Larry Elder vs The Welfare State
Written by Mike on February 21st, 2005Larry Elder’s recent column on the 2006 federal budget and its lack of a constitutional foundation lays waste to any argument of Bush: the fiscal conservative. I for one am sick and tired of the rhetoric that bubbles out of the GOP come election time but seems to evaporate into thin air when everyone gets together to draw up a budget. Sure Bush is 1000x better than Kerry would have been, but that isn’t saying a whole hell of a lot. You can’t cut taxes and then spend like you are FDR. I love the tax cuts, but this sort of fantasy budget is going to have serious consequences on the fixed income and currency markets. I am hoping we have some principled conservatives in the house willing to have another Alamo over this bill.
21
AM
You need to keep the budget deficit and federal spending in economic perspective. Here are a few facts:
Federal spending is currently only 19.5% of GDP which is very low. In the Carter years before Reagan it reached up to 24-25% of GDP. And then it started dropping dramatically under Reagan. Under Clinton it rose back to Carter levels. In short, Bush isn’t doing too bad in relation to his predecessors.
Also, the current deficit is 3.5% of GDP - which is well below the post WWII average of 5-6% and well below the defiicts of most industrial nations (Japan is usually over 10%). As I have argued on this blog before, you can’t just look at the aggregate number of the deficit - you need to look at it in real terms. 400 billion sounds large, but the aggregate number by itself doesn’t mean much. You have to remember that the overall economy is huge, so the deficit number itself will increase and seem huge as the economy itself grows. Remember, this economy has grown at unprecedented levels under the Bush tax cut. Please look at the deficit in terms of GDP. Again, a very manageable 3.5% of GDP is the way the deficit should be expressed. The number itself loses meaning if not placed in the proper context. When you look at the deficit in this way, it is does not rise to a crisis level as you seem to indicate.
For all the railing about the deficit, we seem to forget about how well this economy has recovered under the Bush tax cuts. Clearly this deficit, of which you worry so much about, didn’t get in the way of historic economic growth and rapid employment rates. As long as you keep taxes low and give the economy an incentive to expand, the deficits take care of themselves. Economic growth should always take precedence over budgetary matters.
You also forget about the INCREASE IN REVENUES that marginal tax cuts bring to the economy. Government revenues increased by $100 billion dollars a year after Reagan’s marginal tax cuts in 81 and 82. Similarly, tax revenue has actually increased by 15% under Bush. The economic rationale for why this happens is somewhat complicated, but I wrote about it on a recent post that you can view at the below link
http://www.savethegop.com/index.php?s=milton+friedman
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AM
“Federal spending is currently only 19.5% of GDP which is very low.”
Absolutely. I am well aware of this, but you also have to realize that the budget deficit needs to be compared with how much government borrowing the fixed income markets can sustain without interest rates rising. The Fed has been forced to raise interest rates for some time now because the Federal government is flooding the market with its bonds. Also the feds borrowing, while low in relation to the GDP, is not low in relation to the current total bond market and is taking X% of the lending capital away from the private sector. This is pushing corporate bond rates upwards and into the junk sector. In and of itself this isn’t a massive problem, but we are recovering from a recession and it would help if the Fed weren’t hogging all of the capital out there that is needed by companies trying to finance themselves at a lower rate back into competition.
“Also, the current deficit is 3.5% of GDP - which is well below the post WWII average of 5-6% and well below the deficits of most industrial nations (Japan is usually over 10%).”
Please don’t compare us to Japan, their economy is entirely different from our own and is heavily leveraged by their banking system. Not being like Japan isn’t something to cheer about, it’s something that we should thank God for. The main problem with the current account deficit is that it is a symptom of the government spending too much of my money. Not that it is itself at an unhealthy level, you are right. There is certainly no crisis from a fiscal standpoint, but there is a crisis from a constitutional standpoint. There is no way in heaven or hell that the government needs to be running a deficit to spend money on all of the useless garbage programs that we are financing.
“As long as you keep taxes low and give the economy an incentive to expand, the deficits take care of themselves. Economic growth should always take precedence over budgetary matters.”
We are talking about two different issues. You are trying to argue that the Bush plan is fiscally sound. I agree to a point. But I am arguing that Bush is spending money on things he has no constitutional right to and that if you want to watch the economy really grow then let me spend the money, not Washington DC.
I also subscribe to the theory that tax cuts increase revenues over the long term. This has been proven again and again, my main point isn’t that Bush’s budgetary plans are not going to work, but that they are not conservative. His budget is INCREASING by 7% in 2006. We are spending more and more of my money on things that I don’t like. With the payroll cap removed (as Bush is talking about doing with SS) the top tax bracket in this country would be 47%! The federal government would be taking half of a guy’s income! Now that is Sweden and I didn’t sign on for this program when I voted for Dubya.
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AM
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PM
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24
PM
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