mcardle

Megan McArdle

If you stayed up until the wee small hours last week to watch the passage of the Republican tax bill on CSPAN, you heard a lot of debatable propositions. Would tax cuts really grow the economy as much as Republicans said? Would they really throw tens of millions of people off health insurance, as Democrats said? And so on and so forth.

Someone unfamiliar with their agendas could be forgiven for thinking that Democrats and Republicans were talking about two separate pieces of legislation: one that was going to raise wages, create new jobs and bring working families to new realms of prosperity; and another that was going to gut Americans’ health insurance, take away all their money and plunge them into unprecedented suffering.

But there’s one thing we can’t really argue about: This tax bill is going to increase the deficit. Probably not by exactly the $1 trillion that the Joint Committee on Taxation predicted, but close enough.

Republicans like to sing paeans to the dynamic effects of cutting taxes, where lower taxes means higher economic growth means more revenue. But we ran that experiment in the 1980s, under President Ronald Reagan, and again just recently in Kansas under Gov. Sam Brownback. The results have been pretty consistent: whatever dynamic effects there are, they aren’t big enough to pay for the lost revenue from lower tax rates. Which means that calculating the budgetary impact of cutting taxes is not some arcane art involving lots of exotic economic theory and higher maths; mostly, it’s just arithmetic.

So Republicans should stop crowing about passing a big tax cut; they’ve done no such thing. All they’ve done is cut taxes for some favored constituencies, while raising taxes on future generations. 

This would be bad enough in an ordinary time, but we are not in an ordinary time; we are looking down the barrel of the greatest entitlement crisis the U.S. has ever faced. Every year, more baby boomers retire, and the strain on Social Security and Medicare rises. Sixteen years ago, when the first of the Bush tax cuts passed, this crisis was comfortably far away. But during the Great Recession, payroll taxes stopped being enough to cover Social Security benefits. That gap will continue to widen for the next few decades. So will the burden of covering Medicare and Medicaid. We have spent many decades making promises we didn’t pay for, and kicking the can down the road every time the question of payment came up. Now we’ve reached a dead end, and the reckoning has begun.

This is one reason that even now, 10 years after the Great Recession, budget deficits remain considerably elevated over what they were during most of the George W. Bush years. Of course, a reasonably small budget deficit can be finessed indefinitely; inflation will slowly eat away at the value of the debt, and economic growth will make it look smaller, relative to the amount of income available to pay for it. But thanks to our entitlement problem, the budget deficit is not likely to remain “reasonably small,” nor can it be finessed away.

With inflation low, the value of any new debt we take on will stay high; with growth modest, our income won’t outpace our spending any time soon. Whatever you thought of the other provisions of the Republican tax bill, this should concern you.

But it doesn’t bother many policy makers. These days, in most peoples’ minds, the deficit is simply a tool to try to block the opposition from doing anything. Democrats have been outraged — outraged! — that Republicans were expanding the deficit to finance a tax cut. But where were those Democrats seven years ago? They were cheering the passage of a huge new health-care entitlement loaded with dubious “pay for” provisions that made its claims of deficit reduction more than a little suspect.

It’s hard to remember that just a couple of decades ago, our government did do something about the deficit, other than make it worse. First under George H.W. Bush, and then under Bill Clinton, Congress and the president worked together to pass major deficit-reduction bills that actually tried to put the finances of the country on a reasonably stable long-term footing. These bills were not very popular; the first may have cost Bush re-election. But they were what responsible government looks like.

Megan McArdle is a Bloomberg View columnist. Email mmcardle3@bloomberg.net.

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