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How to Solve the Deficit with No Pain PDF Print E-mail
Wednesday, 17 June 2009 00:35

Seriously, I've figured out a plan that I think will work.  It should not upset Conservatives as it does not raise any taxes.  And it should not upset Liberals as spending is not cut, nor are programs eliminated.  Best of all, it's simplicity itself, insanely easy to calculate, model, and follow.  Are you ready for it?

Peg annual Federal budget increases to be no more than inflation plus population growth.


That's it.  Seriously, if we want to solve the deficit nightmare, all we need to do is cap spending at a reasonable rate, a rate that does not dictate a single program being cut.  Costs of each program are allowed to increase at the rate of inflation, and also to account for more users.


Let's look at the raw data over the period from 1974 to 2007 (latest data available):

This graph shows annual inflation, population growth, the combination of the two, and the GDP annual change.  As we can see, the GDP annual change tends to be higher than the combination of inflation plus population.  Clearly, there is something good to be said!


Now, how do we capitalize on that GDP growth?  What tax rate do we need to set?  Well, there's something called Hauser's Law which essentially states that for all recent (last 50 year) tax rates, the Federal Government will get approximately 20% of the GDP.  Meaning that the receipts the Federal Government can count on - taxes - are pretty much a function of GDP and not of the tax rate.


So, where does that leave us?  Well I propose we leave tax rates where they are - at the current Bush 2003 tax cut levels.  No need to increase OR decrease them.  That will mollify Conservatives (they aren't going up) and Liberals (they aren't going down).  And the growth the US experienced over the last 5 years show that it's a pretty good level.


In fact, what if back in 1974 we had adopted this very approach?  Well, this graph will help:

The blue line shows the annual deficit (if positive) or surplus (if negative).  This is based upon taking the actual annual GDP, and multiplying by the factor of (inflation + pop growth) - (GDP growth).  Meaning what is the amount of annual increase in the GDP above inflation + population growth.  Then we use our Hauser's Law factor of 20% to assume that 20% of that "gain" would be available for debt/deficit reduction.


An what do we see?  Well, the annual deficits tend to actually be surpluses!  And over the course of that 34 year timeline, we not only would have NOT added any deficits since 1982, but actually accumulated nearly $1 TRILLION in surpluses!


And here's the interesting data point: what was the national debt in 1982?  Well, according the US Treasury, it was just $1.14 trillion.  Meaning that if we started this plan back in 1974 we would be nearly debt free at this time - in fact, we would have a national debt of $220 billion; less than 2% of the current national debt!


I propose we adopt this policy as soon as possible; historically, if you look back at inflation, population growth, and GDP growth, the GDP ALWAYS outpaces inflation and population growth (which makes sense, since that is the only way our standard of living can increase).  If started now, and you use the projections of the last 34 years as your guide (which includes the Carter years, the recession of 1981/198, the recession of 1990/1991, the recesssion of 2000/2001, and the hit of the 9/11 attack) we would eliminate our deficit within 6 years, and the national debt within 45.


This is a common-sense plan.  It does not raise any additional taxes, nor turns over more control to the Federal Government.  The "Beast" is capped.  And it does not cut a single program in terms of service provided (inflation) or the number of people served (population growth).  I truly believe this common sense plan is the ONLY way to solve our rapidly mounting deficit and debt fiasco.  Urge your Congressmen to push for this common-sense approach to solving our financial nightmare!

Last Updated on Wednesday, 17 June 2009 01:18