If you apply a basic law of accounting physics to this week's budget deal, you could easily conclude that the results are DAFT (short for "deficits are future taxes.") With a total debt of more than $13 trillion, our government is in the midst of forcing the largest intergenerational transfer of wealth the world has ever seen.
Instead of accepting that truth, and living within our means, each party is using its own favorite myth to make things worse. And they have the nerve to call the result a "deal."
Myth one is the "Keynesian multiplier effect:" one dollar of new government spending creates several dollars in new spending, as the effect on consumption ripples through the economy like waves on a pond. Keynes himself never argued that the multiplier was anything but a stop-gap measure, but for some reason politicians and the media have adopted the multiplier as a permanent guide to policy.
The problem is that empirical measures of the multiplier imply that a dollar buys less than a dollar, not more, at least in terms of pure stimulus. Government spending may be worthwhile, but the justification needs to be that we need that new road, or new school, or defense contract. Government spending for stimulus alone increases the deficit without any significant stimulating effect. And that's DAFT.
Myth two is the "supply side effect:" cutting taxes increases tax revenue. Republicans aren't sure what the question is, but the answer is "cut taxes!" because tax cuts pay for themselves. But again the empirical evidence shows this is false. The two largest increases in the deficit in U.S. history followed the Reagan and Bush II tax cuts.
There are good reasons to cut taxes, of course. Lower tax rates really do spur economic activity, attract investment, and encourage entrepreneurs to start new businesses. But you can't get something for nothing. Cutting taxes to pay for the deficit is DAFT. Our children will have to pay it all back, plus interest.
Government budgets have to be paid for, but we can't rely on the deficit spending multiplier myth or the supply side tax cut myth. Yet the deal wending its way through the lame duck Congress invokes both myths simultaneously, so that both Democrats and Republicans can claim credit.
Our two major parties seem to have learned nothing from the backlash against deficits in this November's election results. The Democrats are insisting on several enormous new spending initiatives, including the extension of unemployment benefits for another year. Their justification is that the spending in this "stimulus" will help the economy. But no effort was made to pay for the new spending.
Surely the Republicans will say no, right? Well, not exactly. Republicans are accepting the unemployment extension so they can indulge their own obsession, again. Instead of asking how to pay for new spending, or better how we might cut spending, the Republicans just cut revenue.
The Republican tax "cuts" really just move money around. Every dollar of debt resulting from extension of the Bush tax cuts is a dollar that must be paid back, plus interest, with new taxes on our young and future workers. The net effect is not a tax cut at all, but an increase.
There are two possibilities for the U.S. The first is we call both parties to account, recognizing that government spending does not increase GDP unless it is spent on infrastructure and programs that can be defended -- not as "stimulus," but on their own merits. In the long run, a dollar of spending must be paid for with a dollar of new taxes. If you hate taxes, cut spending.
The second possibility is that we cling to the twin myths, the economic falsehoods that enable re-election for politicians at the expense of both sound government and economic prosperity. Instead of some combination of reduced spending and increased revenue, we continue to borrow until there is no turning back.
Increasingly, economists recognize that we are near the point where simply paying the interest on the debt will crowd out other government programs (the kind the Democrats claim to support) as well as business investment (the kind the Republicans claim to support).
DAFT, isn't it?