Several years ago in an op-ed I wrote:
I favor a much smaller government but I do not favor the Bush tax cut.
Or, to be more precise, I would support a tax cut if one had been
proposed. But so far President Bush has neither proposed nor
implemented a tax cut–only a tax shift.
Brad DeLong nicely explains the difference:
I, full professor Brad DeLong, am having lunch with lecturer Dariush Zahedi
today. After lunch, I presume Dariush will say we should split the bill–$10
each. Suppose I say: "That isn’t fair. Berkeley pays you less (a lot less: what
we do to our lecturers is shameful) than it pays me. I should lay out more cash
for this lunch. How about this: I put down $5 cash, you put down $0, and we put
the balance on your credit card. That would be fairer, wouldn’t it?"Dariush would then be an unhappy camper. He would think–correctly–that I
was mocking him.Back in 2000 the U.S. government was running a surplus of some $200 billion a
year–a broadly appropriate fiscal policy, given the state of the business cycle
and the looming health care costs dilemma. Today we’re running a deficit of
$300-$400 billion a year. Relative to what would be a sane, reality-based, and
appropriate fiscal policy, the Bushies are putting $500-$600 billion this year
on our collective national credit card. That bill will come due: somebody has to
pay it. To pretend that it won’t…well, that would be the equivalent of me telling Dariush that only cash matters:
that when we talk about who paid for lunch, we should count only cash put down
now, and we shouldn’t count the fact that his credit card bill will show an
extra $15 due next month.
I don’t know that I’d go so far as to give zero weight to the growth argument, but yeah.
I’m surprised that you think DeLong’s analogy puts it “quite nicely.” To the contrary, it assumes that the credit card bill will be paid 100% by Zahedi, who represents low salary tax payers. In reality, the “credit card” is a joint account, and will be paid mostly by DeLong, who represents high salary tax payers, who bear most of the tax burden. So if the analogy were constructed properly, DeLong’s “deal” would indeed be a bargain for Zahedi.
The analogy I’ve used to describe the same phenomenon is that you don’t lower your grocery bill by charging it to a credit card and only making the minimum payment.
I agree with Doug. The missing part of the analogy is that both parties will be, eventually, paying back the credit card bill. So the one party will pay $7.50 and the other $2.50. On the surface everyone takes the deal. As people are doing today. People are voting for people that allow them to pay zero today and in theory half the bill later. Only if the externalities are explictly stated, which no politician will ever do, will people choose to not take the deal. The interest that needs to be paid, that government debts are everybody’s debts and putting it on your children is immoral.
While I agree that smaller government is desired, just cutting the taxes does not lead to smaller government. Someone has to have the cohones to vote for lower services to themselves to pay for it. Simple to describle, almost impossible to execute.
Kip- The only implied mention of any Democrat in that piece is when DeLong states what the 2000 budget surplus was. Your comment that Democrats support Social Security (as indeed we tend to, though the Clinton administration would probably have mistakenly privatized if it hadn’t been for impeachment) has no relevance to that point, or anything else in the post.
Doug – I don’t read the part about Zahedi’s salary as having anything to do with the analogy, that is, he is not being analogized to poor tax payers. Rather, DeLong just wants to make his problems with lecturers’ salaries known. The analogy is between Zahedi, who will have to pay off his credit card in the future, and future taxpayers who will have to pay off deficit spending in the future.
“DeLong doesn’t assume that the poor will pay the bill”
Huh? But of COURSE he does, he says:
“How about this: I put down $5 cash, you put down $0, and we put the balance on your credit card.”
“YOUR credit card” refers to the poor man’s card–he’s saying that the poor man will end up paying the entire remaining balance and the rich man none of it. (Which makes no sense whatsoever as an analogy to the U.S. tax code)
I agree with Slocum. DeLong is a smart guy who for some reason finds it necessary to use cheap shots and shifty rhetoric. His otherwise nice analogy is ruined by the completely bogus implication that the future tax bill will fall entirely on the poor. That’s why I always read Marginal Revolution and almost never read DeLong.
Prof. AT,
You make an interesting point.
However, what if Dariush will be better positioned to pay his bill (higher than it is today) in the future? Well, paying his fair share today ensures that he is able to maintain his dignity/social position. Tomorrow, Dariush may be promoted to full professor or the appreciation on his house may entice him to refinance and have his property absorb his debt; or, he may declare bankruptcy if he is planning to live overseas for a few years or use his spouse’s credit until the bankruptcy is cleared.
Let’s transfer this condition to the level of the state. Absurd as its policies may seem, the Bush admin. does have some decent economists working for it. What future event, planned or otherwise can the bush admin. bank on to absorb the current spending discrepancy?
Many lay folk insist that war contributes to this (i.e. new contracts for arms sales –both domestic and foreign-, construction contracts, high energy prices leading to higher corporate taxes, a show of might that in the long-run may reduce concerns of instability and lead to additional foreign investment in the country-important after 9-11 ).
If Dariush agrees to pay less than 50%, he will appear weak in the eyes of his colleague who may be on the voting committee choosing the next full professor. At a subconscious level, people disdain weakness. Perhaps it’s because it reminds them of their own shortcomings. This may lead to a no vote for Dariush.
Other non-war factors exist for states to act richer than they are. Pandemics reducing a redundant workforce, an overseas labor market that produces for us without health care/retirement/high-wage costs, the long-term effect of an open borders policy etc†¦may change tomorrow’s landscape entirely. Is today’s spending level necessary for marinating national security/national stability to take the country into tomorrow? America may not be as invincible as it seems.
Let’s assume that the Bush admin. spending is not pure insanity. If there is a motive, a safety, what would that be?
Insightful rebuttal. ‘Lamest’?
If only there had been a Democratic President some time in the past 25 years. That way, we would be able to see if it was really possible for a Democratic President to run a budget surplus, or to keep spending under control.
As it is though, I guess we will never know.
This is a bad analogy. The reason why is because everyone is paying the future tax bill, both rich, poor, and middle class. That bill is being paid right now in the devaluation of the dollar. The “bill” is the erosion of savings as well as a shift of wealth from the west to the east. The “bill” is the misallocation of capital much like what happened with the hyperinflation of the Weimar in Germany.
Alex, you are right that credit increases spending. This is a good argument against deficits. It is a tax shift in that all government spending eventually becomes tax(if not by paying off principle, then by interest payments). It seems to cause people to dissociate cost and consumption. But this point is entirely your own, DeLong doesn’t make it.
I think this is part of why some people are overly averse to credit. They don’t correctly evaluate the risk, which in this case is the likelyhood that interest rates will go up (and by how much) and that economic growth will go down (and how much).
Also, how people see this depends on how they view government spending. If you view it entirely as consumption, no level of defecit is appropriate. If you view it entirely as investment, interest vs GDP is a great way to determine a good deficit spending level. However, the reality is probably a mix. Government spending probably doesn’t quite give the return of the GDP growth rate, so some of it becomes inflation. Figure out how to tell how much and you’ll win a Nobel Prize.
Everyone else has commented, I think correctly, on the shortcomings of Prof. DeLong’s argument. But I wanted to look at another part:
Back in 2000 the U.S. government was running a surplus of some $200 billion a year–a broadly appropriate fiscal policy, given the state of the business cycle and the looming health care costs dilemma. Today we’re running a deficit of $300-$400 billion a year. Relative to what would be a sane, reality-based, and appropriate fiscal policy, the Bushies are putting $500-$600 billion this year on our collective national credit card. That bill will come due: somebody has to pay it.
Isn’t this exactly what Keynesians have been trying to tell us to do for decades? A month into Macro 1 they beat into my head that you should run deficits to stimulate the economy when it is in recession, then pay it off with surpluses in the expansion. Is DeLong not a Keynesian but a social democratic monetarist? Or something else?
- Josh
If the current government is willing and able to put $X on the credit card when the tax revenue is $Y, why wouldn’t they still put at least $X on the credit card when tax revenue increases?
Many commenters doubt that deficits dissuade spending. JTK doubts that increased revenues dissuade deficits. I doubt that anything whatsoever dissuades either spending or deficits, and that furthermore precious little dissuades taxation short of confiscatory rates on a large proportion of wage-earners; anything else is too invisible to be noticed, particularly if the taxes are collected through withholding or via corporate taxation.
So if nothing constrains spending, and nothing constrains deficits, and nothing constrains taxation… what do we get?
This, indeed, is the terrible secret of space. I mean government.
I’m sorry, but didn’t the bubble bursting and 9/11 have anything to do w/the deficits?
Not to mention all that Y2K spending? Didn’t that have an impact?
Or are those just inconveniences?
The Moustache has an interesting piece in Foreign Affairs about the fact that increasing oil revenues to leaders of the middle east reduces their incentive to liberalize, and democratize, via the ‘No Representation without Taxation’ effect. I wonder how much effect US borrowing from foreign sources also effects this calculus? Has our ‘freedom coefficient’ changed along with our Debt?
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