The budget circumstance we find ourselves in demands tough decisions without the great luxury of time. We ought to understand the position we are in today.
Our republic can—and probably should—run a debt. As a great nation, we build and do things that endure, and these should be paid for, in part, by successive generations. Over the past decade, we have fought wars and faced a major recession. Accruing a debt to win a war and mitigate the ill effects of a recession makes sense. The question, of course, is, how high should this debt be?
We typically hold a debt of 30 percent or 40 percent of our gross domestic product. This is about twice our annual tax revenue. At that level, we can borrow inexpensively and expect reasonable economic growth if the extra spending boosts productivity.
Today, our debt is $16.3 trillion—a larger share of our GDP than the debt we accrued throughout the Great Depression and the second world war. Worse still, it grows by $1.1 trillion a year, and there is little or no sign that the spending will boost long-term growth. We should be embarrassed by this profligacy.
A shrinking minority of economists argues that we should spend more to push the economy forward. I think them wrong, in part because research increasingly suggests that our labor markets suffer a long-term mismatch between the supply and demand for skills.
If this is true, stimulus spending cannot fix our economic ills. More debt cannot help, so we should slow spending.
If we set a long-term goal, say 25 years, and begin to pay off this debt, a little arithmetic tells us that each citizen will have to pay $2,100 per year, or each family about $5,200, over the next quarter century.
This is optimistic, of course, because it assumes no increased interest payments, no new budget demands, and balanced budgets today. Of course, it will take another $3,500 per citizen in tax increases and spending cuts to simply balance this year’s budget. Overall, the spending-to-revenue gap amounts to an average of $12,800 per household each year.
Elections matter, and the last federal election went to the side that argued for larger government. This should come to no one’s surprise. For some time, we have lived well beyond our means, and we have enjoyed it.
But the time has come for us to explore how much we will relish paying for this extravagant government.
So it is best we go off the fiscal cliff. This will lead to large tax increases for three-quarters of households, big spending cuts and another recession. But there’s always a flip side.
Most households will face a 2-percent payroll tax increase, and 30 million households will find themselves paying federal income tax for the first time in a decade.
I can think of no better way to get folks thinking hard about the size and scope of government.•
Hicks is director of the Center for Business and Economic Research at Ball State University. His column appears weekly. He can be reached at email@example.com.