How the spending spree will end

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John Hood

RALEIGH – Can I let you in on a not-so-little secret? Democrats in Washington don’t really think so. Neither do the Republicans.

To be more precise, they don’t really mean what they say about debt and deficits. Democrats, fully aware of the precariousness with which they control Congress, are trying to push through trillions of dollars in new federal spending before the start of the 2022 election cycle. They either claim that tax hikes on the wealthy can pay either that adding billions more to the federal debt will not have significant downsides. They know – or at least the staff members who feed them their talking points know – that none of their claims are true.

Back when Republicans held their own majorities in Congress, they also ran up massive deficits, in part by passing tax cuts without offsetting budget savings. They claimed either that the tax cuts would be so economically stimulating that they would pay for themselves in future revenue gains, or that the resulting deficits could be managed simply by eliminating waste, fraud, abuse and bureaucracy. They knew — or, at least, the staffers who fed them their talking points knew — that none of their claims were true.

The facts are as follows. The Democrats couldn’t pay all of their spending promises even if they essentially confiscated all of the wealth of today’s billionaires and rocketed income tax rates into the stratosphere. The calculation does not work.

As for borrowing, the federal public debt already exceeds 100% of our GDP. Based on the preponderance of empirical research, including findings from 36 of 40 academic studies published on the subject since 2010, more federal borrowing will significantly hurt future economic growth.

On the Republican side, the reduction in tax rates on work, savings and investment stimulates long-term growth. The Tax Cuts and Jobs Act of 2017 was, overall, a good plan. But its boosting effects were never going to be big enough and fast enough to replenish federal coffers.

The right thing to do from a budgetary point of view was therefore to offset the budgetary impact of the tax cuts by restricting expenditure. Why didn’t the Republicans do it? Because it was hard work. Pinches and folds would not be enough.

The vast majority of federal spending is made up of social security, medicare, health insurance, and other entitlements received by large sections of the population. If presidents and legislators are unwilling to make substantial changes to these programs, they are not really willing to make substantial cuts to federal spending.

In a moment of Yogi Berra-esque insight, economist Herbert Stein once observed that “if something can’t go on forever, it will stop.” Federal spending is not a perpetual motion machine. At some point in the not too distant future, and especially when interest rates rise from historic lows, it will no longer be possible to finance federal deficits with borrowed money. Then one of two things will happen.

One possibility is that the then President and Congress enact a very large and essentially permanent increase in federal taxation. While the resulting package will push the top tax rate well beyond 50%, most revenue will have to come from middle-income taxpayers, likely in the form of national sales or value tax. added. This will make us look more like European countries, where the tax burden of the rich is not much different from ours, but the tax burden of everyone else is much heavier.

The other option is to limit Social Security payments, Medicare and other entitlement-related expenses, but primarily for high-income recipients. In a recent Manhattan Institute paper, economist Brian Riedl convincingly demonstrated that this answer could have bipartisan support. “Before lawmakers endanger the economy and limit their future policy flexibility by dramatically raising taxes on high-income families,” he wrote, “they can promote their redistributive goals simply by cutting federal spending for the rich”.

None of these options is optimal. Both will be unpopular. Politicians in Washington know it too, which is why they don’t tell you about it – yet.

John Hood is a board member of the John Locke Foundation and author of the new novel Mountain Folk, a historical fantasy set during the American Revolution (MountainFolkBook.com).

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