Voodoo Economics

During the Republican primaries leading up to the election of 1980, Ronald Reagan's economic plan was famously called "Voodoo economics" by his chief rival George H.W. Bush.

One of the central tenets of Reagan's plan was that tax cuts would raise the deficit in the short term but the resulting economic boom would eliminate the deficit as the economy outgrew the deficit.  It worked.....well kinda.   Economic growth was substantial but the deficit persisted.  What Reagan hadn't counted on was the boom in spending on entitlements.  The growth in entitlements was such a factor that the President who authored one of the biggest tax cuts in history ended up signing one of the biggest tax hikes in history to ensure that Social Security remained solvent.

Fast forward 30 years and President Obama has proposed a budget that totals 3.6 trillion dollars in spending.  This outflow of dollars exceeds the money coming in by a staggering 1.6 trillion dollars.  Putting this into terms that one can relate to, imagine a family with $50,000 in take home pay spending $90,000 per year.

Obama's budget proposal claims to cut the deficit from 11% of GDP to 4% of GDP in 4 years.  This is largely based upon rosy projections for economic growth.  In fact, economic growth accounts for 6 of the 7% that the deficit is forecast to decline.  Note however that his own projections show the deficits climbing ever higher towards the end of his second term as baby boomers retire and start drawing Social Security.

Such deficits are not only unsustainable, they are immoral.  Deficits represent a legacy of debt being passed onto our children and grandchildren.  We are impoverishing future generations in order to safeguard our standard of living.

So what should be done?  First off, do away with rosy economic projections.  Assume a recession or two.  Why are politicians always surprised that recessions come along?  Second make some hard choices on taxes and spending.  Raise taxes across the board.  Raise the age at which one qualifies for Social Security.  (The age of 65 for eligibility was introduced when the average lifespan was 67 years.  Now that the average lifespan is pushing 80, upping the retirement age is warranted.)

A balanced budget amendment should be introduced.  It could have some flexibility built in so that some stimulus can be introduced at times, however it should be a condition that stimulus spending can only come from past surpluses.  In other words, the government should put away for a rainy day.  I would ask proponents of the idea that governments should spend during recessions and run surpluses in boom times why we can't reverse the order.  Governments should first save money and then spend it during a recession.  When that money runs out, so should the stimulus.

These are very simple common sense ideas.  They are not likely to see the light of day in Washington or Ottawa.