Here is my op-ed on deficit reduction from this morning’s Wall Street Journal (subscription required). For those without subscriptions, the thrust (which won’t be new to long-time readers of this blog) is that raising taxes can’t convert fiscally irresponsible spending to fiscally responsible spending.
If your household is over budget, you can address that problem either by spending less or by earning more income. It is tempting to fall into the trap of thinking that by analogy, the government can address its budget problems either by spending less or by raising taxes. But the analogy fails because raising taxes is not like earning more income; it’s more like visiting the ATM.
The government is an agent of the taxpayers. Raising taxes to pay for government spending depletes our assets just as visiting the ATM to pay for household spending depletes our assets. That’s not at all like earning income, which adds to our assets.
So insofar as the supercommittee relies on tax increases to address issues of “fiscal irresponsibility”, it will have failed.
I’ve never understood this argument of yours. When my family spends money, it goes to someone else. When I earn money, it comes from someone else. When the government spends money, it goes to Americans (usually). When it gets taxes, that comes from Americans. If the government wants to tax persons A and B and spend that money on person B (say, by paying B to build roads), that’s not irresponsible, that’s just a policy decision. Doubling the tax and doubling the spending doesn’t make it more irresponsible. The government is just shuffling the money around more. I don’t understand the ATM analogy at all — that’s saying that the government is taking money from Americans and spending it *elsewhere*. In fact the better analogy for the government is the father who gets money out of the ATM and pays his own kids.
(There are other arguments against taxes, like reducing incentive to work, but I don’t think that’s what you’re saying here.)
@Lawrence:
“The government is just shuffling the money around more.” – That is exactly the point that Prof. Landsburg is making. That is how raising taxes is like visiting the ATM, it doesn’t generate any wealth, it just moves it from one place (the bank / your pocket) to another (your pocket / the government’s pocket).
“If the government wants to tax persons A and B and spend that money on person B (say, by paying B to build roads), that’s not irresponsible, that’s just a policy decision.” – Yes, it is a policy decision, but whether or not it is irresponsible depends entirely on WHAT the money is being spent on. If we believe that the money is being spent irresponsibly in the first place, doubling the amount that is spent would be doubly irresponsible. (Of course there is plenty of room for reasonable debate about what is responsible or irresponsible to spend our money on.)
Mr. Kesteloot, you’re missing a key assumption Landsburg has made: He is assuming the spending is irresponsible (by which he refers only to spending programs that take $1 each from A and B but only returns, say, $1.50 total value with that money) and simply pointing out that raising taxes to finance that loss of $.50 doesn’t make the loss of $.50 in in real world value any less real; it just covers the government’s nominal bill. So it may be fiscally responsible from the standpoint of the gov’t alone, but looking at it from the standpoint of society as a whole, it’s still fiscally irresponsible spending because it resulted in a net loss.
Suppose Uncle Sam taxes you and I each $1 and spends the money building a road that only gives us back $1.50 of our money in real world value, whether that value is social, economic, political, or all of the above. You and I are out $.50, no two ways about it. That is “fiscally irresponsible spending” for the purposes of this argument, and whether the government raises taxes or not to finance it is quite beside the point.
Landsburg is NOT saying that all gov’t spending is irresponsible. That is an empirical question, as he consistently points out on this blog and elsewhere, which depends entirely on the value we as taxpayers get out of the spending. We can argue all day long, and quite reasonably, about the values we should aim for, and about the various justifications for spending programs, for the logic here isn’t affected by such arguments. The point would be equally valid if we reversed the terms and stated that lowering taxes doesn’t convert fiscally responsible spending into fiscally irresponsible spending.
This thesis is not consistent with the argument you make elsewhere that taxation vs debt isn’t the important choice, the important choice is the spending.
However, it would seem this other argument may not apply in a liquidity trap – when the government borrows a dollar, it fails to push up interest rates. I don’t know what the effect of taxing a dollar is in a liquidity trap. Perhaps it depends on precisely which dollars are taxed.
Does the supercommittee know this Econ 201 stuff? Or are they stuck with Econ 001?
There are two issues. Govt. spending is not made responsible just because the taxes can be raised to fund it. I think I get that. However, Govt. spending must be funded. The spending can be funded from taxes, or by borrowing. SL has shown that both cost the citizen the same in the long run. This ignores the effect of lender confidence. Italy has a huge problem now because lenders fear Italy will default, so they charge much higher interest rates to cover the risk. This costs the Italian citizens more money. If countries want to avoid paying higher interest on their borrowing, they must be able to demonstrate that they can pay the money back. This can be done through raising taxes to reduce the borrowing.
Therefore deficit reduction does have some significance.
Yes, it makes sense to reduce wasteful and unproductive spending. Why does Mr. Landsburg ask “if your government insists on maintaining social programs we don’t need and can’t afford…” Why does he not mention defense programs/items we don’t need and can’t afford, or subsidies to folks or industries that no longer need them? In a nutshell, one could say that RESPONSIBLE spending should and could be paid for by higher taxes — at least by those who can afford to pay them.
I am curious – you say “The government’s chief asset—in fact, pretty much its only asset—is its ability to tax people”. Are there any responsible estimates of the value the government could extract from the assets that it holds? Households can monetize relatively illiquid assets, if they have them. Could monetization of government property make a meaningful contribution? I am not making an argument – I simply don’t know the facts and wonder whether Mr. Landsburg thinks there’s any reliable work on the subject …
Myra: one could say that RESPONSIBLE spending should and could be paid for by higher taxes
Absolutely and of course. The point here is that taxation cannot convert irresponsible spending to responsible spending. It’s still incumbent on us to figure out which spending is responsible and which isn’t.
Harold: There are two issues….Therefore deficit reduction does have some significance.
I agree with every word of this comment, and it’s particularly well put. Thank you.
@TimC, the other aspect is where would A and B have used their money if they were not taxed the $1 each? If they would have bought snacks, then the lost activity is only the $0.50 you cite. But if the $2 (total) would otherwise have gone to start a tech company that would have generated $3 from that $2 investment, then the loss is $1.50.
For anyone who has seen “Margin Call”, the flip side is that the $2 could go to build a bridge that saves an aggregate thousands of miles driving distance every year, in which case the $2 investment by the government creates an economic benefit via the increased productivity of the people using the bridge. However, Dr. Steve’s example specifically identifies “fiscally irresponsible” spending, which would exclude the the case of the bridge.
From article: “That’s like saying a $500 haircut can be converted from “irresponsible” to “responsible” as long as you withdraw the $500 from your bank account.”
In some sense, withdrawing the $500 from the bank account to pay for the haircut is more responsible than the alternative, which is to pay by credit card. People would never go bankrupt if they always withdrew money from the bank rather than pay by credit card.
Similarly, it is more responsible for the government to raise taxes than to borrow because the more money they borrow, the more likely the citizens are to overestimate their wealth (“we can get all this amazing stuff without even being taxed much”), and thus to spend irresponsibly. Taxes are necessary to provide the citizens with a measure of their ability to afford what they want to buy.
Landsburg provides a powerful editorial rebutting all those people who have been arguing in favor of spending they know to be wasteful. This would be a more powerful editorial if Landsburg had included even a single example of such a person. I have to suspect these people are made of straw.
If anything, Landburg’s practice of stating only half of a truth would tend to obscure, rather than illuminate, the issues before the Supercommittee. Yes, raising taxes won’t automatically make a wasteful program into a sound one. But by the same token, raising taxes will not make sound programs into wasteful ones, or render new programs wasteful. This is such an obvious corollary, it’s hard to see how a fair-minded person would state one proposition but not the other. Hard, but not impossible.
Here’s what I believe, and what I understand Landsburg to believe: Government has a role, and should be structured to maximize net benefits. Net benefits reflect not only the good a program achieves, but the cost of financing the program – that is, the opportunities forgone by spending for that program rather than leaving resources in private hands.
The sense the REAL burden of Landsburg’s editorial is that current tax revenues are already sufficient to achieve all cost-effective governmental purposes, and ergo any discussion of the need to increase governmental revenues is purely academic. This is a fascinating assertion – and one wholly unsupported in the editorial.
As a bottom line, the editorial seems to achieve no purpose. It will seem quite persuasive to people who are already persuaded of Landsburg’s unstated thesis. It will seem quite pointless to everyone else. I fall into the latter category.
@Nobody.really:
Most bills in congress pass via coalitions, vote swapping, log-rolling. I think your bridge to nowhere is a waste, but I’ll vote for it if you vote for my tunnel to nowhere. I DO think your bridge is a waste and I vote for it anyway — regardless of whether I think the tunnel is a waste. So you are just wrong in that. Steve can rebut your misunderstanding of what he actually said.
@nobody.really:
The argument doesn’t just apply to people who advocate in favor of spending they know to be wasteful. It also applies to anyone who believes:
1. The government is in fiscal trouble.
2. Some (significant) government spending is wasteful.
3. Raising taxes will improve the government’s fiscal status.
I suspect there are numerous people who fulfill these criteria, and I’m sure only some of them are made of straw.
Anyone who believes both that the government is in fiscal trouble and that no (significant) government spending is wasteful either needs to work on his definitions of trouble and wasteful, or he is particularly concerned with lender confidence.
The fallacy of the article is unstated. Specifically, it requires the assumption current spending is being done *efficiently* (i.e. most bang for the buck). As current spending is NOT being most efficiently, cutting spending will always fail *because* the money is being spent on inefficient systems.
It is whining about paying so much for gas–but you insist on driving a car that gets 6 mpg–and you will NOT change. So, how do you plan to pay LESS for gas when you have to make the same 150-miles/week trips over and over and over again?
I was with you for part of the way, until you mentioned “your government” and said that “taxpayers are the government’s ATM.”
The State is a criminal entity, which gets its resources by theft and arrogates a legalized monopoly-crookopoly of organized violence over an arbitrarily circumscribed geographical area.
Taxation is involuntary servitude, a form of slavery.
I am a person, not part of the criminal entity’s ATM. To paraphrase Benjamin R. Tucker, there are two sorts of people, Anarchists and criminals. I know what I am. What are you?
@Al V: Of course, I have no problem with that argument. I wasn’t extending my comment that far, just trying to get the basic point across, but of course you’re right: Cost = [Value of $2 spent by A and B] – [Value of $2 spent by the government].
I did sort of cover this in my comment, by stating that lowering taxes doesn’t convert fiscally responsible spending to fiscally irresponsible spending. To take your bridge example, if the gov’t bridge provides $3 in benefits, and A & B’s snacks would have provided only $2 in benefits, then we as taxpayers have collectively gained $1 in benefits (minus foregone interest) thanks to government spending. Everyone would agree that this is a prime example of fiscally responsible spending; even if we lower taxes (and, presumably, finance the bridge through deficit spending), building your bridge is still fiscally responsible. The decision to spend here is a good one, regardless of how it is financed, and we as taxpayers come out on top.
Am I reading your point correctly?
“raising taxes can’t convert fiscally irresponsible spending to fiscally responsible spending” — yes it can. Consider a case where the government decides to pay Michael Bloomberg $1,000,000,000 one year. That is fiscally irresponsible. It is not fiscally irresponsible if the government, at the same time, decides to tax Michael Bloomberg $1,000,000,000 that same year.
As long as we are willing to refer to the irresponsibility of just giving away money to citizens (in a way that is no far) as a fiscal irresponsibility, we must be willing to admit that the reversal of this action (taxation of same people) eliminates the irresponsibility.
@Jonathan Campbell:
Guess you’ve never heard of opportunity cost huh? That $1M spent paying Bloomberg would STILL be better spent paying me no matter how it is financed.
I agree with this in the long-term. But in the short term a country with very low duration on their debt and a high debt to GDP ratio, but a currently low interest rate has to worry about a speculative attack on their borrowing rates. A la Italy.
To follow on with the analogy, it’s like if you have a loan shark who’s normally nice and friendly but if you miss a payment or get close to missing a payment he breaks your legs. In this case fiscal responsibility might call on you to empty your savings account, pawn your jewelry, etc. to pay him off.
the equivalent to an individual earning more money is for the economy to grow (more productive activity going on). while gov’t can’t command the economy to grow, it can certainly create conditions favorable to growth (or in the case of the obama administration, create conditions less favorable to growth).
Ken B: You failed to address my point. I said A > B, and you “respond” by saying C > A. Would you like to actually make a relevant argument?
@JC: You are kidding, right? If the money spent on paying the mayor has a better use then it has a better use even if you raise taxes on the mayor. So what I said is that if C > A then C-B > A – B.
The issue is NOT ‘is spending plus taxing better than just spending.’ The issue is, does taxing *make* the same spending better. The word Steve used is “convert”. Raising taxes may be a good idea, but so is picking better spending. Doing one does not eliminate the need for doing the other.
Doug: it’s like if you have a loan shark….
Point taken. Thanks.
That’s a better argument. I offer four thoughts.
1. Yes, congressmen regularly vote for packages of policies that include components they find wasteful, but offset by components they find desirable. I engage in the same behavior every time I buy a house, car, or college education. It is unclear to me that congressmen regularly vote for things they believe to be a total, or predominant, waste.
2. Whatever the shortcomings of log-rolling, it is unclear how it bears on Landsburg’s thesis. The SuperCommittee is composed of congressmen. If they raise taxes, they may be inclined to engage in greater log-rolling. But conversely, the choice to retain the current tax structure, or to adopt any different tax structure, is just as likely to be a result of log-rolling. I see no structural reason to believe that log-rolling favors one outcome over another.
3. What is the appropriate measure of “waste” for government? We have a government that engages in log-rolling. Can you identify a government that doesn’t, and identify the mechanism that prevent log-rolling from occurring? If not, then complaining about one aspect of government is akin to complaining about the stocks that your broker bought that lost money while ignoring the stocks that made money. We really need to evaluate efficiency by comparing actual, real-world alternatives based on their aggregate performance.
4. That said, the log-rolling thing pisses me off, too. What policies could improve this situation?
One thought is to render legislative deal-making unenforceable. Some states have laws that prohibit a bill from pertaining to more than one “topic.” These laws are generally ineffectual, but provide a vehicle for undoing certain politically volatile package deals. Some states give the governor a line-item veto. The net effect of these laws is not to undermine packages entirely, but to cut the governor in for a bigger slice of the pie than would otherwise be the case.
Ironically, the Coase Theorem suggests that the socially optimal outcome may be achieved via surrender: Acknowledge that politicians will treat government assets as their own private property, and at least give them the discretion to barter with that property efficiently. Consider the example given above. Politician A proposes a bridge that Politicians B, C, and D don’t value. Does the fact that B, C, and D don’t value the bridge prove that the bridge is socially sub-optimal? It might simply mean that B, C, and D will derive no personal benefit from the bridge. This is the dynamic that many government critics overlook: inefficiency may result in government action OR INACTION.
So, how to resolve this issue? Arguably, log-rolling – that is, letting each politician “buy” the support of fellow politicians by bestowing scarce political capital – represents as close to an efficient solution as we’re likely to find.
@Steve & Doug: The loan shark idea surely addresses the question, ‘is raising taxes now a good idea’ not the question whether it converts bad spending to good.
“What is the appropriate measure of “waste” for government?” The size of government.
No, it is not remotely perfect, and other measures of interest surely exist, but nearly all gov’t spending represents a deviation from market allocation, which represents waste ie opportunity cost.
Plus there are all kinds of public choice issues, which are prabably more dependent on the complexity than size in spending terms, but ‘size’ might make a decent ball-park estimator there too. My guess is that these are actually more costly.
A fair first-order approximation, I guess. But the second-order approximation takes a pretty sharp turn. After all, we can all identify places in the world with no functioning goverment. (Somalia comes to mind.) Fairly rapidly it becomes apparent that theories that rest on assumptions about efficient market allocations — yet do not include any resources for maintaining efficient markets — represent pretty rough models.
@NR: Agreed. But if we limit it to one country, or some similar ones over a few decades, it probably serves tolerably well as a proxy. It certainly seems to right to a first approximation with American states or Canadian provinces.
@Jonathan Campbell
Offsetting Bloomberg’s salary with an equivalent tax does not make the spending responsible, it just reduces the negative consequences. Blowing $1,000 in a casino does not become responsible if you win $1,000 from the lottery tomorrow.
And your transaction of paying and taxing Bloomberg does not have a net effect of zero. There are bureaucrats who are paid to approve his salary and to approve the taxation of it. There is upkeep for the building in which these bureaucrats meet. Lawyers and assistants who are paid to review all of these bills and budgets. Payroll employees paid to oversee the salary. IRS employees paid to oversee the taxation. Police paid to enforce the taxation. I could probably go on all day, and the list grows perpetually.
This is why government spending, as a general rule, provides less utility than private spending. Too much is lost to attrition.
How so? Can we identify any measurable proxy for waste that correlates with size of goverment?
(I’ve encountered a think tank that publishes a study purporting to show this correlation. In brief, it shows that when the size of goverment grows as a share of the economy, GDP grows more slowly! In other words, the study shows that the public-sector is less prone to fluctuate with business cycles. Yippee. I wonder if any goverment funds contributed to that study.)
Dr. Landsburg,
You make one useful point in your op-ed, but, with all due respect, you seem to be making a specious overall argument, based on an invalid implicit premise of fully rational behavior and perfect information.
First, regarding “social programs we don’t need and can’t afford”, obviously “need” is better expressed as “desire” and desire is a matter of opinion, and that’s something the political process is supposed to sort out, however imperfectly. And I doubt “can’t afford” is literally true, since I think we could tax enough to finance social programs and the federal government overall even if no policy changes were made to reduce projected spending. Our economic growth and “average” standard of living would probably be much lower on an ongoing basis at the higher tax levels, but that’s a trade-off rather than an economic impossibility, and I don’t think it would be disastrous.
So your opening premise that some are seeking a spending level that is inherently, objectively “irresponsible” is very questionable.
But now on to the major implicit premise that seems invalid to me and which invalidates your argument.
One thing that would indeed be very irresponsible is for the government to deficit-finance a large portion of such spending for so long that eventually interest rates rise and perhaps also injurious inflation is created via monetization, resulting in economic disaster.
You do make a useful point: that government finances are part of “the American people’s” finances, and as such, reducing public debt by increasing private debt dollar for dollar (leaving aside discrepancies in interest rates) doesn’t change the total debt of the nation (public + private), and your implication is correct that reducing private savings (via higher taxes) is equivalent to increasing private debt, since they are along the same continuum (savings can be considered negative debt).
But you seem to ignore the way people behave in the real world (behavioral economics) rather than in theory where everything is rational and everyone has perfect information. People don’t factor government debt level into their economic decision-making the same way they do their own private debt. And my sense is that, notwithstanding all the problems with private debt that America has had and still has, I think people are much more aware of, and have a better sense of pressure from given levels of their own private debt than they do with levels of federal government debt, with is much more of an abstraction and the size and expense of which is much less visible to them. Put more plainly, I think people would be object more to having to pay another $5,000 in taxes (or to incur $5,000 in personal debt) to fund incremental spending on a given government program than they would object to the government deciding to borrow that much more to spend that much more, in effect, on their behalf, and part of the difference results simply from awareness vs. ignorance, or at least of clarity of magnitude vs. lack of clarity on the cost. Which means that privatizing our debt, so to speak, in the sense of making each individual’s cost for the spending more visible and immediately imposing more of it by financing a larger portion of government spending by taxation rather than borrowing, fosters greater awareness of the cost, greater scrutiny, and greater responsibility, not to mention that I think people are more inclined to pass on federal government debt to future generations than they would be to pass on debt to their own kids and grandkids.
And if you’re saying it would be no more responsible to increase the portion of a given level of government spending that is financed through taxation rather than debt, then presumably you’re saying it would be no less responsible to do the opposite — even to eliminate taxes altogether and deficit-finance all government spending. After all, if it’s a zero sum game, all we’d be doing is reducing private debt (increasing private saving) by the same amount we’re increasing public debt, and per that thinking, I suppose the extra money to eventually pay back the extra public debt will simply reside in private hands for whatever length of time (rather than resulting in incremental private consumption spending) before someday being taxed to pay down the debt, so what harm could there be per your framework? We’re just withdrawing less money from the ATM and keeping more in the bank account, according to you, so there’s no practical difference, and no likely ill effects. I have to think there’s something wrong with that picture.
I would greatly appreciate any reply from you, particularly if you can point out something I’m missing or viewing incorrectly.
Thanks
Todd:
“Offsetting Bloomberg’s salary with an equivalent tax does not make the spending responsible, it just reduces the negative consequences. Blowing $1,000 in a casino does not become responsible if you win $1,000 from the lottery tomorrow.”
How is it not the case that if you are able to mitigate the negative consequences of an irresponsible action, the action is less irresponsible? Generally actions are deemed “irresponsible” at least in part due to their negative consequences. On your lottery example: As Steve’s article suggests, if you want to make an entertainment expenditure (like gambling) more responsible, the legitimate way to do that is to earn more money (and if you can do that at the lottery, more power to you.)
On your discussion of friction costs within govt., i agree, but that doesn’t make it incorrect to say that taxing bloomberg makes it less irresponsible to give him money, it just doesn’t make it as responsible as it would in a world with no friction.
I’m hearing echoes of all the debates and soundbites from which I was supposed to understand that a budget balanced at high spending levels is more fiscally responsible than lower spending with a deficit.
Tim Harford points out (via twitter) that Steve’s basic fallacy is trying to make an analogy between governments and households. We should expect any logical conclusions to be shaky at best.
For example, a household can
A) Spend less
B) Earn More
C) go to the ATM
D) get a loan
but a government can
A) spend less
C’) tax more
D) borrow more
E) print money
Singapore has (B) as well.
Steve asserts C=C’, but I’m skeptical that these are really equivalent. And the household has no (E).
The analogy has big cracks.
…. and the government gets a better interest rate on (D) than any household I know of…
Does not this logic imply that the government, if it chooses to continue to spend at the level it does, can simply give us all a tax holiday this year? And the next. And the next. After all, there is a fixed amount of money in the bank.
But if the government does this, doesn’t it imply that tax rates will have to be higher and higher in the future? And does not the efficiency cost of those tax rates rise with the square of the rate?
And does not this imply that if the government chooses to continue to spend, wasteful or productive, it better the hell tax people now and not keep pushing it off to tomorrow when those taxes will be even more costly to the economy>
Neil:
And does not the efficiency cost of those tax rates rise with the square of the rate?
Yes. Efficiency (more or less) dictates spreading taxes out equally over time. Depending on your forecast for future spending, that can be a good reason to raise current taxes.
But that’s not the same issue I was addressing. I was addressing people who believe (or claim to believe) that balancing the budget can substitute for exercising good judgment over which programs to fund, or how much. If you doubt there are such people, I bet I can provide six good quotes from any week’s worth of issues of the New York Times.
@Harold @ Steve Landsburg
Does it cost the Italians more money? I realize interest rates may rise. However, Italy may default or its creditors might have to take a haircut. Germany (or China) might just finance their debt for them. How do I know the Italians aren’t being rational in handling their debt?
I’m not saying I’m right — I have no idea. I guess my question is how do you know you are right?
I have to say that I am not fully aboard with the ATM analogy. If the government can use lump-sum taxes then the argument fails: taxing more today does not diminish taxing ability tomorrow. Using distorting taxes is not quite as good as using lump-sum tax and will most likely diminish taxing ability tomorrow. But I can’t see why this would be one-on-one like in the ATM example (where withdrawing one dollar today decreases the present value of future withdrawals by one dollar, that’s what I mean by one-on-one).
Mike H:
Pointing out that an analogy isn’t perfect does not an effective argument make. You have to explain the imperfection and then show us how the discrepancy affects the logic. For the purposes of Landsburg’s argument, he’s not saying that C=C’. He’s saying that certain aspects of C are equivalent to certain aspects of C’. Not the same thing.
All we need to understand here is that, like households, gov’t can either borrow or earn (tax) to finance its spending. As is true for households, a gov’t spending $2 for something that produces only $1 of value is fiscally irresponsible, regardless of the method of financing the spending. Just like the case of an alcoholic husband proposing to his wife that she get a second job to finance his alcoholic tendencies, a government that spends wastefully and proposes to raise taxes to pay for the waste is not being responsible simply because it is covering its bills.
Landsburg isn’t attacking gov’t spending. He’s attacking the idea that a balanced budget = fiscally responsible government, because that’s a dumb idea that largely serves as smoke and mirrors to cover up the real issue of whether our spending is justified. Don’t make an issue out of something that shouldn’t be an issue by pointing out trivial flaws in an analogy.
Marek:
taxing more today does not diminish taxing ability tomorrow.
You are assuming that the taxpayers have infinite wealth? In that case, of course, all economic problems vanish.
Tim C: Thank you for the response to Mike H, but I’d like to correct it a bit:
Just like the case of an alcoholic husband proposing to his wife that she get a second job to finance his alcoholic tendencies, a government that spends wastefully and proposes to raise taxes to pay for the waste is not being responsible simply because it is covering its bills.
My point was that the govt that spends wastefully and proposes to raise taxes is not like the alcoholic husband who puts his wife to work; he’s like the alcoholic husband who draws down savings. The former can in fact improve his household’s financial status as long as the wife is willing to do what he asks; the latter can’t. The govt that taxes its citizens to pay for inefficient spending is not putting anyone to work, and not generating any more income; instead it’s drawing down people’s savings.
So I think that in that sense you missed the entire point of the analogy. But of course you are dead on right when you say:
Landsburg isn’t attacking gov’t spending. He’s attacking the idea that a balanced budget = fiscally responsible government,
The point here is certainly not that all govt spending is bad. It’s that bad spending can’t be turned into good spending by raising taxes.
Tim C: Thank you for the response to Mike H, but I’d like to correct it a bit:
Just like the case of an alcoholic husband proposing to his wife that she get a second job to finance his alcoholic tendencies, a government that spends wastefully and proposes to raise taxes to pay for the waste is not being responsible simply because it is covering its bills.
My point was that the govt that spends wastefully and proposes to raise taxes is not like the alcoholic husband who puts his wife to work; he’s like the alcoholic husband who draws down savings. The former can in fact improve his household’s financial status as long as the wife is willing to do what he asks; the former can’t. The govt that taxes its citizens to pay for inefficient spending is not putting anyone to work, and not generating any more income; instead it’s drawing down people’s savings.
So I think that in that sense you missed the entire point of the analogy. But of course you are dead on right when you say:
Landsburg isn’t attacking gov’t spending. He’s attacking the idea that a balanced budget = fiscally responsible government,
The point here is certainly not that all govt spending is bad. It’s that bad spending can’t be turned into good spending by raising taxes.
Steve Landsburg: Thank you for the correction. I mixed up letters and confused B for C in Mike’s example. Whatever part of the analogy was initially lost on me has been corrected.
Steve: Suppose current earnings are y=1, future earnings are yprime=1, interest rate is zero and initial wealth is zero. Then the government can tax at most 2 overall, and increasing tax in period 1 by a decreases MAXIMUM taxing ability in period 2 by exactly a. In this sense you are correct.
But the relevant scenario seems to be the following: the government starts with a tax of 0.5 in both periods and considers increasing the tax in period 1 to 1 (versus decreasing spending by 0.5, say). Is this going to conflict with the government’s ability to tax 0.5 in period 2? No. The government can increase taxes in period 1 by 0.5 without any offsetting decrease in taxes in period 2.
Perhaps I am missing something.
“He’s attacking the idea that a balanced budget = fiscally responsible government, because that’s a dumb idea”
“The point here is certainly not that all govt spending is bad. It’s that bad spending can’t be turned into good spending by raising taxes”
These, to me, seem obvious. Perhaps I don’t listen to enough political speeches.
Mike H: These points, which to you seem obvious, are in fact the entire intended content of my column and post. The political rhetoric surrounding the supercommittee makes it clear that these points are not obvious to everyone.
“The point here is certainly not that all govt spending is bad. It’s that bad spending can’t be turned into good spending by raising taxes.”
Actually, I am not sure this is true. People demand more government spending programs if they appear cheap to them. Deficit financing makes government spending look cheap to a large part of the population, and demands increase accordingly. Requiring government spending programs to be tax financed ensures that voters see the cost of their demands as well as the benefits. Perhaps then we will see more good government spending programs (only those worth the tax cost) and less bad.
@Neil I see the point you’re trying to make. However, your example is not one of bad spending becoming good spending via taxation. It’s an example of how taxation changes people’s perception of certain spending.
” As is true for households, a gov’t spending $2 for something that produces only $1 of value is fiscally irresponsible, regardless of the method of financing the spending.” This is exactly what Mike H now concedes as obvious, but which Jonathan Campbell and Neil deny.
So let’s sharpen it up.
The govt spends $1M a year on a new program to cripple children. Roving bands with cudgels attack playgounds and schoolyards. Is this program rendered more responsible by a new tax to defray iots cost?
Note I am not asking is crippling+tax better as a combination better than crippling+deficit. I am asking if the crippling itself is rendered more meritorious because the tax is collected. You can always have the new tax and stop the crippling too.
Ok, here’s an example of how good spending might become bad spending through taxation. I don’t have an example yet of the other way round.
Suppose that the recession of the 2010’s is like that of the 1930’s, and that Keynes/Krugman was/is right – the solution is for the government to borrow and spend until full employment is restored.
Suppose the government starts spending – not on solid infrastructure projects that lay a strong foundation for the nation’s future, but on a series of bridges to nowhere, or (worse) on a war – no matter, the economic stimulus still boosts the economy so much that we are almost out of the recession. Projections indicate that the net benefit – even counting the cost of the war or white elephants – is positive. We have, here, responsible spending – perhaps not the best possible responsible spending, but it was spending that produced a net benefit, and is therefore good.
However, the government then decides to pay back its debt too early by levying a ‘stimulus repayment tax’. Paul Krugman bitterly denounces this tax in his column, but nobody listens, and the tax goes ahead. The tax is so punitive that it largely cancels out the stimulatory effects of the spending, and we are back to a liquidity-trap recession again. Then, the white elephant projects turn out to have been a complete waste of money, and made it politically impossible to propose any further economic stimulus. The tax has turned good spending into bad.
Now, can someone think of a scenario where a tax turns bad spending into good?
“alcoholic husband who puts his wife to work”
how is that not analogous to the dumb one time $1b payout to bloomberg, made up for by the smart one time $1b tax of bloomberg?
even in the alcoholism example, it is not “responsible” to be an alcoholic once you’ve put your wife to work. so, ken b, we are talking about the total “responsibility” of (problem + solution) rather than any change in the marginal responsibility of the problem alone.
SL: “The govt that taxes its citizens to pay for inefficient spending is not putting anyone to work, and not generating any more income; instead it’s drawing down people’s savings.”
I subscribe to your overall argument that the ability to levy taxes does not make inefficient spending efficient, just like a monopoly business who can raise prices does not make inefficient production efficient. But here is where I get stuck. I would think the inefficient spending put someone to work. If the government wants to raise everyone’s taxes to purchase $500 hammer’s for the military or to add clerks to process more medicare claims, someone has to produce the hammers and cut the checks. So isn’t it putting someone to work and generating income, just not as productively as it might have otherwise?
” it is not “responsible” to be an alcoholic once you’ve put your wife to work.” Indeed, and this constitutes a concession of the point at issue.
Of course I know that the analogy is not exact since as Steve says, taxes don’t add to citizenry’s assets.
But viewing an action’s impact on the citizenry’s assets as the only relevant variable in determining how fiscally irresponsible that action is is too simplistic.
Is it fiscally irresponsible for us to tax $1 trillion from the middle class, and then give it to a rich billionaire, who we are pretty sure is going to spend it all on a 2 week trip to the Bahamas? Yes, I’d say that is fiscally irresponsible. Yet the tax+spend action itself, on the government’s part, is not “irresponsible” if we use the single standard of whether it changes the citizenry’s assets. That, I believe, is why Steve’s analysis is too simplistic.
Well, from what I read, I really didn’t see any particular issue with the column Landsburg wrote.
I suppose it can begin to become equivocal if you automatically assume all government spending is immediately deleterious to everything – which I didn’t see Landsburg argue. I only understood him to say that there are two types of spending: good and bad.
In that, it is my opinion that Landsburg is merely remarking upon the unequivocal fact that not all government spending is responsible. I believe that’s not only evident, but logical, seeing as the congressional supercommittee is a group of humans, and thus regimented to the sad but real phenomena of human error (in its myriad form). Beyond that, I believe Landsburg is also attempting to illuminate the necessity of auditing the government’s expenditures, and coming to a somewhat logical conclusion as to whether or not (in general) the government is doing the best job it can based not on actual results, as opposed to intent, and non-consequentalist decision-making (which is a point he dedicates a chapter to in the Armchair Economist).
Of course, this is a hard point to prove, seeing as there’s not always adequate empirical evidence to substantiate whether or not the government’s policies are cost-effective, economically effective, and have caused effects intended without remote corollaries offsetting those intentions and their positiveness with unconscionable negative fallout through systemic causation.
And again, whether or not something is desired, doesn’t exactly denote whether or not something is good, or beneficial to all. Not everything we think is good may actually be good. Which goes to further prove the point that not all government spending may be responsible just because it passed.
That’s just what I surmised, though.
Be well
Steve Landsburg wrote:
I was addressing people who believe (or claim to believe) that balancing the budget can substitute for exercising good judgment over which programs to fund, or how much. If you doubt there are such people, I bet I can provide six good quotes from any week’s worth of issues of the New York Times.
Sure Steve, I’ll bite. I doubt you will find even one person who explicitly says that. But I’m curious to see, say, 2 examples of what you think implies such a belief.
I think some of us are having trouble understanding your op-ed, since we’re not sure of the exact position you are attacking. I’m still open to the possibility that your op-ed is in fact eviscerating someone, I’m just not sure who. :)
@Bob Murphy: I waded into the muck and read today’s editorial.
We are no fans of the supercommittee process. But bailing out at this point would deal a serious blow to this country’s financial credibility. Republicans on the committee need to get down to the real business of raising revenues, not just cutting spending. That is the only way to tackle the deficit.
Seems to fit; the full editorial seems to assume cutting spending is ipso facto bad.
I’d find 5 more but I have getting hit on the head lessons later and they are more fun and enlightening than the NYT opinion page. (And Jonathan Campbell is clearly way ahead on them.)
There’s a flaw in the argument. If the government takes $100 from person A in the form of taxes and spends it on person B in the form of purchases (or even if they give the money to them, as they did with the Wall Street bailouts) how is that a net loss to the taxpayers? One taxpayer looses $100, another gains $100. The net loss (or gain) is zero.
The caveat here is if the gov’t taxes US taxpayers and then spends the money on foreign products or foreign companies. In that case, the analogy of taking the money from an ATM machine is valid. However, if you and your wife have a joint checking account and you take $500 from the ATM to pay her to cut your hair, have you REALLY wasted $500 on a haircut?
Andy B: ” I would think the inefficient spending put someone to work. If the government wants to raise everyone’s taxes to purchase $500 hammer’s for the military or to add clerks to process more medicare claims, someone has to produce the hammers and cut the checks. So isn’t it putting someone to work and generating income, just not as productively as it might have otherwise. ”
I don’t think so. First we can imagine explicitly destructive or useless spending, like hiring someone to smash windows. Or almost useless work like breaking rock with a hammer. What matters is not if he gets paid but if his efforts produce wealth. If his wage demands drop he would eventually find useful employment — perhaps protecting windows from being smashed or washing them. This would create value.
Someone put it well once. For the individual it is enough to HAVE a job. For society it is important that he DO a job.
Steve, other people have made much the same point, but do you agree that to instill confidence in creditors it’s generally a good idea to pay off your debts in a timely manner? I think that’s the meaning of “fiscal responsibility” that is commonly used. Usually the rhetoric in our political discourse proceeds along the lines:
“We can disagree about the size of government, but we should all agree on fiscal responsibility.”
In other words, the two parties have different views on what level of government spending is a good use of society’s resources, but they agree that you should maintain your credit-worthiness by avoiding excessive and long-lasting debt.
So this may largely be a semantic issue.
Bob Murphy: I’m dashing to make an airplane, but I give you as an example anyone who has ever implied that raising taxes by a dollar is the moral/fiscal/economic equivalent of lowering spending by a dollar — e.g. anyone who has ever implied that it makes sense for the supercommittee to focus on deficits as opposed to spending.
Keshav: Where is your argument?
If the govt makes a one-time one-dollar purchase, what is the advantage of paying for it with a one-dollar tax as opposed to, say, financing it forever by raising taxes 3 cents a year? In what sense is the former more “fiscally responsible” and why should we care about that sense?
To answer the question of what the deficit should be, you first need some theory of what effects a deficit (or surplus) has on the economy. Only then can you come to some guess about whether the deficit needs to be increased or decreased (never mind by how much!)
But the super-committee has no such theory. It exists to pander to the conservative prejudice for sound finance.
@Keshav – my creditors tend to be happier if I maintain my debts for as long a period as possible. Have you ever tried to cancel a credit card, for example?
@Andy B – naively, one would think that if the government spends, people are put to work. It seems strange that this idea should seem strange.
However, during normal economic times, something odd happens. As people are put to work on government projects, it makes them unavailable to work on private projects. Prices rise, interest rates rise. People lose jobs elsewhere. So, the increase in employment is nowhere near as great as you might expect.
However, these are not normal economic times. The government tried spending in 2008, and neither prices nor inflation rates rose. (Economists might say that the “natural interest rate” is currently negative, and the 2008 stimulus package wasn’t sufficient to push it up to 0%). Therefore, currently, extra spending would put people to work, with no offsetting decrease in private sector hiring or spending, no price rise, no interest rate rise.
This is true whether the spending is on $500 hammers, fixing broken bridges, gold iPad covers for rich schoolchildren, flu vaccines for poor schoolchildren, bombs for friendly governments, space exploration, coal mines or solar panels. Each of these would have a similar effect on the immediate future of the economy. The differences between these would be in their long-term effects.
Steve, I think I get your general point, and obviously you are thinking about these issues much more clearly than (say) the NYT editorial board, but I don’t think you’ve really “got them” on this one. I think at best you would just force them to speak a little more clearly when stating their position.
For example, NOBODY would explicitly say, “I am OK with spending that we can neither afford nor need, since we can just jack up taxes on rich people.” Rather, they are saying, “By all means let’s slash spending wherever we can, without compromising important social goals. But to get back to a sustainable fiscal trajectory, we will need to bring in more revenue. So we need to raise taxes as part of the solution.”
In light of the above analogy of a loan shark, I think such a position is immune to your critique.
Let me put it this way: I think for your op ed to really work, you would have to argue that the present discounted value of government tax receipts is independent of the tax system. I don’t think that’s true, do you?
Last way to get my POV across: Suppose we have an Ayn Rand nightwatchman state that just spends $1 million maintaining an arsenal of nuclear weapons, which keeps foreign governments from invading. Right now the government levies an income tax just on red-headed, left-handed people named Jim who work in accounting; everyone else in the country is tax-exempt. With this tax scheme, the government extracts $200,000 per year in revenues. It borrows the remaining $800,000 in the first year. Then in successive years, more and more of the $200,000 (which itself slowly grows over time as the Jims get raises, etc.) is devoted to interest payments on the accumulating debt.
This is clearly an unsustainable situation. At some point, all of the revenue extracted from the Jims will be needed just to service the existing debt. So some people say, “Let’s be responsible people. Let’s raise taxes on the people in our society who are right-handed, or not named Jim, or don’t work in accounting. Then we can maintain this incredibly urgent and socially beneficial spending of $1 million per year to stave off foreign invasion.”
Does such a person not understand Econ 101?
Steve, I have no idea what tax structure minimizes deadweight losses, whether a one-time tax or a recurring tax; you’re the best person to answer that. I was just making the point, made by others as well, that if you have a lot of existing debt then creditors will be less likely to lend you more, or at least they might lend at harsher terms. The desire to keep government debt low, and thus maintain credit-worthiness, is what I think is referred to as “fiscal responsibility” in popular discourse.
Do you agree that government should try its best to have a good credit rating? Or do you go back to the point you made in an old post, where you said that the costs imposed by higher interest rates are balanced by higher interest rates for depositors?
Since I didn’t get any response to my comment above http://www.thebigquestions.com/2011/11/15/econ-101-for-the-supercommittee/#comment-35343 I’ll state my main point more concisely.
Steve Landsburg’s argument seems to be that an “irresponsible” level of spending is no less irresponsible if more of it is financed by current taxation rather than by debt, since public debt and private debt (and savings) are all part of America’s debt (or savings), so there can be no additional cost or risk no matter how large a portion of federal spending is financed with debt.
For this to be valid we’d have to assume full Ricardian equivalence. People would have to save up all that extra after-tax income in anticipation of having to eventually pay that much more in taxes someday (and they’d have to be perfectly willing to part with all that savings to repay creditors whenever they demanded it, and creditors would have to believe in the meantime that they will eventually do so). But full Ricardian equivalence is just theory, and it’s not the reality. People don’t have perfect information, people’s economic behavior is not perfectly rational, and there’s even the matter of the discrepancy between WHO would have to pay now vs. who would have to pay later.
People will not save all that extra after-tax income. Much of it would be consumed and gone. Then someday when our federal debt — which is much more abstract and less clear in terms of an individual’s liability than is private debt — has grown to whatever multiples of our GDP and creditors demand terribly high interest rates to roll over our debt (let alone lend us more), much of that earlier extra after-tax income will not be there in private hands, and the people will be royally screwed.
“Do you agree that government should try its best to have a good credit rating? Or do you go back to the point you made in an old post, where you said that the costs imposed by higher interest rates are balanced by higher interest rates for depositors?”
If interest rates are set by the market, then what is Mr. Bernanke doing? The Fed sets the interbank rate, and the other rates follow by arbitrage. Credit risk never enters the picture.
The Fed raises interest rates when it wants to suppress spending. But taxes are a much more powerful method of suppressing spending. Taxes reduce incomes; borrowing does not (in fact, higher interest rates increase incomes).
Funding without deficit seems to acheive two things:
1) You do not have to pay higher interest rates because lenders have confidence in your ability to pay. (Scott H – I strongly suspect the haircut for Greece (funny how haircuts crop up again) will not be in their long term interest, but interesting point.)
2) As GL said, it sends strong signals to the population and allows them to understand the level of Government spending, and thus helps them decide if they think the spending is responsible or not.
Isn’t the point you are making the same as your friend Krugman? He criticises those who say we must reduce spending in order to reduce the deficit. In other words, his point is that responsible spending is not converted to irresponsible spending by not raising taxes to pay for it. You and he are both correct that many people say that deficit reduction is the goal, not responsible spending. (I think you might disagree on what responsible spending looks like.)
Bob Murphy: I have so much to say in response to this, but am about to board a plane. I’ll say more (or not) depending on the quality of my net access when I get to Jamaica.
Yeah, these days we’re all worried about quality of our net assets. Oh, wait — never mind.
Just have a good trip. And remember: Use sunscreen. And rum. But never in the same container.
Snipe at’cha later.
@Mike H: You wrote
@Andy B – naively, one would think that if the government spends, people are put to work. It seems strange that this idea should seem strange.
Does it matter what they are put to work doing? I have cited two fanciful examples of destructive work they might do, and examples of essenrtially useless work abound. But once the govt spending is in place it can make it harder to reallocate those folks to productove work.
I am not arguing govt spending is ipso facto bad, just that Mie H’s argument is unsound.
@Bob Murphy: It is hard to imagine a better use for $1M in govt spending than to fully ward off invasion. So in your example the spending is already maximally responsible, or close to it. Since Steve’s point is about the need to look at less responsible spending this does not answer his point. Rather the fact that your have to reach for an example wherein the rethink of spending Steve wants has already happened bolsters his claim.
Off topic question for Bob Murphy: Has your website been suspended, or the domain name expired? What’s going on?
@Bob Murphy: “more and more…is devoted to interest payments on the accumulating debt. This is clearly an unsustainable situation.”
The flip side to SL’s comment that “raising our taxes…depletes our assets” is that not raising our taxes means more assets are left in private hands, and these grow along with the liabilities. I believe this was also the main insight (and a good one) in his chapter on the “mythology” of deficits in The Armchair Economist.
SL point: irresponsible spending is not made responsible just because you can raise taxes to pay for it.
Bob Murphy point: responsible spending is not made irresponsible because you need to raise tax to pay for it.
There is no contradiction in these points of view. Both rely on the spending itself being defined as irresponsible or responsible. The means of paying for it is unimportant (in this context).
I think the confusion arises when the definition of responsible is directly linked to the magnitude of the spending. Clearly some spending on education and defence is responsible. Too much on either is irresponsible. It stikes me as similar to SL’s charity donation idea: give to the highest priority until you start to make a difference – then something else becomes highest priority. Individuals seldom donate enough to make a significant difference, Governments do, and therefore the responsibility changes with the donation.
We can see from Greece that spending more than you will ever be able to raise is irresponsible. Thus deciding how much you could raise as a maximum is a starting point. If you are spending more, you are definitley irresponsible, but just because you are spending less does not make you responsible.
Professor Landsburg,
Your argument seems to reduce to a truism.
“So insofar as the supercommittee relies on tax increases to address issues of “fiscal irresponsibility”, it will have failed.”
In other words, if I am reading this right, if the committee raises taxes to address wasteful spending, then it will have failed…
but that’s obvious. In fact’s its so obvious, its practically a truism, because wasteful spending is by definition wasteful and so should be eliminated. That’s not the same as saying – taxes should not be raised.
Maybe I’ve read this wrong and by fiscal irresponsibility you simply mean spending more money than the government takes in in revenue.
But if so, then saying raising taxes doesn’t create, in itself, create any extra wealth is irrelevant. The point is that Government Spending that creates value according to society is either worth its cost or not. If it is worth its cost, then its ok to go to the ATM to pay for it. If it isn’t, then its wasteful spending and should be eliminated…
So your argument here seems to reduce to the truism that wasteful spending is wasteful…
@Harold – fair summary in the abstract, however the backdrop here of a ‘supercommittee’ created to restore balance, for which all sides agree some cutting is required, makes it seems reasonable to conclude that some overspending has occurred (e.g. at least insufficient consideration of downside risk to the economy).
Of course some would suggest the starting point for responsible spending decisions should be driven not by the maximum possible revenue we can raise, but what are essential public goods.
P.S. Not sure I followed your point about charity – are you suggesting govt is a preferred vehicle because it can more easily ‘make a difference’ than any single individual, or that govt tends to overspend on each initiative?
I have two hypothetical children. My daughter finds herself in financial difficulty, as her expenditures exceed her income. She contemplates reducing her expenditures, (many of which I find questionable), increasing her income (add a part-time job, taking a higher paying job, etc.), or some combination. She balances her budget. I am proud. While I might disagree with how see spends some monies, it is hers.
My son is also in financial difficulty. As a college student, he earns little and the reminder comes from me or through loans. He contemplates his options. He cannot work more hours or earn more per hour. He could decrease his expenditures. He proposes a solution to his problem: I should send him more money each month.
He makes decisions I agree with (e.g., paying tuition). He makes decisions I disagree with (e.g., subscribing to a cable premium channel he never watches). Heck he doesn’t purchase some things I wish he would (like a gym membership). If I send him more money, he borrows less. I send him a lot more money, he borrows no more. But, that does not make the bad expenditures good. And the fact that I will repay the loans, not him, does not change that observation.
Iceman, yes, you’re right that if the government keeps taxes where they are, then private sector assets would rise more than if the government jacked up tax rates.
So OK, the government’s debt service continues to grow as a % of tax receipts. You, Iceman, keep saying that’s fine, because SL has taught us that private sector assets are growing too, and it’s basically a wash for a given level of federal spending.
Finally, the day before the government will be forced to default on its massive debt, the politicians decide to transfer some money from their savings account (aka the taxpayers) into their checking account (aka the IRS). So they propose to raise tax rates.
Then SL tells them not to do this, since they can’t make irresponsible spending responsible, by raiding the ATM.
The above story is right as far as it goes, but I don’t see how SL or you are in any way affecting the Big Government liberal line on the supercommittee.
Iceman – I was rambling a bit. I am not really suggesting that the maximum tax revenues possible should be your starting point – just that if your expenditure IS greater than this you are definitely being irresponsible – it sets a maximum possible responsible spend.
The charity thing – it is probably not relevant
Bob M – well if you agree that it’s a “wash”, then there’s nothing in your scenario that suggests why this would cause the debt to become “massive”, e.g. appropriately measured as a % of national income or wealth. So we’re back to the idea that it’s irresponsible spending that can cause problems, not how we choose to finance it, and if push comes to shove the first thing we should do is cut that.
Iceman and Bob Murphy,
First, to Bob’s point, there is the political factor. Creditors of the federal government won’t be so sure that the politicians will make the taxpayers cough up a lot more money when the creditors want to be repaid (and to be paid interest in the meantime), so interest rates could go up enormously.
Also that could lead to a terrible, sudden, huge contraction in aggregate demand and thus send us diving into recession/depression. And it would probably crash asset prices, which would be disruptive.
But moreover, as I’ve pointed out http://www.thebigquestions.com/2011/11/15/econ-101-for-the-supercommittee/#comment-35528, this notion that it’s “a wash” is based on the false premise of full Ricardian equivalence: the assumption that however much taxpayers are left with each year after taxes (due to a larger portion of spending being finance with debt), the people will save that much more in anticipation of the day when they’ll ultimately have to pay back creditors. So year after year, the false premise assumes, people will just bank all that money, and they will have roughly that much more wealth (liquid, presumably) for the government to tap whenever it so chooses, and the people will be no worse off than if that money had been taxed away from them all along. Wrong. Full Ricardian equivalence is just theory, based on perfect information, rationality, and even an absence of inclination to shift debt liabilities to future generations. In reality, people wouldn’t save every dollar of additional after-tax income. They would use much of it for current consumption. It would be gone, not sitting around ready to be taxed at any time. That’s the key problem with Landsburg’s argument that irresponsible spending can’t be made any less responsible by paying for it with current taxes rather than with debt. Financing irresponsible spending with excessive federal debt compounds the irresponsibility, adding additional adverse consequences.
@KenB : you ask if it matters what work people are put to?
You cite the example of someone paid to do useless rock-breaking, and quote “For the individual it is enough to HAVE a job. For society it is important that he DO a job
Don’t forget that the individual breaking the rocks is also part of society. This useless employment contract therefore does provide benefit to society – to one member of society, the employed man. It also provides benefit to the other members of society who benefit when he spends his income.
Yes, it’s better to spend on better things – for the man to DO a job. And yes, during normal economic times, government spending crowds out private spending, so government (or private) spending on rock-breaking has a net social cost.
These are not normal times, however, and the crowding-out would not happen if the government hired an army of rock-breakers. We get the very slight benefit for almost no cost.
No Keynesian recommends rock-breaking. However, if it turns out that hiring a million people to break rocks is actually better than Austerity Measures and Budget Cuts, it shows how completely off-base the policymakers really are.
GL: your point seems reasonable, but so does SL’s explanation. Can I reconcile the two? SL shows that the total paid is the same whether it is funded by taxes now or debt now followed by taxes later (or even never). You say that the extra money the people have now because of the debt will be spent on consumption, rather than savings. Therefore, the extra cash now will not cost any more, but will “deceive” people into making non-optimum spending choices. Therefore, utility is maximised by taxing now rather than borrowing now. Is this the point, or is it more complex than that?
@Mike H: In the situation you posit isn’t it better to pay the rock breaker but not ask he break rocks? Just pay him, period, iof the rock breakihng is (ex hypothesi) useless?
Debt is worse than deception, because even for people who see through the illusion, what can they do? Should I plan for hyperinflation? At what rate? When? For a sudden emergency drop in spending? By how much? When? For a default on government bonds? Partial or total? When?
Debt creates uncertainty that taxes do not.
@Ken and Mike: I suppose breaking rocks at least provides him with some exercise so he doesn’t become obese? BTW Keynes did actually talk about buidling pyramids which I presume would involve some rock-breaking. Others have used the example of having people dig holes and fill them back up (and for this purpose shovels are better than backhoes, spoons better than shovels). I too have wondered why, say, unemployment benefits don’t do the trick just as well as make-work projects as a use of these costlessly-printed liquidity-trapped dollars. One apparent answer is ‘hysteresis’, the notion that if people aren’t out there breaking rocks every day they will lose valuable job skills and become permanently unemployable (?).
GL:
I agree with you; I don’t think it’s a “wash” either. I’m just saying, even on SL’s (and Iceman’s) own terms, this isn’t the crushing insight they seem to think.
Look, suppose we started out at 0% tax rate. So the gov’t takes in 0 revenue. It just keeps borrowing 100% of its expenses year after year, including the interest payments on the existing debt.
Assuming Ricardian Equivalence, from an aggregate wealth standpoint this doesn’t matter. Yes, the government debt is growing exponentially, but so is private wealth. Taxpayers know that at some point, they are going to have to start paying the bondholders, and so the taxpayers are earmarking some of their tremendous wealth for that purpose.
Now at some point though, surely the government *will* have to actually start tapping into that huge reservoir of private-sector wealth. The bondholders might be OK not getting a cent for the first 50 years, but eventually they might start wondering if they will get their money back.
Now when the government moves to implement a 1% income tax, in order to at least start keeping up with the interest payments, would it be helpful if someone wrote an op ed saying, “Let’s not kid ourselves that this is a responsible money-management decision”?
Obviously if the spending is wasteful, then cut it. But after that is done, there will be spending left that most people think is legit. (FYI this wouldn’t include me. I’m just making a point here.) And then, to allow that “responsible” spending to continue, at some point the government will have to raise taxes to bring annual revenue up from $0.
If you can see how the above situation can work, then you should see why a sincere progressive–who thinks we need to cut the military budget but also jack up taxes on millionaires–would find Landsburg’s op ed completely irrelevant.
(BTW Steve if you’re still reading, you know this is all for the search for truth. I don’t think your op ed was “dumb” or something.)
Harold,
Yes, that’s essentially what I’m saying. Landsburg’s point may be valid in theory, but not in practice, because there is no full Ricardian equivalence — people would not save all the extra after-tax income, but would rather spend much of it for current consumption, and thus this supposed pool of incremental savings in the private sector equivalent to the incremental federal debt would not actually be there when the time came to pay down debt (as eventually demanded by creditors who won’t roll it over forever while lending more and more), and the result would be awful (crushing interest rates and/or taxation and/or terrible inflation), leaving “the people” (though perhaps not the same generation) substantially worse off than they would have been if they had been taxed that much more all along.
Also, even in Landsburg’s theoretical world, I think insofar as massive taxation were at some point imposed to tap that theoretical huge pot of savings (or in the real world insofar as some portion is saved and were taxed heavily somehow) there would be enormous macroeconomic disruption likely causing severe recession/depresssion among other macroeconomic problems.
And recognizing all of the above and probably more problems, creditors would at some point demand higher and higher and higher interest rates.
I don’t see how you can reconcile that with Landsburg’s apparent point that irresponsible spending can’t be made any less irresponsible by funding for more of it with current taxation rather than with debt. At best (and probably not even this) one could say that Landsburg is presenting a valid theoretical point about a theoretical world in which people behave completely rationally and have perfect information. But as someone seeking to influence public opinion and policy-maker/politician opinion on our fiscal policy choices, for Landsburg to ignore the very important gap between theory and reality (actual likely economic behavior) and lead people to think some fiscal practice (higher taxation at a given level of spending to yield lower federal debt than we’d otherwise have) wouldn’t benefit us at all even though, in reality, such a practice would avoid a very substantial compounding of harm (and thus benefit us) is not itself responsible.
Landsburg …lead[s] people to think some fiscal practice (higher taxation at a given level of spending to yield lower federal debt than we’d otherwise have) wouldn’t benefit us at all
And the award for completely misrepresenting what Landsburg said goes to GL. Many have tried but few have succeeded so fully.
Ken B,
It’s easy to be snarky. A bit harder to offer an argument.
I’ve explained (repeatedly) why an “irresponsible” level of spending can be made even more irresponsible if a much larger portion of it is financed with debt rather than with current taxation.
In his WSJ op-ed, Landsburg seems to be arguing the opposite — that it can’t be any MORE irresponsible to finance a larger portion an “irresponsible” level of spending via debt (or conversely, that it can’t be any LESS irresponsible to finance a larger portion with current taxation rather than debt).
Are you saying Landsburg is making no such argument? Are you saying it’s not at least implied by his argumentation? If that’s what you’re saying, then what do you think his point is — merely that “irresponsible” spending can’t be made fully responsible merely by financing it all with current taxation (in other words, simply making such a point in those absolute terms rather than as a matter of degree of “irresponsibility”)? If so, that would be one hell of a straw man, since (other than stimulus spending, which isn’t the “social programs” to which Landsburg refers) I don’t think anyone is out there illogically saying “Yeah, that’s an inherently irresponsible level of spending, but it would be responsible if we finance it with current taxation.”
GL (does that stand for garage logic?), Bob et al:
I hope this is all still a ‘search for the truth’? I didn’t have time to read all your latest comments but one thing is I don’t think we need to restrict “assets” to mean a pile of cash in the bank…the issue is how the productive capacity of the private economy (i.e. the tax base) grows over time, and both C and I can contribute to that as they do in the normal course (so I don’t really think this is so much about Ricardian Equivalence). Things get so complicated when we decide we can’t trust people to behave responsibly with “their” assets (while we have implicit faith in the govt to do so?): IS-LMers (who also reject RE) say we must have deficit-financed govt spending because people won’t consume enough, then later you say we have to raise taxes (rather than cut spending) or people will consume too much.
I agree things can get to a point where creditors force the issue, but even there they want ‘real’ solutions to solvency. Raising taxes to sustain irresponsible spending reduces our taxing capacity (permanently for each $ wasted) while preserving the spending. (The flap over the debt ceiling wasn’t the real issue, the ratings agencies wanted (and are still waiting) to see real work toward a long-term solution.) To many the concern is precisely that raising taxes makes it easier to avoid identifying ‘responsible’ cuts going forward – particularly if the tax hikes are designed to appeal to the “99%”.
Many here are also saying here in various ways (incomplete RE etc.) that as a practical matter, borrowing can make it easier for govt to outspend its means than if forced to rely on current taxation, and in general there’s something to be said for that view. However, note that this involves the impact on *future* spending, whereas the supercommittee is largely dealing with a problem of deficits already accumulated, so the point remains that we don’t change the nature of those past expenditures by how we finance them. That does sound like a truism when you think about it, which I guess is why SL thinks it bears repeating once inawhile.
Here’s something specific for the supercommitte, simplistic to be sure but seems relevant to the issue of whether we have no choice but to take a “balanced” approach: If I read the data right, total federal outlays were $1.2 trillion lower as recently as 2004 vs. 2010…that happens to equal the committee’s savings goal OVER THE NEXT 10 YEARS. So they could, for example, set a target for reducing outlays for just 1 year to the 2004 level, anytime over the next 10 years (e.g. backloaded for the IS-LMers) and go home.
iceman,
If you’re going to charge me with “garbage logic”, you might want to point to something I said that you think was illogical and explain why you think it was illogical. Just a suggestion (well, if, that is, you actually have an argument).
Do you believe in full Ricardian equivalence? In a scenario of a high level of deficit-financing of that “irresponsible” spending, and thus accumulation of large federal debt/GDP, do you think that there couldn’t be a significant portion of extra after-tax income that is spent by taxpayers for current consumption along the way and thus not remaining to be simply taxed later rather than along the way? Are you saying GDP or “productive capacity” would necessarily grow enough so that suddenly imposing enormous taxes at some later point couldn’t leave the economy and people any worse off than if they had been paying those taxes all along?
Again, WHAT are you saying is illogical about what I’ve been saying? At least try to match your snark and ridicule with substantive, direct argumentation.
Note to all participants in this lively discussion: I am out of the country and cannot keep up with reading all the comments. Normally I try to do some light moderation to make sure the discussion stays on topic. In this case, you’re on your own. I’ll look forward to catching up on all of this when I get back in the middle of next week.
Here is my much too long for a blog thinking on how the SC and\or Congress can reconcile their various priorities:
A Modest Proposal
The Congressional Super Committee appears to be deadlocked on how to solve the Gordian knot of raising tax revenue and cutting spending to reach its minimum mandate of shaving $1.2 trillion from future deficits. Steven Landsburg wrote in the WSJ op-ed pages that when the government raises taxes to collect more revenue it is, in effect, taking money out of the people’s bank account in that it is drawing on the collective wealth of the American people. “The taxpayers are the government’s ATM” he writes. “Make a withdrawal today and there is less available tomorrow.” His point being that the government’s choice to raise revenue is not the same as an individual’s decision to earn more. Generally, I agree with his analogy and his conclusion that raising taxes is nothing like an individual’s choice to earn more. Less spending must be the solution for government overspending.
His editorial got me thinking on how the super committee should look at the problem facing them taking into account his very valid and well-made points. First, if the earning power of the American people is the bank account upon which the governments writes its checks, then the primary order of business should be to increase the overall (not just certain segments) wealth and income of the American people. What is the optimal level of federal revenue and spending as a percentage of GDP that best balances the legitimate revenue needs of the government with the least amount of wealth destruction (i.e., withdrawals from the ATM)? If history is a guide, that level is somewhere between 18% and 20% of GDP with allowances for wartime needs. If there are no economic studies that can provide further support for some precise number then I nominate Professor Landsburg to lead the research in this area (the Landsburg curve?) but for now why not use 19% as a starting point. Absent extreme situations (war, etc), any taxation and spending higher than the optimal number is like drawing on the people’s bank account and should be legally wrong and is morally irresponsible because taxing and spending above the optimal level does not support the greatest good for the greatest number. We have a twin mandate for the Fed so why not propose a twin mandate for the federal gov’t. The government’s twin mandate should be 1) a balanced budget with 2) tax revenue set at a level on the ‘Landsburg Curve’ that is optimal. This will provide for the greatest good for the greatest number by funding those gov’t services necessary for the general good consistent with the highest possible growth in the economy. Sounds pretty reasonable to me.
How to get the two sides to reconcile their priorities to achieve such a result? Based on past conduct, we have to assume that both sides don’t really want to balance the budget because by nature their desire is to increase their power and the bigger the spending purse the more power they have. However, they may have no choice in a few years if we become Italy and the bond vigilantes fly home from Europe. So as a nation we must decide that we should only spend consistent with tax revenue that allows for the highest possible growth level of the economy. Isn’t that Steve’s point? That spending beyond the level of revenue is the same as taking money out of your savings and that is the road to financial (and national) ruin?
The Democrat’s primary goal is to reduce the deficit by increasing taxation and the Republican’s goal is to reduce the deficit by cutting spending. However, we have already agreed that spending should not exceed the optimal level of taxation. Therefore, what would entice the Democrats to agree to spending cuts if, despite the logic of the optimal level solution, they refuse to agree? Well, the secondary goal of the Democrats appears to be a progressive tax system that has higher income tax rates on “millionaires and billionaires” than on lower and middle income taxpayers. Republicans, for their part, defend a less progressive tax system (indeed, many support a flat tax) on the basis that higher taxes are a disincentive to hard work and wealth creation.
Where is the solution? I have a modest proposal. Since spending must not exceed revenue and revenue must not be so high that it disproportionately burdens the wealth creation potential of the economy, the two sides must find a way to reconcile their secondary objectives in a way that satisfies both of them. The way out of this is to acknowledge that a progressive tax system is the fairest way to tax income as long as the overall spending level is consistent with the optimal taxation level (19%?) as a % of GDP. Let’s also acknowledge (sorry, Republicans for this heresy) that a very progressive tax system is not really a disincentive to the super rich who for the most part will work and create wealth independent of the level of taxation because it is in their DNA. I’m not suggesting a 70% confiscatory level of income taxation for incomes over $1,000,000, but I am breaking a fundamental Republican rule.
So this is my proposal. Spending and revenue must be equal. No deficits. Revenue will be determined by the amount that is raised at the optimal level as a % of GDP (this gets all parties focused on how to grow the economy so spending can increase). Once this is the law, if Democrats hold the majority and want to increase spending to a higher theoretical optimal level that would automatically cause lower (yes lower!) tax rates on high income earners and higher (!) income tax rates on lower income earners such that the budget would still be balanced. In order to get a balanced budget with spending set at the optimal level, Republicans must agree that that optimal level of taxation that provides for the income needs of the gov’t but does not unduly disincentive the individual’s desire to grow wealth and income is different for the super rich than it is for the rest of us. The highest income taxpayers will continue to grow their wealth and income despite higher taxes because that is what they do. So Republicans would agree that the Bush tax cuts would expire for very high income taxpayers and possibly add additional higher tax brackets to make the tax code even more progressive. Democrats would agree that spending must be reduced to balance the budget and that overall revenue would be set at 19% of GDP if that is consistent with the highest possible growth rate in the economy. If Republicans gain the majority and believe that a lower % of GDP is optimal, then they will automatically trigger even higher tax rates on high income earners and lower rates on the rest of the taxpayers. If they are right it’s all good as the taxpayers who would pay higher rates sit atop a bigger economy which accrues substantially to their benefit and lower income taxpayers get lower rates even if they are wrong. If Democrats believe spending based on a higher % of GDP is optimal, their core base of supporters take the risk that they are wrong by paying higher tax rates but if they are right a rising tide lifts all boats so in the end they win too. Win\win.
Democrats use federal spending and the tax code to redistribute wealth in this country. Republicans protect the rich and are fiscally irresponsible when they do not raise taxes to pay for wars or their own domestic spending priorities (or cut spending on other things). This has got to stop. Even if both of their commitments to a balanced budget is just lip service, the day of reckoning (wrecking?) is coming and the bond vigilantes will force austerity on Uncle Sam just like they are doing to the governments in Europe. The super committee can take the first step toward fiscal sanity by lowering the projected deficits and put this country on the glide path toward a balanced budget. First and foremost, they must cut spending. Since Democrats are the most opposed to spending cuts, their incentive to agree is a more progressive tax code as long as it does not unduly restrict the overall wealth creation potential of the country. Taking into account that the super rich are different from the rest of us (yes, I know because they have millions and billions) and that their drive to create wealth is not directly tied to their effective tax rate but rather they are driven to making money because it is what they do best and they will do it almost no matter what, we can balance the budget by reduced spending (Republicans, high five!) and sock it to the “millionaires and billionaires” (Democrats, high five!). It will be interesting to see how many of our current politicians are opposed to this modest proposal since its fundamental goal is to do the greatest good for the greatest number (maximum growth in the economy).
GL: In his WSJ op-ed, Landsburg seems to be arguing the opposite — that it can’t be any MORE irresponsible to finance a larger portion an “irresponsible” level of spending via debt
That is just wrong. And there is no seems needed. He is arguing what he explicitly stated, which is that irresponsible spending is not transformed into responsible spending just by a tax increase. Sheesh.
I just realized how this thread and the QOTD thread are related. Imagine Steve had posted this:
Raping boys is not made more respectable by leading prayers.
We’d be hip-deep in explanations of exactly why leading prayers makes it SO much better.
Ken B,
SL’s “ATM” analogy and his argumentation imply that it doesn’t matter how much of the “irresponsible” spending we finance with debt vs. from current taxation — that it’s simply a wash, because however much more we tax to lower government deficits and debt (vs. what they’d be if we taxed less), we are reducing private savings by that much, so it’s simply a matter of where the money and the debt reside, but the totals for each will remain unchanged (immediately and over time) by the choice of how much to finance with current taxation vs. debt. So, per this argument, if we financed nearly ALL spending via debt, it wouldn’t matter, because all that debt the government is accumulating is matched by a corresponding increase in private saving, and all that private saving will be there in the future to be taxed at some point (like the people setting up an “Eventual Taxation” account at the bank, calculating the amount of their individual “share” of spending, and putting that amount in that bank account) so the people will be no worse off when eventually taxed hugely than they would have been if taxed to fund the spending all along.
Do you agree that SL’s ATM analogy and related argumentation imply the above?
Do you agree that an implication of the above reasoning is that “irresponsible” spending can’t be any MORE irresponsible if financed largely with debt (or, put differently, any LESS irresponsible if financed more with current taxation)?
Do you agree that the above reasoning is wrong because of the lack of full Ricardian equivalence (i.e., people would NOT save all the money corresponding to the lower taxes), and because of shocks to the economy of sudden, huge taxation, and probably other macroeconomic problems that would occur?
And as I said, if all he’s saying is that some inherently “irresponsible” spending can’t be made FULLY “responsible” by financing it with current taxation rather than debt, it’s a straw man.
GL – I too am traveling now without great access, but please note I said ‘garage’ logic not ‘garbage’, which actually was not meant to be as insulting as you took it, just a hasty attempt at a little joke which in hindsight seems pretty pointless so I retract.
I am enjoying the discussion, and again I am essentially arguing that debt to GDP or some comparable measure is what matters e.g. to creditors. C and I both (are necessary to) contribute to growth over time. The real yield generally correlates to real GDP, hence the ‘wash’. Irresponsible spending is what can get us into trouble. I am more convinced now than ever that this ‘truism’ bears repeating. This notion that we literally have to set aside cash seems like a straw man. Let’s take a ‘responsible’ example I would’ve thought we could all agree on, a bridge with clear economic value. Can we only fund it out of current taxes unless we can guarantee the beneficiaries will set up some kind of escrow account?
It sounds like you are basically arguing for a balanced budget amendment, and I would probably support that if it would really help restrain spending. But in terms of the role of RE here, people invoke that to say deficit spending will be less effective than you might otherwise think. You seem to saying not just that people won’t change their savings behavior, but that unless we raise their taxes instead they will begin spending much more foolishly than they otherwise would. (Mike H you might want to want to weigh in here.). I think you get there because you’re trying a little too hard to use the hyperbole of a fiscal crisis to make your point.
That’s an honest attempt to characterize our difference of opinion here. Waddya think?
Iceman,
You are correct that I misread “garage”. I had to look up “garage logic” and I see that it doesn’t seem to to be the insult I thought you had expressed. Sorry for my response.
I agree that debt/GDP ratio is the key metric re: the risk (and thus cost) of our debt. Perhaps a metric of debt to assets would be helpful as well, but I don’t see one commonly used (perhaps because of the volatility of asset prices, but I don’t know).
I am not advocating or even implying support for a balanced budget amendment. I’m not advocating for or against anything, just making an analytical point. And I haven’t said that any level of debt is bad. I have only said that it is possible that “irresponsible” spending can be made less irresponsible if we reduce the portion of it that is financed with debt. And I’ve said that Landsburg seems to argue or imply the opposite – that it is not possible to make it less irresponsible, because (per his apparent argument), the reduction in public debt would be fully offset by an equal reduction in private savings. I’ve said that’s wrong because taxpayers would not otherwise save the full amount of that incremental taxation if instead debt were used; rather, they’d spend much of the extra after-tax income on consumption (i.e., they would not save the full incremental amount of after-tax income per full Ricardian Equivalence), so it would not be there later to be taxed, and for that reason plus other macroeconomic problems associated with sudden, huge taxation, people could (and likely would) be worse off than if they had been taxed all along to fund that spending. Therefore, it can be even more irresponsible if irresponsible spending is funded largely with debt, and less irresponsible if more of it is funded with current taxation.
Re: “responsible” spending funded via debt, I think there are probably many cases where that is fine. I’m fine with debt being used for capital spending if there is a sufficiently strong economic case. The same can occur with a war as with WWII (debt/GDP got quite high, but if we tried to finance our war effort with current taxation we’d have ended up with a far inferior war effort and/or a recession/depression). Even if there isn’t a strong case for long-term economic value, it’s possible in some cases to justify government debt to mitigate hard times, even if it’s at the cost of lessening better times in the future. Lastly, I don’t rule out the possibility that Keynesian deficit-financed stimulus could shorten or mitigate a recession. So no, I’m not at all saying that federal debt is inherently bad.
Ken B,
In addition to my reply to you above http://www.thebigquestions.com/2011/11/15/econ-101-for-the-supercommittee/#comment-35864 let me quote from Landsburg’s op-ed:
Raising taxes is nothing at all like earning income. Instead, it’s a lot more like visiting the ATM.
The government’s debt is the American people’s debt. If we pay down that debt through higher taxes, we will, for the most part, pay those taxes by drawing down our savings. That’s no more “responsible” than drawing down those savings to finance overconsumption within the household.
Note that he’s not just saying “irresponsible” can’t be made “responsible”. He’s saying that paying for “irresponsible” spending with current taxation cannot be any MORE responsible than financing much of it with debt — or even financing all of it with debt, the premise would imply. And saying that spending can’t be made any more responsible by paying for more of it with current taxation is the same as saying it can’t be made any less irresponsible by financing more of it with debt.
So I would ask Landsburg: Do you really think it would be no more irresponsible if we eliminated taxes completely for the time being and financed ALL our spending with debt (or tried to do so)?
If not, why not, given the premise that it doesn’t matter, since supposedly it’s just like keeping more money in our total bank account (public + private) rather than withdrawing it from an ATM?
GL: I think I see more clearly a point your are missing. Here is what you wrote:
cannot be any MORE responsible
here is what Landsburg wrote
That’s no more “responsible” than …
Note SL’s quotation marks. He is NOT making a cardinal number comparison. He is saying, perhaps inelegantly, that the adjective “responsible” is no more applicable to one than the other — comparing the drawing down of savings versus the taking of a new loan. That neither renders the irresponsible spending responsible.
Ken B,
I think Landsburg simply means “no less irresponsible”.
“Last way to get my POV across: Suppose we have an Ayn Rand nightwatchman state that just spends $1 million maintaining an arsenal of nuclear weapons, which keeps foreign governments from invading.”
That is is a no-starter for a premise. See here:
http://motherjones.com/politics/2011/11/nuclear-weapons-complex-budget-disarmament
So the “guns or butter” dichotomy holds.
I think what is unsustainable here is that hypothetical – it just distracts us from seeing your point.
GL – thanks. I just gotta say one last time I don’t see why ‘assets’ can only mean cash set aside in a bank. To say that taxing ourselves (by definition) depletes our assets or savings means that not taxing ourselves now already leaves us with higher levels (of savings/assets/productive capacity/tax base) and growth thereof than would otherwise be the case. This is why I really don’t think Ricardian Equivalence is the main issue here. I’m also not seeing how, say, a constant debt/GDP ratio could lead to a need for a ‘sudden, massive’ tax increase. If a scenario where we both borrow and grow at the real yield is problematic if we consume any of that growth, I don’t see why the bridge example isn’t also problematic unless we can be sure we won’t increase consumption by more than the positive NPV gain? (Don’t some people even think savings simply represents a drag on the consumption multiplier?)
Note that I am not endorsing debt either. In fact I’ve said I think it’s quite possible that borrowing allows govt more easily to outspend it’s means via ‘new’ spending. But I do believe how we finance spending decisions already made is of little consequence — or at worst it’s a distraction from the real source of the problem…the spending.
I don’t say any of this
“I have only said that it is possible that “irresponsible” spending can be made less irresponsible if we reduce the portion of it that is financed with debt.”
The key question is, what are the macroeconomic effects of taxes? Why do taxes exist?
Most people give these questions no thought. They implicitly regard the government as just another market participant, at the mercy of the economy as opposed to exercising control over the economy.
Iceman,
Re: I just gotta say one last time I don’t see why ‘assets’ can only mean cash set aside in a bank. To say that taxing ourselves (by definition) depletes our assets or savings means that not taxing ourselves now already leaves us with higher levels (of savings/assets/productive capacity/tax base) and growth thereof than would otherwise be the case. This is why I really don’t think Ricardian Equivalence is the main issue here.
When I speak of private savings levels involved in Ricardian equivalence I am NOT insisting that the savings must be in cash. I don’t know if I have used “cash” as a sort of slang shorthand, but I have always had in mind a broader definition similar to what you have described. Basically, what I’m saying is that we can’t assume that all (or enough of) the extra after-tax income will be saved or invested — as opposed to spent on current consumption — such that, after larger debts are accumulated and when they must be paid down, we can assume that sufficient incremental assets exist such that all that incremental debt can be paid down without leaving the people any poorer than they would have been if they had been taxed all along. The key is that much of that extra after-tax income would no longer exist as assets, because that substantial portion would have been spent on current consumption.
I would add, though, that, even if there were full Ricardian equivalence of savings in the form of all types of assets, the liquidity of these assets would matter, because it’s possible creditors would “demand” repayment at a pace that would strain the liquid assets, requiring “fire sales” of less liquid assets (as well as some liquid assets like marketable securities), which I assume would be very disruptive, causing asset prices to crash among other problems.
Re: I’m also not seeing how, say, a constant debt/GDP ratio could lead to a need for a ’sudden, massive’ tax increase.
Who said there would be necessarily be a constant debt/GDP ratio? We surely can’t assume that. And I’d say it’s quite unlikely if (just to take an extreme to illustrate the point) we were to eliminate taxes completely for the next couple of years and finance ALL of our spending with debt (or try to). I don’t know what multiplier you assume and how you assume that compounds over time, but as a starting point, if you add, say, $3 trillion in Year 1 spending to the debt (say, increasing debt held by the public from $10 to $13 trillion) and with a multiplier of 1.0 over one year, you thereby increase GDP from $15 trillion to $18 trillion, you obviously have increased debt/GDP, and it seems to me it would take one hell of a multiplier even with some out-year effect and some compounding to avoid an increase in debt/GDP on an ongoing basis.
Re: I do believe how we finance spending decisions already made is of little consequence — or at worst it’s a distraction from the real source of the problem…the spending.
So would you really see no problem with the complete elimination of taxes for the time being, and financing ALL our spending each year with debt (or trying to do so)?
A lot comes down to the ATM analogy. More accurately you have 2 accounts, a current/checking account and a savings/borrowing account. The checking ATM will not let you go overdrawn. The borrowing account must eventually be paid off by the income from your checking account. There is no difference in the interest rates on the two accounts. It theoretically makes no difference which account you use. You can take all your spending from the saving /borrowing account, and let the money pile up in the checking account. At any time, the money in the checking account will be sufficient to re-pay the borrowing – IF you have not spent more than you earned. In this scheme, any spending greater than income is irresponsible. It makes no difference which account you take it from. The two accounts are like the taxing and borrowing options for the Government.
If the “borrowing” ATM would let you carry on taking money out and increasing your debt, even if your checking account was empty, then you may change your spending habits and end up with a debt you could not repay – or repay only with considerable hardship. Thus being able to access your borrowing acount too freely may deceive you into overspending.
However, what if you were a business, not a household?. A business may need to borrow large amounts of money to fund investment. At the right time, borrowing a lot of money is very much the responsible thing to do. Keynesians believe that deficit spending is like this. It is responsible to borrow money to invest in growing the economy. This Government borrowing is more like a business borrowing to invest than like a houshold borrowing to spend. This borrowing [is intended to] increase the amount in the checking account. It still makes no difference which account you take it from – but it is much harder to say whether the spending is responsible.
If all goes according to plan, then the checking acount will have more money in it in the future because of the borrowing you did. If there were no additional costs to borrowing, then it is the same to leave the borrowing and let he additional money pile up in the current account. For businesses, there is always a cost to borrowing, so it makes sense to pay off the debt. I think your argument for the country is that there is no additional cost, so it matters not whether you pay off the debt or let the extra money pile up. It may be difficult to avoid extra costs if you let it pile up too much, because others may not have confidence in the funds in your current account.
Of course, if the stimulus spending does not increase your income, then it will have turned out to be irresponsible after all.
Iceman,
[NOTE re: my earlier NOTE: ok, I did something absent-minded. I submitted the comment below early this morning but it is still (as of 11:41 ET Monday) awaiting moderation. I realize now that I used a different handle (by accident — one I use more often in the blogosphere) and that’s probably why my comment is awaiting moderation. So I’ll paste it again below using quotes instead of italics.]
Re: I just gotta say one last time I don’t see why ‘assets’ can only mean cash set aside in a bank. To say that taxing ourselves (by definition) depletes our assets or savings means that not taxing ourselves now already leaves us with higher levels (of savings/assets/productive capacity/tax base) and growth thereof than would otherwise be the case. This is why I really don’t think Ricardian Equivalence is the main issue here.
When I speak of private savings levels involved in Ricardian equivalence I am NOT insisting that the savings must be in cash. I don’t know if I have used “cash” as a sort of slang shorthand, but I have always had in mind a broader definition similar to what you have described. Basically, what I’m saying is that we can’t assume that all (or enough of) the extra after-tax income will be saved or invested — as opposed to spent on current consumption — such that, after larger debts are accumulated and when they must be paid down, we can assume that sufficient incremental assets exist such that all that incremental debt can be paid down without leaving the people any poorer than they would have been if they had been taxed all along. The key is that much of that extra after-tax income would no longer exist as assets, because that substantial portion would have been spent on current consumption.
I would add, though, that, even if there were full Ricardian equivalence of savings in the form of all types of assets, the liquidity of these assets would matter, because it’s possible creditors would “demand” repayment at a pace that would strain the liquid assets, requiring “fire sales” of less liquid assets (as well as some liquid assets like marketable securities), which I assume would be very disruptive, causing asset prices to crash among other problems.
Re: I’m also not seeing how, say, a constant debt/GDP ratio could lead to a need for a ’sudden, massive’ tax increase.
Who said there would be necessarily be a constant debt/GDP ratio? We surely can’t assume that. And I’d say it’s quite unlikely if (just to take an extreme to illustrate the point) we were to eliminate taxes completely for the next couple of years and finance ALL of our spending with debt (or try to). I don’t know what multiplier you assume and how you assume that compounds over time, but as a starting point, if you add, say, $3 trillion in Year 1 spending to the debt (say, increasing debt held by the public from $10 to $13 trillion) and with a multiplier of 1.0 over one year, you thereby increase GDP from $15 trillion to $18 trillion, you obviously have increased debt/GDP, and it seems to me it would take one hell of a multiplier even with some out-year effect and some compounding to avoid an increase in debt/GDP on an ongoing basis.
Re: I do believe how we finance spending decisions already made is of little consequence — or at worst it’s a distraction from the real source of the problem…the spending.
So would you really see no problem with the complete elimination of taxes for the time being, and financing ALL our spending each year with debt (or trying to do so)?
Yeesh, in that note I meant to say that I was pasting again under “GL”. The reference to italics related to an earlier note that may not end up posted at all, so disregard.
Harold,
I would add something else to build on the uncertainty aspect you point out with a business investment. Compared to one’s own debt (for one’s self or one’s business), there is also a huge difference in clarity as to how much liability one has when the federal government is creating that liability on the taxpayer’s behalf. An individual or business owner can see the number and know the liability in the private case, and that number is also often in his face, whereas one’s “share” of the federal debt is far less clear as well as less frequently observed.
And the above is the source of the lack of full Ricardian equivalence that is the main reason it is wrong for anyone to assert or imply that “irresponsible” spending can’t be more or less irresponsible based on how much of it is financed with debt. People don’t have a clear sense of their liability for public debt and it is not in their face as is their personal/private debt, so they will not increase their private savings fully per increases in federal debt per full Ricardian equivalence. Instead, they will spend much of it on current consumption, so much of it won’t be there later to be taxed to pay down the incremental debt.
Also, stated more precisely, the government is creating a liability on behalf of future taxpayers, some of whom are also current taxpayers but who will have more or less tax liability in the future, and some of whom aren’t voting age or even born yet, so there is yet another factor in the lack of clarity as well as potential unfairness insofar as there is a discrepancy between (1) what “generation” gets how much of the benefits of spending vs. the ultimate cost, and/or (2) what the spending “generation” deemed worth spending on vs. what the paying “generation” would have deemed worth spending on.
“Also, stated more precisely, the government is creating a liability on behalf of future taxpayers, some of whom are also current taxpayers but who will have more or less tax liability in the future, and some of whom aren’t voting age or even born yet, so there is yet another factor in the lack of clarity as well as potential unfairness insofar as there is a discrepancy between (1) what “generation” gets how much of the benefits of spending vs. the ultimate cost, and/or (2) what the spending “generation” deemed worth spending on vs. what the paying “generation” would have deemed worth spending on.”
The next generation will inherit 100% of the productive resources of the economy regardless of the debt level. The only way to “steal” from the next generation is to shift spending from investment to consumption. Conversely, the only way for a nation to save is to shift spending from consumption to investment (assuming a closed economy).
Max,
Re: The only way to “steal” from the next generation is to shift spending from investment to consumption.
That’s what I’m saying could (and probably would) occur insofar as government finances spending (that is, spending that doesn’t provide a huge ROI, which is generally the case) with debt, because much of the extra after-tax income taxpayers would have as a result of the debt-financing would be spent by the taxpayers on current consumption rather than saved and invested. So total saving and investment (public + private) declines and total consumption increases, and the result is that when it comes to pay down debt, much of the assets (or assets plus productive capacity or however broadly we put it) that Ricardian equivalence would presume had been saved and invested and available to be taxed (rather than having been spent) would actually be gone, and taxation at that point would leave the people off worse than if they had been taxed all along (and that’s not even factoring in economic disruption of a sudden, large tax increase).
GL, but what is the reason for thinking that increasing taxes increases investment? Wouldn’t you expect taxes to reduce both consumption and (private) investment, not one or the other? (Leaving a void for [non-inflationary] government spending).
What do you mean by “when it comes to pay down debt”? Debt comes due all the time, but it never needs to be paid down. It is paid with new debt. Incidentally, the debt/GDP ratio can approach zero even if the government always runs a deficit; it only requires that nominal GDP growth exceed the interest.
Max,
Re: what is the reason for thinking that increasing taxes increases investment?
First, let’s think of “savings” and “investment” together as a whole. They are interrelated and not so distinct anyway.
Just for illustration I’m going to pick a breakout for which I have no basis — again, just to illustration the point. Suppose we are talking about whether or not to tax some incremental amount to increase the portion of spending that is funded by current taxation and reduce the portion financed with debt (and note that the spending is the same under either scenario).
Suppose that, if we didn’t tax that incremental amount, and therefore it remained with taxpayers, taxpayers would save and invest 60% of it and spend 40% on current consumption. This means that the private sector is saving and investing 60% of that money, and 40% of it essentially goes out the window (that’s an oversimplification, but it suffices here). But the government debt is increasing by 100% of that money, meaning that government “saving and investment” is decreasing by 100% of that money (since “saving and investment” are along the same continuum as “debt”). So basically, it’s as if taxpayers initially sent the government the money to fund that spending, then government borrowed money to finance it and sent the taxpayers their money back, and then the taxpayers threw 40% of it out the window, even though the taxpayers (more precisely, future taxpayers) still have 100% of the debt that government has acquired on their behalf. The result is a reduction in total (private + public) saving and investment in the lower tax scenario.
Re: What do you mean by “when it comes to pay down debt”?
I’m speaking about the real world, not some theoretical world of full Ricardian equivalence and absolute confidence among creditors in this full Ricardian equivalence and in the political will to service debt no matter how large interest expense becomes, not to mention the political will to repay principal if rolling over debt is no longer an option at some point. In the real world, if we financed ALL of our spending with debt and had no taxation (or tried to do that) creditors would have no such full confidence, let alone have that confidence forever, and for good reason.
GL, you are basically saying that the government can “invest” in its own money. But such an “investment” does not provide any real resources whatsoever. If the government stores a big pile of Federal Reserve Notes, how does that help the next generation? Not in the slightest. Money is not a real resource!
Regarding debt rollover: there is absolutely no risk involved. The central bank sets the interest rate, and bond holders know they will be paid no matter the state of the economy. If you are wondering what is happening in the Euro countries, the problem is that the Euro debt is not backed by a central bank.
Max,
I don’t know if you and I are going to be able to understand each other. I don’t see the sense in your comments and perhaps your an “MMT” guy in which case I don’t want to waste my time (so please let me know if that’s where you’re coming from).
I don’t know what your point is in your first paragraph, but in case this helps: Again, debt is along the same continuum as saving, or more broadly can be thought of as along the same continuum as saving & investment (although some investment entails more range of risk and upside potential). So we can think of debt for this purpose as negative saving & investment. So more government debt means less total saving & investment (public + private), ceteris paribus, unless offset entirely by saving & investment in the private sector, which I’m saying cannot be assumed to be the case, and which I’m saying is generally not the case.
Re: the central bank “setting the interest rate”, not really. The central bank pays the rate it must (based on supply & demand in the market) to attract the amount of credit it seeks when it seeks it.
And if you’re going down the road of “Well, the central bank can just create as much money as necessary to pay interest expense and even principal”, you are ignoring inflation and ignoring the expectation of inflation among creditors, who will demand a higher interest rate accordingly (not to mention the problems associated with high, and volatile inflation that would accompany a strategy reliant on monetization of our debt).
I should note that I’m not an economist, so I’m open to correction, particularly from anyone with greater expertise but also from anyone else who truly knows his stuff well, but I think I know enough to sense that you are missing some big things in whatever your paradigm is.
Are you an MMTer?
GL, you need some theory of how increasing taxes increases the desire of people to invest. An example would be: government debt competes with private investment, increases the required return on investment, and therefore decreases private investment. You can’t just say that government debt is a “negative investment”, whatever that means. You have to make some behavioral argument.
Max,
Unless someone here tells me I’m missing some valid point you’re making, or you make it clearer to me, I’m going to take the liberty of not spending much more time with you on this, because I find it hard to even deconstruct your arguments to make enough sense out of them to see what your point is and where you may be saying something to which I should respond to defend my arguments or concede something.
And I don’t want to be tediously (for me and any reader) redundant. But FWIW:
Again, debt and savings are along the same continuum. Other things equal, higher debt can be thought of as negative savings and vice versa.
Savings and investment can roughly be thought of as one thing for purposes of the matter we’re discussing. So increased government debt means reduced total (public + private) savings and investment unless that increase in debt is fully offset by increased private savings and investment.
Funding more spending with current taxation reduces debt, which by definition increases public saving & investment (again, they’re along the same continuum). The key question then is: If that incremental amount had not been taxed, would the taxpayers necessarily (or even likely) have saved and invested all of it, or would they have spent much of it on consumption, leaving us with all of the borrowing as incremental public debt (i.e., all of it representing a reduction in public saving & investment), but only a portion of that amount saved & invested by the taxpayers (the private sector), since a portion was spent on consumption instead and much of that is gone, and the result is a net reduction in total savings & investment.
You’ll have to forgive me if I don’t respond further if you don’t give me some good reason to respond. I don’t want to continue being so repetitious.
By all means, if anyone thinks I’m the one getting something wrong here or missing something, please tell me.
Max,
Oh, and you didn’t answer my question: Are you an MMTer?
GL, to invest means spending money on investments – roads, factories, whatever. Hoarding financial assets is not investing. An individual can save by accumulating financial assets, but that is an absurdity at the national level. Do you think the Social Security Trust Fund is an investment?
The government can force an increase in investment by commanding a larger share of the economy, but it’s the level of spending that matters, not the deficit.
Max,
I’m still having trouble making any sense of what you’re saying, let alone how your comments relate to my arguments.
FWIW, I’m not talking about incremental spending, however financed. I’m speaking of a given level of spending, and the potential adverse effects of a higher portion of debt-financing of that spending.
I think it’s appropriate etiquette to answer questions one is asked. I’ll ask a third and last time: Are you an MMTer?
Also, to answer your question (not that I see the sense in your asking it), no, I don’t think the SSTFs are an investment, nor do I consider them (there are two of them) really a trust funds. But the latter point is off-topic and would require substantial elaboration that I’m inclined to leave for a more relevant thread and discussion.
Not only is taxing like taking money from the ATM, it’s like taking money from an ATM with a $2.00 service charge. You lose a little every time you take out.
A point that your article misses, though, is that by the same token as your argument, spending isn’t exactly like household spending either. Household spending will never be seen again. Government spending does make its way around eventually back into the economy, albeit much of it gets lost along the way.
It would be like the husband of a household buying a $100 gift certificate for his wife, and paying $150 for it.
GL – I haven’t been able to keep up with recent comments but wrt your last reply to me: As I’ve said I think in the ‘real world’ borrowing can make it easier (esp.) for govt to outspend it’s means on a going-forward basis. Aside from that, e.g. as SL’s post focused on spending commitments already made, to me cases of ‘responsible’ spending aren’t what get us into trouble and pose no special problems however financed, irrespective of any debt we’ve attached to cases irresponsible spending. (I don’t really care much whether we’re saying funding irresponsible spending with debt is even more irresponsible.) I understand you to disagree with that based on a notion that any consumption ‘leakage’ means we won’t have sufficient ‘assets’ left to cover even ‘responsible’ debt. I think the difference here is I take a much broader view of assets (I know you didn’t literally mean just cash but still fairly liquid assets) as the productive capacity of the economy, to which as I’ve said both C and I contribute in the normal course. In the ‘real world’, I (giving rise to wealth-creating productivity gains) requires current C and expectations of future C (which doesn’t just disappear it largely recirculates). I’m comfortable with the idea that resources so left in private hands will grow over time at nominal GDP = nominal Treasury yield. Or if you prefer think of it as the return on I is greater than the debt yield but the drag from C averages it out. (Asserting that the % of C suddenly jumps from the norm would seem to require some inverse-RE-type of behavioral change?)
All of this suggests that people are not made ‘poorer’ by something that has little impact on the present value of the debt burden, which also gives creditors little reason to suddenly change their behavior (to your liquidity argument). I suppose you’re right on the math that if debt/GDP is less than 1 and some multiplier is only 1 then the ratio will rise, but my point would be it can only approach 1, i.e. starting with responsible spending this can’t cause a crisis. And the same argument would of course imply that if the ratio is greater than 1 we should borrow more to bring it down?
Iceman,
I asked you a question 3 times — are you an MMTer — and you ignored it 3 times. That’s inconsiderate and lame, and perhaps you are one of those MMT folks in which case it sure wouldn’t be surprising to me that discussion with you goes nowhere, given how absurd the “reasoning” of subscribers to “MMT” is.
I probably won’t respond further to you, but I will note this. You write:
I don’t really care much whether we’re saying funding irresponsible spending with debt is even more irresponsible.
Well, then you apparently (1) consider unimportant something that is extremely important, and (2) aren’t interested in the point I was making and to which you were supposedly trying to respond.
Perhaps others will be more interested in continuing with you, but I’ve found it not at all worthwhile. I wouldn’t put it in those insulting terms except that you are also inconsiderate, ignoring a clear question I asked you 3 times.
GL (or Brooks et al) – you now appear to have me confused with Max, he’s the one you asked about being an ‘MMTer’ (whatever you think that means). I agree at this point the conversation has become tiresome. As long as I’m here I’ll just add that by ‘don’t care’ I mean I don’t find it very interesting or on point to discuss whether and how we can make irresponsible spending even more irresponsible. I already find it quite obvious that irresponsible spending is the real source of fiscal trouble. What was potentially interesting to me was SL’s point that the form of financing can’t make irresponsible spending responsible (since that seems to be counterintuitive to many people), or even moreso the claim you seemed to be making that suggests it can even make responsible spending irresponsible. That got me thinking, which I enjoyed for awhile, and I think I responded to that issue as clearly as I could. If you find that not worth your time, here’s an idea: just sign off and and chill out. I think I’ll take my own advice now. Life is good.
As to whether balancing the budget with taxes is like going to the ATM to balance the budget, I think the analogy is wrong. I agree that taxes don’t produce more income. However, don’t they change how resouces are used or allocated?
Aren’t increased taxes more like the husband (the government) and the long suffering wife (the tax paying public) choosing to reduce other kinds of current consumption (private consumption to enable the drinking, than a second job? If debt finance is employed in the absence of unemployed resources and ricardian equivalence is the effect to reduce the production of capital goods to finance government programs (including more consumption by those who receive transfers). If otherwise unemployed resources are used to produce government service rather than being idle then aren’t we close to a free lunch.
Iceman,
Sorry about confusing you with Max (and yes, I accidentally used Brooks, which I usually use on blogs). My comment re: not finding discussion worthwhile was directed at Max, not you, so sorry as well for that. And of course my MMT question was to Max as well, so yet another apology for mistakenly accusing you of dodging a question.
(You may come across this ridiculous thing proponents call “Modern Monetary Theory” that basically contends that we don’t have to worry about any fiscal problems because the Fed can simply print all the money we need. These people are kind of the “9/11 Truthers” or the “[Obama] Birthers” of economics blogs, and they waste a lot of people’s time until people realize they are simply goofballs with a few scraps of information/talking points they use to try to sound like they understand what the rest of the world, including the whole economics profession, is missing).
Re: your “don’t care”, ok so you “don’t find interesting” the very point I’ve been making from the start, which is fine as long as you don’t give the impression you are engaging me on that topic. I disagree with you that Landsburg’s point was merely about fully “responsible”, or at least that it is at all clear that his point was so limited (and if it was, it was no more than a silly, absurd straw man, since I don’t know who would or has argued that inherently irresponsible spending is made responsible by financing it with current taxation). Landsburg wrote:
Raising taxes is nothing at all like earning income. Instead, it’s a lot more like visiting the ATM.
The government’s debt is the American people’s debt. If we pay down that debt through higher taxes, we will, for the most part, pay those taxes by drawing down our savings. That’s no more “responsible” than drawing down those savings to finance overconsumption within the household.
Note that he’s not just saying “irresponsible” can’t be made “responsible”. He’s saying that paying for “irresponsible” spending with current taxation cannot be any MORE responsible than financing much of it with debt — or even financing all of it with debt, the premise would imply. And saying that spending can’t be made any more responsible by paying for more of it with current taxation is the same as saying it can’t be made any less irresponsible by financing more of it with debt.
As for what seemed counterintuitive to you re: “irresponsible” spending, and also as for making “responsible” spending “irresponsible”, I think the key here is in the definition of these terms, “responsible” and “irresponsible”, and in recognizing that the form of financing can make a major qualitative difference because of the costs or risks of incremental debt in a given situation or of incremental taxation in a given situation (re: the latter, an argument can be made along Keynesian lines that deficit-financed “stimulus” spending is [more] responsible than tax-financed “stimulus” spending). Obviously they can be defined in ways that, by definition, make something inherently responsible or inherently irresponsible no matter how financed. But the form of financing can affect various metrics of economic value and fiscal health and related risks, all things considered, and so the overall results and thus overall attractiveness of a given form of spending can be affected by the form of financing, not necessarily in theory, but in practice, in the real world of imperfect information (on both creditor and debtor side), less than fully rational economic behavior, differences in “generations” between those who government spends on and those who repay the debt, economic shocks of sudden large changes in taxation, and other factors I’m sure I’m missing (and as a note, I’m not an economist).
All of which means there is a continuum of results and thus attractiveness of some given spending base on how it’s financed, from the financing-spending combination that is the “worst / least responsible / most irresponsible” to the alternative financing-spending combination that is the “best / least irresponsible / most responsible”.
If one wishes to say some given spending is “irresponsible” even at the favorable end of that spectrum (financed in the best way), he should provide his definition of “irresponsible”, and the same must be done for asserting some given spending is “responsible” even if financed in the worst way.
GL – since it seems we’re still the only game in town…I guess I thought I was engaging on a more interesting point than the semantics of ‘less irresponsible’ etc. To me your ‘Ricardian Equivalence’ argument had broader implications (potentially wherever ‘fiscal largesse’ is not saved to a sufficient degree, e.g. even for my ‘responsible’ bridge’ example). It seems we agree on SL’s main point, you just call it an obvious straw man and I agree it’s not a revolutionary insight, but in fairness it was presented as ‘Econ 101’: to a (large in my view) first approximation, the main issue is the nature and level of spending (which consumes real resources), not the financing. It’s pretty clear to me that many people instinctively view, say, a given level of spending at a deficit as less ‘responsible’ — without defining that term — than a larger budget that may be ‘balanced’. This may well reflect the flawed household analogy of taxes = income, so I find that to be a helpful way to frame the issue (which I hadn’t heard before). I’d also agree that SL has criticized people like Krugman for using 101 arguments where 102 considerations can lead to a qualitatively different conclusion. But in this case, even granting your ‘RE premise’ it seems we’re largely quibbling over the extent to which there may be examples of spending in the middle of this ‘continuum’ for which the financing choice might shift one’s conclusion to a different side of ‘socially NPV neutral’. Perhaps the difference here, and your point all along, is that you believe that ‘sensitive middle’ range expands as we approach a crisis scenario. My response is to me that’s still second-order, since we only reach that stage through profligate spending so any real solution must still primarily address those fundamentals.
However I also don’t think I really share your view of the role of RE here either, as I’ll try to explain one more time: To me your argument is that we aren’t borrowing and investing the same amounts (even if at the same rate) if we don’t save all (or enough) of a deferred tax ‘windfall’, and this is certainly a problem at the level of the household. But it seems to me in the aggregate my spending is (largely) someone else’s income and overall growth of assets / income left in the private economy = growth in GDP (comprising both C and I in the ‘normal course’) = real yield + inflation = Treasury rate (I believe the data bear out this general relationship). Note my view needn’t assume any particular behavioral changes with respect to C and I, whereas it seems to me you’re actually making a sort of “anti-RE” assumption that people suddenly consume more and save less (doesn’t this itself require some type of foresight or recognition by people that they have in fact received a windfall?).
P.S. Naturally Keynesians prefer deficit spending as an expansion tool, since offsetting G with T cancels out the stimulus.
Iceman,
Re: “my spending is (largely) someone else’s income…”
I’m not sure, but I think you’re implying that, if the government borrows more and thus taxpayers have more after-tax income, even if taxpayers devote much of that incremental income to consumption, that consumption means income to others, and thus we should assume there’s no loss of total saving and investment.
If that’s your premise, I think it’s invalid. I don’t think it works out just the same from a saving and investment standpoint. If it did, economists wouldn’t be concerned over an inadequate savings rate in the U.S. or generally where they see such a problem. Part of the problem is probably that some of the consumption involves (ultimately) money flowing out of the country (the nation’s economy) without fully returning. But even if all consumption were domestic (or all incremental outflows came back), I think there still would be a long-term economic loss, probably due to the difference in long-term productivity of actual investments vs. money just flowing around for current consumption, even with cash flowing from one person to another and so on. I’m not an economist, but I’m sure there’s an Econ 101 explanation that I’m at best touching upon.
Re: “semantics”, my point on this thread is much more than a quibble about semantics. I think SL was arguing — or at least inadvertently giving the impression to many that he was arguing — that an “irresponsible” level and type of spending can’t be made any less irresponsible by funding it to a greater extent with current taxation rather than debt, and he seemed to be at least implicitly asserting RE as the basis for his argument. I think that’s a dangerous premise to encourage people to accept.
Re: “straw man”, in no way would one be excused for writing an entire op-ed in a major publication based entirely on a straw man simply by saying it was “Econ 101”. The implication is obviously that the op-ed is directed at some people in particular who are supposedly not getting this Econ 101. But my point re: “straw man” was mainly that I’m inclined to think SL wasn’t simply arguing that some form of spending that was inherently “irresponsible” (e.g., the Treasury dumping cash into the ocean) can’t be made “responsible” by smarter financing, because that would be an obvious straw man. Rather, I think he was making (or at least inadvertently giving the impression he was making) the argument that it can’t be made any less irresponsible.