Monday, January 9, 2012

If only we could "solve" the debt crisis

The News & Observer ominously warns
    The failure of Congress to slash the national deficit threatens to cascade from Washington straight into North Carolina's schools, stores and doctor's offices. 
    Automatic spending cuts - triggered by the lack of agreement in Congress over ways to reduce the more than $1.2 trillion deficit - will begin in 2013 and could mean:
    • An estimated 9 percent cut in the $417 million that Duke University gets from the National Institute of Health to research cures for diseases such as cancer and Alzheimer's, alternative energy and national security.

    • The loss of federal funds for public schools with large populations of low-income students. In Cabarrus County, for example, that means the school system could lose money that pays for a series of federal programs, including $210,000 in Title 1 funding, which helps low-income schools hire teachers and assistants to reduce class sizes, improve computer labs, purchase supplies, and increase teacher training.

    • And the death of mom-and-pop shops in military towns like Fayetteville that could lose $351 million in defense contracts and tens of millions in civilian payroll.
The article, correctly, points to the economic harms associated with automatic spending cuts that will be triggered by Congress' debt deal last summer and by Congress' failure to agree on an alternative debt reduction plan. We've seen this kind of government retrenchment at the state level, and it retards and can even reverse economic growth.

However, the article fails to mention the harms that would be associated with a debt deal.

There are only two ways to rein in the deficit: cut spending and increase taxes. The article lists cuts that would hurt university research, school spending, and military base businesses, but other cuts would fall on somebody else.

Cuts to poor people's medical care or food assistance, college students' education assistance, extended unemployment, or the elderly's medical care would also hurt specific people and take money out of the economy. Similarly, increases in taxes, perhaps in the form of closing "loopholes" (a.k.a. somebody else's tax break), letting the payroll tax cut expire, or straightforwardly raising rates, would take money out of wallets and pocket books and slow the economy.

Those are the unpalatable choices on the table. The News & Observer complains about one serving of brussel sprouts but doesn't tell you that the other serving bowls are filled with lima beans and that dinner will be followed by a big spoonful of castor oil.

2 comments:

W.E. Heasley said...

Enjoyed the post. Raises a few questions.

“There are only two ways to rein in the deficit: cut spending and increase taxes.”

A third way exists, which may have slipped your mind: growth. Growth will cause more taxable transactions hence more tax revenue hence reducing a deficit associated with a constant spending level.

Also, its worth one’s attention to differentiate between “cut spending” to equate to/be associate with… the tax revenue level ……..and the separate phenomena of “cut spending” associated with government deficit spending. Further, in Keynesian theory, the government deficit spending will be ended (cuts) and taxes will be raised to pay for deficit spending. Hmmmm.


The problem with raising taxes is likely best illustrated by Hauser's Law:

"Over the past six decades, tax revenues as a percentage of GDP have averaged just under 19% regardless of the top marginal personal income tax rate. The top marginal rate has been as high as 92% (1952-53) and as low as 28% (1988-90). This observation was first reported in an op-ed I wrote for this newspaper in March 1993. A wit later dubbed this "Hauser's Law.""Link to entire essay appears below:

http://online.wsj.com/article/SB10001424052748703514904575602943209741952.html


“Cuts to poor people's medical care or food assistance, college students' education assistance, extended unemployment, or the elderly's medical care would also hurt specific people….”


Does it “hurt” specific people or is it an indicator of a grand fallacy? Maybe the point is best described as follows:


“Government is the great fiction through which everybody endeavors to live at the expense of everybody else.” - Frédéric Bastiat, 1850


Revisiting this statement and now the complete quote:

“Cuts to poor people's medical care or food assistance, college students' education assistance, extended unemployment, or the elderly's medical care would also hurt specific people and take money out of the economy.”


Is not “take money out of the economy.” very misleading if not erroneous? Maybe you were meaning something else?


In the main, government produces nothing. Government is merely a transfer agent. That is, if the transfer payment to government from the private sector never existed, then the transfer payment would remain in the private sector. Stated alternatively, absent the transfer payment to government, the private sector would merely produce a different basket of goods with the transfer payment now retained by the private sector. Hence, “take money out of the economy“ as stated above is erroneous as the same amount of money would exist within the economy albeit used for different purposes by the private sector.

Just checking………

Dave Ribar said...

Although there are things that we can do to affect growth (without cutting government spending or changing tax policy), none of those things will contribute enough to growth to close the deficit.

You cite Hauser's "law" says that tax receipts will be approximately 19.5 percent of GDP regardless of the marginal tax rate. But that does not (and has never) held.

Since the Bush tax cuts were enacted, revenues have NEVER come closer than 1 percent of the magical 19.5 percent figure (the highest was in 2007 when taxes were 18.5 percent of GDP). In 2003 & 2004, receipts were only about 16 percent of GDP. Since 2008, they've been less than 15 percent. Taxable behavior is certainly affected by tax rates, but that behavior is not sufficiently elastic to offset the revenue losses. Put another way, there is no supply side miracle.

And yes, cutting spending for particular groups, absent some other set of changes, hurts. Bastiat's comment refers to the aggregate, not to individuals. You may argue that we are robbing from Peter to pay Paul. But if that is what we have been doing and we cut Paul's pay, Paul is hurt.