Catherine Rampell Is Right About ‘Rosy Scenario’ Fatuity, Wrong About the Solution
As seen in RealClearMarkets.
Several years ago I was invited to attend a Hoover Institution retreat out in Palo Alto. At the gathering, Hoover scholars presented to a variety of economics writers, Left and Right. Catherine Rampell was one of the attendees, and it was pure joy seeing her poke holes in a presentation by Niall Ferguson in which he, among other things, claimed he predicted the 2008 financial crack-up. Ferguson did not do what he claimed, to have predicted 2008 was to have predicted the incredibly inept (a redundancy?) interventions crafted by the Bush White House and the Bernanke Fed amid what was a healthy correction up until then, but the main thing is that separate from Ferguson’s howler of a claim, Rampell exposed so much of what he said as questionable.
It’s a reminder that the Right, like the Left, needs talented critics. Rampell is a good one for the Right, even though she’s not always correct herself. The main thing is both sides need their beliefs critiqued, and Rampell capably critiques the Right.
In a recent opinion piece for the Washington Post, Rampell wrote of how “Republicans have promised balanced budgets, but have simultaneously ruled out virtually every mathematical path for doing so.” Rampell is correct to a certain point. Republicans talk endlessly of spending cuts and limited government when they lack power over the purse, only to occasionally attain power over the purse on the way to government that grows and grows.
Rampell’s piece featured the latest small government rhetorician (Russell Vought) “who has been advising Republican lawmakers about how to prove their fiscal probity.” Rampell properly comments on Vought with a wink given his service to a president (Trump) who signed spending bills brought to him by Congress that increased debt $4.7 trillion; all of this “before the pandemic prompted emergency spending measures.”
Rampell is correct in her assertion that Republicans talk a good game about spending restraint, but don’t act on it. Furthermore, they laughably tie their pursuit of a so-called “balanced budgets” to their projections of economic growth. In their analysis, growth born of tax cuts will produce the tax revenue necessary to balance the budget. Rampell refers to these projections as “Rosy Scenario” projections. Ok, a couple of things.
For one, a balanced budget is utterly meaningless both economically and as a restraint on government. Addressing the latter first, it’s because Americans are so incredibly productive that a “balanced budget” in the U.S. signals soaring government growth as far as the eye can see. In other words, a balanced budget is wholly anathema to at least the rhetorical aspect of the GOP that calls for a federal government that operates within constitutional limits.
Which brings us to the second point. For Republicans, which scenario is best both economically and for freedom: a balanced federal budget of $5 trillion, or a budget of $2 trillion with $500 billion of it borrowed? The answer is simple, or should be: the deficit scenario is infinitely superior. Government spending is what matters. It’s the tax, it’s the extraction of precious resources from the productive sector only for politicians to redistribute the resources in politicized, freedom-shrinking, economy-sapping fashion. Deficits are such a distraction, and worse they hand the argument to critics like Rampell who believe that we have deficits because we’re undertaxed. This is where Rampell gets it wrong with her calls for greater tax collection, which makes as much sense as happy talking Republicans do with their silly calls for deficit relief via growth that produces the revenue to fund the beast.
Both sides would be wise to spend some time understanding fixed income products better. If so, they would recognize that no one – and I mean no one – parts ways with cash blithely. Precisely because compound interest is such a powerful reality, money is rarely “dumb.” All of which explains why rich countries like rich individuals and rich companies can run up a lot of debt. Applied to the United States, the U.S. Treasury can’t borrow with ease because tax revenue collection isn’t enormous, but because it’s enormously high now and it will be even higher in the future.
We know revenue collection will be higher in the future because fixed income products are a look into the future. The actual markets comprised of people with actual skin in the game see an abundant tax collection present and future for Treasury, and they readily lend to it as a consequence. Applied to Rampell, she’s right that “Rosy Scenario” Republicans are nuts for presuming budgetary balance will be achieved via growth, but Rampell is incorrect for the same reason Republicans are.
The simple truth is that Treasuries, like any other fixed income security, are a claim on future revenues. The paradoxical reality missed by Rampell and those she criticizes is that deficits are a logical consequence of too much tax revenue. This is basic bond math. Which means unless both sides embrace tax cuts so gargantuan that tax collections plummet, deficits will be the norm now and forever. In other words, they’re a market phenomenon, not a low tax or lack of tax cut phenomenon as presumed by the warring ideologies.