Can I let you in on a not-so-little secret? The Democrats in Washington don’t really mean it. The Republicans don’t, either.
To be more specific, they don’t really mean what they say about debt and deficits. Democrats, fully cognizant of how tenuously they control Congress, are trying to shove through trillions of dollars in new federal spending before the 2022 election cycle begins. They claim either that tax hikes on the wealthy can pay for it, or that adding trillions more to the federal debt will have no significant downsides. They know — or, at least, the staffers who feed them their talking points know — that neither of their claims is true.
Back when Republicans held their own congressional majorities, they ran up massive deficits, too, in part by enacting tax cuts without offsetting budget savings. They claimed either that the tax cuts would be so economically stimulative they’d pay for themselves in future revenue gains, or that the resulting deficits could be managed simply by cutting out waste, fraud, abuse, and bureaucracy. They knew — or, at least, the staffers who fed them their talking points knew — that neither of their claims was true.
The facts are as follows. The Democrats couldn’t pay for all their spending promises even if they essentially confiscated all the wealth of today’s billionaires and shot income-tax rates into the stratosphere. The math doesn’t work.
As for borrowing, publicly held federal debt already exceeds 100% of our GDP. Based on the preponderance of empirical research, including the findings of 36 of 40 scholarly studies on the topic published since 2010, more federal borrowing will significantly harm future economic growth.
On the Republican side, reducing tax rates on work, savings, and investment does, indeed, boost long-term growth. The Tax Cuts and Jobs Act of 2017 was, on balance, a good plan. But its stimulative effects were never going to be large enough and fast enough to replenish federal coffers.
The fiscally conservative thing to do, then, was to offset the budgetary impact of the tax cuts with spending restraint. Why didn’t Republicans do that? Because it was hard work. Nips and tucks wouldn’t suffice.
The vast majority of federal spending consists of Social Security, Medicare, Medicaid, and other entitlements received by large swaths of the population. If presidents and lawmakers aren’t willing to make substantial changes to these programs, then they aren’t truly willing to make substantial reductions in federal spending.
In a moment of Yogi Berra-like insight, the economist Herbert Stein once observed that “if something cannot 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 their historic lows, it will no longer be feasible to finance federal deficits with borrowing. Then, one of two things will happen.
One possibility is that the then-president and Congress will enact a very large and essentially permanent increase in federal taxation. While the resulting package will push the top income-tax rate well north of 50%, most of the revenue will have to come from middle-income taxpayers, likely in the form of a national sales or value-added tax. That will make us look more like European countries, where the tax burden on the wealthy isn’t much different from ours but the tax burden on everyone else is much heavier.
The other possibility is to rein in Social Security payments, Medicare, and other entitlement spending — but primarily for upper-income recipients. In a recent Manhattan Institute paper, economist Brian Riedl made a compelling case that this response might draw bipartisan support. “Before lawmakers endanger the economy and limit their future policy flexibility by drastically raising taxes on upper-income families,” he wrote, “they can promote their redistributive goals simply by cutting federal spending on the rich.”
Neither of these options is optimal. Both will be unpopular. The politicians in Washington know that, too, which is why they aren’t telling you about them — yet.
John Hood is a Carolina Journal columnist and author of the new novel Mountain Folk, a historical fantasy set during the American Revolution.