Debt and Taxes III

The reliably brilliant Catharine Rampell argues against giving $1400 to quite so many people. She notes

The Democratic-controlled House passed legislation in December to expand stimulus payments to $2,000. This was marketed as aid to the poor and middle class, but the bill would have given some money to 94 percent of households — including those making over $300,000. President Biden, who supports more direct payments, said this week that he is open to negotiating eligibility details to ensure the funds are targeted to the needy.

I actually agree that it would be a good idea to target the additional 1400 more. I think it very likely that this will be the condition imposed by political Manchinations. Rampell considers some arguments for extremely broad stimulus and refutes them effectively. I think it is best to just click the link – the op-ed is too good for me to summarize.

However, she also makes some arguments about the US Federal Government intertemporal budget constraint which do not convince me.

If you believe that government fiscal capacity is infinite and deficits never matter, perhaps it’s easy to dismiss concerns about wasting money on the rich so long as money also happens to reach those who are suffering. But at some point, there will be choices to make, and tradeoffs. Either Republicans will enforce a ceiling on the size of the next relief bill, or the reconciliation process will.

And then every dollar spent on those who don’t need it will be a dollar not spent on those who do.

I am going to respond sentence by sentence. First yes “If” but not only if. If fiscal capacity is finite, but the limit isn’t binding, then I can dismiss concerns about wasting money.

“At some point there will be choices to make and tradeoffs” This is true (it is true now with binding constraints on Senate floor time, Jim Manchin’s ego etc). However, that does not mean that the constraints are actual inter-temporal budget constraints.

Finally, the key (and concluding sentence). “then every dollar spent on those who don’t need it will be a dollar not spent on those who do.” The meaning is ambiguous. One interpretation is tautological — when there is a binding constraint, there will be a binding constraint. The other is not tautological, relevant to the current debate, and dubious — when there is a binding constraint, money spent now o the rich will not be available for the poor.

This does not follow from the fact (I absolutely concede it is a fact) that there will be limits on spending imposed by Republicans or by conservadems. If the future limit were an actual intertemporal budget constraint — no more spending will be feasible without eventual default — then it behaves as budget constraints do, so spending now would make future spending unfeasible.

But the constraints which bound back say in 2011 were not actual constraints on feasible deficit spending. We know that now, having added trillions to the debt without trouble (and while paying record low interest rates). It was true that many people sincerely believed that the debt to GDP ratio had reached an alarming level and a further increase would be extremely damaging. But that does not mean that the alarm had anything to do with the actual level. It was widely argued that debt to GDP over 80% would cause severe costs (recall the spreadsheet error made by Harvard professors and noted by a U Mass Amherst student). I am old enough to remember warnings about the national debt in the 70s, before Reagan, when the debt to GDP ratio was low and had been declining for decades.

Once one shifts from arguments about rational perceptions of budget constraints to irrational fears, one is lost in the deep blue sea. There is no way to know how people will be irrational. However, I think one thing is fairly safe to say — if something which was considered a threat sits around for years without causing trouble, then it will be accepted as normal. Deficits were unacceptable until they were normal. A debt to annual GDP ratio over 100% was unacceptable until it was normal. The argument that debt levels are dangerously high and we must not allow them to get higher, is very normal — no matter what the debt level is.

A possible story about the future is that rising deficit to GDP ratio and a rising debt to GDP ratio are both unacceptable in normal times. So when times are perceived to be normal, there will be a binding limit on deficit spending. If this story is correct, the limit will be similar no matter how much we spend now.

Similar but not the same. As always in this series, it depends on r-g. If the Treasury interest rate is lower than the rate of growth of GDP, then the rule that the debt/GDP ratio must not rise implies an allowed primary deficit of (g-r)Debt

(the primary deficit is the deficit not counting interest on the debt). The allowed primary deficit is higher the higher the debt is. I stress as always that Treasury r < g has been normal in the USA.

If this guess about debt fears is correct (the in normal times debt/gdp must not increase) and if the pattern endures, then the more we give to the rich now, the more we will be able to give to the poor in the future when the constraint is binding.

I’m not confident that this is true, but I see no reason to be confident that the opposite is true either.