Ralph Martire: The Fiscal Horizon

The head of a Chicago-based bipartisan economic think tank, Ralph Martire, discusses the link between government policies and your financial well-being.

March 14, 2013

Though your organization, the bipartisan Center for Tax and Budget Accountability, focuses on state and local analyses, you also have a strong handle on federal policy. Why do you think the nation’s finances are in such terrible shape?

The bottom line is the nation never could afford the tax cuts that were implemented [in the 1980s and early 2000s]. That has led to a lot of the long-term problems we see in the federal budget. At a minimum, things like Social Security costs are going to increase with changes in population and inflation over time. The revenue stream for Social Security will be constrained as a greater share of the population will be at retirement age than in the past and a smaller proportion of the population will be of working age and actually paying into the system.

So the problem is we have some big costs in Medicare and Medicaid that will grow along with inflation, and yet the government is choosing to cut revenue. The economic theory behind cutting revenue is that it’s supposed to encourage enhanced economic growth. That has never materialized in the 30-plus years we’ve done it.

Amid all the federal budget uncertainty, what do you foresee regarding tax reform, including the mortgage interest deduction?   

It’s a real question just how much of a dent you can make in the federal deficit by reining in tax breaks like the mortgage interest deduction. The answer is there’s really not enough there to solve the problem, and it’s a politically divisive issue that benefits neither party. So if they try to do anything with the MID, I think it’ll be at the margins, such as capping the amount you can deduct for the most affluent people or eliminating the benefit for second or third homes.

What economic policies would truly help us regain our footing?

Most Americans don’t want to hear it, but we need this deficit spending right now to prop up the economy. We need investments in infrastructure, rail systems, and education. And we need to keep tax relief in place for low and moderate income families. The economy isn’t largely driven by businesses and business spending. It’s consumer spending. Roughly, 68 percent of all economic activity in America is consumer spending. But between 1980 and 2007, low and middle-income families, who represent the bottom 90 percent of America, have gotten only about 35 percent of all the income growth [and the wealthiest 10 percent have gotten 65 percent of the income growth].That means for most Americans that their incomes after inflation have been, at best, flat. And their purchasing power has declined. So literally every dollar you tax a lower or middle income family is, almost dollar for dollar, taken out of the economy, rather than being used to buy stuff. It is buying stuff that stimulates the economy.

Will we ever get it right as a nation?

I don’t know. There’s way too much pandering on this issue and not enough real understanding of what it takes to grow a moderate economy. I’m somewhat optimistic that voters and taxpayers are beginning to figure out what we need to do, but it takes awhile, and it’s easy for this to become the subject of demagogues.

Who does a better job of managing budgets: the federal government or a typical small business owner?

You can’t compare them. In the private sector, the revenue raiser is also the decider on spending. At the public sector level, the revenue is coming from one place and the deciders are independent from them. At the federal level, there is no requirement to balance your budget. And there are times when massive deficit spending is a really good stimulus. And in the private sector, whether or not you want to balance your budget, there’s only so much you can put on your credit card. When you’re maxed out, that’s it, though you shouldn’t get maxed out because you can’t stay in a deficit position forever.

What does the recent run-up in the stock market tell us?

Right now corporate America is sitting on boatloads of profits, the highest levels in U.S. history. It lays bare the lie that cutting taxes for top earners or for large businesses is going to stimulate anything. Cutting taxes on corporations is just going to allow them to hold on to more capital.