Pitchforks at the fiscal gate

The line from the movie “Network” — “I’m mad as hell, and I’m not going to take this anymore!” — sums up the sentiment of a large segment of the voting public. Liberals and libertarians agree on two things: Government is not working and the system is rigged.

{mosads}Every four years, candidates for the White House make promises about economic growth, tax reform and fiscal responsibility. Usually, these promises end up first getting lip service after the election and then forgotten.

Even though Democrats claim that there was a budget surplus at the end of the Clinton administration, it was more smoke and mirrors since the national debt went up in 2000 and has continued to do so.

Candidates for the Republican nomination have put forward tax reform plans and each one has been viewed with skepticism because there is no explanation of how to pay for lost tax revenue. The accuracy of criticisms have to be taken with a grain of salt, however, because static scoring ignores how incentives change when businesses and taxpayers get to keep more of their money. But it is a truism that tax cuts are unlikely to pay for themselves.

It also takes a leap of faith to believe that true tax reform is likely. The last major reform was in 1986. Its history, as chronicled in the book “Showdown at Gucci Gulch,” explains why 30 years have passed without another one. There are simply too many special interests who have a vested interest in the status quo. President Bill Clinton famously remarked that “the era of big government is over,” but left unsaid was that the era of bigger government, crony capitalism and evolving corporate statism had arrived.

The tax code is an abomination. Simplifying it would take a far greater effort than President Reagan’s Tax Reform Act of 1986. Perhaps voter anger on the left and the right will be enough to galvanize the next president and Congress to roll back the tax code from over 76,000 pages to well under the 26,000 that existed in 1984. Savings, investment and fairness have to be the driving priorities.

Major tax reform is necessary but not sufficient. We are heading toward a fiscal cliff that threatens generations to come. The federal government currently spends about 21 percent of gross domestic product (GDP), with Social Security and Medicare taking an increasing share. Since World War II, government revenue has averaged about 18 percent. Bringing spending in line with revenue in the absence of strong growth would be difficult.

Solving our fiscal crisis involves four steps.

The first is a set of policies that would restore real economic growth to a level between 3 percent and 4 percent.

The second would be a serious reform of Social Security and Medicare, both of which are now unsustainable.

The third would be government reorganization. It has been close to 80 years since the Hoover Commission, the last major reorganization of the executive branch. No organization could go that long without changes in structure and functions. There is no shortage of analyses of programs that have far outlived their usefulness and of those that are pure pork-barrel. A new commission structured along the lines of Base Realignment and Closure (BRAC) could serve as a model: Congress had to accept all or none of its recommendations. It could not cherry pick.

Finally, we need real regulatory reform. The code of federal regulations has grown from 110,000 pages in 1984 to 166,000 pages in 2014. The impact of federal regulation is staggering. A study for the National Association of Manufacturers puts the economic burden at $1.75 trillion annually and a report published in the Journal of Economic Growth concluded that between 1949 and 2005, regulatory burdens had slowed economic growth by 2 percent annually. The authors translate that into 2011 GDP of $39 trillion, instead of the $15.5 trillion achieved. It is not necessary to accept the accuracy of the numbers or the methodology to recognize that we are an over-governed society and an underperforming economy.

The problems have been decades in the making and won’t be solved in one year or one term, but if a path is not charted to start the resolution process, the current political instability will produce serious unintended consequences and economic harm.

O’Keefe is president of Solutions Consulting.