- The Washington Times - Sunday, June 11, 2006

In their effort to debunk the Bush tax cuts, the opposition has reached such a fever pitch as to deny any tax cuts existed. How do they seek to perform this vanishing act? By claiming that rising federal debt offsets the tax cuts’ effect. Of course, if this febrile reasoning were true, we would expect some evidence in the economy’s performance. Yet the economy’s robust performance notwithstanding, it is useful to seek out the true goal behind this fallacious argument.

Those advancing the nonexistent tax cut argument implicitly seek to distract attention from the real economic threat: spending. In their mind, government spending is the “constant” in the fiscal equation, with only revenues being variable. Thus, deficits can only be linked to a revenue shortfall, not spending excess. So defining the problem predetermines that every solution must be a tax increase.

Were deficits offsetting the positive impact of the tax cuts, we would expect to see the economy reflect this. Yet the economy reflects just the opposite. The economy grew 5.3 percent in the first quarter, the stock market has reached levels unseen for years, while inflation, interest rates and unemployment are all low by historical standards.

Such a strong economic performance should not be surprising — even when we look at what is actually happening to federal deficits and the debt. The reason the federal debt burden is not offsetting the effect of the tax cuts is that — counter to critics’ claims — it is not rising in terms of real economic impact. Rather than increasing, the cost of servicing the federal debt has not been lower for decades.

Over 2002-2005, the annual average cost of federal debt service in inflation-adjusted dollars is $154.8 billion. That was last lower in 1983. As a percentage of total federal outlays it is 7 percent. That was last lower in 1977. And as a percentage of the economy, at 1.48 percent it’s lower than any year since 1973.

Federal debt and deficits aren’t displacing a greater amount of private investment. They are in fact displacing less than at any other time in decades. The markets are therefore reacting quite rationally to the real economic variables.

In this respect, the nation’s debt is like a household’s. A household borrows on its earnings, taking on various types of debt such as mortgages, education loans, etc. Borrowing for a household can continue to grow comfortably in nominal terms over time, so long as that growth stays in-line with the growth of its income. Similarly, a government borrows on its economy. And in the U.S. case, our economy is growing faster than its debt.

The real concern should therefore not be on how we finance government’s marginal amount of spending — that difference between receipts and spending — but government’s true burden on the economy: its overall spending. How the government extracts money from the private sector is secondary to how much it extracts overall as a percentage of the economy. And here there is ample reason for worry.

Shifting the focus from the tax cut critics’ myopia on federal debt to the rise in government spending and its future explosion confirms the real future threat. While federal debt service cost is lower than in decades, entitlement spending is exploding.

As new Office of Management and Budget Director Rob Portman recently pointed out in his confirmation hearing before the Senate Budget Committee, the real threat to our fiscal health is this “unsustainable growth in entitlement programs.” Also known as mandatory spending, these programs consume 56.8 percent of current federal outlays.

As the recent Medicare Trustees’ report points out from 2005 to 2080, Medicare’s spending alone will grow from 2.7 percent of gross domestic product to 11 percent, while Social Security’s spending will grow from 4.3 percent to 6.3 percent. To put that in perspective, in 2080 just these two programs’ spending would consume the same percentage of the nation’s economy as the entire current federal tax burden.

Those trying to link the tax cuts to an imagined burgeoning debt burden on the economy are trying to perform a gargantuan bait-and-switch. The true threat to the economy and the future is neither the tax cuts of 2001 nor even today’s deficits. It is the federal spending from whence deficits and debt will rapidly increase.

The real source of deficits and debt remains spending. The person who spends nothing, has no debt, even if he earns no income. The person who spends more than he makes has debt no matter how much he earns. The key variable in both cases is spending, as it is for measuring the government’s impact on the economy.

Those wishing to obscure the obvious want to hide naked spending behind a deficit fig leaf, to switch effect for cause, and most importantly to equate debt with tax cuts rather than the spending they support. They seek to cast spending as untouchable and taxes as the only “adjustable” variable. And by adjustable, they mean increase.

J.T. Young served in the Treasury Treasury and the Office of Management and Budget from 2001-2004.

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