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I’d take Jeb Bush’s offer!

July 15, 2012

Jeb Bush recently said that he would take the “$9 of spending cuts for $1 of tax increases” deficit reduction deal that all the Republican candidates turned down during a televised debate earlier this year.

So would I.

In the five years before the current financial crisis (2003-07), the US government took in between 16-18% of GDP in revenues.  Total spending over the same period ranged between 19-20% of GDP.  These five years added about 12% of GDP to our total debt although as the US economy grew more than 12% during the period our financial position got better, not worse.  If you owed $1,000 and earned $2,000 a year ago but now you owe $1,100 and earn $2,500, you’re better off (even though you owe more).

In 2012 the federal government is budgeted to take in 16% and spend 24% of GDP which means revenues will be 1-2% ($300 billion) below recent averages.  Spending will be at least 4% ($1,200 billion) above recent levels. The 2012 deficit may approach $1,500 billion and with the economy growing at less than 2% this year, our debt problems are getting worse.  With baked-in growth in Social Security and Medicare they will be getting worse faster in the future.

So what’s so attractive about the Jeb Bush deal?  You don’t have to be an economist to understand that if you’re having a problem with your weight and you start to exercise nine hours a week for each chocolate cookie you eat you’ll soon be moving in the right direction.  Unfortunately, back in the real world, governments have great difficulty actually reducing spending.  Don’t be fooled by talk of “austerity” in the press.  The numbers invariably show lots of promises to get into the gym next week and a few more cookies now to ease the pain while contemplating the austerity that’s coming!

What worked in the past is holding the rate of growth in government spending to less than the growth in the economy.  Real spending restraint when coupled with broad tax reform (which clears out the accumulation of deductions, credits and hidden tax expenditures inserted by interest groups over the years and lowers rates just enough to bring in the same revenue) has worked before and is likely to work again.  In fact it’s worked well enough that just agreeing to start the process might stimulate our growth rate enough to make the spending restraint easier to manage.

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