The Critical Problem with a “Balanced” Deficit Reduction Plan

In political anticipation of the president’s deficit reduction plan, due for release this coming week, the White House is preemptively touting its reported “balanced” approach – political newspeak for tax increases in various forms combined with supposed outlay reductions.  As one senior White House advisor noted, “what we won’t do is cut our way to prosperity.”  Whether this plan is a serious attempt at addressing our fiscal woes or pure political gamesmanship is debatable but regardless such plans ignore the economic reality of the State’s clear role in eroding productive economic health.


As Austrian economists are somewhat famous (or infamous, depending on your perspective) for pointing out, deficits themselves, while clearly harmful to the free operation of the economy long-term (even the president acknowledges this), are not the fundamental critical factor affecting sustainable prosperity.  The truly critical element in this context is the ratio of tax revenues forcibly removed from the economy by the State and funneled into necessarily less productive pursuits compared to the overall genuine productivity of the market.  In short, the higher proportion of the economic gains that involuntarily goes to taxes, the greater the damage to the long-term functional health of the (as yet) generally voluntary economy.


Economic statists, Republican and Democrat, conservative and liberal alike, have long marginalized, ridiculed, and even vilified Austrian economists for their general laissez faire, praxeological interpretation of economics as a social science in favor of the various interventionist schemes espoused by Ivy League technocrats and political oligarchs.  This should not be surprising given that regardless of the subject matter, statists will generally gravitate toward ideologies and perspectives that legitimize forceful State interventionism at the expense of individual liberty and empowerment.


That said, however, it is important to note that at least some “mainstream” economists and Ivy League (and other) academics are willing to be objective in their research and reporting, and growing studies are demonstrating what the Austrian School has predicted all along: the only way to support economic prosperity through fiscal policy is to reduce government expenditures and taxation.


Last August, economists from Harvard and Oxford Universities and the Massachusetts Institute of Technology endeavored to determine the practicable economic effect(s) of implementing spending cuts versus tax increases as deficit reduction policy.  In their own words, and as published in the National Bureau of Economic Research:


This paper studies whether fiscal corrections cause large output losses.  We find that it matters crucially how the fiscal correction occurs. Adjustments based upon spending cuts are much less costly in terms of output losses than tax-based ones.  Spending-based adjustments have been associated with mild and short-lived recessions, in many cases with no recession at all.  Tax-based adjustments have been associated with prolonged and deep recessions.  The difference cannot be explained by different monetary policies during the two types of adjustments.  …  The key result is that while expenditure-based adjustments are not recessionary, tax-based ones create deep and long lasting recessions. The aggregate demand component which reflects more closely the difference in the response of output to [expenditure-based] and [tax-based] adjustments is private investment.  The confidence of investors proceeds with the economy and therefore recovers much sooner after a spending-based adjustment than after a tax-based one (emphasis added).


In light of this “legitimate” research, and other efforts that find similarly, one must ask what the president’s goal(s) is with relation to American fiscal policy.  It is one thing for politicians to ignore free market principles and axioms on ideological grounds; it is quite another for a president who purports to represent all Americans to ignore demonstrable economic reality to the detriment of long-term prosperity (and to the benefit of a very select few, I might add) on these grounds.  Are Barack Obama and his political supporters ignorant of simple economic cause and effect, supremely incompetent, or come-Hell-or-high-water ideologues (or some combination thereof)?


If rejecting the ethical principles and foundation of individual freedom that lay at the heart of true unmolested markets is more appealing than simple consequentialist rationale to some, then these folks must also recognize that President Obama’s proposed deficit plan is still a practicable failure with regard to their economic welfare.  By incessantly pursuing his progressive tax policies he is demonstrably sacrificing economic recovery and sustainable prosperity, plain and simple.  If winning political fencing matches and capitulating to ideological special interests are so important that we are willing to sacrifice our own long-term wellbeing, along with that of our children and grandchildren, then we will certainly receive what we ask for.




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