Answer to budget deficit is recover

Published 2:08 pm Thursday, June 16, 2011

The budget deficit is now the third most important issue in America, following the economy in general and unemployment.

If you listen to the doomsayers, the United States is heading off a financial cliff. Chicken Little lives. Whether it be global warming, cataclysmic meteorites, the Muslim menace or nuclear annihilation, Americans have to be worried about some part of the sky falling.

Don’t get me wrong. I am not trying to minimize the seriousness of this country’s budget problems, but a review of the historical tax receipt tables indicates there is a light at the end of the tunnel.

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The Brookings Institute’s Tax Policy Center ( produces a chart going back to 1940 listing tax receipts and outlays in constant 2005 dollars.

To cut to the chase: If the economy rebounds as it always has, the increase in tax receipts will be enough to close at least half of our deficit.

Take for instance, the last recession: At its low-point in 2003, federal tax receipts had fallen from 2.3 trillion in 2000 to 1.9 trillion in 2003 — a decline of 17 percent. Three years later, in 2007, tax receipts had rebounded to 2.4 trillion — an increase of 26 percent.

In the 2001-2003 recession, tax receipts dropped 17 percent. In this latest recession, tax receipts have dropped 21 percent. If you assume the strength of the recovery will be the inverse of the magnitude of the decline, then federal tax receipts should increase 32 percent during the recovery — enough to fix about half the deficit.

The 1990 recession never saw a decrease in tax receipts. However, it too saw a significant rebound — 10 percent from 1991 to 1994. Over the six years following 1994, tax receipts continued to boom. In fact, tax receipts in 2000 were 53 percent higher than tax receipts in 1990 — and this is in inflation-adjusted numbers.

Coming out of the 1980 recession, federal tax receipts increased 12 percent from 1983 to 1985. By 1990, tax receipts in real dollars were 25 percent what they were in 1980.

Of course, this time could be different. We thought housing prices would never tank but they did. However, housing is just one segment of the economy that bubbled. It is much less likely that something as massive as the entire U.S. economy would diverge significantly from its well-established cycles.

If you look objectively at the numbers, one would surmise the key to fixing the deficits is encouraging growth while cutting federal spending. If we do that, we can fix the budget deficit.

As for raising tax rates to fix the deficit, unfortunately there are not enough rich people to make it work. If you taxed everyone making over $500,000 a year at 100 percent, you would only fix half the deficit.

Historically, the federal tax receipts as a percent of GDP have varied between a narrow range of 15 to 20 percent over 65 years, despite a variety of different tax rates. Raising taxes hurts the economy and promotes tax avoidance. It doesn’t work. The only real way to increase federal tax receipts is to grow the economy.

This is why the Federal Reserve is printing money and Congress is running huge deficits. As the private sector cuts costs and pays down debt, the government believes it must counter these deflationary pressures to prevent a depression. For every dollar, the private sector saves, the public sector must spend. Otherwise, the economy collapses.

To the average citizen, this seems crazy. And I’ll admit I have my doubts. That being said, there are thousands of highly trained and educated economists who have spent entire careers studying macroeconomics. I suggest we let them do their job.

To use a personal analogy, my wife kids me that I think I am a doctor. No matter what ailment, I rush to the Internet to self-diagnose. Indeed, I can figure out a lot of things on my own. But I’m also not crazy. I draw the line at self-surgery. I know when to seek professional advice.

The same can be said of our economy. The Great Recession was a 70-year financial disaster. I suggest we let the experts like Ben Bernanke do their jobs. Our role is to stay calm and carry on.

If we had slashed government spending while the economy was tanking, we would have had a depression. Like home surgery, the end result is never good. The difference between today and the 1930s is our greatly advanced understanding of macroeconomics. Let’s be a little less cynical and a little bit more thankful we live in an advanced society.

So what is to be done? First of all, don’t impede the recovery with higher taxes or useless regulations. That’s where Obama is on shaky ground. He is an impediment.

Second, we must rein in federal spending as the recovery grows. Our welfare state is going to have to be a little less generous. Over the last 60 years, the federal government has grown seven percent annually. We must grow at zero percent for several years as we right the ship. That will solve the deficit.

Unfortunately, solving the deficit does not make our $14 trillion in debt go away. We spend 11 percent of our tax money on interest alone. On a positive note, this debt pales in comparison to our $188 trillion in assets.

What to do about the national debt? Since the United States can pay off its debt by just printing more money, we will never default outright. Instead we will crank up the fed presses and default in slow motion by printing more money and devaluing our currency. Inflation here we come.