Economic Growth and Deficit Reduction

Economic growth advocates and deficit reduction fans should be fast friends.  When the economy grows tax receipts go up.  There can be conflicts over the details of tax plans but growth is a crucial element of deficit reduction.  Both also have a long-term impact.  Continuing deficits matter because of the long-term impact.  Growth matters because of the miracle of compound interest.  We don’t want to be Argentina.

Yet the two groups seem to be in mortal combat as shown by recent posts by Kevin Williamson and Larry Kudlow at NRO.  Kevin has the question that nobody ever asks:

Here’s my question, which nobody ever really asks: “Given that a small number of federal expenditures — Social Security, Medicare, Medicaid, national security, and interest on the debt — typically constitute about 80 percent of all federal spending, and given that we are not going to cut non-defense discretionary spending to zero, there is no mathematically plausible way to balance the budget without: 1) cutting spending on Social Security, Medicare, Medicaid, and/or national security; and/or 2) raising taxes. So, what’s it going to be: spending cuts in popular programs, higher taxes, or deficits forever? And before you give your answer, I’d like you all to know that standing behind each of you is a man with a Taser and instructions to use it on the first person whose answer relies on the Growth Fairy — lookin’ at you, Jeb — or the Waste, Fraud, and Abuse Fairy. Go.”  Emphasis added.

Growth must be part of the answer.  On the other side is Larry:

Meanwhile, Governor Christie spent his economic time on a plea for reducing Social Security benefits. Ugh.  Emphasis added.

We are entirely in agreement with the Governor that means-testing is a great solution to the impending bankruptcy of Social Security.  We think his proposal needs a few tweaks but it would be a vast improvement over the current.  Time is running out to fix the deficit, Social Security, and Medicare/Medicaid.  Social Security is easy (numerically but not politically) to fix.  Fix that first and help the deficit.  Reducing regulations can help the reduce the deficit by increasing growth.  Fixing the Obamacare/Medicare/Medicaid (OMM) monster is more of a challenge.

In slaying the OMM monster, James Capretta makes the obvious point that the Cadillac Tax will change behavior:

CBO and others [like MWG] say that, as employers cut back on what they provide in health benefits, they will provide roughly commensurate increases in salaries and wages. But since salaries and wages are taxable, while the health insurance they will replace is not, CBO believes that the Cadillac tax will increase federal revenue far beyond the small amount collected through the tax itself, which most employers will avoid.

He comes up with an interesting suggestion of limiting the tax preference and making the excess taxable income.  It is half a loaf but the notion that the excess would be taxed at different rates depending on income might make it a winner politically.  It might also lead to some growth opportunities.

The point is that there are lots of problems that we now have a reduced margin of error to fix.  We need to work at growth, deficit reduction and a few other things.  The are some conflicts but mostly economic growth and deficit reduction work together.  We should look for progress rather than perfection.

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