GAO 2020 Report on Fiscal Health

Senate Budget, March 12, 2021

The mere existence and size of the national debt does not harm the economy at all, at least not until the European Union consolidates the debt of its members and supports it with a joint progressive income tax. Then the party is over. The real impact of the debt on the economy comes from other aspects of fiscal policy.  

Spending aggregates are fairly stable over time, which is why it is so hard to cut the budget by following this path. Most of the volatility is in tax policy. When taxes are increased, the budget deficit goes down. When they are cut, the budget deficit increases. Revenues are usually about 18% of GDP. Currently, they are 16.5%. Unless you are funded by rich donors or their foundations, this is a real problem. Apologists for Wall Street justify tax cuts as a boon to the economy. It is not unless you make your money on inflating asset prices. My response to such nonsense can be found in Attachment One, which examines the impact of the Tax Cut and Jobs Act. 

Inflation is an increase in prices chasing the same goods, which also increases the supply of goods of lesser quality, such as Cryptocurrency and private equity financing of mortgage backed securities. These are the next asset crisis. The money has already been sucked out of these ventures, so a crash is imminent. Please see Attachment Two for more on our upcoming recession. 

If any witness ever comes before this committee and claims that the problem is entitlement spending (I can think of a few who do), inquire about who their donors are after swearing them in. 

When Republicans control tax policy, tax cuts result in higher savings and lower wages for the non-CEO class (again, as explained in Attachment One). The only way to keep consumption going is to keep the economy moving is to borrow as much as taxes are cut, plus the cost of net interest rolled over into further debt. After this point, increased spending is necessary for increased growth.  

The reason the economy continues to grow is increased spending. The Budget Control Act of 2011 marks were designed to be so low that action must occur. The result has been underspending and late appropriations. to spur action. It has taken place, although usually late. Fiscal sanity dictates amending the Act permanently to increase these levels and tie them to automatic appropriations should no budget resolution or appropriation bills pass.  

In 2017, the Tax Cut and Jobs Act was passed with no concern for long term balance, which was reinforced by the Balanced Budget Act of 2018.  The TCJA expires, in part, in 2025. BBA 2018 expires at the end of FY 2019. The Bipartisan Budget Act of 2019 extends sanity for two more years. Further reform should either extend the higher marks to 2025 or hasten the expiration of the Ryan-Brady tax cuts.  

As long as the current tax cuts are in force, the money not collected in taxes should be made up with bond sales, else all sorts of mischief occur in the area of asset accumulation and inflation. Such accumulations are not economic growth, they are the manufacture of speculative investment bubbles that always lead back to recessions and depressions. There is no such thing as a business cycle, only rich people who are undertaxed who invest in garbage and then sell it to the public, like any Ponzi scheme. 

Insisting on spending cuts, as the Mulvaney Budget submission does, harms the general population, leading to a slower economy. Indeed, any spending cuts must be avoided. If anything, secular stagnation is an endemic issue because low marginal rates on high income CEOs invites the rent-seeking we warned about in 2017. This can be remedied by tax increases, a higher minimum wage and increased transfer payments and salary levels. 

When Democrats control fiscal policy, taxes on the wealthy go up. This not only fuels the economy with increased spending, but it extracts money from savings for consumption directly, rather than through bond markets (at interest). Because spending is mostly stable (most increases are simply catch up spending), a GDP growth rate of around 3% results.  

The way to increase growth beyond average is to increase federal and contractor wages and transfer payments, especially the latter. The recipients spend most of the money. Eliminating welfare as we know it under President Clinton helped balance the budget, but cutting capital gains taxes created the tech bubble and the resulting recession. Lower transfer payments made the recovery that much harder. 

The answer cannot be shifting liability down or claiming that we owe debt on a per capita basis. It is raising taxes enough so that the debt is reduced and incomes for most households are increased.  

To sell a tax increase on high incomes (or wealth, for that matter), we must make the wealthy want to pay more. They won’t do so to fund Medicare for All, the Green New Deal or to decrease abortion by increasing the Child Tax Credit. They will do so to get their children and grandchildren out of hock.  Attachment Three details why it is the wealthy who should be concerned that their tax rates are too low. 

Attachment One – The Tax and Job Cuts Act

Attachment Two – Recession 2020 

Attachment Three – Excerpts from Squaring (and Settling) Accounts: Who Really Owns the National Debt? Who Owes It? - December 2019