think of something else you’d like to spend money on, if you had more money.  As far as I can tell, liberalism contains within it no limiting principle that would tell us when we have reached “enough” government spending and don’t need to increase it further.

(I’ll put aside, for purposes of this discussion, questions of morality and fairness—that money is not Washington’s to take, and anyway the people at the top already pay a disproportionately great share, and too many people at the bottom pay nothing; it’s easy for them to vote for higher tax rates that will only affect other people.)

Next, consider the concrete reality in which we find ourselves:  Has U. S. government spending reached the point where it exceeds the money available through taxation?  The simple answer is Yes.  This Web site (citing its source) points out that even if the federal government confiscated the entire net worth of every billionaire in America, that would amount to only $1.3 trillion—not even enough to cover this year’s deficit, much less eliminate the debt.  This site says that even if the top two federal marginal income-tax rates were doubled (a much greater increase than anyone is seriously suggesting at this point), to 66% and 70%, that would cover less than a fifth of the projected 2011 deficit.  The Wall Street Journal says that even if the income of everyone making more than $100,000 a year were taxed at 100%, it wouldn’t cover this year’s deficit.*  (Those last two base their calculations on the IRS’s own numbers.)  I assume that these numbers are assuming that higher tax rates wouldn’t hurt the economy and depress tax revenues, which of course they would; so the situation is probably even worse than these dramatic numbers make it sound.

(A fairly sarcastic but fact-intensive video makes the point dramatically.)

In other words, federal spending is much, much too high.  It needs to be cut, a lot.  Any plan that doesn’t take that into account is totally unserious.

* Correction (August 12th, 2011): The Wall Street Journal notes, “An earlier version of this story incorrectly stated that the total taxable income of Americans earning over $100,000 in 2008 was $1.582 trillion. The correct figure is $3.4 trillion.”  The point I was making remains:  U. S. government spending has reached the point where it exceeds the money available through taxation.

23 Responses to “The National Debt”

  1. Snoodickle Says:

    You forgot to include in your tax analysis the effect of closing loopholes in the corporate tax code. The United States government collects no taxes from many profitable multinational corporations, and even pays some of these corporations billions of dollars in tax refunds! Please include this in your analysis for a complete picture of how fixing the tax system will reduce the deficit.

  2. Sure. I’m with you—as Jonah Goldberg says, “Cut the Rate, Close the Loopholes”. For more background, I recommend Kevin Williamson, Douglas Holtz-Eakin, and Thomas Sowell.

    Unfortunately, among other things, they point out that “when combined with state-level taxes, American corporations face the highest tax rates among our developed competitors.” While the tax code should be reformed and simplified (which would presumably eliminate some of the strange cases you’re referring to, such as GE), the rate should also be lowered, presumably making such reform revenue-neutral, or at least not a big contributor to closing the deficit (except insofar as it might help the economy and so increase tax revenues—that effect might be substantial, but I don’t suppose it’s exactly on topic here).

    This may be something that all three of us (you, I, and President Obama) can agree on—as he said in his speech last week, “we should reform our corporate tax code as well, to make our businesses and our economy more competitive.” So, we should enact a simpler code and lower rates, but they’re not really a major part of dealing with the debt.

  3. Snoodickle Says:

    Under conservative economic theory, the high corporate tax rates that you refer to above should lead to a situation where the United States does not command a majority, or even close to a majority, of the world’s most profitable companies. But this is the problem with arguing in the abstract, as you so often do. The evidence does not support your conclusions. As of 2008, the United States commanded 50% of the world’s most profitable corporations. 50%! That is despite the high corporate tax rate.

    • Steve Says:

      As long as we’re debunking theories, I’d like to disprove the myth that tobacco use is linked to shortened life expectancy. Average life expectancy in Norway is approximately 80 years, while Ethiopia and Ghana–each of which has a much lower rate of tobacco use–have average life expectancies of 53 and 60, respectively. Case closed.

  4. Steve Says:

    I disagree with your assumption of the Ryan plan. The Ryan Plan relies on a combination of outrageously optimistic economic forecasts, a series of politically impossible developments, and the assumption that the economic policy machinery will actually function exactly as its drafters intend it to. Other than that, it doesn’t have much in common with Obamacare.

    In all seriousness, I think it’s extremely unrealistic to believe that the deficit can be reduced to a sustainable level through spending cuts alone. I think it’s even more unlikely that we can get the deficit under control by raising taxes on “the rich” while leaving the welfare state untouched. My understanding is that S&P’s warning about a potential downgrade stems from the sad political reality that these two approaches are the only options on the table. We’ve got Democrats and Republicans fighting tooth-and-nail over which of two futile budgetary approaches we should take.

  5. Snoodickle Says:

    I completely agree that the debt problem must be addressed through a combination of both spending cuts and tax increases, and that neither approach alone will work. I also agree that the Ryan plan, much like the Obama health care plan, relies on economic forecasts that may be too optimistic. The key difference, however, is that although the Obama plan was touted as deficit neutral, its primary purpose is to provide people health care, not reduce the deficit.

    P.S. People in Ethiopia and Ghana have a higher rate of smoking woobie bush, which is acutally more harmful than tobacco.

    • Steve Says:

      As I said, besides relying on absurdly optimistic assumptions, the Ryan Plan doesn’t have much in common with Obamacare.

      As for Ethiopia and Ghana: I have absolutely no idea what woobie bush is, but are you suggesting the existance of an exogenous variable that calls my simplistic analysis into question?

  6. Steve, I should start by admitting that I’m not an econ or finance expert, and you are; so to some extent I’ll try to engage with you on the ideas, but to some extent I’ll raise some possible counterarguments from people who may be more at your level, and ask your opinion on them.

    Do I understand correctly that parts of what I’m thinking of as the Ryan plan are policy intended to be enacted together, while others are assumptions about what other policy might be enacted at some future time?

    Consider the Charles Krauthammer piece I linked above and a Ramesh Ponnuru piece I didn’t. I’d be curious to hear your opinion on most or all of each piece, but at least let me offer the following on-topic excerpts:

    (Krauthammer) “The most serious charge against Rep. Paul Ryan’s budget is . . . that the Ryan plan fails by its own standards: Because it only cuts spending without raising taxes, it accumulates trillions of dollars of debt and doesn’t balance the budget until the 2030s. If the debt is such a national emergency, they say, Ryan never really gets you there from here.

    “But the critics miss the point. You can’t get there from here without Ryan’s plan. It’s the essential element. Of course Ryan is not going to propose tax increases. You don’t need Republicans for that. That’s what Democrats do.”

    (Ponnuru) “Annie Lowrey . . . says that Ryan’s plan ‘relies’ on economic forecasts that are too optimistic.

    “Which they almost certainly are. But that has nothing to do with whether Ryan’s plan reduces the debt as he says it will. The plan’s projections for debt reduction do not assume that any extra revenue comes in from higher economic growth. The CBO applies the same economic assumptions to Ryan’s plan that it applies when making projections about Obama’s budget and current law. Lowrey and like-minded critics have identified a flaw in the plan’s marketing, not its design.”

    (Ponnuru again) “Perhaps [Ryan] has also reviewed research . . . which shows that tax increases have played little role in successful budget-balancing efforts abroad (‘successful fiscal consolidation consisted, on average, of 85% spending cuts’).”

    I have no reason to believe that the Ryan plan is perfect, but it is my understanding that it is a detailed, serious attempt to address a serious problem before it’s too late. I’m happy to debate policy, and I’m sure Mr. Ryan is too; of course Democrats and Republicans differ on policy, and I wouldn’t expect President Obama just to agree with everything Ryan says. I guess what I think is beyond the pale is President Obama’s declining to propose a serious plan of his own, and trying to blow out the political kneecaps of anyone who does offer one—Obama calls Ryan’s plan “radical”, not “courageous”, “solving a problem on the backs of people who are poor or people who are powerless”, and, apparently without irony, not “serious” and “short-sighted”.

    And what is Obama’s plan? Even the impeccably moderate and fair-minded Charles Krauthammer calls it “the smoke and mirrors the Obama speech shamelessly presented as a plan.” Everyone agrees that entitlements are a huge and growing problem—Social Security itself agrees, President Obama’s own debt commission agreed, even President Obama agreed in his speech last week—and yet he declined to offer any reform or plan to deal with it. He explicitly admitted that “Around two-thirds of our budget is spent on Medicare, Medicaid, Social Security, and national security” and, earlier in the speech, “as the Baby Boomers start to retire and health care costs continue to rise, the situation will get even worse.” Yet his plan is, basically, to raise taxes and let entitlements keep ballooning undisturbed.

  7. Snoodickle Says:

    Woobie bush is an indigenous plant that the natives smoke to get high.

    P.S. Japan has the highest corporate tax rate in the world and commands 7% of the world’s most profitable companies, more than most every other country.

  8. Steve Says:

    To briefly comment:

    I’m flattered that you’d call me an “expert” on econ and finance. I’m actually more of a “hardcore amateur.”

    To illustrate my cricicism of the Ryan plan, consider the ways it attempts to deal with Medicare: switching to a voucher system, and capping payments at the rate of inflation (measured by CPI, not the cost of health care.) I’ve long said that a key to controlling health care costs is to ensure that patients have greater financial incentives to restrain their consumption of health services. Take out the political dimension, and Ryan’s idea makes at least some economic sense. I don’t think it would cause nearly as much pain as liberals predict, what with their static projections assuming zero causal link between growth in medicare spending and rising health care costs. My objection is that such a plan is politically inviable. While it wouldn’t cause the kind of horror scenarios predicted by liberals, it would put at least some additional economic stress on senior citizens. What do you suppose will happen when we’ve got tens of millions of grumpy elderly voters complaining about the inadequacy of medicare funding? Will our elected officials tell them to suck it up? I highly doubt it.

    If I understand the principal thrust of the Krauthammer piece, it’s that the Ryan plan is essentially a “bid” in a policy negotiation between Democrats and Republicans. We’re planning a picnic, and we can count on the Democrats to bring the tax hikes and the Republicans to bring the spending cuts. I can understand the temptation to view the situation that way–assuming I’m not oversimplifying. However, I’m less optimistic. I suspect that if we end up with a compromise, we’ll see a pitiful combination of inadequate spending cuts and inadequate tax increases, all finely calculated to sacrifice as little political capital as possible.

    Notice that I’m not taking a side between Ryan and Obama–a plague on both their houses.

  9. OK, I understand; basically you’re not saying it’s bad policy, you’re saying it’s bad politics. I am at least a little more hopeful than you—as you know, Ryan isn’t trying to change benefits for elderly Americans now so much as start weaning the Americans who will be eligible a decade from now, and it may be a lot easier not to extend an entitlement to someone than to take it away from someone who already has it (and has become dependent on it)—but sure, there may be any amount of difference between what Ryan first proposed and what is eventually enacted (and modified later). I think he deserves praise for at least making the effort, and for whatever partial success he ends up having in reforming the welfare state, rather than a plague for political constraints that are beyond his control!

    On a different note, you haven’t said it, but I will: You told us so. I remember having conversations with you at least a year ago, perhaps years ago, in which you said, Some conservatives talk about how irresponsible and immoral it is to increase government spending now by borrowing money that our children and grandchildren will have to pay back later, but it’s worse than that: We’re borrowing so much that the United States will lose its credit, have to spend enormous amounts on interest, and have a fiscal crisis long before then.

    You called it!

    • Steve Says:

      It’s still too early to say I “called it,” but thanks. Anyway, I’ve slightly modified my predictions: I don’t forsee an outright default by Uncle Sam, but a rapid erosion of our accumulated debt via high inflation, possibly even hyperinflation. The Fed isn’t going to force a default by turning off the printing press, nor, in my opinion, should they. Even though a U.S. hyperinflation episode would be a global economic disaster, it would still not be as bad as an outright default.

  10. Snoodickle Says:

    I hate to break up this love fest between you two, but I’m still interested to know, why do the United States and Japan control 57% of the world’s most profitable companies?

  11. Snoodickle Says:

    Ah, spoken like a true economics expert!

  12. […] as I’ve pointed out before, no feasible amount of raising taxes would go more than a fraction of the way toward eliminating […]

  13. […] contrary to what some critics were saying, Paul Ryan could be a great choice, not least because he is the face of the desperate effort to save America from “the most predictable crisis in history”: […]

  14. Politicians on both sides don’t seem to care about the national debt.

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