How to Grow Out of the Deficit

Democracy and Power:  104 Future Debt Burden

 A government debt is a government claim against personal income and private property – an unpaid tax bill. – Hans F. Sennholz,

All democracies institute programs for current voters and shift the debt to future workers, even the unborn.  Social Security, Medicare, prescriptions drug benefits for seniors are prime examples in America.


How to Grow Out of the Deficit

Limiting spending increases to inflation minus 1% would balance the budget in less than a decade.

Presently, the federal deficit retards economic growth.  Knowing high taxes also slows down economic growth, many politicians seek higher taxes arguing the deficit must be reduced. 

Edward Lazear, Chairman of the President’s Council of Economic Advisers from 2006-2009, presents a plan to reduce the deficit without raising taxes.  Lazear writes in the Wall Street Journal.

To reduce spending and reignite growth, this Congress or its successor should take two actions. First, immediately cut the level of spending that has been increased so dramatically since 2008. Second, institute an “inflation-minus-one” rule to constrain future spending increases….

Spending, not the deficit, is the most important measure of fiscal restraint. A fiscally irresponsible president could balance an out-of-control budget by taxing too much. That approach would hardly be conducive to economic growth.

To return to the healthier spending ratios of the past two decades, Congress should begin by enacting a budget that brings spending for fiscal year 2012 at least half way back to where it was in 2008. ….

Second, Congress should begin limiting future spending according to an inflation-minus-one rule. That rule would hold that in any year when the ratio of government expenditures to GDP exceeds 18% (the 30-year average of tax revenues), Congress could increase spending only by the last three years’ inflation rate, minus one percentage point.

This plan forces Congress and the President to restrict expenditures in accord with the 30 year relationship of spending to GDP.  The harmful deficits would be eliminated in 10 years without imposing harmful tax increases.

  More important, the structural restraint will put in place a system to curtail the curse of every modern democracy – politicians buy voters’ favor at the expense of future workers. All democracies spend more than they tax, which burden future generations and destabilizes democratic forms of governance.  Lazear’s proposal is an initial step to preserving democracy and personal freedom.