If the U.S. economy doesn’t start growing much faster, the federal government’s fiscal problems can’t be fixed. Although last month’s debate over deficit reduction measures painted the fiscal challenge as a choice between tax increases and spending cuts, no combination of those approaches can reasonably be expected to eliminate a shortfall in tax receipts currently running at about a billion dollars every six hours. What we need is an economy that generates sufficient wealth to cover federal obligations without compromising its capacity to create jobs, and there is extensive evidence that raising tax rates works against that goal.
I’ve had plenty of time to contemplate this problem over the last week while sitting at the bedside of my ailing mother in Massachusetts. Her 93rd birthday falls on this coming Saturday, and like millions of other elderly Americans, she owes her longevity in part to the availability of government health care programs such as Medicare and Tricare. If you walk through the kinds of facilities where people her age are treated when they become sick, you quickly discover that much of the government’s health care dollar is being spent on patients who in previous generations would have died at a much earlier age. The year my mother was born — 1918 — average life expectancy for women in the U.S. was somewhere in the low fifties, so a combination of new technology, new drugs, and new government programs has made a huge difference in the lives of average citizens.
It should be obvious to anyone who followed last month’s debate that our government is not prepared to tell people like my mother it can no longer afford to keep them alive. Any politician who tried to advance a theory as to how the government could take on such life-and-death decisions would be roundly condemned and ejected from office in the next election. However, the Congressional Budget Office projects that in the absence of big changes in federal health care policy, U.S. spending on medical and other health-related services will rise from 16 percent of the economy today to 25 percent in 2025 and 37 percent in 2050. It would be nice to believe the necessary changes are mainly about becoming more efficient, but the truth of the matter is that they would also be focused on limiting access to care — the kind of care required to keep some people alive. The latter kinds of changes are unlikely to be made in our system.
CBO’s projections demonstrate that the core problem in federal finances isn’t the Bush tax cuts or the cost of overseas wars, but the failure of the economy to generate the gains in wealth that can keep up with rising health care costs. Higher tax rates might help close the gap in the near term, but by themselves they would simply delay the day when we face up to the mismatch between demand for health care services and available resources. With the population aging and baby boomers abandoning the workplace for retirement, rising health care costs will eventually swamp the finances of a political system that can’t say “no” unless the economy can be induced to grow much faster. Raising tax rates just gets in the way of that goal — especially in globalized economy where money can be quickly moved wherever it generates the best returns (including the lowest effective tax rates).
So the outcome of the next presidential election should hinge on which candidate presents a credible plan for getting the economy to grow much faster. I’m not talking about three or four percent economic growth; the Obama Administration’s deficit projections already assume four percent growth or higher annually over the next several years, and yet still anticipate trillion-dollar deficits as far as the eye can see. What I’m talking about is more in the range of five or six percent, which will require a wholesale reconsideration of tax, trade and regulatory policies. Among other things, the federal government would need to rethink how tax burdens are apportioned to bolster economic competitiveness, crack down on countries engaged in unfair trade practices (especially China), and tell environmentalists to take a long vacation. Right now, Republicans look a lot more likely to do what needs to be done. We’ll see whether Mr. Obama’s increasingly beleaguered team can rise to the occasion.
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