Imagine you’ve got a drinking problem. And imagine this conversation with your spouse:
Spouse: Dear, you’ve really got to do something about your drinking. You’ve been in three auto accidents this week, you’ve lost your job, and you’ve been trying to beat the children, though you keep passing out before you can get to them. I want to help you figure out how to get this under control.
You: You’ve got a fair point there. But let me point out that it would also be a good idea to redecorate the living room.
Spouse: Well, maybe so, and it’s something we can talk about at some point. But right now, I’d really like to focus on the drinking issue.
You: Doesn’t that strike you as imbalanced? Here we’ve got two issues on the table, and you want to focus 100% on one of them and 0% on the other. Why are you being so one-sided?
Spouse: Well, but I feel like there’s some urgency about the drinking thing, and I’d like to prioritize it.
You: Apparently, you’re fanatical on this issue. I don’t see how I can continue to take you seriously.
Spouse: Well, actually I’m trying to get you to focus on a very serious issue.
You: Yes, but by focusing exclusively on that issue, you’re betraying your fanaticism. Clearly, I’m the one who’s willing to address our problems, and you’re the one who’s just out to score debating points.
Spouse: Huh?
You: Not only that, but I’ve got a Nobel-prize winning economist who agrees with me!
How does that make you feel? I feel that way a lot when I read the news lately. Arguably, our country faces a spending crisis. The Republicans claim they want to deal with that crisis. (There’s some legitimate question about how sincere they are, but they at least say they want to deal with it.) The Democrats say: Okay, but let’s also talk about raising taxes. Maybe they’d also like to talk about redecorating the Rotunda; this seems roughly as pertinent. In other words, the Democrats attempt to deflect attention from the crisis (or the alleged crisis) by insisting that we talk about some other thing at the same time — and then they insist that the Republicans, by insisting that we focus on the issue at hand, are “betraying their fanaticism”. And they’ve managed to find a Nobel-prize winning economist willing to parrot this nonsense almost daily on the pages and webpages of the New York Times.
Now, I realize the above is at best a stylized version of the facts. Surely “the Republicans” hold a great diversity of views, and some Republicans have even argued that we have a crisis of debt as opposed to a crisis of spending, which would actually render tax policy relevant. But by and large, what we’ve got is a bunch of people who are trying to call attention to what they believe is a spending crisis, another group of people who, in order to avoid addressing the issue on the table, are trying to talk about something else entirely, and a Nobel prize winning economist who keeps insisting that any reluctance to change the subject is a sign of fanaticism or unseriousness or something.
In other words, Krugman counts you as serious only if, no matter what serious issue is on the table, you attempt to deflect attention to the federal debt. You are required, in other words, to suffer from Deficit Attention Disorder.
So here’s my suggestion: Every time the Democrats argue for raising the minimum wage or changing the tax code or reforming the military, the Republicans should nod their heads sagely and respond that this is indeed an important issue, but it can’t be looked at in isolation, and should certainly be tied to the question of whether Paul Krugman should shave his beard. And every serious attempt to address these issues should be deflected into a discussion of Krugman’s beard, together with a reminder to the public that unlike the one-sided fanatical Democrats who are trying to focus on one thing at a time, the Republicans are so fair and broadminded that they’re capable of talking about several things at once. Instead of Deficit Attention Disorder, they could adopt a stance of Beard Attention Disorder, which is about equally defensible. Maybe they’d finally get some respect from the New York Times.
Do Republicans actually use the phrase “spending crisis”?
Google says :
* “deficit crisis” : 151000 hits
* “debt crisis” : 13200000 hits
* “fiscal crisis” : 2290000 hits
but
* “spending crisis” : 39100 hits
I know this is very iffy, but it suggests that those who worry about a “spending crisis” either don’t talk about it much, or don’t get much attention….
Krugman would say that we have a spending crisis — we don’t spend nearly enough money. He says that we should spend more until we reach our maximum borrowing capacity.
“Krugman would say that we have a spending crisis — we don’t spend nearly enough money. He says that we should spend more until we reach our maximum borrowing capacity.”
This argument might hold water if the government was financing with 30 year bonds. But the duration of the national debt is about 3 years. If interest rates move north there’s no way the US can pare down its debt level before it has to rollover nearly all its debt at much higher rates.
(US National debt is about 105% of GDP. Countries under extreme austerity might achieve 5% GDP primary budget surpluses at best. To pare down the debt to position against an interest rate spike would take two decades at most).
The analogy here is a bank, which borrows short and lends long. It becomes very sensitive to short term fluctuations in the rate that it can borrow, leading to everything seeming find until a bank run occurs.
Lehman Brothers in January 2008 appeared to be borrowing far below its maximum capacity. In August 2008 its borrowing capacity suddenly shifted until its balance sheet was suddenly far above its new borrowing capacity. A very similar thing could happen to the US government given its current financing situation (although on the order of a couple of months instead of a couple of days).
Now could the US start shifting the duration of its debt to 30 year bonds, protecting against such a situation. Absolutely, but the maximum borrowing capacity available at the long end of the curve is much smaller than that available at the short end. Plenty of risk-averse liquidity wants to hold short-term dollar denominated debt as a cash substitute, those same investors will not be 10X-ing their interest rate exposure by buying long bonds.
In short the US government is enjoying continued low interest rates despite very high debt largely because its shouldering extreme rollover risk by borrowing very short.
Oy.
And arguably the country faces a crisis of financial sustainability. (And arguably neither issue is a “crisis.”) Who is to say which issue is “on the table”?
Assume Obama takes Landsburg’s political advice. Assume we change spending in a manner that suits Boehner – and assume that this still leaves a substantial deficit. Having done that, what brilliant political advice does Landsburg offer for motivating Republicans to raise tax rates to come closer to covering spending levels – a topic close to Democrats’ hearts?
Perhaps the relationship between spending and deficits is no greater than the relationship between cash and a hamburger. Yet people at the McDonald’s counter don’t seem to have any difficulty understanding how these seemingly unrelated items could both be “on the table.” Given Landsburg’s understanding of the nature of trade, I’m baffled that Landburg can’t grasp the idea of legislative horsetrading.
There’s some legitimate question about how sincere they are? Where, exactly, is this legitimate question? I’d like to meet it.
Landsburg is curiously obtuse about this issue. Yes, spending differs from deficits; that’s a worthy and oft overlooked distinction. Yes, how society allocates resources may matter more than how, precisely, it structures its finances – although I’m not persuaded that finances are of no relevance.
Yet Republicans have proven themselves perfectly happy to spend. The one thing they have proven themselves perfectly unhappy to do is raise tax rates to cover their spending; indeed, as I repeatedly note to Landsburg, Republicans take pledges on this precise point. In stark contrast, they have taken no pledges pertaining to spending.
On the other hand, Obama has repeatedly signaled willingness to reform entitlement programs (the big spending items) if he can get concessions on tax rates – and has taken flak from his own party in the process.
Thus, if Republicans are sincerely concerned about a “spending crisis,” they should PAY MORE ATTENTION TO LANDSBURG! They should realize that spending and taxes are distinct phenomena, and that spending is a bigger deal than taxes! In short, if Republicans were sincerely concerned about a “spending crisis,” they’d TAKE OBAMA’s DEAL and trade spending cuts for tax increases!
So … have they?
I vaguely recall Landsburg giving a post on the theory of revealed preference. It must have been a very long time ago because either I’ve completely forgotten it, or Landsburg has. Anyway, my recollection of the theory of revealed preference leaves very little room for me to conclude that Republicans are sincere about the “spending crisis” – or, perhaps more charitably, leaves me little room to doubt that Republicans value various things more highly than the resolution of this alleged “spending crisis.”
@4: That seems a good argument. When discussing the economic principles, Steve is usually spot on. When it comes to interpretation of politicians’ motivations and reasonableness, I am not so sure.
If Nobody.really’s summation is accurate, then the conversation above could be continued:
You: OK, I will stop drinking if we agree to decorate the living room.
Spouse: No Way! That room was done only three years ago. It is fine as it is. You carry on drinking.
Coase may have made a comment on this.
Implicit in their whole argument is that the bond market is inefficient. Therefore any reference to rationality once you say that spending is a problem is unjustified.
Additionally, while the output gap is (in my opinion) overestimated when utilising a pre-crisis growth trend, there still remains a huge human problem, which Krugman is quite right to point out. Why do you assume the Democrats are the metaphorical drink driver then? It would seem that there is an actual short term problem and a longer term problem that only exists if you believe bond markets to be wildly inefficient. In which case I know some leveraged futures brokers you should get in touch with.
nobody.really:
Thus, if Republicans are sincerely concerned about a “spending crisis,” they should … realize that spending and taxes are distinct phenomena, and that spending is a bigger deal than taxes! In short, if Republicans were sincerely concerned about a “spending crisis,” they’d TAKE OBAMA’s DEAL and trade spending cuts for tax increases!
An excellent rejoinder, which makes me wish I’d used a slightly different analogy. Let’s say the reason you want the living room redecorated is because a different arrangement will make it easier for you to get to the liquor.
Your spouse says you’ve got a drinking problem and you should cut back. You offer a more balanced solution: Maybe you’ll cut back a bit if your spouse also agrees to make it easier for you to *not* cut back. Who’s being less reasonable?
Harold:
You: OK, I will stop drinking if we agree to decorate the living room.
Spouse: No Way! That room was done only three years ago. It is fine as it is. You carry on drinking.
Following up on my comment to nobody.really, I envision the argument more like this:
You: OK, I will drink less if we agree to redecorate the living room with open liquor bottles.
Spouse: No Way! Let’s focus on the problem.
To bolster Steve’ implict point in 7 and 8, Obama and the Democrats explicitly argue that raising taxes would help resolve the problem. Then they also argue against cuts in general. It’s hard to avoid the conclusion that they think the real problem is deficts, not spending, and pushing the logic just a bit — and following Krugman — they also seem to think the deficit is a problem mostly because it hampers spending.
So 7 and 8 are spot on.
Well, now we need to reflect on what people are trying to accomplish, under what scenarios.
Right now the Republicans control Congress. Thanks to Republican-dominated gerrymandering, that’s likely to remain the case for the next ten years. To put it another way, Republicans currently have, and have had for some years now, absolute control over new spending. Thus, Congress could agree to increase marginal taxes to 50% and STILL exercise a veto over new spending. In short, my wife need not worry that I’ll start drinking more than I was previously authorized to, even if we open every bottle in the house, because there are no straws and no one can tip any new bottles without her permission.
True, she’s not merely concerned with my drinking from new bottles; she’s also concerned with my drinking from the old ones. But she has no control over that – unless she can do a deal with me. And if I’m willing to do a deal to reduce drinking in exchange for opening bottles – bottles I can’t drink from without her permission – why wouldn’t she take it?
I can see two reasons (and here the metaphor is growing more cumbersome than it’s worth) why Republicans resist policies that might reduce the deficit (with or without spending cuts):
1. Boehner fears that Republicans won’t be in control of the House forever, and wants to retain policies that will impede government spending even after he’s out of power. Keeping government deep in debt may tend to constrain government spending, at least for a while, even when Democrats are in power.
2. Boehner wants to leverage the debt ceiling in negotiations.
Thus, Republicans may not merely resist raising tax rates; they may resist pursuing reimbursements for the BP oil spill, or selling public assets (auctioning spectrum rights, etc.), or developing public mineral rights, or licensing a government patent, or charging for admission to Yellowstone, or whatever. ANY government revenues, no matter how benign the source, would tend to weaken their hand.
But under this analysis, ironically, even spending cuts prove to be counter-productive, in that they free up resources that government may spend later.
Arguably, the best thing Boehner can do is something he’s already done: Impair the US’s credit rating.
ahhh… so this is why they want to talk about guns and the imaginary republican agenda against women. to distract us from all of our tax money they are flushing down the toilet.
1. Is this an accurate portrayal of the situation?
Various reports suggest Obama has been floating a Grand Bargain of spending cuts for tax increases. In particular, Obama has signaled his embrace of changing the way Social Security cost-of-living adjustments are calculated, and of means-testing entitlements.
You can say that talk is cheap – except that Obama has taken a certain amount of flak from his side for making these offers. So it’s not THAT cheap.
(Now, whether Obama could actually deliver enough Democratic votes to seal such a deal — who knows?)
To be sure, Krugman is furious with Obama for making such offers, precisely because they run counter to the Keynesian (no, not Kenyan – Keynesian) formula for dealing with a recession. And, ironically, I wouldn’t be surprised if Krugman gets his way – that is, that the ultimate deal is to simply scrap the sequester, letting both high spending and low taxes continue.
2. Let’s assume Ken B’s portrayal is accurate. That is, let’s assume that Democrats forthrightly don’t value spending cuts.
This contradicts the entire premise of Landsburg’s post – the premise that everyone recognizes that “we have a spending crisis.” In this case, Democrats would quite rationally ignore Republican bills that propose spending cuts without promoting any other policy objective. Wouldn’t you?
It’s one thing to argue with a guy who is in Alcoholics Anonymous about adopting sound policies to avoid drinking. It’s quite another to expect random people on the street to abandon alcohol simply because you claim, without a shred of argument, to know what’s best for everyone.
I think the analogy has stretceh a bit too far. A gambling addict makes more sense. You could offer to hand over control of the bank accounts if the living room were decorated with bookmakers phone numbers.
“This contradicts the entire premise of Landsburg’s post – the premise that everyone recognizes that “we have a spending crisis.” ”
(my bold)
First, I don’t think that’s the premise of Landsburg’s post. I think in fact Steve is pretty clear it’s not.
So it can’t undercut a premise that isn’t there. And it’s not a contradiction if Ken B says one thing and Steve Landsburg says another. Steve Landsburg and Ken B do often disagree.
nobody.really:
This contradicts the entire premise of Landsburg’s post – the premise that everyone recognizes that “we have a spending crisis.
As Ken B says, this is by no means my premise.
My premise is that some people think we have a spending crisis, and given that belief, it is not unserious for those people to insist that we address the spending crisis. Paul Krugman argues that the spending hawks are unserious because they’re focused on spending. I reply that maybe they’re not unserious; maybe instead, they’re quite seriously trying to focus on what they believe the problem to be.
Note my opening statement that “*Arguably*, we have a spending crisis.” I carefully avoided saying that we definitely have a spending crisis, let alone that we’re all agreed on that.
Steve,
Although I’m second to no one in my disdain for the embodiment of hyperpartisan hypocrisy, Paul Krugman, I must ask you the following about your own premise on which you base your entire argument: What is the “urgent” “spending crisis”, as opposed to a deficit or debt crisis, or no crisis at all?
How are you defining “urgent” and “crisis” for this purpose? I would think an “urgent” “spending crisis” (forgive the redundancy of “urgent” and “crisis”) means that unless we make major cuts to overall current spending and/or to projected spending, and do so immediately or at least very soon, great harm will be caused by our level of spending, regardless of how much of it is financed by current taxation vs. borrowing.*
Is that essentially what you mean? If not, what do you mean by those terms?
Assuming the above is what you mean, then what is your basis for asserting that we have an “urgent” “spending crisis”? In other words, assuming we raised taxes enough to contain deficits and debt-to-GDP sufficiently to render very unlikely a bond crisis or more generally very high interest rates (or runaway monetization of debt resulting in severe inflation), what is your case that, unless we make major cuts to current or projected spending immediately or very soon, the spending level itself would still (despite the tolerable deficit and debt levels) cause great harm?
And roughly what projected spending level(s) (as percent of GDP, unless you have a better metric), by around when, are you assuming in this disaster scenario, with what sort(s) of great harm?
*I’m leaving aside the factor of at least short-term GDP gain we would have from higher spending, along with associated incremental tax revenue that would partly offset the spending; I’d rather focus on the more basic question I’ve asked above.
Ok, we’re off in the weeds now. Let me apologize if my excess of snark has prompted some defensiveness. I was trying to be clever, and maybe I’ve overdone it.
That said, I humbly assert that of course Landsburg was assuming that people agree that there’s a spending crisis; nothing about this blog post makes any sense under the contrary assumption.
Consider — Here’s Landsburg’s analogy:
If we change this analogy to eliminate the assumption that people agree on the problem, it looks like this:
The premise of the blog post falls apart.
In short, I understand Landsburg to remark on the peculiarity of the way Democrats are dealing with the spending crisis negotiations. But if we assume that Democrats forthrightly reject that there IS a spending crisis, I find nothing peculiar about the fact that they wouldn’t embrace the bill.
Nor could I regard anyone on Capitol Hill as being especially serious about legislation that is based on a premise that they know the other chamber rejects. If you’re serious about passing such legislation, you have to combine it with policies that you know the other chamber will embrace. That is precisely the strategy that Krugman is advocating – and that Landsburg is rejecting.
n.r: “I was trying to be clever, and maybe I’ve overdone it.”
Oh worry not my friend; I’ve never thought you overdo cleverness.
Certainly not in your latest!
:)
Steve,
As follow-up to my comment (#16), I see in #15 (which I saw after posting my comment) you seem to be saying that you do not hold the premise that we have a spending crisis, but instead are saying that it is at least “arguable”.
But, following your illustrative dialogue with “I feel that way a lot when I read the news lately. Arguably, our country faces a spending crisis” certainly gives the impression that you at least consider this premise quite plausible. Moreover, your post makes little/no sense unless this premise is quite plausible. After all, if the Spouse’s claims about the drinking and related behavior — and claims that we have a spending crisis — are less than very plausible, what is the point?
Therefore, please answer my questions in #16, but if you wish, merely adjust the questions to relate to why you consider it quite plausible that we have a “spending crisis”, rather than to why you hold that premise.
*snort!*
Thanks a bunch, Ken B; now I need to get Diet Pepsi and snot out of my keyboard….
How about this analogy?
Spouse: Dear, you’ve really got to do something about your weight. Your clothes don’t fit and you’ll have a heart attack within a few more years if you don’t get more fit.
You: You’ve got a fair point there. But let me point out that it would also be a good idea to buy new clothes in larger sizes.
Spouse: [Facepalm]
Steve,
I think the other problem Krugman and the democrats are having with the Republicans is that they keep saying we have a spending problem, but not proposing any solution to deal with it. Democrats believe we have a long-term spending problem but that it would be imprudent to focus now on our current spending in reaction to our future spending problem. They’re flabbergasted when republicans focus so much of their political attention on the current deficit which they believe is mostly due to a depressed economy. Obama has proposed incremental proposals with details to begin to deal with our long-term spending problem. His spending cuts might be good, or they might be terrible. If Republicans, don’t like his version of cuts why don’t they propose their own version of specific long term spending reductions so that the American people can compare their options and decide which one they like better?
Democrats also believe, maybe wrongly, that deficits do matter and that our long-term spending is to high but that our long-term revenues might also be to low, so that we need both some revenue increase and some spending reduction. You could be right that long-term deficits don’t matter at all, but that doesn’t change the fact that some people think that they do, and that spending as well as taxes is a way to deal with this problem.
Democrats also believe that there’s a much more urgent matter to attend to, persistent high unemployment and low economic growth, and that this problem deserves our attention more than our long term spending problem at the moment. They also believe that our long term spending problem is at the moment a political distraction to what they believe is the more pertinent issue. So let me once again modify your scenario.
“You: Can you take me to the doctor for my cancer treatment?
Spouse: Dear, you’ve really got to do something about your drinking. I want to help you figure out how to get this under control or ten years from now you could have a serious problem. We’re not even going to talk about your cancer treatment until we’ve dealt with your drinking problem.
You: Huh?”
True story: A friend walked into my and my wife’s home and saw the new flat screen TV I had just purchased and said “wow, what did that cost you?” I replied, “a new sofa”.
And so it is with politics, no? There may or may not be a spending crisis. If you think we need to address it fine, what am I going to get in return? Isn’t that the way it generally works unless we’re actually IN a crisis or the matter is trivial or of such universal agreement as to not warrant anything?
“How does that make you feel? I feel that way a lot when I read the news lately. Arguably, our country faces a taxation crisis (taxation too low). The Democrats claim they want to deal with that crisis. (There’s some legitimate question about how sincere they are, but they at least say they want to deal with it.) The Republicans say: Okay, but let’s also talk about cutting government spending.”
Steve,
As follow-up to my #16 and #19, it occurs to me that perhaps you say that we “arguably” have a “spending problem” — implying that the only sensible solution is entirely on the spending side — simply because it is the projected growth in spending (rather than any reduction in revenues) that is creating our long-term fiscal imbalance. I hope that’s not your basis, because, while it’s often repeated, it’s nonsensical. Obviously the optimal solution to a problem is not necessarily — let alone necessarily solely — reversal or mitigation of the change that created the problem. Depending on the macroeconomics involved (i.e., the sets of trade-offs from which we can choose) and on our priorities (i.e., our preferences among those potential trade-offs), the optimal solution could be entirely on the spending side, or some combination of spending and revenue sides, or possibly even entirely on the revenue side (although the latter seems debatable to me because it’s possible that, without policy changes to contain Medicare and Medicaid costs, we literally could not sustain spending levels several decades from now even if we maximized tax revenue, meaning it may not be an option).
“Trying to slash the deficit while the economy is still up against the zero lower bound is a really bad idea, because it will depress the economy further and hurt both growth and revenue.”
Is Paul Krugam right or is he wrong?
Daniel,
the other problem Krugman and the democrats are having with the Republicans is that they keep saying we have a spending problem, but not proposing any solution to deal with it.
Wow. And I thought Krugman was a biased fool. That you think no solutions have put forward to address this problem means you need to read something other than the NYT and Krugman columns.
I don’t understand how you can draw a line between spending and taxes. Are increased tax expenditures to be counted as spending increases or tax decreases?
We could cut spending by 80% by
a) increasing taxes by 200% (rough guess)
b) re-classifying all paychecks cut to US taxpayers as tax reductions
Would that make you happy, Steve?
Ken,
Actually I read this blog and WSJ a lot. What’s the proposed solution to our long-term spending problem?
The one’s I’ve seen so far from Republicans are,
1. Increasing the medicare eligibility age to 67
2. Using chained CPI (I think democrats might agree on this one)
3. Creating a voucher system for Medicare
None of these things would substantially reduce spending. I’m not sure there’s much proof that #3 would reduce spending at all. Can you tell me some others, I’d really like to hear them.
#12 – “to claim to know what’s best for everyone”
I see an important asymmetry in this respect – favoring more tax-funded federal spending, or leaving more for people to spend as they see fit.
It seems to me the point of this post is fairly simple: we can disagree about whether spending is too high (A), but *if* we agree the manner of financing doesn’t matter much (B), it’s hard to call someone who believes in A and therefore wants to focus on A less “serious” than someone who wants to focus on B (particularly if they at least tacitly acknowledge A).
iceman,
Let’s pretend for the sake of argument that our current level of future spending is optimal (I don’t think this is the case but just for this argument let’s pretend). What *if* we acknowledge that the manner of financing doesn’t matter much, but we think the other side will use deficits as a rhetorical device (I’ve often heard republicans and some democrats say things like, “Americans are paying their bills so why shouldn’t we?”) to get us to spend less. Then wouldn’t there be a practical reason to bargain for both spending cuts and tax increases to make the argument that deficits are a problem less convincing?
Ken,
Also if I’m a fool, don’t you think that your time would be better spent educating me than insulting me? By educating me you may gain a convert. By insulting me you make it less likely that I will agree with your position, and you’ve wasted your time on insulting a fool because no one was going to consider the fools position correct in the first place.
Just my 2c worth….
The bulk of US government spending falls under :
* welfare
* defense
the Iraq war brought on a blowout in the second of these, the GFC brought on a blowout in the first.
The Iraq war is now over, and as the economy improves, welfare spending is dropping. However, the country has bills to pay.
Isn’t it wise to go to the ATM to pay the bills?
Spouse: Dear, you’ve really got to do something about your drinking. You’ve been in three auto accidents this week, you’ve lost your job, and you’ve been trying to beat the children, though you keep passing out before you can get to them. I want to help you figure out how to get this under control.
You: What? I haven’t touched a drop since 2010. Have you been watching Fox News re-runs? I thought we were going to redecorate the living room?
Spouse: Well, maybe so, and it’s something we can talk about at some point. But right now, I’d really like to focus on the drinking issue. Like the $83 you spent on your bank buddies.
You: $83? Where did you get that figure from? One of them found $0.083 on the floor, I didn’t spend a cent. Especially not on drinks. I’ve drunk less than any of your previous husbands, except at that big party you organised with George. That was years ago! Can’t we focus on the issues here?
AMTBuff (#21): I like your vignette much better than I like my own. Thanks for sharing it.
‘Right now the Republicans control Congress.’
That’s simply untrue. The Republicans control 1/2 of congress. The Dems have the other half and the Presidency. They outgun the Republicans.
As for those who are claiming that tax increases will solve the deficit problem, no way. We’ve never been able to sustain more than about 18-1/2% of GDP in tax revenue. While spending is scheduled to remain above 23%.
Jonathan Campbell (28): This would not make Steve happy. By “spending” he is referring to the government’s consumption of resources, not the moving around of money. This is made clear in past posts.
Re #38, I wonder how much the government “spends”, using that as the definition?
Patrick,
Take a look at tax revenues across countries. There’s a wide range of tax revenue percentages? Explain how our revenue is capped at 26.9% (all levels), whereas many other countries have revenue in the 40%-50% range? Are you saying that Americans are more likely to stop working in the face of marginal tax increases? What would cause this drastic difference in response to taxes?
Sorry forgot to post the link,
http://en.wikipedia.org/wiki/List_of_countries_by_tax_revenue_as_percentage_of_GDP
Daniel–
The argument about marginal tax rates and work incentives is very theoretical. It’s very, very hard to find historical evidence of change in marginal tax rates actually producing large changes in work incentives. The way some people on this blog speak (“taxes destroy work incentives”), you would think a situation where the economy can actually do better under higher marginal tax rates would be physically impossible. The fact it happened, and more than once, doesn’t seem to faze these people (ie, Ken).
To me it’s always seemed a little silly. Human behavior is complex. If I’m at the gym, will increasing the weights I lift necessarily decrease how often I lift them? In a static analysis, sure. In real life, um, no.
Lastly, the argument against taxes only focuses on the cost they impose (which they do), and not on the benefits they provide. Hey, taxes pay for things. Maybe I’m okay with rich people losing some of their spending power (and mythical ‘incentive to work’) if it means providing more healthcare for everyone else. Maybe other people are too. Everything has a cost; if you only argue against an intervention based no its cost, you can’t do anything.
– KS
Per Mike H. #1, the Republicans originally started out talking about a debt problem. Only when Obama started winning the war about whether the root cause of the debt problem was a spending problem or a revenue problem, did the Republicans start talking about a spending problem.
Personally, I see it as both, although more of a spending problem than a revenue problem. I think that revenue increases should be targeted by making most of the non-defense, non-entitlements portion of the budget self sustaining. Let’s make the FAA and the Federal Highway Administration self funding.
By the way, the NY Times’ “Fix the Budget” challenge from 2010 is still accessible on the web: http://www.nytimes.com/interactive/2010/11/13/weekinreview/deficits-graphic.html . It seems to me to be quite easy to balance the budget. The problem is agreeing on where the changes should be.
Mike H (39): Well I know what I mean so… fine.
Steve is concerned with government spending insofarasit consumes resources. Whether the spending is financed by current or future tax payers is of lesser consequence.
Martin-2
What percent of what we usually describe as “government spending” actually consists of resource consumption?
i’d think medicare, medicaid, and social security wouldn’t count. that is a big chunk of “spending” that doesn’t actually count.
so the big driver is military maybe?
Mike H – “as the economy improves, welfare spending is dropping”
But in a previous post you seemed to see no reason to question why this ought not be the case for the secular relationship between “social support services” and living standards?
Daniel – I’m not tracking the hypo…if we think spending is optimal, we should cut spending (and raise taxes) so some people can’t use a bogus deficit argument to cut spending? I completely agree politicans like to use bogus arguments to play on the rational ignorance of voters, which makes me take them all less seriously.
Also if I’m a fool, don’t you think that your time would be better spent educating me than insulting me?
Not really. You can’t fix stupid. If you are so unaware, uneducated, and stupid as to believe what you wrote, there’s absolutely nothing I can say to change your mind.
Ken,
So what do you gain by insulting a fool? Are you interested in winning or coming up with a solution to our societal ills? I’m interested in the latter, how about you? If I’m unaware then make me aware. Let’s turn the conversation to a more productive avenue. What I said might have been an exaggeration. Can you provide either a source that states how the three things that I’ve listed that republicans have stated they want to do will be substantial enough to repair our long-term spending problem or additional fixes for our long-term spending problem? The three things I’ve heard of again are.
1. Increasing the medicare eligibility age to 67
2. Using chained CPI (I think democrats might agree on this one)
3. Creating a voucher system for Medicare
Iceman,
That’s essentially my hypothesis. The other assumption I’m making is that despite spending being at optimal levels (hypothetically), republicans do not believe it is at optimal levels, and thus will block anything that doesn’t include some spending cuts. To mitigate the damage, as less spending cuts are better in this hypothetical, tax increases could be used to allay the bogus fears about the debt, and achieve a compromise that is less harmful than the alternative.
It really seems hard to separate true spending from transfer payments
Is medicare spending or a spending item or a transfer payment? It is a transfer payment in the sense that it is just giving money to people, contingent on their using it on medicine. But can also be thought of as spending (“consuming resources”) for the benefit of a select group of people. So does it boil down to a question of behavioral economics: is this payment more or less likely to inspire resource consumption than that payment? In that sense, payments to the poor are spending (since the poor will spend it) while payments to the rich are not spending, as much.
Or, said in perhaps a better way:
What could be though of as a pure spending item? Bombing foreign countries? but that could also be thought of as a transfer payment to that set of people who would, if they were rich enough, buy bombs & planes with which to bomb other countries.
I don’t agree with the tenet of this post, which is that the Republicans are focusing on a *spending* crisis, but the Democrats keep talking about *deficits*.
After 2008, and somewhat mystically given their not-so-prior belief that “deficits don’t matter”, the Republican party began to talk incessantly about the problem of *debt* the US faced. But they also committed to never raising taxes. If that’s the case, then the only way to deal with *debt* is to reduce *spending*. The original terms of the debate were NEVER limited to a *spending* crisis.
(What’s hilarious about this is the hypocrisy of these so-called small government politicians, too. Quick question, what’s the biggest unfunded entitlement of the past 50 years? Answer: No, not Obamacare, Medicare part D. Next question, who voted for part D? Answer: Paul Ryan. Next question: who pushed Medicare part D through the House of Representatives by keeping the floor open for more than 3 hours because he couldn’t initially get some conservatives to agree to such a ridiculous package? Answer: House Majority leader Tom DeLay, a Republican).
I would really love to see as much anger/fury about Medicare part D from conservatives as I see about Obamacare. That’d be nice.
@KS: debt, deficit, spending, and taxes are different thins. There aren’t four degrees of freedom, but they are different things. Some people, Steve among them, and me, think spending is the most important. Some people are trying to talk about spending. Trying to deflect talk about cutting spending by talk about taxes, deficits, debt or the rotunda is not the same thing as dealing with the question of spending directly.
@Daniel 48
I am a different Ken. Think of me as the kinder, gentler Ken.
There’s a lot of low hanging fruit. Here’s my pick for the lowest juiciest of all: the war on drugs. End it immediately, pardon drug users and cut prison populations drastically. Stop wasting money and goodwill in interdiction. Tax pot sales.
@ Ken B–
“Some people, Steve among them, and me, think spending is the most important. Some people are trying to talk about spending. Trying to deflect talk about cutting spending by talk about taxes, deficits, debt or the rotunda is not the same thing as dealing with the question of spending directly.”
Sure, and you’re allowed to believe we should focus exclusively on cutting spending. As is Dr. Landsburg. As is anyone, really.
But that was never the original terms of the debate, so saying the Democrats or Obama or evilKrugman are “deflecting” talk is just stupid. It’s like me saying, hey Ken, give me your money or I’ll shoot you. Now you’re calling the cops? Stop “deflecting” talk.
Just because the Democrats aren’t agreeing to the terms as the Republicans see them does NOT mean they are “deflecting” talk and refusing to “focus” on what’s important. They have a different view of what’s important.
@ Ken B,
Agreed 100%.
Ken B , 52
I don’t get the validity of your argument because there is a symmetrical argument Democrats can make, namely, granted spending and taxes are different things. We think taxes are the most important thing but you keep talking about spending, we may as well talk about redecorating the Rotunda!
@richardR
The difference is that Spending does matter more than financing. Steve has a lot of posts on this so I won’t recap the arguments. If you look at the real stuff, goods and labor, you see spending decisions are direct allocation decisions, and that matters more.
“Spending does matter more than financing”
Those arguments Dr. Landsburg make take the premise as the conclusion. In the end it’s a political judgment. (For instance, raising taxes is only equivalent to going to the ATM more often IF you assume that raising current taxes necessarily depletes the future revenue potential by the same. I would disagree, say we raise taxes to build a bridge between two towns who can now trade freely, future revenue potential is higher than it was before, etc…)
You BELIEVE the focus should be on spending only. That’s your right, and you should make supporting arguments to that effect. The Democrats and Obama and evil-yet-somehow-very-right-Paul-Krugman disagree. They believe the attention is on the *deficit*, and they believe in a balanced approach to deficit reduction. Saying they are deflecting attention is just dumb.
– KS
KS:
They believe the attention is on the *deficit*,
….except that Paul Krugman (like me) keeps saying the debt/deficit is *not* much of an issue right now.
Agreed, I shouldn’t have combined Obama, the Democrats, and Paul Krugman into one category.
Steve, whether you like it or not, surely you agree that when most Republicans say that we have a spending problem, they mean that our high spending levels are creating big deficits and debts, and that that’s a problem. Now you have a different reason for opposing government spending, but shouldn’t Krugman address the motivations of his opponents rather than your motivations?
Steve:
“….except that Paul Krugman (like me) keeps saying the debt/deficit is *not* much of an issue right now.”
Right, Paul Krugman doesn’t think that there’s much of a problem with debt/deficit right now. He also probably assumes there are different multipliers for taxes on the rich in a liquidity trap and direct spending. Since he believes that we are spending too little right now, and that republicans want to use the debt as a reason we should not raise spending, he probably thinks that by raising taxes on the rich it would make it more politically feasible (since lot’s of people in Washington think the debt matters) to increase current spending. Not saying he’s right, but I think his logic is consistent.
So here’s what I think is the circle of logic going on in Washington right now:
Democrats: We need more (stable) spending to allow the economy to reach full employment.
Republicans: Trillion dollar deficits!
Democrats: Okay we’ll begrudgingly deal with the debt right now since we can’t pass budgets without your help, even though we don’t think the debt is a problem, but we think taxing the rich has a lower multiplier than direct government spending, so will you at least meet us halfway, for some new taxes and some spending cuts?
Republican: Just kidding about the whole debt thing, it’s government spending that’s the real problem.
So the real split I think is between Keynesian economists who think we’re in a liquidity trap and think the fastest way out is more short-term government spending, and supply side/Austrian economists who believe we need less government spending. The short-term debt/deficit is just a distraction used by both sides, but I think more by Republicans (I’m pretty sure they brought it up first in 2009) to get what they want.
“So the real split I think is between Keynesian economists who think we’re in a liquidity trap and think the fastest way out is more short-term government spending, and supply side/Austrian economists who believe we need less government spending.”
Agreed. Are our current economic problems due to inadequate aggregate demand (Keynesian), or uncertainty/debt/government intrusion/whatever-other-nebulous-concept-you-can-think-of? I think we have ample empirical evidence over the last 5 years as to what the answer probably is.
KS in 58:
“I would disagree, say we raise taxes to build a bridge between two towns who can now trade freely, future revenue potential is higher than it was before, etc…”
That’s not disgreeing with Steve or me at all KS. We both think the spending is the key issue. So if the bridge is good spending then it is good spending regardless whether we issue bonds or raise taxes. In each case the bridge gets built.
We should decide whether it makes sense to build the bridge based on the costs and benefits of building the bridge, not which method we choose to finance it, and not whether we have a debt or defict already. Those things have secondary effects, but smaller.
Likewise, spending a trillion dollars to empty and fill the same hole over an over is probably foolish even if you have a surplus. What matters is where the goods go, and that is determined principally by spending.
Ken B 65:
I agree. How is what you and Steve are saying any different than what Krugman is saying? The other piece I think we’re missing here are that Obama and Krugman are not just interested in the deficit, but they probably both think that the distribution of wealth is out of whack. Isn’t that one function that a tax system allows for? Having a progressive tax system allows the government to redistribute wealth based on income (as long as their consumption changes in response to the tax increase), as opposed to some of the other methods of financing government like printing money which would cause inflation in normal times and redistribute wealth based on level of debt or savings? In this respect doesn’t the manner in which spending is financed matter?
“Arguably, our country faces a spending crisis.”
What is the evidence that we have a spending problem?
Ken B, 57
Steve’s whole argument in the post is not to do with whether the Democrats or Republicans are correct. In fact he explicitly states “Arguably, our country faces a spending crisis” (note the very important word “arguably”) but the rest of his argument is based on “our country faces a spending crisis” and therefore he gets frustrated when Democrats don’t want to talk about spending. Therefore his whole argument is wrong (I repeat: not the argument about whether there is a spending crisis or not; but the argument that it is frustrating that the Democrats refuse to engage in the debate because if the debate is “arguable”, as premised in the post, it can equally be argued that the Republicans do not engage with the Democrats’ argument that there is a tax crises (taxes too low))
Mmm, to me the point of the post was that we can certainly have different views (e.g. on optimal spending), the problem is in accusing the other side of being “unserious” or “fanatical” for wanting to focus on the things they think are relevant. Particularly if we agree on some things that are not that relevant but keep getting dragged in.
KS – “the Republican party began to talk incessantly about the problem of *debt*…but they also committed to never raising taxes…then the only way to deal with *debt* is to reduce *spending*.”
(& Keshav – “when most Republicans say that we have a spending problem, they mean that our high spending levels are creating big deficits and debts”)
Who knows what any politician actually thinks, but doesn’t that actually sound like a smart tactical approach if the *public* believes the financing matters? And on Part D, it’s not necessarily hypocritical if they believed it was the only way to prevent the opposition from passing something even bigger. One thing I’m pretty sure of is they’re all playing the same game and will use whatever arguments and tactics are most effective.
Daniel 66 – I think that would be a good example of dragging in a topic that is not very directly relevant to determining the optimal spending level.
I’ll add as context I think just about everyone acknowledges a problem with our entitlement programs…not sure if Jonathan Campbell calls that “spending”
iceman – i think you could consider entitlement programs somewhat “spendingy” since they generally transfer wealth to people who are more likely to consume resources with it. However this is not a strict rule, again it seems to me that the question of whether a program constitutes spending or not is a question for behavioral economics.
iceman 69:
And I would argue that when talking about spending levels in general we’re already very much deciding on a distribution of wealth. Can’t we avoid further cuts in programs that arguably help the poor by reducing the consumption of the rich via higher marginal tax rates? See how that might get lumped in with the spending discussion?
@iceman #46, in response to me “as the economy improves, welfare spending is dropping” But in a previous post you seemed to see no reason to question why this ought not be the case for the secular relationship between “social support services” and living standards?
I observe that over the past 2 years (short term), the economy is improving, unemployment is *slowly* improving, and people are getting off unemployment benefits.
I also observe that over the past 200 years (long term), we have become incredibly more wealthy as a society, and we demand and receive far more from governments in terms of services, infrastructure and security.
No contradiction there, naturally.
The direction of causality is clear enough in the 2 year blip (fewer unemployed implies less money spent helping the unemployed – but not less money per unemployed capita), and doesn’t help make a case for decreased government spending. The 200 year trend likewise doesn’t help make any such case, nor is the causality anything like so clear.
On what politicians think : here’s a quote from a senator in the Liberal Party of Australia (which is the more conservative of the two major Australian parties)
“In our view, the mechanism which is fundamental to the operation of the economy is the market, and regulation should be targeted to enhancing the operation of the market and dealing with any externalities that may arise
Fine, but two paragraphs later, he expressed his (party’s) opposition to “costly new regulation such as the carbon tax” which his party’s leader wants to replace with “incentives”, that is, picking favourites (such as hydroelectric) to sponsor as a means of reducing CO2 pollution.
*sigh*
@ Ken B–
“We should decide whether it makes sense to build the bridge based on the costs and benefits of building the bridge, not which method we choose to finance it, and not whether we have a debt or defict already. Those things have secondary effects, but smaller.”
Perfectly said. I wasn’t disagreeing with you or Dr. Landsburg, I was disagreeing with my preceding sentence, which is that raising current taxes necessarily depletes future revenue potential.
@ iceman–
“And on Part D, it’s not necessarily hypocritical if they believed it was the only way to prevent the opposition from passing something even bigger.”
Umm. I have heard many defenses of big government Republicanism, but NEVER have I heard anything along the lines of: ‘We need to pass this completely-unfunded $500 billion entitlement where the fed govt gets no bargaining power so it’s a big giveaway to the pharm companies because if we don’t, the Democrats will pass something bigger even though we control all three parts of government right now”.
Sorry, Medicare part D is indefensible if you have ANY type of belief in markets whatsoever. The lack of outrage to part D versus the hyper-hysteria to Obamacare is merely a reflection of the tribal aspects of human nature. (Somewhat like when Red Sox fans get mad at the Yankees for overspending on free agents. Yeahhh, they’re arguing that one on principle…)
a question from the ignorant on spending…. what about spending on services? For example, if I buy one of Steve’s books, he gets some money for having written it…. but what “resource” is being “used up” here? His time? He’d have lost that anyway…. His knowledge? Arguably that actually increased as he wrote the book…. his opportunity to do something else with his time and knowledge… are opportunities “resources”?
Mike H:
“are opportunities “resources”?”
I’d reply but I have other things to do so if I reply I won’t be able to do them.
Does that answer your question? :)
Mike H – yes, I believe these are ther resources:
a) steve’s time
b) raw materias that went into book
c) miscellaneous other things involving publishing house etc.
You are right that in a sense a) was not used up, since Steve would have written the book even if you weren’t planning on buying it, however it seems this should be in the equation somewhere since Steve wouldn’t have written it if no one was going to read it.
So perhaps the upshot is that buying a (very popular) book, since it involves lots of fixed costs, is not much of a resource consumption.
I think Steve has gone into detail somewhere about how books are not a very good example of the market, since one book can satisfy everyone in principle. Increasing demand does not affect supply, or something.
KS – I’m not defending Part D but questioning whether “hypocritical” is the right word. “Spineless” might be a better. But one can imagine a thought process such as “Kennedy is pushing a larger program (which I recall he was) which seems to have much superficial public appeal, so we’re probably better off scoring some compassion points with something a little smaller”. Maybe making the pretty bad the enemy of the horrible.
@ iceman–
“I’m not defending Part D but questioning whether “hypocritical” is the right word. “Spineless” might be a better.”
It’s probably both. Hypocritical because it goes against ALL their stated and principled limited government free-market beliefs. (I’m a liberal, and even I recognize Medicare part D as atrocious). Spineless too. I will say that Kennedy and others may have pushed a more outlandish plan, but their plans had no chance of passing a Republican single-party government at the time. ‘Twas the lobbyists who wrote that bill and passed it.
#78 Ok, time is a resource, but its a weird one. If I buy a Big Mac when the store is not busy, most of the cost is the time used up making my burger, wrapping it, collecting my money…. But if I don’t buy the Big Mac, their time gets used up anyway, in idle chit-chat about economics.
If the store is busy, it’s different. I may end up crowding out someone else’s purchases.
Steve is no doubt busy, so my first example didn’t get the gist of my question across.
Mike H – Yes, so in other words you have deprived the employees of their opportunity to entertain themselves through idle chit-chat. That is definitely an opportunity cost. To the extent that they don’t enjoy idle chit-chat, but they still choose it as an alternative to serving you, they are inefficient and wasting their own resources (time).
Further on 83, think about availability. There are bsuy times when McD’s needs all hands on board. It’s hard to predict to the minute or staff to the minute. So some employees are there to be available. But that makes them unavailable at the Wendy’s across the street.
Daniel – When you said “progressivity” I was thinking that can apply to any level of spending. I agree if your *goal* is redistribution per se, you require more redistribution, but in that case it doesn’t really matter if it’s a particular program or just shifting money around (and then we can decide if transfer payments constitute “spending”). The flip side is many conservatives / libertarians would probably care much less about the progressivity of the system if the scale of the spending was confined to what they view as more ‘necessary and proper’ purposes.
Mike H – seems inconsistent to me, at least focusing on “income assistance” spending (I’ll try that label). In the short term more people have jobs. In the longer tem more people have better paying jobs. Simply observing the overall spending trend isn’t an answer; maybe 51% have just figured out they can vote themselves more stuff and that’s not sustainable. We’d observe the opposite in the ST if we decided to cut all unemployment benefits in recessions, but would that be wise policy? In discussing an alleged debt / spending crisis we might wonder why things *need* be the case. More broadly, sure we want more of everything as the economy grows, but it seems legitimate to ask why we should expect public goods (i.e. those things markets couldn’t provide then or now) to increase faster.
KS – just quibbling I know but to me “hypocritical” applies to one who is unprincipled and pays lip service to different sets of ideals when it serves their purpose, or voluntarily takes actions that betray their espoused principles. Deciding to support the lesser of two evils seems a bit different, even if one momentarily holds the strings of power but reads the tea leaves of public opinion. Of course leadership means trying to shape public opinion.
iceman,
I may be missing something but I’m still not getting how what you’re saying refutes the fact that democrats want to talk about revenue increases along with spending cuts. My point is it’s not a distraction to talk about reducing the rich’s consumption via higher taxes, so that we can cutback less on programs that help the poor if what we’re interested in is redistribution and not deficit reduction.
“The Republicans claim they want to deal with that crisis.”
Yeah but the Republicans took us from a $200 bilion dollar surplus to a trillion dollar deficit in 8 years when they had the presidency. They have no legitimate authority on the issue. Most of the increase in debt is a result of tax cuts and decreased revenues from the recession NOT from increased spending.
on #83 and #84, Suppose further that the idle workers are not even employed yet, since unemployment amongst fast-food workers is high. There are armies of them looking for work, but Maccas and Wendy’s and KFC etc keep telling them “sorry, things are slow, nobody is using Big Macs as a Pizza Topping any more.”
If I start to order dozens of big macs (yuk), and McD’s decides to employ extra staff, they haven’t deprived their competitors of the opportunity to employ staff (since unemployment is still high), the new hires are thankful to get a job (it beats watching Oprah re-runs all day)….
Under *this* circumstance, does my spending really consume any resources of time or opportunity? Isn’t this then a net gain all round (as well as, on my side of the equation, a net gain of pounds all round)?
Muirgeo:
Yeah but the Republicans took us from a $200 bilion dollar surplus to a trillion dollar deficit in 8 years when they had the presidency. They have no legitimate authority on the issue. Most of the increase in debt is a result of tax cuts and decreased revenues from the recession NOT from increased spending.
You certainly win the prize for most self-contradictory comment. First you say the Republicans have no legitimate authority on the spending issue; then you say they didn’t increase spending much. Putting aside the issue of whether your facts are correct, your logic leaves a bit to be desired.
Steve 89:
Muirgeo probably also should have mentioned Medicare part D and the Iraq and Afghanistan wars in his argument.
Many people confuse balanced budgets with fiscal responsibility
@iceman 91: !! I begin to suspect iceman that you go around prodding sleeping dogs into wakefulness, and carry about with you a special rod, used for stirring hornet’s nests!
:)
“First you say the Republicans have no legitimate authority on the spending issue; then you say they didn’t increase spending much.”
I think he was referring to the Republicans having no legitimate authority on the deficit issue. And then pointing out how our current deficit issues are more a function of lower-than-historical tax revenue than higher-than-historical spending. I don’t see a contradiction in those two sentences.
@93: Your parsing is in error. Muirego referred to “that crisis”. Since the crisis Steve identified, in the remarks to which Muirego was responding, was a putative spending crisis, “that crisis” refers to a spending crisis.
Ken B – with a can of Raid in my hip pocket
Daniel – seems you’re basically saying democrats don’t want to cut spending as much. In which case I’d agree it’s only a “distraction” if they claim to be just as concerned about spending (and particularly if they don’t actually think the financing matters much). Likewise it’s not “unserious” or “fanatical” for republicans to want to focus on what they think is more important (though they are happy to use the debt bogeyman as a pawn themselves). But by Landsburg’s account that is Krugman’s accusation.
Mike H – it appears you have successfully identified the McDonald’s liquidity trap. Is the goal to suggest that government spending involves less crowding out than often perceived as a general matter?
Iceman:
No, they think spending is a concern but they believe that by lowering the riches consumption via taxes they will have to cut back on spending less. If they focus on just spending then they’re not specifically cutting back on the riches consumption at full employment by spending more because they’d be crowding out all investment.
sorry i didn’t understand that