Budgetary Nightmares

The former director of the Congressional Budget Office, Douglas Holtz-Eakin, recently estimated that implementing AOC’s Green New Deal would cost about 93 trillion dollars (https://www.foxnews.com/politics/green-new-deal-would-cost-93-trillion-or-600g-per-household-study-says). This figure is so absurd – more than 100 times our annual spending on defense and more than four times our total national debt – that the proposal has no chance of becoming law. Even so, its warm reception among leading Democrats shows that they believe that it is directionally correct, if maybe a little overeager. Given the power to do so, they would presumably enact something more moderate – maybe only doubling or tripling the national debt.

Here’s the thing, though: all such new programs – and, indeed, our current policies insofar as they are being paid for by new borrowings rather than taxes – will eventually have to be paid for by somebody. Money does not just appear out of thin air unless the government chooses to debase its currency, thereby impoverishing all. Appropriated funds may be raised through taxes, or borrowed within limits set by what others are willing to lend – but the well of bond market appetite (and resources!) is not infinitely deep and the deeper a borrower reaches for liquidity, the more costly the borrowings will be. With our current national debt at 78% of GDP, and rising fast, even without a tidal wave of Green New Deal –type spending, we can expect to find ourselves exceeding the limits of inexpensive borrowings within a few years. We’re already headed for debt trouble and the would-be Green New Dealers want to put the pedal to the metal.

Our fiscal problems can’t be solved through higher taxation. Total federal tax receipts (including payroll taxes like Social Security and Medicare, which the government wants us to think, falsely, that it’s setting aside in “trust funds” for our future use) for fiscal 2020 are estimated to be about $3.65 trillion – roughly $1 trillion less than the government will spend in the same period (https://www.thebalance.com/current-u-s-federal-government-tax-revenue-3305762).  Raising tax rates yields diminishing returns; think of it this way: if tax rates were doubled, many fewer people would work (and companies would move to more favorable tax environments) because the net after-tax rewards for working would be dramatically reduced. Even if some taxes can be increased without meaningfully harming the economy, the idea that trillions more can be squeezed out of taxpayers each year is a nonstarter.

I have little confidence that AOC has spent much time contemplating the fiscal realities of her proposal – she seems really happy about all the attention she’s getting – but her chief of staff, Saikat Chakrabarti, is clearer-headed about what’s at stake. In an interview with The Washington Post (https://www.washingtonpost.com/news/magazine/wp/2019/07/10/feature/how-saikat-chakrabarti-became-aocs-chief-of-change/?noredirect=on&utm_term=.ff0ad1ed4aa5) he made the following statement:

“The interesting thing about the Green New Deal,” he said, “is it wasn’t originally a climate thing at all.” Ricketts greeted this startling notion with an attentive poker face. “Do you guys think of it as a climate thing?” Chakrabarti continued. “Because we really think of it as a how-do-you-change-the-entire-economy thing.”

No kidding. They are talking about “a how-do-you-change-the-entire-economy thing” in the sense that committing the US government to Green New Deal –style spending would necessarily mean the end of our comparatively free economy. If the government couldn’t pay for these programs through taxes raised or money borrowed, ours would quickly become a command-and-control economy, with the government simply taking what it needed for as long as there was something to be taken. See also: Venezuela.

***

In my view, Holtz-Eakin performed two valuable services in issuing his evaluation of the Green New Deal. The more obvious of these was adding up the staggering costs of AOC’s wish-list.  By showing the radically unaffordable nature of the proposal, he almost certainly forestalled the likelihood that very many of the saner Members of Congress would get behind it.

The second was more subtle, but I think it has the potential to change the way budget decisions are made: he recast the total (again, $93 trillion) into terms of cost per household ($600,000).

One of the problems with government numbers is that they may be so large as to be almost meaningless to most people. $93 million, $93 billion, $93 trillion – who has time to really focus on what these different orders of magnitude really mean?  By dividing the program’s cost into a per-household figure, Holtz-Eakin made it relatable: would you want to assume a(nother) mortgage for $600k to pay for AOC’s and Chakrabarti’s dreams? Probably not, since the average actual mortgage debt in the US is $201k (https://www.investopedia.com/personal-finance/american-debt-mortgage-debt/).

Henceforth all budgetary numbers should be presented both “raw” in terms of their projected costs and on a Holtz-Eakin basis: divided into the cost per household (or, better yet, the cost per citizen). In this manner, we will all be able to readily understand just how much of our money our elected representatives are proposing to spend.

A small step, but a salutary one.

M.H. Johnston      

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