WaPo's Fiscal Truths

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A Washington Post editorial today discusses the National Academy of Sciences “Fiscal Future” study. The NAS report modeled four possible tax and spending paths for the nation over the next 70 years.  I was one of the NAS report’s co-authors.

The Post focuses on the “low spending and revenue” path, which would keep federal revenues below about 19 percent GDP and keep spending below about 21 percent of GDP. The Post argues that both tax hikes and spending cuts will be needed to fix the government’s budget problem because the “pain and sacrifice” would be too large if we just cut spending, as under this “low” path. But the Post’s conclusion is based on faulty one-sided accounting, only considering the recipients of government largesse.

The reality is that every dollar the government spends imposes ”pain and sacrifice” on current or future taxpayers. Thus, spending cuts may impose temporary pain on people whose benefits are withdrawn, but they relieve equal or greater pain on the taxpayers who foot the bill. Indeed, standard economic theory suggests that the economy gets a “free lunch” when spending and taxes are reduced in tandem because the deadweight losses caused by government coercive actions are reduced.

Note that I say “temporary” pain because to a substantial degree, benefit recipients will adjust their lives as subsidies are withdrawn, and most people will prosper without government help, as we saw following welfare reform in 1996.  Misguided government spending programs–like welfare–cause damage to society and the economy, so that reducing spending doesn’t increase pain, it ultimately reduces it. Consider how government housing subsidies ended up causing widespread damage, including for many people who initially benefited. For a guide to damaging federal programs, see www.downsizinggovernment.org.

The Post is right that the NAS study’s “low spending” path would require “broad areas” of federal spending to be cut, such as K-12 school subsidies and other state aid programs. But that would be a good thing for citizens, the economy, and for responsible government. Federal spending on properly state and local activities has been a giant failure, and it should be ended whether or not there is a budget deficit. 

The Post is on sounder footing with its observation that many Republicans do not seem to grasp the magnitude of spending reforms that are needed in the years ahead. The GOP does need to “get specific” and push for particular cuts. Let’s have national debates on the federal involvement in K-12 schools, raising the Social Security retirement age, and cutting the corporate welfare programs mentioned by the Post. Let’s start that “adult conversation” right now, because as the NAS report warns, the longer we wait, the more the federal debt monster grows.

For the record, the NAS report did not endorse tax hikes or any other particular fiscal solution. It simply provided four possible combos of future tax and spending levels as starting points for discussion. It also usefully described how to overhaul the income tax and replace it with a much simpler and flatter tax system, as I’ve described here.