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Last week
the Congressional Budget Office (CBO) issued its annual long-term budget
outlook report, and the 2012 numbers are not promising. In fact, the CBO
estimates that federal debt will rise to 70% of GDP by the end of the year--
the highest percentage since World War II. The report also paints a stark
picture of entitlement spending, as retiring Baby Boomers will cause
government spending on health care, Social Security, and Medicare to explode
as a percentage of GDP in coming years.
While the
mainstream media correctly characterized the CBO report as highly
pessimistic, they also ignored longstanding errors of methodology in CBO
estimates. And those errors tend to support arguments for higher taxes and
government spending, when in fact America needs exactly the opposite.
As Paul
Roderick Gregory explained in a recent Forbes column (http://tinyurl.com/cf746dl), CBO has always applied wrongheaded assumptions
inherent in Keynesian economics when forecasting future deficits - no matter
how many times both history and economic theory have proven such assumptions
incorrect. In particular, CBO seems wedded to two enduring Keynesian myths: First, that higher taxes necessarily increase federal
revenue and have no negative effect on the economy; and second, that lower
government spending hurts the economy. Neither is true, of course.
CBO also
fails to factor in unexpected wars and expensive foreign entanglements, and
we should not assign too much validity to predictive models based on peace.
Judging from the actions and rhetoric coming from both parties in Washington,
new military entanglements in Syria and Iran may well spike military spending
in coming years.
Despite
these sobering budget realities, the CBO report suggests that a solution is
possible with merely a few minor adjustments in the way Congress handles
economic issues. But what we need are not minor adjustments, but rather a
fundamental shift in our philosophy of government. If we could come to our senses
about the proper role of government in America, and what level of government
interference is appropriate in a free economy, we would quickly find that
there is no reason for government to spend so much, borrow so much, and tax
so much.
If we
simply allowed markets to work free of governmental or Federal Reserve
interference, bad debt would be liquidated relatively quickly and malinvestment would be curtailed. Scaled-back regulations
would encourage businesses to expand. Lower taxes would jump start investment
and spur job creation.
This is
not rocket science, it is Economics 101. All it would take is for government
to get out of the way. There would be some short term pain, of course, but
only by allowing the bubble to burst and bad debt to liquidate can we ever
hope to begin building a real economy again.
The CBO
report was alarming to most simply because they know neither party will take
the steps necessary to avoid eventual fiscal calamity. Instead, despite their
rhetoric, both parties want to maintain the fantasy that “deficits
don’t matter.” But the CBO report, combined with what is
happening in Greece and the European Union, should finally make the
undeniable case that economic realities apply even to industrialized first
world economies. We must take concrete steps today to avoid having America
become the next Greece.
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