The truth is that it’s “game over” with respect to the nation’s fiscal predicament. We are hurtling irreversibly toward a budgetary crack-up that will generate the mother of all crises in global bond and currency markets….

Indeed, lacking any coherent fiscally conservative opposition party, the nation’s finances have succumbed to the raw, parochial imperatives of organized lobbies and hometown industry. These primal political forces now heap fiscal largesse on clunker cars, random homebuyers, farm-belt ethanol plants and Wall Street bankers with bipartisan equanimity….

But after the Panic of 2008 there was no mysterious demand leakage — just the final exhaustion of a 30-year borrowing binge by households and businesses. So “counterfeit demand,” based on unsustainable borrowing that had swelled the boom economy, has now been irrevocably dissolved. This means that honestly measured gross domestic product is lower than before, and the nonbubble job count is about 20 million fewer (counting part-time and discouraged workers) than previously reported. Permanently adding trillions to an already staggering national debt, to re-create spending and jobs that were an illusion in the first place, hardly constitutes sound economic policy….

The collateral damage to the fiscal policy process from this Keynesian consensus, however, is palpable. At 15 percent of GDP, Federal receipts are at their lowest since World War II, yet both parties pile on jobs, housing and investment tax credits that further dismantle the revenue base. Similarly, spending is at an all-time high of 25.5 percent of GDP, yet white-elephant stimulus projects, such as high-speed trains that local taxpayers would never pay for, push the spending ratio ever higher….

Thus, the Obama budget assumes real growth of nearly 4 percent per year in an economy still listing from the collapse of a 30-year debt spree. More improbably, it assumes nominal GDP grows by 6 percent annually for five years — though the world economy is caught in a powerful deflationary downdraft, and nominal U.S. GDP has not grown at anything close to a 6 percent rate since early 2006, before the day of reckoning arrived.

The laws of compound arithmetic extract a painful toll when these numbers are reset to more realistic values. Nominal GDP could easily grow at only 3 percent, meaning the size of the U.S. economy forecast for 2015 is overstated by $2.5 trillion and Federal receipts by $500 billion annually — while spending is probably understated by several hundred billion more. Thus, adjusted to real-world assumptions, the White House budget projects a $1.5 trillion deficit out as far as 2015, and $10 trillion of incremental bond finance in the interim….

And finally, ending on a pessimistic note:

After 30 years of evisceration, the ingredients for successful fiscal governance are gone. The current drift toward doomsday is likely irreversible.

I am starting to warm to the idea of a tax on financial transactions (trades in stocks, bonds, currencies, derivatives), also discussed in the article.  It probably won’t hurt the efficiency of the markets much at all, it might reign in some of the more useless speculation, and could bring in a large amount of revenue.  Chance of this happening: < 5%, in my opinion.

About 47 percent [of U.S. households] will pay no federal income taxes at all for 2009….

The result is a tax system that exempts almost half the country from paying for programs that benefit everyone, including national defense, public safety, infrastructure and education. It is a system in which the top 10 percent of earners — households making an average of $366,400 in 2006 — paid about 73 percent of the income taxes collected by the federal government.

The bottom 40 percent, on average, make a profit from the federal income tax, meaning they get more money in tax credits than they would otherwise owe in taxes. For those people, the government sends them a payment.

"We have 50 percent of people who are getting something for nothing," said Curtis Dubay, senior tax policy analyst at the Heritage Foundation.

First, such a skewed tax system clearly creates a disincentive to work hard and to invest in oneself so that one’s future income will be greater.  Given the federal government’s poor fiscal situation, taxes are almost certainly going up (and probably not just on the rich), creating an even greater disincentive for young people to invest in themselves.  But perhaps more worrying is the fact that roughly half of Americans don’t recognize the burden of government.  They think it comes for free.  In fact, as the article makes clear, roughly 40 percent “make a profit from the federal income tax”.  To quote George Bernard Shaw, “A government that robs Peter to pay Paul can always depend on the support of Paul.”  Hence, the current structure of the tax system threatens the integrity of our democracy.

Actually, I would point out that lower-income individuals definitely do feel the burden of government.  More government intervention (through barriers to trade, red tape, labor-market regulations, and even through secondary effects of taxation, such as lower investment) often tends to reduce their standard of living, although they often do not realize this.  Rich people will generally find a way to get by, but poor people have less flexibility, fewer exit options, fewer contacts, etc.  Hence, it would be more accurate to say that lower-income Americans suffer greatly from the burden of government (except when it comes to the direct burden of income taxes), but just don’t realize it.  Often, they wrongly believe that more government is in their interest.

(HT: Chris)

While it is easy to get depressed observing the machinations in Washington, D.C., over the past couple of years, there has been substantial progress where it may count most: More people have become libertarians, and even more, who may not self-identify as libertarians, have grown to harbor a greater skepticism of government.  The corruption used to shove the healthcare initiatives through the legislature was on full display, receiving (somewhat surprisingly) a reasonable amount of media coverage.  Those who go on about poor incentives for government officials, government corruption, and in general, government failure outweighing any market failure suddenly look a lot better.

The bottom line is that the cause of poor policies like healthcare “reform” was many years of bad ideas circulating in society and taking hold in people’s minds.  We are well past an inflection point, as the momentum is in favor of libertarian ideas (and in my view, probably has been for many years now).  More precisely, the percentage growth in libertarians is probably greater than the percentage growth in non-libertarians.  Hence, I remain optimistic.

Furthermore, raising taxes now (along with at least modest reform of benefits) is better than completely kicking the can down the road, at which point the options will be even less palatable: even more tax increases being weighed against even greater benefit cuts, along with a more-enfeebled economic position for the US in the global economy.  If the recommendations are heavy on the tax-raising side, at least it will introduce Americans to the reality of the fiscal problem in a very poignant way, by hurting their pocketbooks.  This, hopefully, will result in more libertarians.

Simply put, without getting into the nuances of the trade-off between the two, I would value more libertarians above short-, or even long-term policy successes.  Of course, policy successes are great, and ultimately, that is what most people are after.  However, more libertarians will eventually lead to more liberty-friendly government, and in a more sustainable way.  Does it really matter if the government is more libertarian for a few years, only to be voted out of power?

(Via Students for Liberty.)