Serious about Cutting Debt? End GOP Voodoo Economics

A new report from the Congressional Budget Office expresses concern (as ought we all) over continuing growth of our national debt-to-GDP ratio. The CBO appears to agree with something I said to Mr. Gibilisco the other day: sometimes you have to borrow money (e.g., wartime production, anti-recession stimulus), but the more you borrow, the less wiggle room you have for future spending. Bringing down the debt requires austerity programs that raise taxes and cut spending. CBO says such policy changes usually though not always "exacerbate... economic downturns." So odds are you have to pick what you want grumble about. If you don't like the recession, you might have to live with a growing debt for a few more months. If you don't like the debt and want austerity now, then brace for another downturn.

Austerity, alas, is a dirty word in American politics, which assumes a perpetual-motion machine of magic abundance. Conservatives are harping on the debt, but they don't want to take direct action to pay it down. The President comes up with a health care law that will save $8 billion on Medicare this year and $575 billion over the next ten, and conservatives fan fears among seniors that these cuts will mean Democrats want old folks to die. Conservatives instead want to leave most of the big spending (war, entitlement programs for senior voters) in place and cut taxes, thinking the debt will magically reduce itself.

Cutting taxes does a lot of things, but it doesn't reduce the debt, certainly not as a percentage of GDP. Check out the bumps around the time of the great Reagan and Bush tax cuts. Those bumps don't go downward:

Figure 1: U.S. Debt-to-GDP Ratio, historic.
Source: CBO report, p. 2. Click figure to enlarge.

David Stockman, who worked for President Reagan, agrees that the fiscal policy Republicans offer is a useless mess. Stockman finds it "unseemly" that Republicans respond to our mounting public debt with cries to extend the Bush tax cuts and spare the wealthiest Americans a three-percent tax increase. (CBO notes it would take a 1% increase in federal revenues to stop the growth of the debt-to-GDP ratio; a 3% increase would reverse that growth.) Stockman finds this shirking of fiscal responsibility particularly odious given that the wealthiest 1% amassed two-thirds of the economic gains from the 2002–2006 economic bubble.

Our debt situation is dire due not to drunken-spending Democrats but Republicans living in la-la-land, says Stockman:

This debt explosion has resulted not from big spending by the Democrats, but instead the Republican Party’s embrace, about three decades ago, of the insidious doctrine that deficits don’t matter if they result from tax cuts.

In 1981, traditional Republicans supported tax cuts, matched by spending cuts, to offset the way inflation was pushing many taxpayers into higher brackets and to spur investment. The Reagan administration’s hastily prepared fiscal blueprint, however, was no match for the primordial forces — the welfare state and the warfare state — that drive the federal spending machine.

Soon, the neocons were pushing the military budget skyward. And the Republicans on Capitol Hill who were supposed to cut spending exempted from the knife most of the domestic budget — entitlements, farm subsidies, education, water projects. But in the end it was a new cadre of ideological tax-cutters who killed the Republicans’ fiscal religion.

Through the 1984 election, the old guard earnestly tried to control the deficit, rolling back about 40 percent of the original Reagan tax cuts. But when, in the following years, the Federal Reserve chairman, Paul Volcker, finally crushed inflation, enabling a solid economic rebound, the new tax-cutters not only claimed victory for their supply-side strategy but hooked Republicans for good on the delusion that the economy will outgrow the deficit if plied with enough tax cuts [David Stockman, "Four Deformations of the Apocalypse," New York Times, 2010.07.31].

Stockman notes that under President GW Bush's last budget, federal revenue was just 15% of GDP, the lowest percentage since the 1940s. Once again, we see that cries of "Taxed Enough Already!" show ignorance of historical fact... and a thin-skinnedness that Grandma and grandpa would find shameful. And don't forget: those low taxes not only make the debt worse but also may be hurting the economy.

Let's trade the myths about the Bush tax cuts for reality. Right now, those tax cuts for the rich are responsible for about 25% of our annual deficit. Extend the Bush tax cuts, and they'll be responsible for around 50% of our deficit in 2019.

Make Grandma and Grandpa proud: end voodoo economics. End the Bush giveaways. Pay the bills.
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Update 10:41 CDT: Robert Reich helps out with some useful facts.