November 17, 2011

November 17, 2011 | Commentary on Budget and Spending, Deficits

Deficit Reduction Over Job Creation

Cutting spending is the most important way to reduce the debt, but we won’t be fully able to fix the problem without renewed economic growth. Growth will mean more jobs and higher wages. This will translate into more revenue for the federal government and get us back to the traditional level of revenue more quickly. It will also mean fewer families depending on government, which will reduce spending. Our total national debt is approaching 100% of our economy. Research has shown that countries with debt-to-GDP ratios greater than 90% see their economic growth slowed by at least 1%age point a year. If the current ratio of GDP-to-jobs holds steady, that could mean more than 1 million lost jobs every year. Congress needs to cut spending soon; otherwise, international credit markets will require an abrupt and unpleasant correction like they have recently with other debt-laden nations. If that happens, and Congress still refuses to cut spending, it will have to raise taxes to the point that it cripples the economy. We can avoid that harrowing future, but time to act is running short. The way to encourage growth isn’t through more government action, but through loosening the government-created ties that bind the economy. Tax reform would lift the burden of the current tax code, and a regulation overhaul would help, too.

What does the ideal economic recovery plan look like to you?

First, the federal government must adopt a policy of “do no more harm.” No more stimulus. No more taxes hikes or new regulatory burdens. No more meddling in the economy. The unprecedented government intervention in the free market over the past few years has created uncertainty and caused businesses to retrench while they sort out the effects of all the government’s new policies. Second, Congress should seek for government policy to “do less harm.” That means eliminating government policies that inhibit economic growth and job creation—and the list is long. Properly carried out tax reform would be a good start, followed by a thorough review of regulations. Repeal of Obamacare and the Dodd–Frank financial reform law would be a boost, too. 

How would you benchmark success?

'The federal government should not fund job creation.'

The unemployment rate. Too many Americans are out of work, and too many who have jobs are worried about losing theirs. Until the unemployment rate falls below 6%, the American people will not feel the economy has recovered. Unfortunately, it could be a long time until it falls that far, since the economy needs to create around 125,000 jobs per month just to keep the unemployment rate steady, accounting for new entrants to the labor pool.

Why do you think those on the other side of this conversation are misguided?

I don’t think they’re misguided. I think they have a preference for bigger government. They want to raise taxes and grow government and the people’s dependence on it. I prefer a limited federal government that encourages independence and self-reliance. I prefer it because our traditionally limited government has allowed us to maintain a relatively low level of taxation compared to other developed countries. It is that relatively low tax burden—and relatively low levels of spending and regulation—that have helped fuel the unparalleled economic growth we’ve experienced over the last 60 years, which has made us one of the most prosperous countries in the world and generated our high standard of living. If we return to our small-government roots, we will return to an era of abundance. If we follow the lead of other nations with large governments, we will tax our economy into a stasis that will lower our children’s standard of living, and that of future generations will be lower still. That would be an unacceptable reversal of the American Dream.

How should we fund job creation?

The federal government should not fund job creation. It is long past time for it to stop meddling in the economy. The stimulus was an attempt to fund job creation, and it failed miserably. All it did was leave us with an additional $1 trillion of debt and 2.5 million fewer jobs. Further government efforts to fund job creation would only lead to similar futility and extra debt. The economy will rebound and businesses will create jobs as long as the government stops getting in the way.

How should we approach debt reduction?

The biggest driver of our spending problems is entitlement programs—specifically Social Security, Medicare and Medicaid. Any serious debt-reduction plan must tackle those programs. The Heritage Foundation has put together a plan to reform entitlements that solves our spending and debt crisis. We call our plan Saving the American Dream. It is important to remember that these programs are leading our nation into bankruptcy. If we don’t fix them soon, there will be no money to pay all the promised benefits, even to those seniors who need them most. If we adopted this plan, we would save the economy from the crushing tax burden to pay for these entitlements as currently constituted and ensure that seniors have economic security in their retirement years.

Is there a way to simultaneously create jobs and reduce debt? How?

Yes. First, tackling the debt problem directly through spending reductions would also remove the uncertainty that is chilling job creation. Beyond that, economic growth must be a priority. It would create jobs and increase tax revenues, thereby reducing the debt. To encourage growth, Congress should reform the tax code, roll back regulations (especially costly new regulations imposed by the Obama Administration), and absolutely stop meddling in the economy with new programs that only increase uncertainty and delay recovery. It should also repeal Obamacare and the Dodd–Frank financial reform law and replace them—Obamacare with a patient-centered, free-market plan, and Dodd–Frank with a law that actually solves the “too big to fail” problem and reforms Fannie Mae and Freddie Mac.

What do you think of the latest incarnation of the president’s jobs act?

Not much. In fact, I think if Congress passed it, the policies would end up destroying jobs—not creating them. That’s because the “jobs policies” in the plan are a rehash and recycling of policies that already failed to create jobs, such as an extension of the payroll tax holiday and another credit for businesses that hire new workers. On one hand, these policies would do little to spur hiring. On the other hand, the President wants to pay for those failed and temporary policies with permanent tax hikes on job creators. Those permanently higher taxes would cause businesses to hire fewer workers and investors to invest less. This divisive class warfare would harm the economy forever.

What do you think of the Democrats’ latest deficit reduction proposal?

The latest Democrat plan to reduce the deficit, reported in late October, came from six members of the Super Committee. There aren’t many public details, but what we do know isn’t encouraging. These Democrats want to go above the $1.2 trillion minimum—to $3 trillion of deficit reduction through a 50/50 split between spending reductions and tax hikes. That would mean tax hikes of $1.5 trillion on American taxpayers already suffering from persistent 9% unemployment. Even talk about these kinds of tax hikes is chilling to job creation. Relying on taxes, even in part, means continuous tax hikes as spending continues relentlessly to go up. As for as the spending cuts, some are good but some are harmful—like cuts to doctors and health care providers, which would result in less care and poorer care. The key is what actually emerges from the Super Committee.

What do you think of the Republicans’ latest deficit reduction proposal?

The best Republican plan is the budget passed by the House of Representatives earlier this year. House Budget Committee Chairman Paul Ryan authored the plan. It included much-needed tax reform and a fundamental restructuring of Medicare along the lines of the Heritage Foundation’s plan. It wisely capped spending and made other much-needed cuts to discretionary spending. It could have been better had they included a plan to fix Social Security.

Is there anything else our readers need to know about this issue?

Many say that higher taxes are a necessity for closing the deficit and lowering the debt. This is wrong. Tax hikes aren’t necessary because our problems are caused by overspending, not under-taxing. According to the Congressional Budget Office, tax revenues will surpass their historical average as a percentage of the economy by 2018 and grow thereafter. Spending is now 25% above its historical average, and CBO projections show it growing dramatically in coming years. If Congress returned spending to its historical average through bold spending reforms, deficits would fall to manageable levels, and the debt would stabilize as a share of the economy and decline in the future. Whenever you hear people say that taxes must be part of a serious debt-reduction plan, they aren’t revealing some profound truth. They’re revealing their preference for a bigger government.

 

About the Author

Curtis S. Dubay Research Fellow, Tax and Economic Policy
Thomas A. Roe Institute for Economic Policy Studies

First appeared in Loop 21