Zakaria’s GPS on CNN gives poor route to deficit reduction
What got my attention this week was something I heard this past Sunday on Fareed Zakaria’s Global Public Square (GPS) program on CNN. Zakaria states point blank, that the Bush tax cuts are the single largest part of the deficit.
Notice that Mr. Zakaria thinks he has Greenspan and Paulson in a “gotcha moment,” claiming that they fail to live up to the ”courage of their convictions” by not supporting immediate repeal of the Bush Tax Cuts. The problem is that Zakaria is a poor listener. We face two problems, the recession, which is short term and acute, and the deficit which is long term and chronic. Notice that Paulson says that the deficit is a long-term problem. Zakaria is missing a vital point in this discussion. Reducing deficits, either by raising taxes or cutting spending, during downturns are widely thought to exacerbate recessions. Paulson and Greenspan both suggest that now, because of our current recession, is not the time to be raising taxes, but they never rule out raising them at some time in the future.
Zakaria later points listeners to a Feb. 4, 2010 article in Time by Jeffrey Sachs, a leading economist at Columbia University, whose work on something called the “natural resource curse” has captured my recent research attention.
The current budget deficit runs about 10% of our national GDP (US tax receipts are currently at 15% of GDP while spending is at 25%). Sachs writes in his article that closing up the Bush tax cuts on the rich would only amount to .4% of GDP, which means that the Bush tax cuts account for only 4% of the deficit. Sachs states: “even with rollbacks of tax cuts for the rich, the fiscal gap will remain enormous. The Bush cuts in rates hardly account for the biggest part of the current deficit, as Zakaria claims. Zakaria is not only a poor listener, he is also a poor reader.
Take a look at this picture of Federal Spending and Receipts in millions of dollars:
Here are those same figures but as percentages of GDP:
I should point out that there were actually two Bush Tax Cuts, one enacted in 2001 after 9/11 and the other in 2003.
Note that tax revenues rose faster after the 2nd Bush tax cuts than they did in the Clinton era, with the tax revenue growth coming to an end in 2007 at the beginning of the recession.
More importantly, notice that starting in 2001, public spending as a percent of GDP started to grow again after shrinking, as it had over the Clinton era. While we should avoid post hoc thinking, we should also note that while the tax cuts may have led to revenue declines, there were also large increases in government spending that started at the beginning of the Bush era. The Bush spending programs included a generous pharmaceuticals program for the elderly, an increase in Homeland Security spending, an expensive war in Iraq in 2003 and allowing Republicans in Congress to spend heavily in their districts to increase their reelection chances.
It is the growth of entitlement spending that is at the heart of our future deficit problem, and in the very near future, growth in entitlement spending, from Social Security to Medicaid to Medicare, will be the drivers in our deficits. Driving these spending figures are an aging population and rising health care prices. One of the biggest reasons for the rising health care prices is that we have an aging population, boosting the demand for health care goods and services. Increasing entitlements, through the health care bills that have gotten approval in the House and the Senate are destined to push projected deficits even higher.
A more realistic, as well as more pessimistic, view of the growing defict is reported in this ABC article. The article reports the findings of the Peterson-Pew Commission on Budget Reform. One of the commission’s publications is the testimony of Alice Rivlin. Rivlin, an economist who was appointed by Johnson, Carter and Clinton to various government posts, recently testified before the Senate Budget Committee. In her testimony, she states “In the next decade and beyond, federal spending, driven by the impact of an aging population and rising health care costs on Medicare, Medicaid, and Social Security, will rise substantially faster than the whole economy can grow–faster than the GDP. Revenues, at any likely set of tax rates, will grow only slightly faster than the GDP. The gap between spending and revenues will keep widening.” Obviously, repealing the Bush Tax Cuts, as Zakaria suggests, will do little if “revenues, at any likely set of tax rates,” will grow more slowly than the promised spending from Medicare, Medicaid, and Social Security.
Recently, my daughter and her roommate drove from Natchitoches, LA to Monroe, LA and followed her roommate’s global positioning device. The car’s GPS routed them through Shreveport, doubling the usual time through Winnfield and Ruston.
As bad as the advice my daughter and her roommate got from the auto GPS, it did get her to her destination. Zakaria’s suggestion that repealing the Bush tax cuts, or allowing them to expire, would put us much closer to erasing the deficit is just seriously misleading. Zakaria’s GPS does not even set us on the right path. Perhaps if Zakaria would listen more carefully and read the articles he suggests to his listeners, he might be worth listening to.
And this just in, President Obama has created a bi-partisan commission to come up with ways to deal with the deficit crisis. From what I understand, the commission’s proposals would come before Congress to be voted on, yes or no, without amendments. Unlike Zakaria’s suggestion of dealing with the Bush Tax Cuts (which should be on the commission’s table), President Obama has put us on course to effectively dealing with the long-term deficit problem, looking at both the spending and the revenue side of the deficit problem.
-MC