On the Deficit, Poverty and Paying More Taxes

Not long ago, I was talking to a wealthy New York real estate mogul. I asked him whom he was thinking of voting for in the 2012 presidential election. His answer was simple and immediate, “anyone who promises not to raise my taxes.” I was horrified. Of all the issues confronting our country, this was the one on which he would make his choice. I didn’t know where to begin to respond. Regrettably, millions of Americans agree with him.

They agree with him, of course, because they reason that keeping tax revenues low will force massive cuts in government spending.

I understand the long term dangers of the size of the U.S. fiscal deficit. I understand that at 10.1% of the GDP–the figure expected for fiscal 2011–we are running unsustainably high deficit levels. I also understand the extent to which we are building our federal debt as a percent of the GDP. Eventually, buyers will expect higher interest rates commensurate with the perceived risks of mounting debt to GDP levels. That will just increase the burden on the federal budget.

The late Herbert Stein, the chairman of Nixon’s Council of Economic Advisers, was fond of saying that “a thing that cannot go on forever, will come to an end.” A 10.1% fiscal deficit can certainly not go on for ever. The question is how to diminish that deficit while, at the same time, strengthening the capacity of the American economy to grow.

At present, U.S. Government revenues are running at some 14% of GDP. The slow growth of the economy reduces revenues and tax rates are the lowest they have been in some 60 years. Government expenditures have increased in the face of payments aimed at compensating for the low levels of growth as well as the continued expenditures on the wars as well as ever increasing health costs. The deficit, in other words, is not difficult to explain.

Assuming that the American commitment to both Iraq and Afghanistan winds down, substantial savings will be generated. But not enough to tame the growth of federal debt levels. Don’t look to discretionary spending for the solution. That spending runs at about 15% of government expenditures. In that 15% is spending on education and other programs, such as infrastructure, that will boost the competitiveness of the economy.

The rest of the government is all transfer payments–mandatory spending. The bulk of that mandatory spending–and growing far more rapidly than any other category–is Medicare, medical care for Americans 65+. Whether or not significant savings can be generated by Obama’s healthcare program, major cuts in Medicare will still have to be made in coming years.

But none of this suggests that in the midst of a weakening economy federal expenditures should be cut now. Nor does any of this suggest that the cut should be made in programs that will benefit the country in the future.

So the hard parts are ahead. I for one hope that those hard parts include higher taxes, not just for the super-rich as Warren Buffett suggests in the accompanying article, but for incomes like mine as well.

Poverty in America

For one thing, I believe in the concept of the American nation–the American people. I believe that I, and all Americans, have a responsibility to our fellow Americans that includes benefits for the poorest amongst us.

In all the years I have taught at the business school at the University Chicago, I have asked my students what percent of the population of the United States they imagine being unable to function successfully in a market economy, whether from physical or mental impediments. In all the years that I have asked that question, the answers have never been lower than 12%. They have run as high as 20%.

As I am writing this report, the U.S. Census clock (www.census.gov) reports the US population as 311, 994, 511.

On the basis of the 2010 national census, the 2009 official poverty rate was 14.5% of the total population. Assuming that rate to be holding, not unreasonable in the face of slow economic growth, then some 45, 239, 204 Americans are living in poverty, more than half of whom are children.

My students’ estimates of  “not making it in a market economy” are close to the poverty rate determined by the U. S. Census bureau.

Certainly, those of us who are committed to the concept of an ‘American people’ want to support those 45 million Americans and, especially, provide opportunities for their children.

“Fraud, Waste and Abuse”

According to the Washington Post (March 3, 2011), 63% of the American people believe that if “fraud, waste and abuse” were eliminated from the federal budget, the budget would be in balance. In short, there is a phenomenal amount of ignorance in the United States about the status of federal spending. While it is clear that some government spending is wasteful, that there is corruption of federal level, that hundreds of million’s of dollars of spending in the Department of Defense are unaccounted for, all those failings do not go very far to explain our current budgetary dilemma. (For useful reports on waste, see www.gao.gov.)

National Priorities

Where then do we go from here? The answer appears to be glaringly obvious – to me. We ought to eliminate “fraud waste and abuse” where it exists. We ought to take on Medicare spending as well as health care spending at the Pentagon. We ought to find ways to help millions of children living in poverty develop the skills that will make them productive American citizens while helping their parents to a decent standard of living.

But the midst of an economic slowdown is no time to cut federal spending. Economic demand generated by the government, in the face of cutbacks in business investment and slow downs in consumer spending, can help propel the economy to growth.

Above all, we should tax the super-rich. They have benefited the most from the opportunities of the American economy. They can afford to pay more towards reducing the federal deficit and bolstering the strength of the United States.