Don't Balance the Budget!

By Derek Thompson

This is the wrong way to think about deficit reduction, for at least three reasons:

"Closing the gap from revenues that equal 15 percent of GDP and spending that equals 25 percent of GDP still looks pretty hard to me. To repeat yesterday's thought-experiment, say we construct a point-by-point trade-off, equalizing spending and revenue at 20 percent of GDP. I don't see Republicans supporting a 33 percent tax increase or Democrats supporting a 20 percent spending cut. Lots of readers have made clever suggestions about how we get there, but none of them seem convincing to me. The trade-offs would have to be pretty significant, like collecting that 20 percent of GDP via a flat tax and enacting deep entitlement reform." - Kevin D. Williamson, National Review

1. We don't have to make spending and revenue perfectly equal. Nobody is saying we need to balance the budget in 2015. We can run deficits. We just can't run structural deficits that add to our debt faster than we grow the economy.

2. The figures for revenues and spending (approx. 15 and 25% of GDP, respectively) aren't normal. Collapsed tax revenue and inflated spending are both the exceptional products of the recession. So it doesn't make sense to draw a line between them and say "OK, Republicans and Democrats, hit 20%." What's magic about 20%, anyway? It's just a number. If Americans want Social Security and Medicare past 2020, we'll have to raise more than 20% of GDP in taxes. If they want to pay fewer taxes, somebody will eventually have to explain that we can't afford out entitlement programs. We should govern by elections, not by a randomly chosen percentage.

3. Raising 20% of GDP in taxes isn't drastic. Over the last 30 years, we've averaged between 18 and 19%; we hit 20% in 1999, and the CBO's baseline projections have us getting back to 20% by 2020.
Revenue:Outlay Picture.pngKevin Drum has it right. In the short term, the federal government should expect a high deficit and hope there aren't any exogenous shocks to the economy. In the medium term, we will have to raise taxes and cut spending. VAT, carbon taxes, expenditure reform and higher income taxes should be on the table. Defense spending, Social Security, and discretionary spending should be on the table, too. In the long term, our debt crisis is a medical inflation crisis. If we don't slow health care costs ... well, the point is we have to slow health care costs.

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