DISCRETIONARY INCOME – II

Dale McConnell: “Sorry, still not buying it. I don’t have a good cite on this, but I’m sure these are the right – or nearly the right – numbers. The 10-year deficit is $10 trillion, repealing the Bush tax Cuts would generate $4 trillion. Problem is, no one wants to do that, they only want to repeal on the earners making over ~250K, that would generate much less.”

☞ No one says that going back to Reagan’s tax rates on dividends and capital gains (say) or Clinton’s rates on interest and “earned” income (say) would by itself close the entire budget deficit. But note that in a world of 2.5% growth and 2.5% inflation (say), you could have a $750 billion annual deficit without in fact growing the National Debt at all, relative to the economy as a whole. Both would be growing at 5%.

We need to do better than that. Over time, we need to shrink the debt relative to the economy. That’s what we did from 1946 to 1980, from a ratio of 121% in 1946 all the way down to 30% in 1980 when Ronald Reagan took over. (He then spiked it sharply higher, as did George W. Bush, handing it off to Obama at 100% and soaring.)

But – to repeat – if for the next ten years we ran $750 billion annual deficits in a world of 2.5% inflation and 2.5% growth, the debt would not have grown relative to the economy as a whole. Both would have been growing at about the same rate.

So a big chunk of the $10 trillion deficit hole that Dale is trying to fill – $7.5 trillion in this example – doesn’t necessarily have to be filled. Taxes and spending cuts do not need to make up the whole $10 trillion. It’s okay to have some deficits if the economy is growing. And we need deficits to get the economy growing (just as we needed deficits to win World War II).

Indeed, if the annual deficit stayed constant at $750 billion for a century as the economy grew at 2.5% (plus another 2.5% inflation), the National Debt – nearly $15 trillion today – would grow to $90 trillion . . . but the GDP – also roughly $15 trillion today – would, via the magic of compounding, grow to $2 quadrillion. So the debt would then equal just 4% of GDP. Like a $14,000 mortgage on a $280,000 home.

The key here . . . and the heart of the whole debate . . . is not to focus on the deficit in the short run, but to put our people to work building an America that is modern, efficient, healthy, well-educated, competitive, and energy independent. THAT will secure our future and solve our financial problems, jump start the economy and replace the outflow of unemployment benefits with the inflow of payroll tax receipts.

THE DIVIDE

Ken Doran: “My summary of this issue: Wealthy conservatives seem to believe that they have what they have in spite of a government that has in recent generations been somewhat activist and equality oriented (actually only very moderately so by developed world standards, but that’s by the by). Those who do think that are wrong; their wealth on the contrary is dependent on and largely derived from the strengths of an equality-oriented society whose government is activist when it needs to be. Even by their own narrow self-interest, and assuming no concern with the greater good of society, those wealthy conservatives are making a very serious blunder in trying to destroy the institutions that gave America its exceptionalism.

PROVERBS

John Leonarz: “Digging around in Proverbs for another purpose, I came on this one, Proverbs 29:7, which seemed pertinent to yesterday’s column: ‘A righteous man knows the rights of the poor; a wicked man does not understand such knowledge.’ Right out of the Bible – from 3000 years ago!”

POOR PEOPLE HAVE A TOUGH TIME NETWORKING

This essay by Joe Queenan speaks to those, like Stephen N. yesterday, who think “the lower class of income earners pay far less than their fair share of taxes.”

(Stephen wrote back to say I had taken his comment out of context – that his point was that the rich should only be taxed more if we also raise taxes on low-income folks because “the lower class of income earners pay far less than their fair share of taxes.” But to me, that still seems to mean he thinks lower income folks are getting too good a deal and should be taxed more heavily.)

Tomorrow: Starting Your Own Business

 

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