Green Room

How I Learned to Stop Worrying and Love the Debt Bomb

posted at 10:17 am on July 19, 2011 by

The title is misleading; then again, so was the subtitle for Dr. Strangelove. Sometimes, a light touch helps illuminate a heavy topic.

Let’s start with the heavy part. Kevin D. Williamson lays out the inevitable endgame for our public debt problem:

Medicare, Social Security, and national-defense spending are going to be cut. Lots of other stuff is going to be cut, too. To the extent that such cuts are insufficient, taxes are going to go up to pay the difference. That’s the deficit-reduction deal. There isn’t another one. The question is only whether we implement it voluntarily or involuntarily, under conditions of stability or under conditions of crisis.

The issue of whether we are stable now aside, Williamson’s question reminded me of a piece from Megan McArdle back in May, warning left and right that neither may like the results of waiting:

Fiscal crises are–ahem–inherently unpredictable events. No matter how you assure each other that your awesome new health care plan can’t possibly be repealed because everyone’s going to be lovin’ on it so hard . . . or that no peacetime US government in history has ever collected more than 20.5% of GDP . . . the fact remains that when interest rates are rising and everyone’s panicking, the unthinkable frequently happens. Moreover, the tax hikes and spending cuts that are required in a fiscal crisis tend to be much more draconian than would otherwise be required, because they tend to happen when GDP is depressed and the gap between tax revenue and spending is exceptionally large.

Some of what McArdle writes is true, but the real fight — both now or in a possible crisis — is over the mix of spending cuts and tax hikes. A look at other countries’ crises is rather eye-opening on this key point. Canada reduced government debt from 68% of GDP in 1994 to 29% of GDP in 2008. There were six to seven dollars in budget cuts for every dollar of tax hikes — and these were real cuts in spending, not reductions in spending growth, and not the imaginary spending cuts Democrats have offered Republicans in past decades. By 2000, Canada was cutting personal and corporate taxes, as well as capital gans taxes. (Read the linked story for another example, set by New Zealand in the 1980s.) During the same period, Sweden reduced public debt from 78% of GDP to 47% of GDP by cutting public spending from 71% of GDP in 1993 to 52% in 2008—that is, by almost one-fifth of GDP. During the period Sweden cut taxes four times and abolished wealth taxes, inheritance and gift taxes. Finland similarly cut spending and taxes as part of its fiscal consolidation.

Indeed, a study of fiscal consolidations in 21 countries of the Organization for Economic Cooperation and Development over 37 years concludes that failed attempts to close budget gaps relied 53% on tax increases and 47%, while successful consolidations averaged 85% spending cuts and 15% tax increases.

I am not for doing nothing about the debt ceiling and have written a number of pieces about the need to do something about the public debt at all levels of government. Moreover, it is certainly possible that in a debt crisis, the intransigence of the left could force the federal government to take a tax-heavy approach proven to fail in all those other OECD countries. I tend to think there is still enough of the American spirit around to resist becoming wage slaves to the state. Assuming we can manage to avoid a more statist approach than Canada, Sweden and Finland, it would seem the left ought to have the greater interest in defusing the debt bomb now, as a crisis will likely be tougher on their priorities.

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“Gentlemen, you can’t make cuts in here! This is the Budget Committee.”

BobMbx on July 19, 2011 at 2:21 PM

This post has been promoted to HotAir.com.

Comments have been closed on this post but the discussion continues here.

Jazz Shaw on July 20, 2011 at 4:11 PM