Cato Institute:Spending is our problem Part 4

Cato Institute:Spending is our problem Part 4

Should we spend more federal money to help the poor?

Uploaded by on Oct 3, 2011

The so-called War on Poverty has failed. Making government bigger and creating more federal redistribution programs has been bad news for taxpayers. But the welfare state also has been a disaster for the less fortunate, creating a flypaper effect that makes it difficult for people to lead independent and self-reliant lives. This Center for Freedom and Prosperity Foundation video shows how the poverty rate was falling after World War II — but then stagnated once the federal government got involved.

People think that we need to raise more revenue but I say we need to cut spending. Take a look at a portion of this article from the Cato Institute:

The Damaging Rise in Federal Spending and Debt

by Chris Edwards

Joint Economic Committee
United States Congress

Joint Economic CommitteeUnited States Congress

Added to on September 20, 2011

This testimony was delivered on September 20, 2011.

Baseline Projections Are Optimistic

In support of building a large “fiscal buffer,” policymakers should recognize that both short-term and long-term CBO projections are optimistic in various ways. Perhaps the future will include some positive budget surprises, but the big risk factors seem to be on the negative side.

In CBO’s baseline, federal deficits fall substantially over the coming decade, partly due to changes under the recent Budget Control Act. However, spending will be higher than projected if:

  • Policymakers lift caps in the Budget Control Act.
  • Policymakers launch new spending programs or respond to unforeseen crises or wars.
  • Higher interest rates push up interest costs, which is a risk that gets magnified as federal debt grows larger.
  • A major recession causes large cost increases in programs sensitive to economic cycles, such as unemployment insurance.
  • Policymakers respond to another recession with costly new “stimulus” plans. The persistence of Keynesian policy ideas in Washington is an important risk to the outlook for federal debt.

There are likely to be negative shocks in coming years that we don’t foresee. Consider that in its January 2008 budget outlook, CBO projected that U.S. economic growth would slow in 2008 but then rebound fairly strongly in subsequent years.15 CBO discussed the risk of a recession, but didn’t foresee the calamity that was already starting. The upshot is that policymakers should take a conservative approach and build a “fiscal buffer” with large spending cuts now before another recession causes the deficit to soar again.

CBO’s long-range projections — such as the “alternative fiscal scenario” (AFS) shown in Figure 1 — are also optimistic. In its basic projections, CBO does not factor in the negative effects of rising spending, debt, or taxes on GDP after 2021, but it does do that in a separate analysis.16 If spending actually followed the course shown in Figure 1, CBO estimates that GDP in 2035 would be up to 10 percent less than shown in the AFS, and GNP would be up to 18 percent less. In turn, spending-to-GDP and debt-to-GDP ratios would be worse than usually shown in long-range budget charts.

Under the AFS, rising deficit spending could reduce American incomes. The CBO finds that real GNP per capita could stop growing in the late 2020s, and then start falling after that. In a historic reversal, future generations of Americans would become successively poorer.

The way to ensure our continued prosperity is to cut federal spending and reduce debt. In a 2010 analysis, the CBO compared the high-spending AFS with Rep. Paul Ryan’s “Roadmap” plan.17 The Ryan plan would restrain federal spending to roughly current levels for the next few decades, and then start reducing it. By the late 2020s, GNP per capita under the Ryan plan would begin rising above the flat and then falling levels under the AFS. By the late 2050s, GNP per capita would be 70 percent higher under the Ryan plan than under the AFS.18

15 Congressional Budget Office, “The Budget and Economic Outlook: Fiscal Years 2008 to 2018,” January 2008, Chapter 2.
16 See Chapter 2 in Congressional Budget Office, “Long-Term Budget Outlook,” June 2011.
17 Congressional Budget Office, Douglas Elmendorf letter to Paul Ryan, January 27, 2010,
18 Congressional Budget Office, Douglas Elmendorf letter to Paul Ryan, January 27, 2010, p. 16.

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