No week goes by without an email from Murkey Matrus, a successful Hoosier entrepreneur, now in retirement. Lately the themes have been consistent with the national debate consuming the presidential and congressional elections.
Murkey writes: The national debt is too high. We must cut it down to a more reasonable level.
I reply: How do you know the national debt is too high? Is there a magic ratio of debt to something? For a family, is there a magic ratio of debt to income? Some families cannot handle a debt equal to 5 percent of their annual income while others have no difficulties with a debt that exceeds annual income. It all depends on the repayment terms, the interest rate and the annual income and expenditures of the family. What would be the “right” amount of national debt?
Murkey responds: Less debt would be better, and the way to get it is to have a balanced budget where federal taxes equal federal outlays.
My response: How do you get less debt with a balanced budget? If the inflow of money equals the outflow, the debt remains unchanged. To lower the debt the federal government must run a surplus of revenue over expenditures. Candidates who pledge to have balanced budgets and cut the deficit need to return to the second grade for remedial math work.
I continue: Only when revenues exceed expenditures can the government run a surplus and pay down the debt. That means spending can be cut without touching taxes, eliminating the deficit (the excess of spending over revenues). But if you want to cut taxes, then spending must be cut an equivalent or greater amount. The scalpel must be taken to expenditures more severely than to taxes. Candidates emphasizing tax cuts are misleading the electorate.
Murkey answers: Then let’s get on with cutting expenditures.
I answer: Then let’s get on with raising taxes.
Murkey: Raise taxes? That would cut back on consumer spending, hurting employment and stifling investment.
I: Cutting federal spending does the same — consumer spending falls, jobs are lost, and investment is postponed.
Murkey: If that is true, doesn’t it make sense to cut government spending because it is less efficient than private spending?
I: How do you know that? Forget the rhetoric and show me the evidence that the private sector is more efficient than government. Don’t you look in the shopping baskets of folks in the superstore? Do you see what they, the poor and the well-to-do, are buying? How many families need a 40” or larger TV? Do teens or adults really require unlimited calls and texting? Contrast unfettered consumer excesses to already constrained federal spending on education, public health, research, infrastructure and public safety in its many forms.
Murkey writes after a delay: So your solution to the debt problem is raising taxes, cutting consumer spending, and maintaining government spending?
I answer: Yes.
Murkey: Don’t ever run for public office; you won’t stand a chance.
Morton Marcus is an economist, formerly with the Indiana University Kelley School of Business.