Wednesday, July 27, 2011

Revenue Problem or Spending Problem?

Joe Weisenthal over at Business Insider would have us believe that the current fiscal problem is one of not enough revenue. In the commentary to yesterday's Chart of the Day, he draws on analysis of Menzie Chinn and tells us that:
While outlays as a percentage of GDP are near all-time highs, tax revenue + entitlement contributions is near an all-time low, and well below average.

If you believe that this gap needs to be shrunk, it's impossible to think it can be done on the cost-side at all.

He continues, by dismissing any suggestion that the government spends too much and asserting that any who think it does spend too much are led astray by ideology. "Of course, Weisenthal says, "any politician who says Washington has a spending problem, rather than a revenue problem, is speaking from a position of anti-tax ideology, rather than empirical data, so a rebuttal is probably pointless."
Weisenthal may be right that we cannot make up our fiscal shortfall by cutting so-called discretionary spending as our budget is presently constituted.His argument, however, merely assumes that we cannot bring spending down. It is as if government expenditures just go up on their own.  All of those little government programs just pass themselves into existence.

In reality, all government spending is discretionary. There is no divine or natural law of the universe that requires Social Security, Medicare, and Medicaid to continue into perpetuity in its present form. There is no reason, beyond that which is purely political, why we cannot cut the rest of the budget to the bone. The state has gotten itself into this predicament by convincing the masses that we can live off of other people indefinitely and that it is perfectly respectable to do so.

Indeed, as noted by Richard Ebeling,
Virtually all that is going on in Washington about the government’s debt is really smoke and mirrors because everyone there accepts the premises of the “entitlement” society. As a result, practically no one is willing to call for the real cuts in government spending that would bring about a reduction of the government’s “slice” of the national economic pie; and put the country on a real solution to the debt problem.

It does not have to be this way, however. Congressional deficit hawks should explain to the citizenry that we are where we are because we have purposely charted a course in which we are committed to spending more than we take in. The only way for us to stop this train is to drastically reduce the size and scope of government. The Republicans have little moral capital on this issue, however, because, as the graph illustrates, the course was begun while George W. Bush was in office and the Republicans gained power in Congress.

The chart also helps us make sense of something else that is very important for understanding the consequences of macroeconomic policy, but I will wait and discuss this tomorrow, Lord willing.

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