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Why the Deficit Is Simply Not an Economic Problem Now, or in Future Decades

The profound disconnect between what Americans expect to receive from the government in services, and what they expect to pay for it in taxes.
 
 
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Despite ubiquitous claims to the contrary, the United States does not have a “deficit problem,” over either the short or the long term. That’s because a large fiscal deficit is an economic issue, and what we face is a political problem -- a profound disconnect between what Americans expect to receive from the government in services, and what they expect to pay for it in taxes.

That’s fueled, in large part, by a well-funded conservative movement that has convinced a significant portion of the population that they can live in a modern, highly developed country with decent infrastructure and a modest safety net, get an endless series of tax breaks and not take on a mountain of debt as a result. That mathematical impossibility represents a different problem; namely, a public that’s poorly informed about taxes and spending. It’s a low information problem.

We would have a deficit problem -- an economic problem -- if the right’s narrative of “runaway government spending” had some basis in reality.  But it doesn’t. Using data from the Organization for Economic Cooperation and Development -- the “rich countries’ club” whose members represent most of the world’s leading economies -- Sabina Dewan and Michael Ettlinger showed that between 2004 and 2007, the U.S. ranked 24th out of 26 countries in overall government spending as a share of our economic output.  Only Ireland and South Korea, both relative newcomers to the club, had a more “limited government” than we did during that span.

That share will rise in the coming years as the baby boomers move into their golden years and we offer health insurance to millions of Americans who couldn’t previously afford it, but given that our spending was about 7 percentage points below the OECD average -- and almost 20 percentage points beneath that of big spenders like France -- we still won’t have a very “big” government relative to the rest of the developed world.

We would also have an economic problem if we couldn’t afford to raise taxes to pay for what we, as citizens of a democracy, want the government to do -- if the Right’s narrative that we’re “being taxed to death” had some basis in reality. But, again, it doesn’t. In 2008, we ranked 26th out of the 30 OECD countries in our overall tax burden -- the share of our economy we fork over to the government -- coming in almost 9 percentage points below the average of the group of wealthy nations, and, again, some 20 percentage points below highly taxed countries like Denmark.

One can’t call something that’s readily fixable a “serious" problem, and economically our “budget gaps” are readily fixable -- we could raise revenues with the addition of, say, a Value Added Tax (probably the easiest way, politically), and we could do that as soon as the economy recovers or in 20 years from now.

Of course, raising taxes so they cover our government’s relatively modest spending is deeply unpopular with the electorate, which is, again, a political problem. And because that political reality is driven by the widespread but false belief that we have out-of-control government spending and are taxed to death, it is, again, a problem of an electorate with bad information.

The reason it’s important to understand that our budget gap is a not a structural economic problem is simple: presenting it as such -- and getting pretty much everyone to repeat the claim -- is giving America’s elites an opportunity to steal your Social Security, make seniors and vets pay a bigger chunk for their health care, and otherwise deepen their brutal assault on working America’s economic security.

 
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