David Sanger, American power, and the need for more revenue

It’s common to simplify the decline of empires by saying their eyes were bigger than their stomach, their military became too strong, they went into debt, cracked at the edges first, and then declined in the process of tackling the debt problem.  That hypothesis is a basic version of Paul Kennedy’s 1980s bestselling book, The Rise and Fall of the Great Powers.  That hypothesis is also the tone animating David Sanger’s analysis yesterday in the New York Times.

Here is Sanger’s extrapolation for how the situation may unfold:

For Mr. Obama and his successors, the effect of those projections is clear: Unless miraculous growth, or miraculous political compromises, creates some unforeseen change over the next decade, there is virtually no room for new domestic initiatives for Mr. Obama or his successors. Beyond that lies the possibility that the United States could begin to suffer the same disease that has afflicted Japan over the past decade. As debt grew more rapidly than income, that country’s influence around the world eroded.

Or, as Mr. Obama’s chief economic adviser, Lawrence H. Summers, used to ask before he entered government a year ago, “How long can the world’s biggest borrower remain the world’s biggest power?”

The Chinese leadership, which is lending much of the money to finance the American government’s spending, and which asked pointed questions about Mr. Obama’s budget when members visited Washington last summer, says it thinks the long-term answer to Mr. Summers’s question is self-evident. The Europeans will also tell you that this is a big worry about the next decade.

In other words, it is very likely that our debt is approaching those levels at which we are forced to behave like a debtor, not creditor, nation.

I say very likely because all the projections assume that the current tax levels stay the same; they read past behavior as indicative of future behavior and project current trends forward.  This era’s only balanced budgets have occurred after tax raises, and the economic performance of the country then has also been above-average.  I think our political system will eventually come to its senses and prevent us from actually defaulting on our debts, and that outcome can only pass with a large increase in the revenue of the government.  Part of that revenue has to come from tax increases.

Projections from current trends into even the medium-future always discount exogenous shocks.  The sooner we raise our taxes, the less we will have to raise them in 5 or 10 years; the sooner we raise taxes, the less difficult will be the decisions we have to make down the road.  Whenever we reach that realization, we’ll have to see an increase in the amount of tax revenue collected as percent of GDP and probably a reduction in the growth rate of the cost of entitlement care.  For everyone but denialist Republicans, the debate has already shifted from “Do we have to raise taxes?” to “How do we best raise taxes?”  I am sure we will be in debt for quite some time and face annual deficits over the short-term, but after that time period, deficit forecasts too heavily discount the possibility that our political system rescues the country’s solvency when it’s on the brink of disaster.