Michael J. Hicks, PhD, is the director of the Center for Business and Economic Research and an associate professor of economics in the Miller College of Business at Ball State University. His column appears in Indiana newspapers.
The budget circumstance we find ourselves in demand tough decisions without the great luxury of time. We ought to at least understand the position we are in today.
Our republic can, and probably should, run a debt. As a great nation, we build and do things that endure and these should be paid for, in part, by successive generations. Over the past decade we have fought wars and faced a major recession. Accruing a debt to win a war and mitigate the ill effects of a recession make sense. The question of course, is how high should this debt be?
We typically hold a debt of 30 or 40 percent of our gross domestic product. This is about twice our annual tax revenues. At that level, we can borrow inexpensively and expect reasonable economic growth if the extra spending boosts productivity. Today our debt is $16,300,000,000,000. This is a larger share of our GDP than the debt we accrued throughout the Great Depression and the Second World War. Worse still, it grows by $1,100,000,000,000 per year, and there is little or no sign that this spending will boost long-term growth. We should be embarrassed by this profligacy.
A shrinking minority of economists argue that we should spend more to push the economy forward. I think they are wrong, in part because increasingly research suggests that our labor markets suffer a long-term mismatch between the supply and demand for skills. If this research is true, stimulus spending cannot remedy our economic ills. More debt cannot help, and so we should slow spending.
If we set ourselves a long-term goal, say 25 years, and begin to pay off this debt, a little arithmetic tells us that each citizen will have to pay $2,100 per year or about $5,200 per family over the next quarter century. This is optimistic of course, because it assumes no increased interest payments, no new budget demands and balanced budgets today. Of course it will take a further $3,500 per citizen in tax increases and spending cuts to simply balance this year's budget. Overall, the spending to revenue gap amounts to an average of $12,800 per household each year.
Elections matter and the last federal election went to the side that argued for larger government. This should come to no one’s surprise. For some time, we have lived well beyond our means, and we have enjoyed it. But the time has now come for us to explore how much we will relish paying for this extravagant government.
So it is best we go off the fiscal cliff. This will lead to large tax increases for three-quarters of households, big spending cuts and another recession. But, there’s always a flip side. Most households will face a 2 percent payroll tax increase, and 30 million households will find themselves paying federal income tax for the first time in a decade. I can think of no better way to get folks thinking very hard about the size and scope of government.