The first presidential debate just held in Colorado had President Obama going head to head for the first time with Mitt Romney. Most accept and believe Romney was the clear winner of this debate. After the debate was over, fact checkers went into high speed, working on the various figures thrown out by the two contestants.
Romney seemed to win in part because he told the American people things they wanted to hear, whether their was any basis for them or not. Obama however seemed to get too bogged down in the grim details of the situation our nation faces.
Of all the great things Romney promised, he said he would balance the budget. At the same time he said he wouldn’t raise any new taxes. In fact he proposed lowering taxes and closing loopholes, but doing so in a manner that remained revenue neutral. This means the government wouldn’t get any additional money. Obama agreed with closing loopholes and being able to lower the corporate tax rate, but stands by the idea that we still have to raise some more revenue from somewhere. (He said preferably from the wealthy. Those who are able to afford it.)
So Romney promised to balance the budget and not raise any taxes. He also said he wouldn’t cut Medicare, wouldn’t cut education and wouldn’t cut the military. So if he won’t raise taxes and won’t cut from any of our biggest expenditures, how does he plan on balancing the budget? He did say he’d cut funding for PBS. Funding for PBS is hardly a large expense that would balance the budget.
What is Romney’s plan for balancing the budget if he won’t raise taxes or cut any big expenses? His idea and that of his constituents is to focus on growing the economy. The increased jobs and wealth created would mean more revenue for the government without raising tax rates. And he is right. When you grow the economy and more people are working, the government is able to raise more revenue. This reasoning makes perfect sense.
However there is one big problem with this reasoning that the fact checkers and pundits have overlooked. The thing standing in Mitt’s way for this plan to work is MATH and history. This is where we need to get out our calculators.
Over yearly federal deficit is 1.5 trillion dollars. We spend 1.5 trillion dollars more than we take in from tax revenue. So for Mitt to balance the budget without raising taxes and without major cuts, he needs to raise 1.5 trillion dollars. He suggests doing this by growing the economy. So how much will the economy have to grow in order to raise 1.5 trillion? Under current tax rates, the government earns 16% of GDP in tax revenue. If keeping the same net tax rates, the economy will have to grow by 9.3 trillion dollars in order to raise 1.5 trillion in additional tax revenue. How much is 9.3 trillion? In order to increase our current GDP of 14 trillion by 9.3 trillion, GDP would have to grow consistently at 16% for the next four years. This has never happened anywhere in the world! Even China’s largest growth rate was only 14% just before the recession hit.
Ok, so we give Mitt eight years to balance the budget under this philosophy and GDP would need to grow 8% for eight years straight. Again, this has never happened! Our average growth over the past 50 years is around 4% and we’ve had one-year peak growth at 8.5% in 1966 and 1984. Never before have we grown 8% for more than a year straight.
So far this doesn’t seem anything close to a plausible path towards balancing the budget without raising tax rates or making drastic cuts.
Ok, so let’s say Mitt does decide to make a bunch of cuts and is able to cut 500 billion out of the federal budget. (500 billion is about 14% of the total federal budget).
If he cuts 500 billion, we still have a trillion dollar deficit. Again, without raising taxes, how much does the economy need to grow so that we can increase tax revenue by 1 trillion dollars? We would need to add 6.25 trillion dollars to our GDP. It’s not as bad as our previous example, but GDP would still have to grow 11% for 4 years straight to raise an additional 1 trillion in revenue. Again, if we give Mitt eight years to balance the budget with 500 billion cut from the yearly deficit, GDP would still need to grow 5.5% for eight years straight. This sounds a bit more possible, but again very unlikely. Even during the boom years of the 90s, GDP growth averaged at 3.5% and peaked at 7% twice.
Even in this liberal example, where we cut 14% of government spending and give Mitt eight years to balance the budget by growing the economy at 5.5% each year seems highly improbable.
So if Mitt promises not to cut Medicare, military or education, then there are only two other options left to balance the budget.
1-severly gut our government functions by cutting 40% of government spending in other areas.
2-Raise tax rates.
I for one believe in the “balanced” approach Mr. Obama has so often mentioned. Some cuts and some tax increases. That is what balance means. A little of both. But how can there be balance when people in the GOP adamantly insists on no new revenue?