Everyone right now is worried about the so-called fiscal cliff—a truckload of new taxes (and an across-the-board cut in government spending) that will take place at the end of the year if Washington can’t come to an agreement. There’s no question those taxes will put a strain on many Americans—Americans who are already feeling the strain of a bad economy. But what’s being ignored in the debate is this: we’ve already fallen headfirst off the freedom cliff.
Over the last century, the U.S. government’s role has transformed from the original one of protecting individual freedom to redistributing wealth (Medicaid, welfare, Social Security, farm subsidies etc.), usurping economic functions that should be private (mail, education, mortgage securitization), and interfering in voluntary economic transactions (virtually everything done by Washington’s alphabet regulatory agencies). Given the omnipresent role of the state in our affairs, is it any wonder we’re facing a massive deficit?
A government that limits its function to protecting American freedom via a police force, military, and legal system, is relatively affordable. War-time aside, during the whole of the 19th century, when the U.S. came closest to capitalism, federal government spending as a percent of GDP stayed around 3%.
What about state and local government? Tack on another 6% or so. And then keep in mind: this was not perfect capitalism. Particularly at the state and local levels, government was doing things it should not be doing, such as building roads and canals and operating the post office.
The biggest problem today is not that our leaders cannot come to an agreement. It’s that they are trying to satisfy the irreconcilable views of Americans: We want government to do everything—but we want our freedom. We want government to fulfill everyone’s every need—but we don’t want to pay for it.
The result? We have two political parties that agree on what government is doing but are bickering over how to make it affordable. The Democrats say the key is raising taxes. The Republicans say the key is to jigger with the programs and make some minor cuts. But no one is asking: should government be doing things other than protecting our freedom?
The Tax Foundation has put together a helpful guide to the “fiscal cliff” debate.
On December 31, 2012, a large swath of the federal income tax code is scheduled to expire, an event which has come to be known as the “fiscal cliff.” Among the expiring provisions are the 2001 and 2003 tax cuts enacted under President Bush, a compromise on the estate tax, a “patch” in the Alternative Minimum Tax (AMT) reducing its impact, the temporary 2 percent payroll tax holiday, increased business expensing, and the “extenders” package of miscellaneous tax deductions. On January 1, 2013, five taxes enacted as part of the Patient Protection and Affordable Care Act (PPACA)—popularly referred to as Obamacare—also take effect, along with sequester spending reductions of $109 billion due to the failure of the “Supercommittee” to reach consensus on budget reductions.
In late February, the U.S. government will hit the debt ceiling, exhausting its ability to borrow to finance ongoing spending without an increase by Congress. Finally, the federal government’s continuing resolution appropriating spending expires on March 27, 2013.
The fiscal cliff is the culmination of a decade of “temporary” tax and budget bills that have postponed resolution of key policy differences. Should the tax code be used to heavily promote income distribution or aim instead to raise revenue in the least distortive manner possible? How large should federal spending be? Should PPACA be modified or repealed? Should there be a federal estate tax and if so, at what level? Should the payroll tax be reduced and if so, how should we fund Social Security and Medicare? What should Social Security, Medicare, and Medicaid look like as the population ages?
The Institute for Policy Innovation has an informative (and sobering) introduction to one of the most important economic issues we face today.
The “fiscal cliff” coming at the end of the year pales in comparison to the “entitlements cliff” being forced on us by a multitude of entitlement programs that we can no longer afford. . . .
The budget implications of these programs are enormous. For fiscal year 2012, the country spent roughly $2.2 trillion of its $3.7 trillion budget on entitlement programs-about $400 billion less than the $2.6 trillion in gross annual revenues. In addition, interest on the federal debt was $220 billion.
Thus, the cost of entitlement programs plus interest on the debt is nearly equal to total federal revenues today. Virtually everything else the government does is with borrowed, or printed, money.
Entitlement spending is also growing much faster than the economy. Since 1980, Social Security and the various income security programs have grown at an average annual rate of 6 percent, while Medicare and Medicaid have both grown at more than 9 percent annually, which includes population growth.
Much more here. I should add that I think their solutions don’t go nearly far enough. The solutions assume that our goal should be to save these programs. As I have discussed many, many times on this blog and elsewhere, our goal should be to end them.