Thursday, March 17, 2016

Fiscal Responsibility

The idea of “fiscal responsibility” is a pretty simple thing: the government pays for what it buys, or it buys no more than what it can pay for (and sometimes it even saves some monies that were collected from taxpayers, and applies them to pay down the National Debt a little).  Fiscal responsibility disappeared during the Reagan years (I know – you don’t believe me; look it up) when the conservative goal of “making government smaller” ran into a wall of Democrats who refused to slash their own precious programs; but Republicans went ahead and cut taxes anyway.  So, they accomplished half of “making government smaller” (the cutting taxes part); while they put the other part (cutting spending) on hold indefinitely.  The result was predictable and has come true with a vengeance for some 35 years: out of control deficits and an exploding National Debt.  This is NOT fiscal responsibility, it is fiscal IR-responsibility.

Republicans have called themselves the party of “fiscal responsibility” for decades, while they have called Democrats the party of “tax and spend.”   This is what Republicans like to say, and it used to be true, some forty or fifty years ago.  But it has not been entirely true for decades.  Democrats may still be the party of “tax and spend,” but Republicans have become the party of “spend and charge it.”  They vote to fund government programs, even though they know they will not raise enough taxes to pay for them.

During the first six years of the George W Bush administration, Republicans had the votes in Congress (and the White House) to cut “unnecessary and wasteful” programs, programs they found unnecessary anyway.  Not once did they vote to cut programs in a way that made a real difference, but they did continue to vote tax cuts (especially for folks who didn’t need them).  Huge deficits resulted, and the National Debt exploded (and you thought that was Obama’s doing!).

The problem with tax cuts is situational.  While there is a National Debt to pay down and while the economy is growing and is not in recession, tax collections should cover what we spend and even pay off some of our Debt.  On the other hand, when the economy is faltering, when it is in recession, it is legitimate to spend more than we collect in taxes, in order to goose the economy back into positive growth.  But in the long-run, we want to match deficits with surpluses so that our National Debt does not grow into a fiscal time-bomb.

Try as I may to be crystal clear, many folks will not understand what I am trying to explain here.  It may be useful to scale down the annual federal budget to your own monthly credit card habits and see if that clears up any confusion.
  • Your credit card unpaid balance is like the National Debt (the sum total of all government spending that we have not paid for, past to present).  If you have no unpaid balance it is like our being Debt-free.
  • Your credit card purchases (for a month) are like the programs that the federal government decides to fund (for a fiscal year).
  • Your credit card payments (for the month) (for your purchases and your unpaid balance) are like the taxes the federal government collects from all of us annually.
    • If you pay off exactly what you purchased last month (plus interest charges on your unpaid balance), you are in balance for the month: no deficit, no surplus, the Debt stays the same.  
    • If you pay less (than what you purchased plus the interest, etc.), you are in Deficit by that amount, and you add to the Debt by that amount.  
    • If you pay more (than what you purchased plus the interest, etc.), you are in Surplus by that amount and you pay down the Debt by that amount.
  • Our behavior at the federal level has mirrored our behavior at the family level for some 40 years; we have stopped paying for everything that we buy, and over time we have added more and more to our family debt, and to our National Debt.  We have grown by spending money that we didn’t have. 
In 2002, Vice President Dick Cheney (in-)famously said “deficits don’t matter.”  He had a partially valid point: that there is no compelling need for a Balanced Budget every year.  And there is no compelling need to pay off the entire National Debt.  Indeed, there might never be a compelling need to run a surplus as long as the National Debt is not a drag on the economy.  Without trying to define precisely what professional economists can’t agree upon (when does the Debt become a drag on the economy?), we can say the following: we have a Debt of some $19 trillion and a GDP of some $17 trillion.  In other words, our Debt is larger than our productivity for the year.  And the interest on the Debt costs us nearly $500 billion this year, money that can’t be used to pay for real stuff that we want to have, like better schools, paved roads, and bridges that don’t collapse as we drive across them.  Clearly, our current level of Debt is NOT sustainable, especially as the interest rate we are paying now is at historically low rates.

So, why do we never want to pay down the Debt to at least sustainable levels?  Because YOU won’t let us!  It is your doing, dear tax-payer!  You have let your representatives in your nation’s capital know, in no uncertain terms, that raising taxes (THAT is how we would pay down the Debt) is a bullet in the head of whoever votes for it.  So, you choose to “spend and charge it,” and you keep electing and re-electing the lackeys of Grover Norquist (“I want to reduce government to the size where I can drag it into the bathroom and drown it in the bathtub”) to do your bidding.  Fiscal responsibility?  It is your fault that we are not “fiscally responsible”!  Maybe we should just stop complaining about our Debt, let it climb to the heavens (like the Tower of Babel), and just see what happens if we ignore it totally.

But Debt or no, there are things we need to do – fix our crumbling infra-structure, pay for education, and put people back to work – or we can kiss our future goodbye right now!

Fiscal responsibility is not – cutting taxes.  Fiscal responsibility is – paying your bills!

What would I do?  For the beginnings of my thinking, read my blog post on Tax Reform.