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Posts Tagged ‘Deficit’

The Congressional Budget Office just released its annual Economic and Budget Outlook, and almost everyone in Washington is agitated (or pretending to be agitated) about annual deficits exceeding $1 trillion starting in the 2020 fiscal year.

All that red ink isn’t good news, but I’m much more concerned (and genuinely so) about this line from CBO’s forecast. In just 10 years, the burden of federal spending is going to jump from 20.6 percent of GDP to 23.6 percent!

Simply stated, we’ve entered the era of baby boomer retirement. And because we have some very poorly designed entitlement programs, that means the federal budget – assuming we leave it on autopilot – is going to consume an ever-growing share of our national economic output.

The bottom line is that Washington is violating my Golden Rule.

Let’s look at the underlying numbers. Federal spending is projected by CBO to grow by an average of about 5.5 percent per year over the next decade while nominal GDP is estimated to grow by just 4.0  percent annually.

And that unfortunate trend isn’t limited to the nest 10 years. CBO’s latest long-run forecast, which I discussed last year, shows a never-ending deterioration of America’s fiscal position.

Hello Greece.

Fortunately, there is a solution to this mess.

A modest amount of spending restraint can quickly reverse our fiscal troubles and put us on a path to a balanced budget. More importantly, limits on the growth of spending can slowly reduce the size of the federal government relative to the private sector.

Here’s a chart, based on CBO’s numbers, that shows how much Uncle Sam is spending this year (a bit over $4.1 trillion), along with a blue line showing projected tax revenues over the next 10 years (blue line). And I’ve shown what happens if spending is “only” allowed to increase by either 2 percent annually (orange line) or 3 percent annually (grey line) over the next decade.

This chart is basically everything you need to know. It shows that our fiscal situation is not hopeless. All we have to do is make sure government is growing slower than the productive sector of the economy.

A good rule of thumb, as suggested in the chart title, is that government shouldn’t grow faster than the rate of inflation.

And we’ve done it before.

  • During the Clinton years, the United States enjoyed a multi-year period of spending restraint. We got a balanced budget because of that frugality. More important, spending fell as a share of GDP.
  • During the Obama years, we benefited from a five-year de facto spending freeze. Deficits dropped dramatically and the nation experienced the biggest drop in the relative burden of spending since the end of World War II.

And many other nations also have also managed multi-year periods of spending restraint.

Let’s close with a video I narrated which illustrates how modest spending discipline generates good outcomes.

It’s from 2010, so the numbers are no longer relevant, but otherwise the analysis applies just as strongly today.

P.S. I’m not overly optimistic that President Trump is serious about solving this problem. His proposed a semi-decent amount of spending restraint in last year’s budget, but then he signed into law a grotesque budget-busting appropriations bill.

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Five former Democratic appointees to the Council of Economic Advisers have a column in today’s Washington Post asserting that we should not blame entitlements for America’s future fiscal problems.

The good news is that they at least recognize that there’s a future problem.

The bad news is that their analysis is sloppy, inaccurate, and deceptive.

They start with an observation about red ink that is generally true, though I think the link between government borrowing and interest rates is rather weak (at least until a government – like Greece – gets to the point where investors no longer trust its ability to repay).

The federal budget deficit is on track to exceed $1 trillion next year and get worse over time. Eventually, ever-rising debt and deficits will cause interest rates to rise. …the growing debt will take an increasing toll.

But the authors don’t want us to blame entitlements for ever-rising levels of red ink.

It is dishonest to single out entitlements for blame.

That’s a remarkable claim since the Congressional Budget Office (which is not a small government-oriented bureaucracy, to put it mildly) unambiguously shows that rising levels of so-called mandatory spending are driving our long-run fiscal problems.

CBO’s own charts make this abundantly clear (click on the image to see the original column with the full-size chart).

So how do the authors get around this problem?

First, they try to confuse the issue by myopically focusing on the short run.

The primary reason the deficit in coming years will now be higher than had been expected is the reduction in tax revenue from last year’s tax cuts, not an increase in spending.

Okay, fair enough. There will be a short-run tax cut because of the recent tax legislation. But the column is supposed to be about the future debt crisis. And that’s a medium-term and long-term issue.

Well, it turns out that they have to focus on the short run because their arguments become very weak – or completely false – when we look at the overall fiscal situation.

For instance, they make an inaccurate observation about the recent tax reform legislation.

…the tax cuts passed last year actually added an amount to America’s long-run fiscal challenge that is roughly the same size as the preexisting shortfalls in Social Security and Medicare.

That’s wrong. The legislation actually increases the long-run tax burden.

And that’s in addition to the long-understood reality that the tax burden already is scheduled to gradually increase, even measured as a share of economic output.

Once again, the CBO has a chart with the relevant data. Note especially the steady rise in the burden of the income tax (once again, feel free to click on the image to see the original column with the full-size chart).

The authors do pay lip service to the notion that there should be some spending restraint.

There is some room for…spending reductions in these programs, but not to an extent large enough to solve the long-run debt problem.

But even that admission is deceptive.

We don’t actually need spending reductions. We simply need to slow down the growth of government. Indeed, our long-run debt problem would be solved if imposed some sort of Swiss-style or Hong Kong-style spending cap so that the budget couldn’t grow faster than 3 percent yearly.

In any event, they wrap up their column by unveiling their main agenda. They want higher taxes.

Additional revenue is critical…responding to the looming fiscal challenge required a balanced approach that combined increased revenue with reduced spending. Two bipartisan commissions, Simpson-Bowles and Domenici-Rivlin, proposed such approaches that called for tax reform to raise revenue as a percent of GDP…set tax policy to realize adequate revenue.

As I already noted, the tax burden already is going to climb as a share of GDP. But the authors want an increase on top of the built-in increase.

And it’s very revealing that they cite Simpson-Bowles, which is basically a left-wing proposal of higher taxes combined with the wrong type of entitlement reform. To be fair, the Domenici-Rivlin plan  has the right kind of entitlement reform, but that proposal is nonetheless bad news since it contains a value-added tax.

The bottom line if that the five Democratic CEA appointees who put together the column (I’m wondering why Austan Goolsbee didn’t add his name) do not make a compelling case for higher taxes.

Unless, of course, the goal is to enable a bigger burden of government.

Which is the message of this very appropriate cartoon.

Needless to say, this belongs in my “Government in Cartoons” collection.

P.S. Entitlement spending is not only to blame for our future spending problems. It’s also the cause of our current spending problems.

P.P.S. In a perverse way, I actually like the column we discussed today. Five top economists on the left put their heads together and tried to figure out the most compelling argument for higher taxes. Yet what they produced is shoddy and deceptive. In other words, they didn’t make a strong argument because they don’t have a strong argument. Reminds me of Robert Rubin’s anemic argument last year against the GOP tax plan.

P.P.P.S. Four former presidents offer good advice on the topic of taxation.

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Way back in 2009, I narrated a video explaining that people worry too much about deficits and debt. Red ink isn’t desirable, to be sure, but I pointed out that the real problem is government spending.

And the bottom line is that most types of government spending are bad for an economy, regardless of whether they are financed by taxes or borrowing.

It is possible, of course, for a nation to have a debt crisis. But keep in mind that this simply means a government has accumulated so much debt that investors no longer trust that they will receive payments on government bonds.

That’s not a good outcome, but replacing debt-financed spending with tax-financed spending is like jumping out of the frying pan and into the fire. Or the fire into the frying pan, if you prefer. In either case, politicians are ignoring the real problem.

Greece is a cautionary example. Thanks to a period of overspending, Greek politicians drove the country into a debt crisis. But this dark cloud had a silver lining. The good news (at least relatively speaking) is that the government no longer could borrow from the private sector to finance more spending.

But the bad news is that Greek politicians subsequently hammered the economy with huge tax increases in hopes of propping up the country’s bloated welfare state. And the “troika” made a bad situation worse with bailout funds (mostly to protect big banks that unwisely lent money to Greek politicians, but that’s a separate story).

In other words, Greece got in trouble because of too much government spending and it remains in trouble because of too much government spending. As is the case for many other European nations.

And I fear the United States is slowly but surely heading in that direction. I elaborate about the problem of government spending – and the concomitant symptom of red ink – in this interview with the Mises Institute.

For all intents and purposes, I’m trying to convince people that deficits and debt are bad, but they’re bad mostly because they are a sign that government is too big. Sort of like a brain tumor being the real problem and headaches being a warning sign.

I feel like Goldilocks on this issue. Except instead of porridge that is too hot or too cold, I deal with people on both sides who think red ink is either wonderful or terrible.

For an example of the former group, here’s some of what Stephanie Kelton wrote for the New York Times last October.

…bigger deficits wouldn’t wreck the nation’s finances. …Lawmakers are obsessed with avoiding an increase in the deficit. …It’s also holding us back. Politicians of both parties should stop using the deficit as a guide to public policy. Instead, they should be advancing legislation aimed at raising living standards and delivering…long-term prosperity.

Hard to disagree with the above excerpt.

But here’s the part I don’t like. She’s a believer in the perpetual motion machine of Keynesian economics. She thinks deficits are actually good for the economy and she wants to use debt to finance an ever-larger burden of government spending.

Government spending adds new money to the economy, and taxes take some of that money out again. …we should think of the government’s spending as self-financing since it pays its bills by sending new money into the economy. …the deficit itself could be deployed as a potent weapon in the fights against inequality, poverty and economic stagnation.

Ugh.

Now let’s check out the view of the so-called deficit hawks who think red ink is an abomination.

Here are some passages from a Hill report on the battle over last year’s tax plan.

A handful of GOP deficit hawks are worried that their party’s tax plan could add trillions to the deficit, deepening a debt crisis for future generations. …The tax plan could cost the government $1.5 trillion in revenue over the next decade… Sen. Bob Corker (R-Tenn.), who recently announced his retirement at the end of this Congress, has warned he’ll oppose the tax plan if it adds to the deficit. …In a separate interview, he told The New York Times that the debt is “the greatest threat to our nation,” more dangerous than the Islamic State in Iraq and Syria, or North Korea.

Ugh, again.

The threat isn’t the red ink. The real danger is an ever-increasing burden of government spending, driven by entitlements.

Besides, the GOP tax bill actually is a long-run tax increase!

Let’s close with a video on the topic from Marginal Revolution. It has too much Keynesianism in it for my tastes, but the discussion of Argentina’s default is useful for those who wonder about whether the United States is going to have a debt meltdown at some point.

P.S. I don’t agree with Keynesians and I don’t agree with the self-styled deficit hawks. But I can appreciate that both groups have a consistent approach to public finance. What really galls me are the statist hypocrites who are cheerleaders for debt when there are proposals to increase government spending, but then do a back flip and pretend that debt is terrible and must be reduced when tax increases are being discussed.

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At some point in the next 10 years, there will be a huge fight in the United States over fiscal policy. This battle is inevitable because politicians are violating the Golden Rule of fiscal policy by allowing government spending to grow faster than the private sector (exacerbated by the recent budget deal), leading to ever-larger budget deficits.

I’m more sanguine about red ink than most people. After all, deficits and debt are merely symptoms. The real problem is excessive government spending.

But when peacetime, non-recessionary deficits climb above $1 trillion, the political pressure to adopt some sort of “austerity” package will become enormous. What’s critical to understand, however, is that not all forms of austerity are created equal.

The crowd in Washington reflexively will assert that higher taxes are necessary and desirable. People like me will respond by explaining that the real problem is entitlements and that we need structural reform of programs such as Medicaid and Medicare. Moreover, I will point out that higher taxes most likely will simply trigger and enable additional spending. And I will warn that tax increases will undermine economic performance.

Regarding that last point, three professors, led by Alberto Alesina at Harvard, have unveiled some new research looking at the economic impact of expenditure-based austerity compared to tax-based austerity.

…we started from detailed information on the consolidations implemented by 16 OECD countries between 1978 and 2014. …we group measures in just two broad categories: spending, g, and taxes, t. …We distinguish fiscal plans between those that are expenditure based (EB) and those that are tax based (TB)… Measuring the macroeconomic impact of a plan requires modelling the relationship between plans and macroeconomic variables.

Here are their econometric results.

There is a large and statistically significant difference between the effects on output of EB and TB austerity. EB fiscal consolidations have, on average, been associated with a very small downturn in output growth: a spending based plan worth one percent of GDP implies a loss of about half of a percentage point relative to the average GDP growth of the country, which lasts less than two year. Moreover, if an EB austerity plan is launched when the economy is not in a recession, the output costs are zero on average. …On the other hand TB plans are associated with large and long lasting recessions. A TB plan worth one per cent of GDP is followed, on average, by a two percent fall in GDP relative to its pre-austerity path. This large recessionary effect lasts several years.

Here’s a chart from the study showing that economic performance drops farther and farther to the extent taxes are part of an austerity package.

In addition to the core results, the authors explain why tax-based austerity packages are bad for capital…

…investment growth responds very differently following the introduction of the two types of austerity plans. It responds positively to EB plans and negatively to TB plans. …in their sample of OECD countries, business confidence increases immediately at the start of an EB consolidation plan, much more so that at the beginning of a TB plan.

…and why tax-based austerity packages are bad for labor.

…clearly tax hikes and spending cuts – beyond other effects – have different effects on labor supply. …EB plans are the least recessionary the longer lived is the reduction in government spending. Symmetrically, TB plans are more recessionary the longer lasting is the increase in the tax burden and thus in distortions.

Since capital and labor are the two factors of production, the obvious and inevitable conclusion is that the economy does worse when taxes are higher.

The study also make a critical point about the futility of tax increases when the burden of government spending is rising faster than the private sector. Simply stated, that’s a recipe for ever-increasing taxes, sort of like a dog chasing its tail.

…a TB plan which does not address the automatic growth of entitlements and other spending programs which grow over time if much less like likely to produce a long lasting effect on the budget. If the automatic increase of spending is not addressed, taxes will have to be continually increased to cover the increase in outlays.

That’s why spending restraint is the only way to successfully address red ink.

It doesn’t even require dramatic spending cuts, even though that would be desirable. All that’s needed is some modest fiscal restraint so that spending grows slower than the productive sector of the economy.

Nations that follow this approach for a multi-year period always get good results. But if you want examples of nations that have achieved good outcomes with tax increases, you’ll have to explore a parallel universe because there aren’t any on this planet.

P.S. I need to update the table because both the United States (between 2009-2014) and the United Kingdom (between 2010-2016) enjoyed dramatic improvements in fiscal outcomes in recent years because of spending restraint.

P.P.S. Politicians don’t like spending restraint, which is why most periods of good fiscal policy come to an end. To achieve good long-run outcomes, some sort of constitutional spending cap is probably necessary.

P.P.P.S. The study cited above builds upon research I cited in 2016.

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Since the House has passed a tax cut and the Senate has passed a tax cut, it’s quite likely that there will be a consensus deal that will be signed into law.

Which makes me happy since any agreement presumably will include a lower corporate tax rate and the elimination of the deduction for state and local income taxes.

But some folks don’t think this is good news.

Writing for U.S. News & World Report, Pat Garofalo argues that taxes should be going up.

The entire bill is premised off the belief that taxes are too high and need to go down, when the opposite is actually true. …the U.S. is, by developed country standards, a very low-tax country. It raises about a quarter of its gross domestic product in revenue at all levels of government, compared to about a third in the rest of the developed world, and well more than 40 percent in some countries. For the last several decades, the U.S. at the federal level alone has raised roughly 18 percent of GDP in taxes, while spending around 20 percent. Sorry, but that just doesn’t cut it. …other countries prove there’s plenty of room to raise more revenue without kneecapping economic growth. …America’s concentration of wealth is such that there’s plenty of room to raise taxes on the rich with nary an economic blip… it is possible, as Sen. Bernie Sanders, I-Vt., does all the time, to make a case that, yes, taxes on the middle class will go up, but that the benefits will be more than worth it.

I won’t bother responding to all his inaccurate assertions, but I will give Mr. Garofalo credit for honesty. Unlike a lot of folks on the left, he openly acknowledges that the middle class will have to be pillaged to finance a European-style welfare state. I’ll add him to my list of honest leftists.

But honesty is not the same as accuracy.

Chris Edwards put together a very helpful chart showing federal taxes and revenues as a share of economic output. As you can see, America’s real fiscal problem is government spending. The tax cut being considered on Capitol Hill only causes a small – and completely temporary – drop in revenues.

This is such good information that it deserves a closer look.

I decided to look at the raw year-to-year numbers. I got the latest 10-year budget projections from the Congressional Budget Office, as well as the 10-year projections for the Senate tax bill from the Joint Committee on Taxation (the House bill’s numbers are very similar, so these figures presumably are a very accurate proxy of any final package).

Let’s start with a look at the annual baseline revenues (blue) and annual baseline spending (orange), along with the annual post-tax cut revenues (grey). As you can see, there’s very little difference in the two revenue lines. There’s some short-run aggregate tax relief, but that quickly begins to shrink. And by the 10th year, the federal government actually will be collecting more revenue!

Some people nonetheless will oppose even a tiny and temporary tax cut. They will claim they want to balance the budget (though oftentimes these are the same people who supported the faux stimulus and wanted the new Obamacare entitlement, so judge for yourself whether they are sincere).

Even in the unlikely event that they are sincere, their complaints don’t make sense since revenues will be higher after 10 years. And that’s not even properly considering the impact of additional economic growth, which would cause tax receipts to grow even faster.

But let’s set that aside and consider what would be necessary to balance the budget over the 10-year budget window. Earlier this year, I calculated that it would be possible to balance the budget and enact a $3 trillion tax cut so long as politicians would simply restrain federal spending so that it grew by 1.96 percent per year.

Based on the most recent numbers (and starting the spending restraint in 2019 rather than 2018), the budget can be balanced if federal spending grows by 2.67 percent annually. Since that’s much faster than what would be necessary to keep pace with inflation (projected to average about 2 percent per year), this wouldn’t require any “harsh” austerity.

By the way, if you want an example of successful multi-year spending restraint, we had a five-year de facto spending freeze from 2009-2014 (yes, those fights over debt limits, sequestration, and government shutdowns produced a big payoff).

Heck, when Clinton was in the White House, overall government spending grew by 3.2 percent annually between 1993 and 1999.

Surely Republicans can beat Bill Clinton’s record, right?

I’ll close by observing that we shouldn’t fixate on balancing the budget in any particular year. It’s much more important to shrink the burden of government spending. And that happens when the private sector grows faster than the federal budget.

To be sure, it’s also a good idea to shrink red ink, at least relative to our ability to finance debt. That happens whenever the private economy grows faster than federal borrowing.

The good news is that spending restraint is the one policy that achieves both goals.

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Left-wing columnists at the Washington Post have hit upon a theme. In late October, Ruth Marcus wrote a column asserting that tax cuts are “dangerous.”

I explained why her argument was nonsensical, but that clearly didn’t have any impact since Robert Rubin has a new column in the same paper with the same theme. He claims to have identified five “dangers” in the Republican tax plan.

It’s a remarkably weak list, but I guess it merits a response, both because Rubin served as Bill Clinton’s Treasury Secretary and because I feel compelled to once again slap down the claim that tax cuts are dangerous.

I debunk each one of Rubin’s points below, but you’ll also notice that I first restate (fairly, I think) what he’s really trying to say since his writing style is so bureaucratically obtuse.

Rubin Claim #1:

…business confidence would likely be negatively affected by creating uncertainty about future policy and heightening concern about our political system’s ability to meet our economic policy challenges.

What he’s really saying: We don’t know what will happen in the future (“uncertainty”) and it would be good if taxes were higher so politicians could spend more (“ability to meet…challenges”).

Why he’s wrong: Since it’s very difficult for today’s politicians to restrict the behavior of future politicians, it is true that there will be policy uncertainty. But that’s just as true if we leave the corporate tax rate at 35 percent as it will be if the rate is reduced the 20 percent. I’m also unimpressed by his desire for government to have more cash to meet challenges since it’s far more likely that government is the cause of problems rather than the solution.

Rubin Claim #2:

…our country’s resilience to deal with inevitable future economic and geopolitical emergencies, including the effects of climate change, would continue to decline.

What he’s really saying: If there’s a tax cut, politicians will have less money, which means it will be harder (a “decline” in “resilience”) to spend money in the future.

Why he’s wrong: Once again, I feel compelled to point out that very few problems can be solved with more government spending. Indeed, that’s usually a recipe for making a problem worse (the welfare state, for example). But the most glaring flaw with Rubin’s argument about “future…emergencies” is that there’s no long-run tax cut. The GOP tax plan is revenue-neutral after 10 years. So how can a plan that doesn’t lower the long-run revenue baseline impact the government’s ability to do anything?

Rubin Claim #3:

…funds available for public investment, national security and defense spending…would continue to decline as debt rises, because of rising interest costs and the increased risk of borrowing to fund government activities.

What he’s really saying: Less tax money going to Washington could mean higher interest payments (“increased risk of borrowing”), which would displace other forms of spending.

Why he’s wrong: There’s actually some truth to this argument, at least in the first 10 years when there actually is a tax cut. If I was being snarky, I could ask why Rubin wasn’t making the same argument when the faux stimulus was being debated. Or when the Obamacare boondoggle was being discussed. Why does he think deficits are only bad when tax cuts are on the agenda (just like CBO), but deficits are “stimulus” when spending goes up? I may sue for whiplash since folks on the other side keep changing their minds on red ink.

Rubin Claim #4:

Treasury bond interest rates would be highly likely to increase over time because of increased demand for the supply of savings and increased concern about future imbalances.

What he’s really saying: A tax cut will lead to higher deficits, which will lead to higher interest rates (“increased demand for the supply of savings”).

Why he’s wrong: I believe in supply-and-demand curves, so it’s theoretically true that interest rates should increase when government competes against private borrowers. That being said, even big shifts in U.S. deficits are just a drop in the bucket in a world where global capital markets amount to tens of trillions of dollars. Here’s a slide from a speech I gave to the Leadership Program of the Rockies earlier this month in Denver. If I had space, I would have added “but in reality the impact is minimal” to the third sentence.

Rubin Claim #5:

…at some unpredictable point, fiscal conditions…would likely be seen as sufficiently serious to cause severe market and economic destabilization.

What he’s really saying: Tax cuts will mean more red ink, which could ultimately lead to a Greek-style fiscal crisis (“severe..destabilization”).

Why he’s wrong: It’s certainly true that America faces very worrisome long-run fiscal problems, but those challenges are entirely due to a rising burden of government spending. And since the GOP plan is only a tax cut in the first 10 years, it’s absurd to say the GOP plan will have any meaningful impact on that dismal outlook. If Rubin really was concerned about America’s fiscal situation, he would be aggressively arguing for genuine entitlement reform.

I could have shortened that entire section by collapsing his five “dangers” into one teenager-type rant: “OMG, the economy will be in danger with tax cuts and the government won’t be able to spend on good things.”

To which I could have replied: “LOL.”

To be fair, there actually is a semi-serious section in Rubin’s column. He summarizes the left’s economic argument against lower tax rates.

…tax cuts will not increase growth and, given their fiscal effects, would likely have a significant and increasingly negative impact. The nonpartisan Tax Policy Center’s latest report estimated that, over 10 years, the average increase in our growth rate would be roughly zero, counting the crowding out of private investment by increasing deficits but not counting other adverse effects of worsening our fiscal outlook. The Penn Wharton Budget Model, using the same approach, estimates virtually no increase in long-term growth. …These estimates reflect three underlying views held by mainstream economists. First, individual tax cuts will not materially induce people to work more. Second, corporate tax cuts will likely have limited effect on investment or decisions about where to locate business activity, given the many other variables at play. Third, deficit-funded tax cuts will have little short-term effect on growth, except perhaps for some temporary overheating, because we are at roughly full employment.

Now allow me to translate: It is quite possible to generate bad numbers if you build models that, 1) assume lower tax rates have very little impact on incentives to engage in productive behavior, and 2) assume larger deficits cause interest rates to increase significantly and therefore measurably reduce investment.

The real question is whether those theoretical models are correct given so much of the empirical evidence on the other side. After all, what are you going to believe, the models or your lying eyes?

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The swamp is pulsating with excitement. For the lobbying community, tax reform is like Christmas. No matter what happens, they win because of lucrative retainers and fat contracts.

And what about libertarian policy wonks? What do we get? Well, we look at the sausage-making process in Washington with disdain, but we hope that the final outcome is a less-destructive tax system.

And there are some interesting debates along the way. Here’s an interview I did a couple of days ago with Maya MacGuineas of the Committee for a Responsible Federal Budget. We touch on several topics relating to tax reform, but pay close attention to the discussion on federal spending and red ink because you’ll see a very interesting mix of agreement and disagreement.

There are big areas of overlap. We both like spending restraint. We both favor getting rid of loopholes (though I fear she may favor the Haig-Simons definition of loopholes rather than the consumption-base definition). And we both seem to agree that lower tax rates can improve economic performance.

But it seems we might diverge on whether a stand-alone tax cut is desirable. My view is that the right kind of tax cut will boost incentives for productive behavior. Yes, that can produce more red ink, but that’s not necessarily a bad thing if it “starves the beast” and creates pressure to restrain the growth of spending. I’m motivated by a desire to limit the overall size of government.

Maya, by contrast, is not happy that Congress is considering a stand-alone tax cut. As a “deficit hawk,” she would prefer that the tax cut be “paid for” with spending restraint or by cutting back on tax preferences. She is motivated by a desire to limit red ink.

For what it’s worth, I think she’s focusing on the symptom or red ink when it would be better to focus on the underlying disease of excessive spending.

I think this 2×2 matrix is a good way of illustrating our areas of agreement and disagreement. Libertarians like me are in the top-left box. Indeed, in the top-left corner of the top-left box. I want less spending and lower taxes. Deficit hawks like Maya, by contrast, are going to be somewhere in the lower-left box since they want less spending but are open to higher taxes.

I also added other groups to the matrix, such as Reaganites (i.e. the Gipper), populists (i.e., Trump), and so-called compassionate conservatives (i.e., Bush). As well as some Democratic politicians such as Bill Clinton, Hillary Clinton, and Crazy Bernie. Since I’m going by gut instinct, I’m not going to claim everybody is in the exact right spot, but I do think this is a decent representation of the real debate in Washington.

But it’s not a perfect representation. For instance, we know the folks in the lower-left box care about red ink. But you can also find people in the top-left box and lower-right box who favor balanced budgets. Perhaps there should be a diagonal line from the top left to the lower right so that we can see who wants balanced budgets and/or budget surpluses.

So here’s a slightly more cluttered version of my fiscal matrix.

And I added Hong Kong and Sweden to the matrix to show that balanced budgets are possible with small government or big government.

Last but not least, I decided to create one more visual. The fiscal matrix is mostly designed to show preferences on spending and taxes, with the obvious implication that people below the diagonal line don’t like deficits.

But if we consider just red ink, here’s a spectrum showing how people view deficits. Maya and her group are in the deficits-are-horrible camp on one end, while the deficits-are-wonderful Keynesians are on the other end. And I put myself in the middle to represent the alleged voice of moderation.

Though even this spectrum isn’t really accurate since Keynes only believed in deficits during a downturn. And I confess I have no idea whether Maya would support red ink in that circumstance.

By the way, I can’t resist commenting on a few other moments in the interview.

  • First, Maya said that tax cuts don’t pay for themselves. That’s true (except in rare circumstances), but it’s still very important to realize that supply-side tax cuts can produce some degree of revenue feedback.
  • Second, modest spending restraint would enable both huge tax cuts and a balanced budget.
  • Third, Republicans in Congress actually approved budgets that restrained spending when Obama was in the White House (hence, my reference in the interview to the Ryan budgets).

I’ll close with a grim prediction. The tax reform battle will be Part II of the Obamacare repeal battle. I fear the effort will come to naught. Those 76,000 pages in the tax code are defended by too many powerful interest groups.

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