Fiscal responsibility: investing in our children's future

The paper I was invited to write for a spring conference (the William B. Ruger Chair Workshop on “Economics and Security: Resourcing National Priorities”) at the Naval War College has been published. (Right after attending the conference I had written only about what I learned about defense/national security spending.) The entire monograph can be found here, and my paper appears on pages 81-88. Some of my favorite parts (leaving aside my never-ending rants about the Bush/Obama tax cuts):

As parents, many of us baby boomers make “investing” in our kids a priority in our household budgets. We pay for our kids’ music and dance lessons, team sports, and after-school academic enrichment and health-promoting (fitness) programs. We make sure they go to the doctor and dentist regularly, and we even pay to give them perfectly straight teeth as a warm-up to paying for college. And we pay for tutoring and test-preparation classes and encourage them to do their best with their studies in the hopes that they will get into a good college that we can manage to pay for and will turn out to be a “good investment.” What makes all of our parental efforts worthwhile isn’t always measured in purely monetary terms, but all of us certainly hope that we help set our kids on a path to a high “quality of life.” And I think most of us hope that our kids’ lives will be of even higher quality than ours have been.

That is why any parent should be particularly concerned about the budget outlook: it directly undermines all of our personal efforts to provide for our kids and set them on that good path. We contradict ourselves if on the one hand we are saving for our kids’ college educations but on the other hand are clamoring for more deficit-financed tax cuts or benefits for ourselves.

…

I consider myself a “deficit hawk,” but I certainly don’t think the goal should be a perfectly balanced budget with a zero deficit in every year. Running a debt can be valuable, because it can allow us (whether as a society or as a family) to achieve a higher standard of living than what is possible if relying on current income alone, particularly when the borrowing makes possible investments that increase future income. But if we borrow too much and use it to buy things that do not increase our future income, we can get into an economically “unsustainable” situation where the burden of the debt we carry grows faster than our income—and we cannot keep up. (Examples from the family budget: borrowing for college is less worrisome if college boosts future income; borrowing to buy a home is not a problem if the interest rate will not “balloon” in the future and if the home’s value is expected to rise; borrowing for a flat-panel TV because you don’t have a job right now to pay for it . . . not so smart!)

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Advocating for “fiscally responsible” government is not the same thing as arguing for a smaller government. Often people who say they want a smaller government really don’t want a smaller government; they just want lower taxes. The “right” size of government from a fiscally responsible perspective is that which we are willing to pay for in taxes. And the “right” level of taxes is that which is adequate to cover the cost of the government programs we deem worthwhile.

Americans have lost sight of this connection between the government we desire and the taxes we are willing to pay, because we have become too accustomed to persistent budget deficits as the norm, and too often our political leaders mislead us into thinking that there are no budget constraints and that deficit financing is “free.”

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Those who argue for lower taxes often claim that the historical evidence shows that taxes are not the problem, spending is, because the level of federal taxes as a share of GDP has been around 18 percent of GDP over the past forty years and is projected to remain at or above that level under either current law or even current policy extended. But maintaining a level of revenues consistent with the past proves nothing about their adequacy for the future.

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Certainly we must do all we can to control the growth in government spending, however, particularly where higher spending does not translate into higher-quality goods and services. On health care reform, we must learn from the demonstration projects and improve the flow of information in the health care market so that wiser public and private decisions can be made and wasteful spending eliminated. But the longer-term challenge will not be solved by cutting only the spending that is genuinely or even sounds like “waste, fraud, and abuse.” Tough choices on what kind of health care the public sector can subsidize and for whom (in other words, decisions about how to “ration” publicly provided health care) will have to be made. Because those choices are tough both economically and politically and will likely take a long time to both be implemented and to make a difference, health care and entitlement reform cannot be our only strategies to close the fiscal gap. Tax policy has to be a big part of the solution, too…

And my conclusion:

Conclusion: Moving from “Budget Scolds” to “Fiscal Inspirers”
As an economist and a mom, I believe that getting our nation back on a fiscally sustainable path is one of the most important ways we can ensure a bright future for our kids. To encourage this, fiscal policy experts need to do more than present the numbers and charts that warn of a scary but hypothetical future for the U.S. economy as a whole. We need to bring the issue down to the level of the family in order to make it immediately relevant to people right now. We need to remind parents that as they are working hard every day to provide for their kids, they need to demand that their politicians do the same for all our kids. Public education and engagement are crucial to not just sound an alarm but create a movement to promote fiscal responsibility as a duty to our kids and grandkids and make the “crisis” salient now. Instead of allowing our leaders to perpetuate the irrational notion that everything will be fine without having to make any tough choices, we need to tap into the inherit optimism of the American people to prove that what Paul Tsongas said (as he started the Concord Coalition in the early 1990s) was and still is right—that “we are better than what we are being asked to be by our leaders.”

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