What Will Balance the Federal Budget?

Column 2017-15 (5/1/17)

Balancing the government’s budget has long been a hot topic of discussion. Still the deficit continues on the same trajectory, one step down and two steeps up.

 Most of the discussion focuses on two possibilities, raise tax rates or cut spending. Unfortunately politicians usually prefer to cut tax rates and increase spending. So far this plan has only produced oceans of red ink. The last eight years have more than doubled the ink supply.

The accumulated debt is around $20 trillion. That doesn’t include the unfunded promises for future spending such as Social Security and Medicare. The cost of the “entitlements” is estimated to be $100 trillion or more beyond estimated tax revenue.

If we continue on the present course there is a financial train wreck coming. Unfortunately warnings of the coming crash have echoed for so long that many people no longer take them seriously. This head in the sand approach won’t make the financial wreck any less of a disaster when it happens.

On rare occasions someone raises his voice to offer another way to eliminate the deficit. So far those voices have barley made a ripple in the D.C. swamp.

That other way is easy to describe. Also in theory it could work. The big question is, Will it work in D.C?

The first step in the plan is to concede that cutting spending is politically impossible. Thus. forget about cutting spending. Also forget about raising tax rates. We are past the point where higher tax rates begin to decrease revenue rather than increase it.

There is only one option left. Increase the wealth available to tax. In other words we must increase productivity. Government is good at decreasing productivity, but mostly useless at increasing productivity. This may seem depressing. In this case it is the only reason that plan could work.

Economists who study productivity have concluded that without the burden of excessive regulations productivity and incomes would be at least twice what they are. This sounds believable. If over the last 70 years productivity had increased 1 percent a year more than it did, incomes would be double what they are.

This would have doubled tax revenue. That is enough to eliminate the federal deficit and provide a tidy surplus. Of course that would have happened only if spending didn’t exceed current levels. That is the fly in the ointment.

Unspent money drives politicians mad. If there had been more money available, Who wants to bet that spending wouldn’t have increased as much as tax revenue did?

Why did I bring the plan up at this time? President Trump has promised to drain the swamp of regulations. If he actually does we will have a real life test of the plan. I doubt that much drainage will happen. Perhaps there is a chance that it will.

If the regulations are dumped and increased revenue rolls in, what government does will be up to the voters. If voters continue to demand more spending on more “free” goodies, that is what the politicians will deliver. The spending orgy will continue until the well runs dry. I don’t know how many decades it be until the end. However long it takes it will happen.

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Copyright 2017

Albert D. McCallum