Wednesday, August 22, 2012

Old Wisdom is the New Normal

Joseph was a savvy political advisor

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Known also as Yosef and Yusuf, Joseph was the 11th son of Jacob. Though sold as a slave, he eventually became Vizier and was – after Pharaoh – the most powerful man in ancient Egypt. The Book of Genesis tells how Joseph interprets Pharaoh's dream, recommending that Egypt set aside seven years of abundance for seven years of coming famine.

Now I'm not suggesting that we're facing anything so dire as seven years of famine. But we currently have an abundance of talk and a dearth of action when it comes to the Federal budget. Our annual budget deficit is $1 trillion and Federal debt is $16 trillion. Here are some central questions and my take on each:

Why do we have an annual deficit and a growing debt?
The deficit is the annual imbalance of spending over revenue and the growing debt is the result of year-after-year deficits. Sounds simple enough. But as Robert Samuelson of the Washington Post says, "No one wants to take away; it’s more fun to give."

Do we spend too much or tax too little?
Both.  Let's be clear about this: it's "we the people" – not "the government" – that have incurred this debt that now stands at $16 trillion. We don't like paying taxes; never have, never will. We continually ask our elected officials for more and more, whether tax breaks or spending programs. As a result, the U.S. now has the lowest tax rates and the biggest government budget in the industrialized world. We benefit from a low rate of taxation and a high rate of government spending. But the tax code is uneven and inequitable because of its structure, application, and opacity. Only by fixing tax structure and its application and imposing transparency will we know what numeric rate provides budgetary balance over time.

Does public spending displace private investment?
Spending by all levels of government is about 40 percent of gross domestic product (GDP) – that's a lot – and the deficit is approaching 8 percent of GDP this year. There may be some "crowding out" effects in investment, borrowing, and individual consumption. And there are definitely efficiencies to realize and duplication to delete. Government needs to provide effective public goods and services, offer a safety net for the less fortunate, and ensure that free markets are competitive and function.

Which political party is likely to propose a workable solution?
In times of plenty as well as times of lean, one party typically spends more while the other typically taxes less. Both tactics have the effect of throwing gasoline on the budgetary fire to make the economy burn more quickly, more furiously, and less sustainably. The abundance is now a cooling heap of ash, so it's not the time to snuff any remaining embers with a firehose of austerity. Rather, now is the time to fashion a plan that pays off debt over time and readies our position to fend off any future years of lean.

Economic and social philosopher Adam Smith wrote, “Never complain of that of which it is at all times in your power to rid yourself.” We have the power; it's our November ballot. Now is the time to rid ourselves of the status quo and bring old wisdom to bear.