How the US Budget Left History Behind

If you only read one article about the perils of our pay-less/get-more budget, you can't do much better than David Leonhardt's column from the New York Times. There's plenty of clear writing about our screwed up finances, but these are the key paragraphs:

As a society gets richer, its tax rates tend to rise...

Sure enough, the United States followed this path for most of the last century. In 1900, federal taxes amounted to just 2 percent of gross domestic product. By 2000, the share had risen to 21 percent.

Over the last couple of decades, though, we have repealed Wagner's Law -- or, more to the point, only partly repealed it. Taxes are no longer rising. They fell to 18 percent of G.D.P. in 2008 and, because of the recession, to a 60-year low of 15.1 percent last year.

Yet our desire for government services just keeps growing. We added a prescription drug benefit to Medicare. Farm subsidies are sacrosanct. Social Security is the third rail of politics.

Phrasing our deficit crisis simply doesn't make it simple to solve. But this is useful perspective. It reminded me of an event I attended in D.C on Tuesday, where President Bill Clinton told Newsweek editor Jon Meacham that the nation's problems essentially boil down to "the typical problems of old, wealthy countries."

This is right and wrong. It is true that are victims of our own success. Consider our health care system. In 1965 we passed into law Medicare to assist the medical expenses of our elderly, retired population. Social insurance for old people is a good thing. In the last 45 years, medical technology has improved dramatically. Better medical care is also a good thing. In the last half-century, Americans have doubled their post-retirement life expectancy. Living longer is a really, really good thing. But these three good things have three bad financial consequences: advanced technology makes treatments more expensive; longer lives extends expensive health care coverage; and Medicare requires younger generations to foot the bill for this extraordinary financial guarantee.

But consider Leonhardt's lede (which is also known as Wagner's Law): as a society gets richer, its tax rates tend to rise. Whether or not we think this is a good thing -- I do, some of my commenters might not -- we can certainly agree that it is no longer a "law" of any kind in the United States. In a way, our nation's problems are not at all the "typical problems of old, wealthy countries." Rather than continuing to track with Wagner's Law, American budget politics has veered into a kind of parallel post-historical universe, where society gets richer, services rise and tax rates fall. Taxes and services are simultaneously moving backward and forward at the same time, and the distance between them is measured by our increasingly cavernous debt.

The solution, like the problem, is easily explained, but difficult to implement. It will require tax increases and spending cuts. Any don't-touch-taxes solution would dismantle our entitlement program. Any don't-touch-spending solution would require us to adopt the highest tax burdens in the world. Does anybody really think either of those is an acceptable answer?

Presented by

Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the entertainment business.

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