Misguided Belief #1: “We [the federal government] don’t have to balance our checkbook. We are like the banker in Monopoly. We create the money. We hand out the money everyone else plays the game with.”
Rep. John Yarmuth (D-KY), the then-chairman of the House Budget Committee, was literally caught on film making that claim. He argued there is no need for federal spending restraint. As Yarmouth put it, “we can pay for whatever we want to pay for.”
That misguided thinking is why the federal government is poised to spend $6,418,000,000,000 this year. That’s $204,000 per second!
Given that the speed of light is 186,000 miles per second, the federal government is literally spending faster than the speed of light! (RELATED: JOHN STOSSEL: The World Needs More Elon Musks And Fewer Elizabeth Warrens)
The source of the problem? The federal government’s decrepit budget process pays lip service to the concept of scarcity and does little to encourage a thoughtful weighing of national priorities and the trade-offs involved.
Sadly, as Thomas Sowell so aptly noted, “The first lesson of economics is scarcity: There is never enough of anything to satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics.”
Misguided Belief #2: Tax Cuts Are Costly
Several elements of the Tax Cuts & Jobs Act of 2017 (TCJA) are, under current law, being phased out and will expire entirely by the end of 2025. Whenever Republicans speak of extending those policies, opponents invariably claim that doing so would “cost” trillions of dollars.
Actually, tax policy changes do not “cost” anything. Taxation is merely one method the government uses to extract resources from the private sector for its own use. A tax cut changes the mix of how the government extracts resources — a little less taxing, a little more borrowing. While the method of extraction is important, it is generally less important than the fact that it is the government, and not the private sector, that is consuming or allocating those resources.
Federal spending is the true cost.
The federal government must pay its bills, but the impact tax policy has on economic growth and national prosperity ought to be a vitally important consideration. The anticipated revenue loss associated with a tax policy change ought to be weighed against the impact of keeping an economically destructive tax policy in place or of allowing a pro-growth provision to expire. (RELATED: ALFREDO ORTIZ: December Jobs Report Is Cold Comfort For Main Street America)
For example, the non-partisan Tax Foundation estimated last year that permanently extending four key expiring TCJA business provisions would boost long-run gross domestic product (GDP) by 0.6% and score as a $568 billion dynamic revenue loss over the decade. Translated into nominal dollar terms, a 0.6% increase in long-run GDP means cumulative GDP would increase by $723.1 billion over the decade. In short, permanently extending TCJA’s business provisions would increase GDP by $1.27 for every $1 of lost federal revenue.
If that’s not a worthy trade-off, what is?
The bottom line? Cost is not the right word to use when discussing tax policy. Quoting Mark Twain yet again, “The difference between the almost right word and the right word is really a large matter. ’tis the difference between the lightning bug and the lightning.”
Misguided Belief #3: Moody’s recently cut the federal government’s credit outlook to “negative” from “stable,” but there’s plenty of time to clean up this mess.
In Ernest Hemingway’s classic, The Sun Also Rises, Mike Campbell, a Scottish war veteran, is utterly penniless. Asked how he went bankrupt, Mike replies, “Two ways. Gradually and then suddenly.”
The federal government is the 21st century’s Mike Campbell.
Having accumulated a debt of $33.9 trillion and trillions more in unfunded liabilities, the federal government faces a rapidly deteriorating fiscal outlook. According to the Congressional Budget Office (CBO), federal spending will push the budget deficit to nearly $3 trillion per year within the decade.
But the cost of Washington’s serial profligacy is already starting to bite. Given the Biden era’s higher inflation and interest rates, net interest payments on the federal debt are exploding—up by $176 billion last year alone—and have become the single fastest-growing element of federal spending. According to CBO, annual interest costs will rise to $1.44 trillion within the decade, up from just $710 billion last year.
Penn Wharton estimates, “Under current policy, the United States has about 20 years for corrective action after which no amount of future tax increases or spending cuts could avoid the government defaulting on its debt whether explicitly or implicitly (i.e., debt monetization producing significant inflation).”
God help us!
James Carter on January 7, 2024