The United States has set itself on a path of unsustainable debt levels with little political prospect to implement the policy mix that will turn this tide. What America needs is a government committed to generating real and sustainable economic growth and a real lowering of the fiscal deficits through strong commitments to (1) permanently lower tax rates on households and businesses and (2) stricter responsibility and control on government spending.
Recent research by two Harvard economists highlights the link between regaining a balanced budget by the federal government, lower tax rates, and the economy. This research supports the model of economic growth where a reduction in the tax rates faced by households and businesses stimulates an economy much more than a model relying on more government spending.
Printing more money to pay off our debt (by creating inflation so the fixed debt is worth less in real terms) is out of the question because of the possibility of losing control of the high inflation. Hence, our only remaining option is to pay off the debt the old fashioned way, by creating budget surpluses and paying a bit of our debt every year.
Moreover, the research recommends that a strong commitment to cost-cutting measures will also contribute substantially to lower and sustainable deficit- and debt-to-GDP levels. A critical step we could take to decrease spending is to cut costs of largely inefficient government-sponsored programs, allowing lawmakers to cut back tax rates across the board accordingly.
And yet this is easier said than done. Government-sponsored entitlement programs have no end in sight, making it hard to significantly cut spending and by extension to refrain from raising taxes to fund these entitlement programs. The stimulus bill and the current health care bill will make it even more difficult to achieve fiscal solvency. These authors conclude:
Health care reforms seem to imply large increases in spending, the retirement of the baby boomers is not too far, and in the pressing time of the crisis the issue of Social Security has been in the background, but it has not disappeared. A relatively high unemployment for a couple of more years will require spending on subsidies. The budget outlook looks rather grim on the spending side. The Congressional Budget Office predicts deficit of 7 per cent of GDP up to 2020. This is not a rosy scenario.”
Aleksey Gladyshev currently is a member of the Young Leaders Program at the Heritage Foundation. For more information on interning at Heritage, please visit: http://www.heritage.org/About/Internships-Young-Leaders/The-Heritage-Foundation-Internship-Program