Conclusion to my Kauffman Institute Presentation
Note: This is “what I believe I said,” not“what I would have said” and is presented here solely to document the confluences that were, perhaps, clearer in my head than they were in the presentation itself. As such, several references here are echoes of earlier pieces of the presentation. (Links to same will be updated as soon as possible.)
To review, there are three standard methods of reducing a fiscal debt: default, inflate, and taxation and/or budget cutting. I believe it is clear that default is not desirable; the historic examples of 1917 Russia and the State of Louisiana are clear indicators that issues persist long after the act itself, and the recent suffering of the Argentineans in 2002 and 2003 clearly shows that, even at the time, default is at best a problematic solution, more an amputation than a lancing.
The second, moderate inflation, has the collateral issue that some of the assumed benefits of an inflationary policy—especially an inflationary policy in an environment with a relatively low savings rate—do not accrue to the country whose currency is the dominant one in the world. As I noted earlier, David Beckworth is doing some research in this area, and I look forward to seeing the results.It seems safe to assume that the benefits of inflation will not accrue in the way a model might predict, and therefore “solving” the problem with inflation will require a suboptimal level to achieve optimal policy. The chance of having to repeat “the Volcker experiment” would not be small, while the likelihood of success would not be so large.
Budget cutting is an abiding idea. While I’m perfectly willing to stipulate that one might be able to cut around 1% of GDP from the US defense budget, and that some direct consumption—though much of this is a State and Local issue more than a Federal one—might be reducible, this appears unlikely to have more than a marginal effect. While we like—indeed, make a living from identifying—marginal effects, the magnitude of the issue at hand requires more. Since we generally can stipulate that transfer payments are at worst neutral (or, by Jim Baker’s “supply-side/conspicuous consumption” theory presented earlier, likely beneficial to both the velocity of money and overall tax revenues), gains from there will, at best, not help the team.
This leaves taxation, and it is perfectly reasonable to assume that taxation can be increased. Except that, as you can see from the graphic I have left on the screen, we have a large deadweight loss in health care spending. We spend approximately 6% more, on a percent-of-GDP basis, than the next country, with no noticeable economic value-added. Having that deadweight loss hanging over the economy limits options—possibly as much or more than being the dominant currency. And since the basic premise of this panel appears to be that we would prefer that the US Dollar remain the dominant world currency—that is, becoming the 21st century equivalent of 20th century Britain not being a desired outcome—we are left to the reality that we cannot solve the budget crisis without reducing or eliminating much of the deadweight loss in the health-care system.
Were we to solve only half of the difference and transfer that amount to tax revenues, we would solve the budget deficit without adding any drag to the economy, effectively substituting tax revenues for cost overruns. We would, in short, have produced a better team: a better engine for growth and a greater potential for entrepreneurial opportunity, even if a groundskeeper becomes underutilized in the process.
The most viable alternative to addressing the deficit by addressing the deadweight loss in the health-care system appears to be to yield our place as the world’s Reserve currency of choice. There does not appear to be much of an appetite for that, even if there were a clear mechanism to do so.
As economists we look for the suboptimal. In this case, we can identify the areas where the returns are low—defense spending—the areas where spending growth might be moderated—Government Direct Consumption, although that is a very nominal portion of the Federal budget—and areas where there are clear deadweight losses—health care spending. Only the latter shows much promise as a direct, not just a marginal, way to address the problem.
From reading this article tax increases are the only viable way to reduce the deficit. Why is it that we can only solve our problems by increasing the size of government. The health care legislation just passed is a great example. While it does provide some excellent benefits by shifting the cost to the taxpayer it also increases costs substantially. To pay for this bill we are increasing taxes by $450+B and reducing Medicare by $500B. The bill also adds 111 new federal programs and increases the IRS by 50,000 personnel. How will this reduce the deficit? It will not.
Inflation can be used to deal with a large debt or to finance an ongoing deficit, but inflation in and of itself can not be used to reduce an ongoing deficit. To get that result you would have to make the unrealistic assumption that revenues would be boosted by the inflation but expenditures would not be increased by inflation.
“We spend approximately 6% more, on a percent-of-GDP basis, than the next country, with no noticeable economic value-added ASSUMING CETERIS PARIBUS.”
While we are at it lets ASSUME pink unicorns exist and that there is a troll hiding in your bedroom closet.
There is nothing more arrogant and short-sighted than modeling a complex system with 1 RHS variable. How many people over 65 in those countries are getting boob jobs?
Increasing taxation does not reduce the deficit if outlays are increased by the same amount. It thus misses the point of a deficit reduction argument to ask “Why is it that we can only solve our problems by increasing the size of government(?)” By holding the (projected) size of government unchanged, or by reducing it by 1% of GDP (as Ken suggested), tax increases reduce the size of the deficit. No increase in the “size of government”, just an increase in the government’s revenue. If by “government” you meant “revenue” you are using the language in a non-mainstream way. That is not usually helpful in reasoned debate.
Now, as regards your health care argument, the CBO acknowledges that its estimate that the health care bills will cut the deficit by $1 trillion in the second 20 years (just $138 bln in the first ten – nothing, really) is rough, but makes clear that the odds of a bigger surplus are just as great as the odds of a smaller one from the bills. That you see things otherwise is obvious, but they did the math, you did not.
I would also point out that, when the other guy actually opens up the possibility that other things aren’t equal – celery parabolas or whatever – to then turn around and act as if he is doing a bad thing is kinda dishonest. It is pretty common for partisan skunks to leave out that little caution. Putting it in means admitting the possibility of other explanations. Show me a non-trivial argument based on data that doesn’t require a good dose of settling parachutes to make it honest.
Seriously. Find one.
“Since we generally can stipulate that transfer payments are at worst neutral (or, by Jim Baker’s “supply-side/conspicuous consumption” theory presented earlier, likely beneficial to both the velocity of money and overall tax revenues), gains from there will, at best, not help the team.”
Could you explain that, please? Why would increased aggregate demand and resultant economic growth, with resultant increased tax revenues not help the team, as far as debt reduction is concerned? Using the household analogy, if I get a raise I might be able to pay off my credit cards.