Imagine that a year ago the president had proposed to begin dealing with the government's budget deficit, and the urgent need for infrastructure investment, by raising the federal gas tax by 60 cents a gallon, from its current level of 18.5 cents. You can almost hear the howls of protest and condemnation, with dire warnings about how it would bring auto sales to a grinding halt, force entire swaths of rural America into bankruptcy and plunge the economy back into recession. Oil industry economists would surely have projected the loss of millions of jobs.
That didn't happen, of course, but guess what: Over the past year, the average price of a gallon of unleaded gasoline in the United States actually increased by the same 60 cents, according to AAA. Instead of that money —as much as $100 billion — going to the U.S. Treasury for deficit reduction and infrastructure, it went straight into the pockets of Arab sheiks, Russian oligarchs, global commodity speculators and oil company shareholders.
During that same period, private businesses created 1.2 million jobs and recorded near-record profits, stock prices rose by more than 20 percent and auto sales were brisk enough that General Motors recently handed out $4,000 profit-sharing checks to each of its unionized workers.
History will also record that, during that same period, not one politician of whom I am aware took to the floor of the House or Senate to denounce this "job-killing" 23 percent increase in the price of gasoline.
The purpose of this real-life fable is to provide a bit of perspective to the bitter and contentious debate that is about to begin in Washington over taxes and spending. The outcome of this debate will surely have a significant impact on the economy, and failure to deal with the government's long-term structural deficit would be likely to lead to another financial and economic crisis. But in considering the unpleasant tradeoffs we face, it is important to remember that government spending and taxing are not the sole determinants, or even the major determinants, of how the economy performs.
The tendency on the part of nearly everyone who participates in this debate is to exaggerate the impact of any particular policy choice by viewing it in isolation, comparing it with the status quo and relying on static analyses. Such exaggeration not only makes it harder to reach an acceptable resolution, but also is almost certain to result in bad policy.
Put more simply, this budget debate will turn out much better if we all lower our voices, dispense with the histrionics and keep things in perspective.
In that context, a few observations:
Most of the $4 trillion slated to be added to the government's debt during President Barack Obama's first term is the result of tax cuts that the country could not afford plus a bad recession that drastically reduced revenue and increased spending. That doesn't mean there isn't a serious long-term structural deficit that needs to be addressed, but that was baked into the cake long before Obama arrived in Washington. He can be blamed for not yet stepping forward with a plan to deal with that structural deficit, but no more than most of his Republican critics, who have yet to come up with a credible plan themselves.
All the shouting about where and how much to cut domestic discretionary spending is wildly overdone. This category accounts for about 12 percent of all federal spending, and even if you were to wipe it out entirely, you still wouldn't balance the budget. The real money, and therefore the real savings, is in entitlement spending, Social Security, Medicare and Medicaid, and the military.
That doesn't mean domestic discretionary spending should be ignored, but cuts ought to make sense economically and morally. The president's do — and at more than $1 trillion over the next decade, are nothing to sniff at.
If the aim is to reduce the deficit, you don't do it by cutting back on enforcement agents at the IRS whose job is to collect some of the $300 billion in unpaid taxes each year. Or to cut programs designed to immunize children, reduce teen pregnancy, and offer nutritional support for pregnant mothers and infants — all programs that save a bundle later in future spending on health care, law enforcement and special education.
The best way to balance the federal budget, of course, is to increase economic growth. I wonder if there is a serious economist anywhere in America, however, who thinks the way to increase growth is to reduce Pell grants, the money used by poor and working-class kids to pay for college at a time that state colleges and universities are raising tuition.
The GOP plan, in reality, is driven primarily by political calculation. Spending for seniors, veterans, farmers, Israel, oil and gas companies, and the military is left largely untouched, while reliably Democratic constituencies such as the poor, environmentalists and government workers would take the brunt of the cuts. And then there's the extra money for the inspector general of TARP, the successful and largely profitable Bush bank-rescue program that Republicans now love to hate.
It's pretty clear that the tea party Republicans who are demanding these cuts don't really know or even care what programs work and what don't. So far, they've probably spent a total of 20 days in Washington, talking to themselves, learning little about the government they are meant to run. They wear their ignorance almost as a badge of honor.
So let the 2011 budget games begin. Anyone for a hike in the gas tax?