Mortgaging the future

The grandchildren that MeTheSheeple does not yet have may be paying for mistakes that may have started on a cocktail napkin.

The napkin was the infamous napkin supposedly drawn upon by economist Arthur Laffer, who sketched the "Laffer curve" that theorized tax collections could increase as the tax rate decreased. Laffer has since said he doesn't remember the napkin and disavowed the theory.

Just last year, the Congressional Budget Office studied the results of a 10-percent tax cut. Assumptions varied, but the CBO decided that growth due to tax cuts would make up only a small fraction of government's economic losses due to the tax cuts: about one quarter, and quite possibly less. In other words, cutting taxes really cuts tax collection. It doesn't stimulate the economy nearly enough to make up the difference within a decade.

Today, Washington Post columnist Sebastian Mallaby argues that efforts to cut taxes -- and thus government revenue -- backfire and actually increase the size of the "beast," or government.

Everybody knows that the Reagan tax cuts did not actually cause spending to come down in the 1980s; most people have surely noticed that the Bush I and Clinton tax hikes were followed by spending constraint in the 1990s; and the Bush II tax cuts certainly have not stopped Congress from spending like a drunken sailor recently. But then the plural of anecdote is not data, and until the starve-the-beast theory is conclusively discredited, tax cutters won't stop hiding behind it.

Well, now it has been discredited. Rauch cites William Niskanen, an economist who worked in the Reagan White House and now chairs the Cato Institute. Niskanen has crunched the numbers between 1981 and 2005, testing for a relationship between tax cuts and government spending, and controlling for levels of unemployment, since these affect spending and taxes independently. Niskanen's result punctures his own party's dogma. Tax cuts are associated with increases in government spending. The best strategy for forcing cuts in government is actually to raise taxes.

Mallaby said the interesting thing to watch will be the Republicans' reaction.

Forget partisan politics as a spectator sport. MeTheSheeple's reaction is to worry about his yet-spawned grandchildren. Talk about the "national debt" comes and goes in cycles, but even less talked about are the government's obligations to Medicare, Social Security and other entitlement programs that are running out of money. And remember: These are the same entitlement programs facing a surge of demand from Baby Boomers. At the same time, we've decreased our ability to pay (tax cuts) and increased the obligation and debt (prescription coverage). Is any of this new? No, take a look at a story from 2004:

A USA TODAY analysis found that the nation's hidden debt — Americans' obligation today as taxpayers — is more than five times the $9.5 trillion they owe on mortgages, car loans, credit cards and other personal debt.

This hidden debt equals $473,456 per household, dwarfing the $84,454 each household owes in personal debt.

The $53 trillion is what federal, state and local governments need immediately — stashed away, earning interest, beyond the $3 trillion in taxes collected last year — to repay debts and honor future benefits promised under Medicare, Social Security and government pensions. And like an unpaid credit card balance accumulating interest, the problem grows by more than $1 trillion every year that action to pay down the debt is delayed.

"As a nation, we may have already made promises to coming generations of retirees that we will be unable to fulfill," Federal Reserve Chairman Alan Greenspan told the House Budget Committee last month.

Think of your grandchildren, or their grandchildren. Encourage your legislators to quit playing partisan poltics and mucking around in the feces-strewn sandbox of pet economic theories.