In his speech at Carnegie-Mellon yesterday, the President lamented the growth of federal spending and proposed to attack the problem partly by letting the Bush tax cuts expire. Can you say non sequitur, boys and girls?
Now as it happens, I’ve got this maple tree in my yard that’s been growing much too fast for my tastes. In fact, it’s been growing far faster than I have. But inspired by the president, I’ve found a solution. I’m going to stock up on E.L. Fudge Double Stuf cookies so I can grow faster than the maple.
The President raises the real problem of excessive spending so that he can misdirect your attention to the phony “problem” of excessive government debt—that is, an excessive gap between spending and tax revenues. This is very like my raising the real problem of my overlarge maple tree in order to misdirect your attention to the phony “problem” of an excessive gap between the height of the maple and the size of my waistline—giving both me and the President equally flimsy excuses to do exactly what we wanted to do in any case, namely gorge out on junk food or let taxes rise.
As I’ve said before, an individual facing a gap between expenditures and income can sensibly attack this problem either by reducing his expenditures or increasing his income—but he can’t sensibly attack the problem by moving money from his right pocket to his left. For the government, which represents all of us, increasing taxes is not the analogue of earning more income; it’s the analogue of moving money from one pocket to another.
If the president is willing to reason this way, why stop here? Federal spending has been growing faster than state spending; therefore we need to close the gap by encouraging state governments to spend more. Federal spending has been growing faster than the interstate highway system; therefore we need to close the gap by building more interstate highways. Federal spending has been growing faster than immigration quotas; therefore we need to close the gap with more immigrants. Any of these might or might not be good policy, but to claim they address the problem of excessive spending is pure sleight of hand. And ditto for tax increases.
The Federal Government is spending a lot of money. They can get that money by taxes or borrowing. If we let the tax cuts expire then we need to borrow less.
So, if you don’t want the tax cuts to expire then you want to borrow more. Economics is more of an art than a science so maybe we should be borrowing more, I really don’t know.
So, you want to spend less. That means we will need to borrow less. Now, if we let the tax cuts expire then we will need to borrow even less.
Of course, there comes a point where we raise more in taxes than we spend. Then we can either cut taxes or pay down the debt.
We can move things from one pocket to the next. However, letting the tax cuts expire reduces our need to borrow. And the debt seems to be the thing that most people are focusing on.
neil wilson: That doesn’t address the root of the problem. Drastic slashes in spending (military spending in particular) is needed. Just because someone doesn’t want a set of tax cuts to expire, doesn’t mean they want to borrow. I say end our military engagements full stop; shut down the bases; cancel all new weapons developments; and demobilize to a skeleton crew. Use the money left over to pay the debt. This means, yes, letting the tax cuts expire. Selling some public land to the highest bidder would raise funds as well. But, ultimately, spending and the debt need to be paid off.
Neil
Read the first sentence again. “Obama lamented the growith of ” something. The deficit? No, government spending.
Neil, I agree with Ken. The concern of the president in this speech is out of control spending. If spending is not a concern and you’re just looking to close the gap between spending and revenue, then increasing taxes is a fine approach.
However, the only way to decrease spending is to spend less… regardless of how much you tax or borrow.
Mike – “the only way to decrease spending is to spend less”
Made me laugh. So succinct and clear….wish I could cut things down so beautifully.
You’re giving us the impression that his primary or only approach to the problem is letting tax cuts expire (even though you say partly in your first sentence, your subsequent argument gives the impression that this is all the president is suggesting). As I read it, he also advocated the following:
1) a 3 year freeze on all discretionary spending outside of national security,
2) eliminating 120 (presumably government) programs,
3) the implementation of pay as you go budgeting, and
4) charging a fee to the largest wall street firms to repay taxpayers for the rescue.
Now while one might argue that these additional talking points in conjunction with expiring tax cuts would be insufficient to address the problem of excessive spending, I would argue that you are attributing fuzzy reasoning to the president that he is not exhibiting.
If we had a brand new country with no Government spending, lets say the Govt. wants to raise a standing army. The people agree this is a necessary and good thing. By having an army, the interests of the country abroad and at home are protected, and everyone gets better off, thus making available more money to be taxed. However, the army must be paid. One option is to tax the people now. The other is to borrow the money, and tax people tomorrow to pay back the loan. The people of tomorrow will have more money because of the wise spending by the Government, so perhaps it is best that they should pay for it. Lets say it chooses to borrow, and so runs up a deficit. Are you suggesting that future Governments need never raise a tax to pay off the loan? This is not a rhetorical question, I am not sure of the answer.
We can compare this to the same new Government wanting to raise a large company of people to chant the name of the president. The Government borrows the money to pay for the chanters. Most people do not agree that this is worthwhile, and the president will get voted out next term, but in the meantime, the company of chanters must be paid. This makes everyone worse off. Is it necessary for the next Government to raise a tax to pay off this loan (after sacking the chanters, of course)?
As you said before, the reducing of the deficit does not convert the spending on the chanters from irresponsible to responsible. Nor does borrowing to pay for the army change it from responsible to irresponsible. But in each case, is it not responsible to make steps to pay off the deficit?
Most Government spending is of course not entirely clear cut. Is it worth the money spent on medicaid? Is the army too large? As we saw yesterday, you cannot justify these by appeals to “generating economic activity” alone. We must get “value for money” for them. This could be stimulation of greater economic activity, perhaps through infrastructure, or maybe by some other benefit that the country would rather have than the money. The current USA Government has considered it necessary to spend a huge amount of money on the bailout and stimulus. It considered this to be responsible, or presumably it would not have spent it. It considers that ultimately everyone will be better off because of it, (as was the case in our raisng an army example earlier). Others may disagree. However, the loans taken out to spend the money must be repaid, and as you say, the only way the Government can do this is to raise taxes. It is quite possible to regret the necessity of having to spend the money, whilst still feeling it necessary to actually take steps to pay it back.
I am not aware of the full text of the Presidents speech. You say he raises the real problem of excessive spending, but I am not sure if the term “excessive” is yours or his. If he is actually saying we are spending more than is wise, but that is OK because I am going to raise taxes, to pay for it, then he seems to have fallen for the fallacy you describe. If he is saying we have unfortunately had to borrow a lot of money to spend wisely, and now we must pay it back, then I don’t think he has. You are quite right in pointing out that the wisdom of Government spending does not depend on the ability to raise taxes to pay for it.
Come on now, Obama lamented a lot of things in his speech.
I don’t think many taxpayers are too concerned about government spending.
For example, People tell the government to keep the government’s hand out of their social security checks.
Gov Jindel wants government spending to protect the LA shoreline.
VP Cheney says deficits don’t matter.
Sen Long said “don’t tax you, don’t tax me, tax the guy behind the tree”
My point is that, assuming you don’t want to take things out of context, the choices we face are either to let the Bush tax cuts expire or to borrow the difference.
Should we spend less? Sure, what do you want to cut? I want to raise the retirement age to 72.
I used to be rich. I was shocked at how much I paid in taxes. I knew what I did was legal but it didn’t provide any real benefits to society. Then they changed the law and I had to get a real job. I now pay $50,000 less each year in taxes. Gads, I wish I had to pay taxes on $100,000 at the top marginal rate.
Dray: I agree that points 1) through 4) (or at least 1) through 3)) address the problem. I continue to object to the inclusion of point 5) (let tax cuts expire) which has only pretend relevance.
Steve: What about default risk? I agree with your argument that, for the most part, it is irrelevant how you finance the debt. Pay back now, set aside money now and pay back later, don’t set aside money but count on future earnings to pay back later, etc., are all equivalent methods of repayment. But suppose the debt is dangerously close to default level (and assuming the consequences of a default are more costly than the debt); is it worthwhile to pay back a large portion of the debt in the short term? I’d like to hear your answer to this.
David Friedman suggested recently on his blog (in an analysis of the Greek situation) that a government default could happen with surprising speed. His reasoning was: high interest rates make default an attractive option for governments, and the prospect of a default causes lenders to raise interest rates, which in turn… (you see where this is going).
Actually if taxes have to be raised to increase spending (taking borrowing off of the table), then increased government spending becomes less popular. The 1990s budget policies in the George H.W. Bush and Clinton eras involved a bipartisan agreement that all new spending had to be offset with new tax revenue and all tax cuts had to be offset with government spending cuts. The result was not only an improvement of deficit accounting, but also considerable restraint on government spending growth. Thus, while taxing or borrowing may be theoretically similar, required budget balancing (or 1990s, required balance for new changes) seems to have an effect.
GregS: I have not thought hard about the question that you’re asking, but in any event it still seems to me that if debt is a problem, it is still a *different* problem than the one the president was claiming to address.
Mike: “However, the only way to decrease spending is to spend less”
Indeed, though one might consider it sufficient to merely decrease the proportion of spending relative to the economy. However, it is not quite clear that raising taxes is a surefire way to grow an economy.
Steven–Your basic argument “For the government, which represents all of us, increasing taxes is not the analogue of earning more income; it’s the analogue of moving money from one pocket to another” should hold, then, that eliminating all taxes and stopping all government services would have a negligible effect on our economy. Since we are just “not” moving money from one of out pockets to another.
I’m sure this has come up before, knowing your love of models based reasoning, but when a model fails to reliably predict actual outcomes it is likely based on faulty logic or is too simple.
Like when your model that predicted a “terrible flood” based on the flow of water from a bathroom faucet (4GPM) and the approximate capacity of the tub (50 gallons?). Even though you had never witnessed such an event, nor heard anyone else recount such a calamity, You tell us that you allowed this belief to remain, unchallenged, untested, until well into your adulthood. I imagine it was your faith in such a simple model. One that in a lab would have been useful but in reality just kept you scared of a self imposed lie.
Steve, to make your analogy more accurate, the tree growth that you’re using to justify your junk-food gorging didn’t just happen; rather, you’ve been shoveling sack after sack of Sooper-Grow fertilizer at it.
“For the government, which represents all of us, increasing taxes is not the analogue of earning more income; it’s the analogue of moving money from one pocket to another.”
I’m not sure why this analogy is run only in one direction. The Federal government does not incinerate the tax revenue it collects – it spends that revenue on things. So while it is true that if I have $2 and the government takes $1 in taxes I have $1 less to spend, the government then spends that $1. So from a non-selfish position the amount of expenditure remains constant. SOMEONE is going to get that extra $1, either the McDonald’s restaurant I buy my coffee from or the McDonald’s restaurant that supplies coffee to a government meeting.
It seems that your objection to letting the tax cuts expire is based on some other reasoning and I don’t see how your analogy applies.
Alan Wexelblat: So from a non-selfish position the amount of expenditure remains constant.
My point exactly.
To be clear, here’s what Obama said:
True, Obama was discussing the third point – belt-tightening – when he discussed letting the Bush-era tax cuts expire; it does seem like a non-sequitor viewed in that narrow context. But the speech clearly addressed the desire to reduce the deficit through both spending cuts and revenue increases. Within that larger context, the proposal to let the tax cuts expire seem entirely on point. Can you say quibbling, boys and girls?
Of course, I surmise Landsburg would regard my remarks as quibbling, too. I don’t really understand Landsburg to be offering critiques on Obama’s rhetoric. Rather, I understand Landsburg to be using Obama’s speech as a topical excuse to reiterate Landsburg’s view (as I understand it) that the economic consequences of government borrowing vs. taxing are trivial compared to the economic consequences of government spending. That’s a fine point of view. But since I don’t know that Obama embraces Landsburg’s view, I can’t fault Obama’s rhetoric for failing to reflect it.
noboyd.really: But the speech clearly addressed the desire to reduce the deficit through both spending cuts and revenue increases.
But my point is that sleight of hand takes place right at the moment when he addresses the desire to reduce the deficit, as if the deficit were the source of any significant problem.
But since I don’t know that Obama embraces Landsburg’s view, I can’t fault Obama’s rhetoric for failing to reflect it.
If Obama had suggested that the root of our fiscal problems is the gap between government spending and contributions to the Democratic National Committee, I think we’d be entitled to fault his rhetoric on the grounds that the DNC budget has nothing to do with “getting our fiscal house in order”. Someone might say “Oh, but perhaps he really *believes* that the DNC budget is relevant here”. Maybe so, but it seems implausible.
Is it implausible to imagine that Obama thinks the deficit is the source of significant problems? I find it implausible to imagine the contrary. But I guess we’ll just have to disagree about that.
Do I think deficits are the source of serious problems? Yes – although I embrace (what I understand to be) Landsburg’s view that many people misunderstand the nature of that problem.
The issue here is not so much a traditional economic one: “Do we optimize public welfare by conducting public finance via debt or taxation?”
Rather, it’s a political/accounting one: “Politicians say this policy is optimal. If so, then they should not merely impress upon the public the policy’s benefits; they should also impress upon the public the policy’s costs.” While a politician may bask in the glow of a government program as soon as the program begins providing benefits, borrowing lets the politician spread out (capitalize) the program’s costs; in contrast, taxation corresponds more closely with a pay-as-you-go (expense) model of finance.
Neither model is good or bad in itself; arguably borrowing is an appropriate mechanism for matching the political benefits of certain projects with their political costs. But given the natural inclination to derive benefits now and defer payments until later, both politicians and MCI are prone to treat regular expenses as capital items – arguably deceiving the public and leading to long-term problems.
I sense Landsburg doesn’t agree with this analysis. Landsburg regards foregone consumption as a cost, and raising $1 trillion in new borrowing requires just as much foregone consumption as raising $1 trillion in new taxes. Yet people who pay taxes anticipate no return on their sacrifice beyond the government services provided; in contrast, people who lend do anticipate a return – and the cost of that return must be borne by an unsuspecting (or under-suspecting) public. Thus a system of pay-as-you-go taxation seems to provide a political impetus to curb spending that a system of borrowing does not.
Taxation creates a system that says, “I can eat whatever I want, but for each additional calorie I ingest I must go to the gym and work it off within 24 hours.” Borrowing creates a system that says, “I can eat whatever I want, but for each additional calorie I ingest I must go to the gym and work it off … oh, eventually.” While the difference between these incentive structures may be opaque to an economist, I suspect it’s clear to most of the rest of us.