Cato’s Dan Mitchell says he is willing to agree to the President’s spending cut/tax hike mixture on the federal budget, but only if all sides agree to use what Dan calls “honest math“:
What I mean by this is that I don’t want politicians to approve a budget that results in more spending, but then claim that they “cut spending” because the budget didn’t grow even faster. I want a spending cut to mean less spending (gee, what a novel idea).
And when they talk about new revenue, I want to see how much revenue the IRS is collecting this year, and measure revenue increases against that number. After all, the crowd in Washington should be happy to get more money, even if it is the result of benign factors such as more jobs being created, companies earning higher profits, and people getting more pay.
In other words, drop the baseline budgeting gimmick and make real cuts and don’t fudge the tax receipts.
Dan projects such an approach could lead to a balanced budget in five years and generate enough revenue to make the Bush tax cuts permanent, and even allow for additional cuts.
It sounds deceptively simple. Could basing federal income and outgo on the principles folks use in their personal budgeting really make such a rapid, and enormous, difference?
Possibly. Then again, that possibility runs so counter to DC’s bipartisan spending culture that it is unlikely to be embraced outside the think tank walls. And as we are dealing with political creatures whose long-term vision makes Mr. Magoo look like Nostradamus, any deal they craft will owe far more to avoiding blame for missing the August 2nd deadline than actually solving the debt problem.
Nassim Taleb said it best:
“This is not an insoluble problem,” he said of the U.S. debt crisis. “You can fix it with some fiddling here and there. But you need the will to do it. And you need consciousness about the importance of debt. I don’t see that. Politicians are good at getting elected, not at solving problems like this.”
If by “fiddling” he means something like Mitchell’s “honest math,” then we really could get closer to a solution, and rather fast. But given the existing political class, we are likely to remain stuck in neutral.
Or we could end up in reverse, particularly if U.S. interest rates rise to historical norms. As Larry Lindsey wrote in the Wall Street Journal:
, a normalization of interest rates would upend any budgetary deal if and when one should occur. At present, the average cost of Treasury borrowing is 2.5%. The average over the last two decades was 5.7%. Should we ramp up to the higher number, annual interest expenses would be roughly $420 billion higher in 2014 and $700 billion higher in 2020.
The 10-year rise in interest expense would be $4.9 trillion higher under “normalized” rates than under the current cost of borrowing. Compare that to the $2 trillion estimate of what the current talks about long-term deficit reduction may produce, and it becomes obvious that the gains from the current deficit-reduction efforts could be wiped out by normalization in the bond market.
Lindsey offers a few caveats, saying the the Federal Reserve could try to intervene in the market to slow rate increases. But this could upset the government’s lenders (including, but not limited to, China).
But these are projections, based upon historical data. Even if they are correct, they are irrelevant to the overwhelming political imperative to avoid blame for missing a deadline that may or may not be real, but has been repeated so often that it has become a certainty.
Politicians like certainty. It allows for tidy press releases and pithy sound bytes. It could also result in a deal that does nothing.
(Cross-posted at Score Radio Network)
