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Memories of the 28th Century

Fiscal Conservatism

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It as been a while since the term “fiscal conservatism” was in common use, but in the years after WW II and before Reagan’s Alzheimer’s term it was in common use, and the concept was embraced by both of the major parties; although the Party of Lincoln was usually more for it, because the party of FDR was more focused on social problems, and some people thought that throwing money at a problem would eliminate it.

Ronnie showed us that it made no difference what one’s political or philosophical preference might be, but he preferred to spend money instead of collecting taxes, and if the money spent exceeded the taxes received, he thought that was a win-win.

The matter of fiscal policy wasn't a major concern, until FDR was elected, because before then most people could read, and they understood that the federal government had only certain, specified powers, and those did not extend into social welfare. The government of the alliance was supposed to keep the general economy in good shape, so that the people could live and make money as they wished. Unfortunately, the New Deal cost a huge amount at a time, when tax revenues were low.

That was just one of the periods, when the feds ran up huge debts for some reason. The New Deal period wasn't as bad as the Reagan debt build up, and the present debt build up is even worse, because tax rates have been slashed. For a country to have some debt is good, normal, and reasonable, but high sovereign debt undermines the currency and leads to high inflation, especially when the currency is backed by debt obligations, as is the case with the U.S.A. If the higher debt is on top of a plunge in the economy from businesses being closed due to the pandemic, it becomes much worse. At some point, taxes will have to rise dramatically, not just correcting the rates that Trump got for his pals, but all federal taxes will have to rise to cover the interest on the debts, and to cover for the parts of the economy that will take several years to recover.

I wouldn’t have written about fiscal conservatism, except that it is relevant and necessary now and in the future. The national debt is $27.8 trillion and rising. It isn’t that we will have to pay it back this month, but the interest on the debt is the second largest item in the federal budget, and the GDP is only $ 21.4 trillion, so the debt is 130% of the GDP. (The calculation of both is variable, and some will claim that the debt is more or less, but those numbers are in the right range.) The World Bank says that a debt ratio of more than 77% over an extended period can lead to slower economic growth.

There are two ways to correct an excessive debt ratio: through taxes or spending. The U.S. tax code is a mess, so much so that many rates could be lowered and lead to greater revenues, if a few tax advantages were eliminated. The first step should be eliminating the giveaways of the Trump and Reagan tax cuts. Low corporate tax rates are of little importance. In times with high corporate tax rates, the U.S. economy did very well, and that included corporate growth. When the rate is high, corporations spend more money to avoid paying tax on it, and those expenditures help the rest of the economy. Getting rid of advantages for certain sorts of income would also help, and those changes would not be noticed by most people.

And it would be easy for the U.S. to spend less money. To start with, defense spending is absurdly high. If the U.S. cut half of the defense budget, it would still spend more on defense than most of the rest of the world. And the U.S. spends money on things that are not among the concerns of the federal government according to the Constitution. Cutting the excess spending would allow the country to pay down the debt relatively painlessly.

These are the sorts of plans that reasonable people in government would put forward, if they thought they would pass. We should encourage politicians to act reasonably, instead of looking only to their own interests.

Hey! We can try.

Updated 01-06-2021 at 07:46 PM by PeterL