Sunday, November 20, 2011

For supercommittee, cuts are all in the details

Published in The Tennessean, Sunday, November 20, 2011

by Richard J. Grant

During the past week, the total debt of the U.S. government surpassed $15 trillion. This brings the total debt up to about 99 percent of the annual production of the U.S. economy. Given that the debt has been growing more than four times faster than the economy, it should cross the 100 percent barrier by the end of the year.

Meanwhile, in Washington, the congressional “supercommittee” is supposedly working on proposals to reduce, if not eliminate, the annual budget deficit. We know for sure that they have no intention of eliminating the deficit. Their assigned task is to reduce the deficit by $1.2 trillion over the next 10 years.

This leaves two big questions: What is the benchmark from which the cuts will be made, and why will it take 10 years to reduce the deficit by an amount that is less than the last annual deficit?

As for the benchmark, the usual trick is to use projected spending, rather than actual current spending, as the starting point for cuts. Given that projected spending will always be set higher than current spending, it is possible to “cut” projected spending and then ignore the fact that actual future spending will still be higher. Rumors have it that the supercommittee will treat the reductions of planned future war spending as if they are real cuts.

A 10-year time frame allows politicians to spread any big-sounding cuts, real or otherwise, across the years such that the cut in any one year is minuscule. Ten years is also longer than any election cycle, putting any real results safely beyond the next election. The next Congress must deal with the mess left by the previous one, but it is not bound by its predecessor’s decisions. It can then proceed to shift its mess onto the next Congress, and so on.

This cycle will continue until a sufficiently high portion of voters comes to understand that higher government spending guarantees a higher total tax burden. Those who are most likely to believe that someone else is bearing that burden are those who are least likely to have the aptitude to understand that the burden really is being shifted onto them. They are the ones who don’t understand why their salary is so low or why their job has been outsourced or eliminated.

Half of the supercommittee is determined to raise taxes. They like to call this “revenue enhancement” in the hopes that you won’t understand that they really mean to raise your tax burden in order to buy your vote with your own money. But they can’t even be sure that raising tax rates on you or your neighbor will really bring in more tax revenue, at least not in the long run.

Whatever they say, they must know that higher tax rates reduce long-term economic growth even when we’re not in a recession. If your politicians were serious about increasing tax revenue in order to reduce the deficit, then they would look more seriously at reducing the regulatory burden that is crushing the tax base. That is, the regulatory burden that is hindering business and your ability to make a living.

As we let government spend more of our money for us and to tell us what to do with the rest, the more trouble we will have paying our bills.

Richard J. Grant is a Professor of Finance and Economics at Lipscomb University and a Senior Fellow at the Beacon Center of Tennessee. His column appears on Sundays.


Twitter: @RichardJGrant1

Copyright © Richard J Grant 2011