The Entitlement Crisis That Isn’t

An article by author and economist Jeff Madrick in the November 2012 issue of Harper’s Magazine offers an antidote to the view that social spending — not anemic tax revenues — is the cause of America’s deficit problem.

“Contrary to warnings by politicians of both parties and by almost all of the mainstream press,” Madrick writes, “America’s biggest fiscal problem is not spending on Social Security, Medicare, and Medicaid; it is our almost complete unwillingness to tax ourselves sufficiently to maintain a modern state.”

America fostered a $1.1 trillion budget deficit amid the Iraq War, the 2001 and 2003 Bush tax cuts and the ongoing 2008 recession. That number, flashed on the nightly news and shouted from the mouths, blogs and Twitter accounts of conservative and some liberal pundits, has convinced much of the public that smaller government is the quickest, most sensible solution to the problem.

But that opinion has nothing to do with “serious economic research,” Madrick says. “[I]deologically biased economists” have generated studies “ ‘proving’ that higher taxes and bigger government reduce growth,” he writes. But “the best, most objective analysis of tax rates, by Joel B. Slemrod of The University of Michigan, and Jon Bakija of Williams College, finds no relationship between high taxes and reduced rates of economic growth.”

Large government does not diminish growth either. On the contrary, federal spending on such programs as affordable education, parental leave and child care encourages growth, according to research by UC Davis professor Peter Lindert.

Bruce Bartlett, an economics adviser from the Reagan era, agrees. The notion that tax increases could never cover the cost of social programs is “factually wrong,” Bartlett says. High tax economies in Europe grow just as fast, if not faster, than our own, and their tax-to-GDP ratio “is high enough to cover all the projected increase in spending in the United States through higher revenues alone.”

Madrick doesn’t want to raise taxes now. He says the economy is too weak for that. But once conditions improve, a tax increase of 10 percent would bring in roughly $1.5 trillion in one year alone and $17 trillion to $18 trillion over 10 years. This enormous sum towers over the paltry $1.5 trillion that the bipartisan Budget Control Act seeks to cut from the government’s budget in 2011, and would more than provide for all possible increases in social expenditure.

A tax hike of 3 or 4 percent, alternatively, would add $400 billion to $600 billion yearly to government revenues. With Medicare expected to grow by only 2 percent of GDP to just under 6 percent by 2035 and Social Security benefits forecast to increase from 5 percent of GDP to no more than 6 percent by the mid-2030s, such increases are easily manageable. “But virtually no one in a position of power is talking about a 3 percent tax increase,” Madrick writes. “Cutting entitlement spending is a much more attractive pitch for politicians, who can directly blame the alleged profligates of society, mostly the poor, for our woes.”

Although it’s economists who propose stamping out budget deficits via spending cuts, their adoption in Congress is “largely politically motivated.” Politicians claim that Americans don’t like paying higher taxes, but that’s demonstrably untrue when people are directly experiencing the benefits of programs such as Social Security and Medicare.

“Better government, not weaker government, is the path to prosperity,” Madrick writes. “The nation requires sophisticated education for all; high-speed, low-cost transportation; universal access to the Web; efficient energy usage; and adequate support for the poor and the elderly — all of which demands more government revenue.”

But, “[t]here is no debate of good conscience in America about how to pay for the nation’s most profound needs,” Madrick concludes. “If there were, raising taxes would be a major part of it. Instead, the lower and middle classes will bear the brunt of deficit reduction.

“Politicians and ideologues are playing a cruel game by keeping serious tax increases off the table, but it is especially hypocritical to do so in the name of fiscal responsibility. America’s budget problem is a revenue problem, not a spending problem. The current national conversation about tax hikes is a fine example of political deference to the rich and powerful. It is not good economics.”

— Posted by Alexander Reed Kelly.