The national debt has been a punching bag for almost a century, even mentioned in a song written in 1951 (“If You’re So Smart, How Come You Ain’t Rich?”) The debt stands at over $30 trillion and the alarms are sounding just as they did when it hit $5 trillion, $10 trillion, $15 trillion… you get the idea.
Everyone’s hair goes on fire with each high water mark, and yet, nothing catastrophic has happened.
There is occasional talk about a “Balanced Budget Amendment” to cure this, but it’s hardly necessary and would needlessly hamstring the government. People are looking at this the wrong way and in highly simplistic terms.
Worse is the political discourse. Comparisons by Congress people referring to the debt as if it were a credit card balance or likening it to household debt are just plain infantile. But there is a mature way to look at this and a rather obvious one.
The last time we ran a surplus was in 1998 to 2001. A confluence of a strong economy and higher tax rates, among other factors, propelled revenues over the level of expenditures. We stopped issuing 30-year treasuries during this period as there was no need to run auctions to fund the government.
People were wondering aloud back then how mortgages would be priced if the same thing happened with shorter maturities that base their yields off 10-year paper.
A series of unfortunate events ended this state of affairs in short order.
First the “dot-com” market crash, then September 11, and lastly, two poorly structured, reckless and badly timed tax cuts executed by the Bush Administration.
The rationale presented by the Administration was that “it was your money” so it should be returned as if the recession we went through at that time wasn’t enough to eliminate the surplus all by itself.
Note that no matter what, spending and revenue always go up over time. They can vary at different rates depending on what is going on at any given moment, but generally speaking, the economy continues to expand and so do the funding and the spending to maintain it.
The first thing to acknowledge is that strong economies deliver stronger revenues. If a solid pace can be maintained, the gap between spending and revenue narrows. Again, nothing kills revenue like an economic downturn.
The second thing to acknowledge is that tax policy has deliberately sabotaged revenue growth below what could be considered a more “natural,” for lack of a better term, rate than what has been needed.
That is what grew the debt, and although we’ve had moments where the deficit shrank dramatically, it was never enough to pole vault over the debt threshold. But with judicious steps taken, that can be done. And to remind you, you can’t reduce the debt without first completely eliminating the deficit first.
There is a common theme with the tax cutters: if you do enough of it, the economy will grow and the debt will take care of itself. There is only one flaw in this theory: It is a complete fantasy, it never happened in reality and tax policy over the years has not been a major factor in overall economic performance.
No matter what the tax rate, there are dozens of levers working on the economy at any given time, and to underscore the obvious once again, a solid economy will generate solid revenue growth, and historically, tax policy hasn’t helped or hindered any outsized degree unless
it’s some targeted sector like real estate, for example. So recessions come and go, employment and waxes and wanes no matter where marginal rates sit, or how capital gains are taxed.
Moreover, the tax-cutting policy sews the seeds of ever larger debt. As mentioned, spending and revenues always go up, save for the occasional disruptions that history serves up.
So if you never give revenues a chance to catch up to expenditure after the bottom falls out, it’s like dropping the baton in a foot race over and over again. You’ll just keep falling behind, and there is no way to catch up. Ever.
So this explains why we needlessly torture ourselves over the national debt, and why a few sober, simple acts of policy aimed at revenue growth would end the farce once and for all. That’s where the conversation should start. Not with an artificially imposed debt limit, or the performative nonsense served up by the Republicans.
I write a weekly real estate/business column for Steve Blank and Meg Norris in 11 Nassau papers. I do believe at this point in time we are on an extremely slippery slope in the U.S.’s financial future. In order for our debt to decrease we need to bring in more revenue than we spend, common sense, right? But common sense is no longer common and critical thinking is no longer critical. We have 3.5 years left to become average and more mediocre like many other so-called empires in the past. Our debt is eating us up and kicking the can down the road when we keep increasing our debt ceiling is not going to solve our debt crisis. We will just, as usual, be increasing our money supply as a temporary bandaid fix. The real solution is when we grow our economy by producing more goods and services thereby increasing our revenues, which are greater than our expenditures; as that is the only logical and true way to reverse our disastrous financial path. We all need to feel more personal financial pain and I feel bad for those with the least financial assets; but more importantly, cutting government spending for the military and whatever other areas can be reduced will surely help too. We cannot continue this path of doom, otherwise, in the near future we will end up not being able to pay our bills as many people declare bankruptcy, and so will our government will too!
* The real solution is when we grow our economy by producing more goods and services thereby increasing our revenues”
As my article points out, that’s never going to happen even if we racked up 3 straight years of 5% GDP growth. If it hasn’t happened except for 3 short years since 1945, there’s your answer. And that surplus was immediately squandered by a very bad President.
The problem is the economy suffers through these episodes, like the 2008 financial crisis, when revenues plunge, and the situation is exacerbated by the fiscal stimulus needed to reflate the economy, essentially a double whammy.
But once that mission is accomplished, THEN is the time to raise taxes, and there are 1000 good ways to do it. We HAD a surplus in the 90s because of higher marginal tax rates and higher capital of gains to taxes.
The Trump tax cuts brought the effective corporate tax rate for large corporations from 16% to 9%, so again, we put ourselves further behind.
Anyone who doubts the simple math of the effect of this cynical tax policy is conning themselves, and denying the economic history they’ve actually lived through.
Marginal rates should be raised, the mortgage interest deduction should be phased out, and we need to stop taxing labor at three times the rate of capital. We’ve created an economic dystopia for ourselves, and true to form, the people who have benefited most from this self destructive template are the ones who are most fearful from seeing the problem actually dealt with, because it might mean sacrifice in their part.
From the letters I see in this newspaper, that’s not surprising.
In the meantime, there’s no debt crisis. All the debt amounts to is uncollected taxes, and the debt is used as a net credit to the economy.
*higher capital gains taxes.