Weigel's Static Reasoning
Slate's David Weigel responded to my article about the S&P downward revision of U.S. federal debt by making arguments that strengthen my point and demolish his own position.
Let's take his so-called rebuttal head-on because Weigel's assertion, while not a strawman (as he incorrectly termed my points), is simply wrong.
I argued that both data and common sense suggest that no amount of tax increase will prevent entitlements from bankrupting the country. (One would think the implication is clear that I was talking about tax hikes in the absence of massive entitlement cuts. After all, I was responding to Weigel's correct assertion that "Democrats won't give on entitlements.") Weigel responds with an IMF report which suggests that the U.S. "can restore fiscal balance by raising all taxes and cutting all transfer payments immediately and for the indefinite future by 35 percent. "
My usual response to something as preposterously hypothetical as this is "And if my aunt had balls, she'd be my uncle." But rather than just discarding the IMF argument as rapidly as it deserves to be circular-filed, let's explain why it's so misguided.
On the revenue side, the IMF suggests increasing taxes by 35%. They have particular venom for the Bush tax cuts but -- strangely for an organization with so much research power on their own -- they "borrow from the CBO" for their estimates of the budgetary impact of the Bush tax cuts. The CBO famously uses "static" modeling, meaning it assumes that people do not change their economic behavior when the tax environment changes. But nobody except Congressional Democrats and perhaps David Weigel could honestly believe that to be a reasonable assumption.
As economist Kurt Hauser has shown, the total tax collected by the federal government as a percentage of GDP has fallen within a fairly narrow range between about 16.5% and just under 21% for sixty years whether tax rates were raised or lowered. However, lower taxes cause more economic growth, so the total tax collected by the government in real dollars rather than as a percentage is always much better following tax cuts than the CBO's modeling predicts. And the tax revenue collected following tax hikes is almost always less than predicted. (Yes, economic downturns after tax cuts or upturns after tax hikes can alter the outcome, but those events are the exception not the rule.)
In other words, the IMF lazily and, in my opinion, ideologically, chooses unrealistic assumptions for the revenue to be gained by increasing tax rates by 35% since there is absolutely no chance that doing so would increase tax revenue by 35%.
Although the IMF report is already rendered worthless by their bogus revenue assumptions, let's debunk it a little further:
The idea that governments will spend less money if revenue increases is pure fiction. Politicians ever and always use the public treasury to buy votes. So even if transfer payments were cut by 35% as the IMF calls for (to which I say "that's a good start"), and even if tax revenues were raised by 35% (which is all but impossible without crushing economic growth and turning us into Europe -- which Weigel, President Obama, and the IMF clearly wish for), we would still end up with large budget deficits until we limit Congress' broader spending capacity.
Milton Friedman put it best: "In the long run government will spend whatever the tax system will raise, plus as much more as it can get away with." So even if the US could raise 35% more tax revenue as a share of GDP (a political impossibility, fortunately), and even if entitlement spending was cut 35%, nobody who has studied actual rather than theoretical economic history would believe that the U.S. would actually achieve a balanced budget in the absence of enforceable spending caps and/or a Balanced Budget Amendment to the U.S. Constitution. "So," as Friedman continued, "my view has always been: cut taxes on any occasion, for any reason, in any way, that's politically feasible. That's the only way to keep down the size of government."
While European nations certainly haven't made large strides toward reducing transfer payments, we can at least look at the tax side of the ledger and their historic economic growth. Data from the Heritage Foundation's 2011 Index of Economic Freedom include tax burden as a percentage of GDP. The U.S. comes in at 26.9 percent. The IMF apparently would like that to go up 35% to 36.3 percent of GDP. Now let's look at some of the bankrupt or near-bankrupt nations of Europe. The tax revenue as a percentage of GDP for Greece is 35.1%, the UK 38.9%, Spain 33.9%, Portugal 37.7%, and France an astounding 44.6%. In other words, the IMF wants us to be European.
Last year's GDP growth for these same nations was: USA 2.9%, Greece -4.5%, the UK 0.8%, Spain, -0.1%, Portugal 1.4%, and France 1.6%. For the sake of discussion, let's agree that 2010 was an unusual year, with European governments regrouping and instituting austerity budgets following the economic turmoil of late 2008 through 2009 while George W. Bush and Barack Obama embarked on a reckless spending spree. So, let's look at data over a longer period.
According to IMF data, the U.S.'s average GDP growth rate during the 15 years from 1996-2010 was 2.55%. Greece and Spain were both slightly higher at 2.76%, while France, Portugal, and the UK were lower at 1.73%, 1.86%, and 2.10%, respectively. (Greece's growth is entirely due to massive spending of money it didn't have, which is now causing its economic collapse. And Spain's growth was due to a now-imploding real estate bubble that took construction to 16% of its GDP by 2006-2007. By comparison, during those same real estate boom years in the U.S., construction accounted for about 4.4% of GDP.)
Since it's extremely hard to eat GDP, however, perhaps a more instructive data set is unemployment. During that same 15 year period, the U.S. had the lowest average unemployment rate at 5.6%. The UK was second best at 6%, then Portugal at 6.8%, France at 9.5%, Greece at 10.1%, and Spain at a dismal 14%. Greece and Spain also had the highest inflation rates among the group during those years, making life even harder for their citizens.
And we're supposed to look favorably at becoming more like Europe as the IMF, Obama and Weigel propose?
No comments:
Post a Comment