Economic illusions have permeated DC for too long

“Reality,” Albert Einstein observed, “is merely an illusion, albeit a very persistent one.” Nowhere is this more true than in our nation’s capital. Unfortunately, when policymakers succumb to illusion — when what they “know” simply isn’t so — they’re prone to pursue policies that range from ill-conceived to downright dangerous. 

Consider the following three examples:

Illusion No. 1: Tepid economic growth in America is the “new normal.” 

{mosads}Although the Great Recession ended in June 2009, the subsequent recovery and expansion have been among the weakest on record. Persistent sluggishness prompted academics and policymakers to speculate that the U.S. had entered a new era of secular stagnation. 

By 2012, citing slower labor force growth, President Obama’s Office of Management and Budget advised: “In the 21st century, real GDP growth in the United States is likely to be permanently slower than it was in earlier eras … .” 

Enter Donald Trump. He ran for president promising to reinvigorate the economy — something secular stagnationists thought all but impossible. 

Achieving and sustaining faster economic growth requires fielding a growing and more productive labor force. That’s why the Trump administration and the 115th Congress enacted tax and regulatory policies to entice sidelined workers back into the labor force and to encourage productivity-enhancing capital investment.

It worked. The U.S. economy grew 3.1 percent last year, the fastest since 2005. And, according to the Congressional Budget Office (CBO), “Real GDP … and real potential GDP are now projected to be greater throughout the coming decade … in part because of the significant recent changes in fiscal policy.” 

The Obama administration was under the illusion that slower growth was inevitable. Its policies were, arguably, self-fulfilling. 

Illusion No. 2: Current U.S. fiscal policy is sustainable. 

CBO estimates federal budget deficits will total $11.6 trillion over the coming decade. The problem is so severe that the debt will literally grow by $199,000 in the time it takes to read this single sentence.

Yet, public concern over the budget deficit is waning. Per the Wall Street Journal: “One of the reasons deficit concerns are low is that the country has been living with big federal deficits for a long while now, and the economic calamity some predicted has never materialized.” 

Policy analysts have long projected a large and sustained increase in the federal debt, but lawmakers were comforted by the thought that the day of reckoning wouldn’t occur for years.

Then came the Great Recession. The recession brutalized the economy and years of debt were compressed into mere months. This raised the debt-to-GDP ratio to a level not seen since the late 1940s. 

It is from this already elevated level that the debt is projected to explode, spiraling to unprecedented levels.

One saving grace of the Great Recession was that the run-up in the federal debt occurred just as interest rates collapsed. This allowed the federal government to finance its debt at little cost. 

As recently as fiscal year 2016, for example, the federal government spent $240 billion on interest on the publicly-held federal debt. That’s literally $1 billion less than was spent 20 years earlier to carry a debt only one-fourth as large.

The debt has exploded, but we are only now beginning to pay the extra cost of carrying that debt. This year alone, net interest costs will total $383 billion — 46 percent more than just two years ago. And it only promises to worsen.

Within 10 years, annual net interest costs are expected to soar to $928 billion. The difference between what the federal government paid in interest last year versus what it will pay a decade from now is roughly equal to Sweden’s total annual economic output. 

This will place severe pressure on the federal budget. Rising net interest costs are projected to consume 45 cents of every new dollar of federal revenue next year and more than 25 cents of every new dollar of revenue over the next 10 years.

Factor in the projected increase in federal outlays for health care and other mandatory spending programs and the budget spirals out of control. Rising deficits grow the debt and the growth in the debt balloons interest costs and the deficit. It’s a vicious cycle.

Despite a decade of rock-bottom interest rates giving the appearance of indefinite sustainability, the CBO warned: “The prospect of large and growing debt poses substantial risks for the nation and presents policymakers with significant challenges.”

Illusion No. 3: The rich don’t pay their fair share of taxes.

Public discourse over the appropriate level and distribution of the federal tax burden is fraught with misinformation. Rep. Alexandria Ocasio-Cortez (D-N.Y.) and her ideological compatriots, for example, claim “the rich” don’t shoulder their “fair share” of the burden. The American people tend to agree. 

Few have even the vaguest notion of how much or little the rich actually pay, but polls say most Americans want upper-income households — loosely defined as anyone who earns substantially more than the person answering the survey — to pay more. 

But just how much do the rich pay in taxes? According to the latest IRS statistics, the top 25 percent of taxpayers earn 68 percent of total adjusted gross income and shoulder 86 percent of the income tax burden. 

{mossecondads}By comparison, the bottom 50 percent of taxpayers earn 12 percent of all income and shoulder 3 percent of the income tax burden. And, amazingly, the top 1 percent of income taxpayers pay more income tax than the bottom 90 percent combined. 

While the illusion is that the rich don’t pay their fair share, the reality is that they pay far more than is commonly understood. Imposing higher taxes on them may well solve a nonexistent problem but at the expense of national well-being. 

Ultimately, the share of the tax burden shouldered by the rich is far less important than how tax policy impacts economic growth and the ability of people at all income levels — rich and poor, alike — to prosper.

Policy decisions are only as good as the information upon which they’re based. A world where sluggish economic growth is the norm, where fiscal policy is on sound footing, and where the rich aren’t paying their “fair share” is a world requiring very different policies than the one we now inhabit. 

James Carter served as the head of tax policy implementation on President Donald Trump’s transition team. Previously, he was a deputy assistant secretary of the Treasury and deputy undersecretary of labor under President George W. Bush.