Ezra Klein's "Let It Ride" Plan is A Quick Trip to Cloud Cuckoo Land

| April 12, 2011 | 5 Replies

I can not imagine a blogger that does less with more than the Washington Post’s Ezra Klein. All he has to do is occasionally put up a random chart with nice pretty lines that end right about where he wants them to end and write a few paragraphs that sound like serious policy proposals and, hey presto, in comes another paycheck.

Here is his latest pretty chart and the introduction thereof.

That’s Austin Frakt’s graph, which uses the Congressional Budget Office’s September numbers, and it shows what happens if we do … nothing. The answer, as you can see, is that the budget comes roughly into balance. Our problems are solved!

But nothing is hard to do. This nothing, for instance, includes three crucial elements: (1) All the Bush tax cuts expire, as they’re currently scheduled to do; (2) The Medicare doc fix is either implemented or its repeal is paid for over the next 70 years; and (3) the Affordable Care Act is implemented, and all of its spending targets are met and all of its taxes are collected.

Klein’s notion, borrowed from the CBO’s June 2010 budget outlook, is that we pony up several trillion more dollars in the “doc fix”, jack up taxes, and implement Obamacare, and all will be well. See how the dotten line meets up nicely with that rising mountain of spending on the right side of the chart? That’s utopia right there — the magic land where revenue rises to 30 percent of GDP and covers all the spending and taxes on the rich that the progressives really want. Philip Klein (no relation) calls it the “Do Nothing” plan, for that’s truly what the younger Klein claims we should do to reach the promised land.

Except there’s a problem. Actually, there are three problems, one for each point in Klein’s plan, but we don’t need to go past the first one. Let’s start with how the CBO describes that dotted line marked “Revenues”.

Under this scenario, the expiration of most of the tax cuts enacted in 2001 and 2003, the growing reach of the alternative minimum tax, and the way in which the tax system interacts with economic growth would result in steadily higher average tax rates. Those rising rates, combined with the tax provisions of the recent health care legislation, would push total revenues to 23 percent of GDP by 2035–much higher than has typically been seen in recent decades–and to larger percentages thereafter.

There’s a bit of an understatement in there that blows a rather gaping hole in the entire plan. When the CBO says that a revenue figure of 23 percent of GDP would be “much higher than has typically been seen in recent decades” it fails to note that we have never seen a revenue figure larger than 20.9 percent of GDP. Furthermore, even when the top marginal tax rate was over 90 percent, we still didn’t crack a 60-year average of 19.5 percent of GDP. In other words, the CBO’s alternative plan on which Klein pins his hopes assumes that the government will take in at least 3 percentage points more of all the goods and services we create in a year than we’ve ever taken and that we’ll keep taking at least that much for the next 80 years. Oh, and if you’re wondering how revenues have been looking lately, what with all the new taxes and fees rolled out by the Democrats over the last two years, you can find that here in Table 2.3. We took in 14.9 percent of GDP in 2009 and 2010, down over 2.5 percentage points from the year before. In fact, we haven’t hit that 19.5 percent average since 2001.

I can’t find a single reason to expect that we’ll take in even 19 percent over the next few years (the President’s budget projections notwithstanding) much less 23 percent or more. Neither can I find a reason to believe that consumers won’t react to the far higher levels of taxation that Klein’s idea will require with much less economic activity. That will drive the GDP down (and it’s not doing particularly well right now), which will also drive down the amount of money our government gets, which will push that magic dotted line way down into the light blue morass of big government and relentlessly-growing entitlements. So much for Klein’s utopia.

In the end, the political battle over the 2012 budget will pit utopians like Klein, who believe sheer fantasy will save us all, against grown ups who can do math and understand how human beings work. Kevin Williamson, who may well be psychic, anticipated Klein’s “let it ride” budget idea and pointed out the very clear battle lines for the coming debate.

Ryan and the Republicans will accept the strongest deficit deal they can get; Obama and the Democrats will accept the strongest deficit deal they are forced to: That’s the basic dynamic that shapes this debate between now and November 2012. They have no credible budget plan — they didn’t even pass a budget last time around. Welcome to the Party of No, Mr. President; Mrs. Pelosi will show you the secret handshake.

The Democrats want 2012 to be about anything other than deficit-reduction.

The left will do everything they can to keep things just the way they are. They will — and you can bet your paycheck on this — throw every conceivable issue at Republicans over the next few months to distract them from what must be done. Klein’s nonsensical notion is only the beginning. Expect the arguments to move away from the budget entirely and into hot-button issues that have nothing to do with money at all.

We can’t let ourselves get distracted and we can’t let arguments like Klein’s go without dispensing a harsh dose of reality. Like it or not, we’re in a desperate place right now, and we’re going to need a real solution. Klein could help if he wanted to. It seems, though, that his only real interest is in trudging relentlessly toward the cloud cuckoo land of progressive fantasy.

(Cross-posted at The Greenroom)

UPDATE: Fixed one paragraph to make the rates of increase more clear (from a suggestion in the comments).

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Category: The Economy and Your Money

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