Television personality Ben Stein (Image credit: Getty Images via @daylife)
Sen. Ted Cruz (R-TX) (Image credit: Getty Images via @daylife)
In his remarks to the Robert L. Bartley Gala Dinner on October 23, Senator Ted Cruz disparaged the notion of a “grand bargain,” which would raise taxes and (supposedly) cut spending. Cruz went on to say:
“I’m going to tell you my view, which is I think that we ought to be relentlessly, tirelessly, exclusively focused on growth, because every other priority we have depends on growth.”
In an October 28 article for the American Spectator, Ben Stein took issue with Senator Cruz’s position, saying:
“The reason we have these chronic budget crises is PARTLY that taxes are just too low. That was where the crisis started in 2002. The other part is that entitlements are too high… We need higher taxes and lower entitlements. It can be done.”
In calling for a “grand bargain” solution to our deficit problem, Mr. Stein was speaking for a traditional, “austerity” strain of conservatism, not the newer, supply-side/pro-growth variant championed by Ronald Reagan. And, Mr. Stein is completely, utterly, and hopelessly wrong.
"Grand bargains” are great, if what you are seeking is bigger government, a stagnant economy, and the extinction of the Republican Party. Any conservative not desiring those outcomes should align with Senator Cruz and become, “…relentlessly, tirelessly, exclusively focused on growth.
Yes, America’s current deficit and debt problems do date from the early 2000s. But the problem wasn’t tax cuts; it was a disastrous slowdown in economic growth.
During the 12 years from 2000 to 2012, real GDP (RGDP) growth averaged 1.75%. If RGDP growth during those years had averaged what it had from 1988 to 2000 (3.35%), 2012 GDP would have been $3.3 trillion (20.6%) larger. The federal budget would have been balanced in FY2012 (rather than in deficit by $1.0 trillion), despite wildly excessive federal spending and the Bush tax cuts. Also, far more Americans would have jobs today, and family incomes would be rising, rather than falling.
But wait—there’s more.
If America’s economy had continued to grow at the same rate as it did during Clinton’s second term (4.47%), 2012 GDP would have been or a 37%, or a full $6.0 trillion, larger. The federal government would have run a $0.5 trillion surplus in FY2012 at current spending levels.
In his article, Mr. Stein buys into the fantasy—shared by liberals and clueless conservatives alike—that raising tax rates will increase the “tax take” (federal revenues as a percent of GDP). History shows this to be a dubious proposition.
In FY1956, the top marginal income tax rate was 91%, the corporate tax rate was 52%, and the capital gains tax rate was 25%. And, federal tax revenues amounted to 17.5% of GDP. In FY2007, after Kennedy, Reagan, and Bush 43 had slashed these tax rates to levels that Mr. Stein considers “just too low” (35%, 35%, and 15% respectively), the federal tax take was 18.5% of GDP.
Higher tax revenues with lower tax rates. How about that?
History clearly shows that the federal tax take is influenced more by the rate of economic growth than it is by tax rates. During times of high growth, the federal government automatically captures a higher percentage of GDP.
For example, in FY1995, our RGDP growth rate was 3.04% and the federal tax take was 18.4% of GDP. The only significant tax change that occurred between FY1995 and FY1999 was a capital gains tax cut (from 28% to 20%) that was effective on January 1, 1997. Despite this tax cut (actually, because of it), the federal tax take increased to 19.8% for FY1999, during which we enjoyed 4.91% RGDP growth.
During his speech, Senator Cruz noted correctly that an additional 1.0 percentage point of economic growth (over the CBO baseline) would reduce the federal budget deficit over the next 10 years by $3.1 trillion, while the hated “sequester” spending cuts would only amount to $1.2 trillion. However, the senator’s example wildly understates the case for growth.
What matters in finance is present value, which is calculated by discounting future cash flows at the appropriate interest rate (2.7% real for the federal government, according to the CBO). The financial markets lend to the federal government against the present value of its future revenues, which are equal to the tax take multiplied by the present value of future GDP.
Compared with the CBO baseline forecast, an additional 1.0 percentage point of growth would increase the present value of federal revenues over the next 100 years by 60%, or $132.5 trillion. “To the infinite horizon,” a 1.0 percentage point increase in RGDP growth would increase the present value of future GDP by 2300% (i.e., multiply it by a factor of 24).
Bottom line: In terms of impact on federal finances, both spending cuts and tax increases pale in comparison with economic growth. Anyone that understands the numbers understands why Washington should be, “…relentlessly, tirelessly, exclusively focused on growth.”
Not so fast, says Mr. Stein. Senator Cruz’s “one stinkin’ percent” of additional RGDP growth amounts to raising our economic expansion rate by almost 50%!
Yes, Ben, but it also amounts to raising our growth rate to a level (3.85% over the next 10 years, 3.21% to the infinite horizon) that is below the average that the nation achieved during its first 210 years, before Bush 43 and Obama came along (3.86%). The required growth rate is also less than the average during President Clinton’s two terms (3.89%).
What if achieving what amounts to a historically normal rate of economic growth is not, as Stein asserts, “…a gigantic exercise?” What if it is just a matter, as Cruz appears to believe, of stopping the federal government from strangling the economy’s natural tendency to advance?
Ben Stein would call adapting to the CBO’s starvation-level growth forecast via a “grand bargain” of tax increases and entitlement cuts “realistic.” A more accurate term would be “sadistic.” RGDP growth this slow would condemn millions of Americans to underemployment, dependency, and despair.
During the first four years (July 1, 2009 – June 30, 2013) of President Obama’s so-called “economic recovery,” RGDP growth averaged 2.23%, almost exactly the number that the CBO forecasts to be the growth rate that we can expect from now to “the infinite horizon.”
During those four years, America moved 1.5 million FTE* jobs farther away from full employment (to 15.8 million), and real median family income fell. America’s struggling middle class can’t take much more of this kind of “realism.”
Also, anything you tax, you get less of. If we pile even more taxes on an economy that is already barely moving, we will get even slower growth. Right now, RGDP growth is running behind even the CBO’s dismal projections.
With respect to the importance of economic growth, Senator Cruz is not just right economically and financially, he is right politically. The Republican Party is either the party of economic growth, or it is the party of clueless conservatism—and it loses elections.
The current battle for the soul of the Republican Party is exemplified by the conflict between the world views of Cruz and Stein.
Summoning the words of Irving Kristol and Bob Bartley, Senator Cruz declared that conservatives should stand for:
“…the economics of growth instead of the economics of equilibrium and stability…” and for, “…free trade and sound money, and against confiscatory taxation…”
In contrast, Ben Stein waxed nostalgic about those halcyon days when:
“…we had in place a system of running the economy which I would call the Samuelson/Keynesian model. It said that it was a good idea to match taxes with spending, to have a big government that provided an “automatic stabilizing” effect on the business cycle, and that a responsible people ran a surplus in good times and a modest deficit in bad times to stimulate the economy.”
Unfortunately, in the real world, big governments seeking stability (automatic or otherwise), tend to produce stagnation. Governments are all about force and control. They do not tend to be fonts of growth and innovation.
The ultimate failing of Ben Stein’s approach is this: planning for 2% per year RGDP growth is like trying to live on 500 calories a day. No matter what recipes you come up with, you are still going to starve to death. During its first 181 years (1790 – 1971), the U.S. averaged 3.95% growth (with less than 1.0% average annual inflation). America can’t be America on half of that growth rate.
Senator Cruz is exactly correct when he rejects the Washington consensus and demands that we go for (at least) “one stinkin’ percent” of additional RGDP growth. An attempt to adapt to 2% growth via a “grand bargain” would just make a bad situation even worse.
If conservatives are wise, they will follow Ted Cruz’s lead regarding economics and deficit reduction. Sorry, Mr. Stein, but American doesn’t need a “grand bargain.” We need to be, “…relentlessly, tirelessly, exclusively focused on growth.”
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*FTE jobs = “full-time-equivalent” jobs = full-time jobs + 0.5 part-time jobs
