Democrats and Deficits

Brad Plumer on whether the Democrats should pursue fiscal austerity first and foremost, or whether the deficit should give way in favor of important objectives such as health care, inequality, and addressing climate change:

Democrats obsess over deficits, by Bradford Plumer, TNR Online: ...For the past six years, Democrats have savaged the Bush-era GOP for running up the national debt with reckless spending. Pelosi has promised that the Democratic Congress will insist on fiscal responsibility. ... But not everyone's thrilled with this return to Clinton-era austerity. Two weeks ago, a handful of liberal policy wonks gathered at an Economic Policy Institute (EPI) forum, titled "Beyond Balanced Budget Mania," to address this very issue. Joseph Stiglitz, the Nobel Prize-winner who once headed up Bill Clinton's Council of Economic Advisers, was invited to give the keynote.... The purpose was to persuade Democrats that they could spend responsibly without sacrificing liberalism at the altar of fiscal rectitude. It's hardly a radical notion. But that doesn't mean it's anywhere near catching on.

Stiglitz ...[is] using his former insider status in the Clinton administration to try and steer liberals away from "Rubinomics"--the view that Clinton offers an enduring model for Democrats because he followed the advice of Robert Rubin in the early '90s by raising taxes, slashing spending, and bearing down on the deficit in order to gain Wall Street's confidence.

Those moves appeared to have helped bring down interest rates in the years that followed and usher in a decade of high economic growth. But, Stiglitz cautions, "One should not think of that as a normal situation." In part, he argues, Clinton and Rubin were blessed with special economic circumstances ... that don't exist today. At present, with the housing market sagging, employment middling, and a possible recession on the horizon, Stiglitz argues that Keynesian-style deficit spending may be a better remedy. In addition, problems such as "growing inequality, the health care crisis... energy and climate change" may require a fair bit of money to address. "If this money is well spent," Stiglitz adds, "it does make sense to do that--even if it led to a greater deficit." It's an old tune that liberal Clintonites such as Robert Reich were humming in the early '90s. But it may sound catchier this time around, given that a growing number of economists are doubting that a Rubin-style policy focus on growth alone can benefit all Americans.

None of the participants at the EPI event suggest that the Democrats should just go wild and spend, spend, spend ... But Stiglitz points out that the current deficits aren't harmful just because they're deficits; they're harmful because Congress is borrowing money specifically to fund a needless occupation in the Middle East and massive tax cuts for the wealthy that have done little to boost the economy. Whereas deficit hawks tend to worry about ... borrowing... Stiglitz would prefer they ask, "What is it borrowing for?"

The conventional case against budget deficits is that the government has to borrow private money that could be used more productively elsewhere; as the econ textbooks put it, deficits "crowd out" private investment. But several panelists point out that this takes a too-dismal view of government, which can sometimes invest more usefully than the private sector. ...[P]olicies geared toward early childhood--preschool, child care--pay off massively in the long run. ...[O]utlays for infrastructure and research have historically played a driving role in the U.S. economy, but that such spending has drooped since the Reagan years. While it's satisfying to tweak conservatives by pointing out that Clinton restrained domestic spending more effectively than George W. Bush, such restraint has real costs...

Of course, the elephant in the room is the long-term budget situation, especially once the Baby Boomers start retiring in about five years and entitlement spending begins to balloon. But,... this "crisis" is fueled entirely by the rapid rise in health care spending--by Medicare and Medicaid. Focusing on drastic cuts to food stamps or Social Security, as entitlement hawks at, say, the Wall Street Journal propose, misses the point. Only an overhaul of the country's health care system ... will alleviate the problem. ...

To some extent, the party has backed itself into a corner by carping so loudly about the Bush administration's prodigal ways. And, while many hope that ending the Iraq war--which now costs nearly $200 billion per year--will provide a "peace dividend" for future domestic spending, that's probably too optimistic....[O]nce the war ends, most of that money will go toward repairing a military that's at the breaking point (not to mention treatment for wounded vets). That's doubly true so long as Democrats want to expand the Army's strength and avoid cuts to the Pentagon's budget.

A key question is whether Democrats will continue the posture they adopted through much of the '90s, when, cowed by Newt Gingrich's success, they followed his lead in backing spending cuts and praising deficit-reduction as an end unto itself. ... Perhaps Dems still don't have the votes--or the popular support--to do anything else. But, as Stiglitz notes, "there is a wide agenda facing our society--important priorities that need to be addressed that will require expenditures." Democrats can hardly make that case so long as they obsess about deficits. ...

Greg Anrig has one response to this. From TPM Cafe:

On the Same Team, by Greg Anrig, Jr.: The ongoing debate among progressives about where reducing federal deficits should rank on the policy priority list is completely legitimate, but denigrating Clinton’s 1993 budget agreement is wrong-headed and counterproductive. Remember that every last Republican in Congress, along with some blue-dog Democrats, voted against the legislation entirely on the basis that its tax increases would purportedly send the economy into a tailspin, kill jobs, make deficits even worse, destroy investment markets, and a host of other calamities concocted by the fertile minds of Newt Gingrich and Wall Street Journal editorialists.

Any future Democratic president who attempts to raise revenues, whether for deficit reduction or any of the initiatives on the admirable wish list of the Economic Policy Institute, will be subjected to the same fear-mongering litany. And the most effective response will be to describe how after those alarms were raised in 1993, nothing but good economic news followed. It’s a really bad idea for liberals to help the right out by suggesting that the 1993 budget agreement had nothing to do with the prosperity that followed – especially when it also happens not to be true. ...

Obviously, no one knows what would have happened had just one more Democrat in either the Senate or the House voted against the 1993 bill. But we do know that every last horror that opponents said would arise from raising taxes did not occur. Just the opposite. That history will be an essential touchstone for future Democratic presidents, regardless of the extent to which they may worry about deficits. So we should be venerating that history, not unjustifiably trashing it.

I can't argue that an increase in taxes will not have negative consequences for the economy. There are special cases where that is true, but in general increasing taxes will slow the economy. It's true that the effect on the economy will depend on initial conditions so that the costs can be large or small, but the costs will be there.

It's what you do with the money that matters. What I can argue is that the benefits from using the tax dollars for things such as health care, infrastructure, or other important objectives provides benefits that exceed the costs from increasing taxes, including any reduction in output. Thus, when the economy is in a state where there are highly beneficial government projects waiting in the wings and taxes that can be increased without causing substantial costs, i.e. if the benefits exceed the costs, then deficits should not be an obstacle to putting those projects in place. Focusing solely on the cost side - whether the economy will slow at all as the result of the tax increase - without focusing on the benefits from what is done with the increased tax collections misses an important part of the equation.

That is why I would oppose deficit reduction for the sake of deficit reduction presently. What are the benefits from decreasing the deficit? There do not appear to be large gains from the usual channel, i.e. from lowered interest rates and less crowding out since interest rates have been insensitive to deficits recently, and there's no evidence that growth would be strongly affected. So it is not clear to me what large economic benefit would result from reducing the deficit, but there may be large costs in terms of the programs we have to give up in the pursuit of fiscal austerity. Thus, reducing the deficit brings no great benefit presently, has large potential costs, and for me is easy to oppose on that basis. And going in the other direction the costs and benefits are reversed. There are lots of beneficial things we could do with more revenue, and though increasing taxes would have costs, it's unlikely those costs would be large enough to offset the expected benefits if we are careful to limit the spending to projects that are expected to produce a high return.

Comments

[Bruce Wilder]

Democrats, including certifiably liberal Democrats, struggle to escape the "supply-side" frame, and fail. No matter how idiotic the Laffer Curve, no matter how crazy the gold bugs, no matter how deceitful the David Stockman's and George W. Bush's, we cannot seem to escape the political frame they created.

George W. Bush's tax cuts, like Ronald Reagan's policies, had one, primary aim: income redistribution.

If you insist on accepting the lie that they were about economic growth, you are in a hopeless position, rhetorically as well as policy-wise, and will never get out.

The primary question, going forward, is whether the American People will choose to continue the Bush policy of income redistribution in favor of the Rich, or reverse course.

Describe the Bush tax policies (and spending policies, and the Reagan policies) as what they were: gambits in income redistribution.

There's no law requiring smart people to humiliate themselves, arguing with Alan Reynolds, or any of the denizens of the National Review or the Wall St. Journal editorial page, or the hacks, who inhabit the American Enterprise Institute or, even, the Hoover Institution.

Relegate the specious claims about economic growth to a footnote, and focus on the real game. If you want to measure economic growth, use the median wage as the indicator of choice. Real economic growth moves the real median wage; everything else is redistribution.

One thing that really disturbs me about the game of "Wot me worry about the deficit? Nah" is that somebody eventually pays. That's what makes it redistributive. (Bush's plan was, as far as I can see, to steal a portion of the Social Security Trust Fund.) The policy decision about who will pay for the Bush tax cuts still has not been finalized, and if Democrats don't use their sojurn in power to finalize it in favor of the middle class, Republicans (who will be back in power, sooner or later) will make their usual choice.

Both rhetorically and policy-wise, I think a productive frame would be for Democrats to point out that who will pay for the Bush tax cuts is still, to a large extent, an open question. And, it is a question, to which economic events will, sooner or later, force an answer.

Bob Kuttner, who is an economic idiot and always has been, may think the Bush tax cuts are just a good-bye, but the accumulated deficit does matter and does constrain responsible choice, which is another way of saying that a choice will have to be made about who pays for them, in reduced standard of living.

Conceding that "high taxes" in general will reduce growth misses the political choice posed by Republican policies, entirely. "High taxes" on whom? Reagan's policies had little discernible effect on economic growth as measured by the real median wage, but they had a huge impact the distribution of income, and not incidentally, on the distribution of risk.

If morons like Laffer can take a trivial point about the economics of marginal tax rates and make it into a shibboleth of economic policy, Democrats ought to be able to take the fundamental economic truth, that ties the distribution of income to the distribution of risk (and the availability of insurance), and make it stick in the public mind.

Even if Democratic rhetoric to date has lagged back in the 1930's, people's experience of the Republican redistribution of income and wealth since 1970 has, certainly, included the increasing levels of risk and uncertainty. All Democrats have to do is connect the dots between the increased abrasion of middle class income and wealth and the accumulations of the plutocracy.

I could rant on, but I know people don't like some of my extended soliloquys, and I think people should actually read this argument.

[tom]

Well that's a no brainer. The Democrat's bash the president's reckless spending habits while the Dems are out of power. But guess what, now with the Dem control of congress and possibly the presidency in '09, fiscal responsibility doesn't look so attractive anymore. Fiscal responsibility would require discipline and making tough choices, something the Dems don't look favorably on. Starting in '09 the Dems are not going to look much different than Republican fiscally. Nor will the Democrat faithful much care about an irresposible Democrat fiscal policy. Fiscal responsiblity has been only a convenient tool used by the Democrats to bash Republicans.

[Winslow R.]

B.W. wrote: ", but the accumulated deficit does matter and does constrain responsible choice, which is another way of saying that a choice will have to be made about who pays for them, in reduced standard of living."

While I agree with almost everything you write and always seem to learn something new, this is something I can not easily swallow.

An accumlated deficit takes the form of treasury securities than can be indefinitely rolled over as long as someone desires to save. While I agree the saver must accept a 'lower standard of living' in order to save, it is a personal choice.

If overall savings desires decrease and the government/Fed fails to raise rates then there will be an increase of money in circulation raising the price level and decreasing the value of all money. Savers accept a 'lower standard of living' by their choice to hold money during inflationary times. Perhaps their personal choice was due to ignorance of the inflationary situation.

In either case, the saver of money pays. The main reason they are paid interest :)

[spencer]

Is very simple, take Chenney at his word that Reagan proved deficits do not matter. Just tell the republican that they plan on using deficit to finance unlimited social security and Medicare programs.

[robertdfeinman]

Why is scaling back militarism to a level that serves "defense" purposes never on the table.

What are we getting for our $650+ billion military budget? Why do we need 750+ overseas bases?

The EU gets all the raw materials it needs without invading anybody, it just pays for it. Why can't we?

[bakho]

There are deficits and there are DEFICITS. Running a short term deficit to increase infrastructure spending, float states through downturns and retrain the workforce make sense. Then monetary policy takes hold and wipes out any gains from deficit spending. Running long term structural DEFICITS delays taxes and pays wealthy bond holders to "borrow" their money instead of collecting it as revenue. Borrowing lots of money through long term deficits sets up substantial transfer payments from those who pay the taxes that service the debt to those who hold the bonds. Other than the internal transfer payments of SSTF and other pensions and funds, there is absolutely NO Reason to run long term structural deficits other than political cowardice.

Now that we have a huge debt, should we try to pay it off? Not even Bill Clinton tried that. Clinton added $1.4 Trillion to the debt. Those arguing against budget balance are those that want to extend the unaffordable Bush tax cuts for the filthy rich.

[Outside the Box]

Well, there is the matter of the $406 billion spent paying interest on the federal debt in FY 2006. That would buy a lot of food for the poor.

[Holly W.]

Not quite on topic, but responding to Bruce Wilder's comment: The primary question, going forward, is whether the American People will choose to continue the Bush policy of income redistribution in favor of the Rich, or reverse course.

Democrats need to start being more aggressive about calling a spade a spade. Conservatives use "redistribution" as a code word meaning 'always downward to people who don't deserve my hard-earned cash,' but they need to be called on this. If redistribution downward is bad, shouldn't redistribution upward be equally reviled? How can they defend taking money from the hard-working, often-struggling middle class and shifting it to people who make millions and then get golden parachutes if they lose their jobs? The challenge to Dems is to come up with a shorthand frame that exposes this hypocrisy and makes people see it for the blight on our nation that it is.

[David]

I agree with bakho that we should use debt to weather bad economic times and make infrastructure improvements, not to fund operating budgets. And I agree with Mark that there are programs worth increasing taxes for. Running a structural deficit essentially transfers money from the young upper-middle class and wealthy (tax payers) to the old upper-middle class and wealthy (retirees with large investments). Many of the people who will pay for Bush's tax cuts can't vote yet.

[James Kroeger]

I can't argue that an increase in taxes will not have negative consequences for the economy. There are special cases where that is true, but in general increasing taxes will slow the economy.

I'd like to encourage you, Mark, to re-think this assumption. It is simply not true that tax increases slow the economy; precisely the opposite is true.

In the short run, economic growth is nothing more than an increase in aggregate spending. We can all agree about that, can't we? When governments increase the amount of taxes that are collected from households, the ultimate result is either no change in aggregate spending or a net increase in aggregate spending. If the taxes are collected from people who would have spent all of that money, then there is no net increase...the government's increased spending is exactly matched by the decline in private spending that would occur.

But if the new taxes are collected from individuals who would have saved some portion of the money that they handed over to the government, then the net effect is an increase in aggregate spending because money that would have been saved---taken out of the economy---ends up getting spent by the government. That is a net increase in total spending---economic growth, any way you look at it.

As you correctly pointed out, in the long run, it matters what the money is spent on. When the government raises taxes on the very wealthy---who would be likely to save much of the money that the government collects in taxes---and spends that money on public investments (infrastructure, human capital), well...the result is a net increase in economic growth in both the short run and the long run. Think of China.

Seriously, Mark...is there any way that you or anyone else can dispute this? In spite of the specious arguments that have been repeated endlessly by Republican economists, the truth is that the best way to increase growth in both the short run and the long run is by raising taxes (assuming that the money the government spends is on public investments and that the new taxes collected come from rich people).

The Bush tax cuts were actually contractionary, not expansionary. The only reason why they did not drive the economy into a deep recession is because the Republican Congress didn't slash government spending in order to pay for them, but instead increased government spending by using borrowed money. If they had actually followed the full Supply Side prescription by slashing government spending, the full lunacy of their reasoning would have been devastatingly exposed.

The only reason why we have seen economic growth occur in the last few years is because the Bush administration increased federal spending enough (using borrowed money) to counter the contractionary effect of the tax cuts. Only in the last few years has private investment spending finally recovered enough to produce something that resembles an economic recovery.

I hope you'll do your part in correcting the specious arguments of Republican economic mythology that I'm highlighting here.

[James Kroeger]

I'd just like to emphasize the point that a tax increase is never contractionary. At worst, the net effect is a wash. The decline in household spending that occurs is exactly matched by an increase in government spending. That is assuming that the new tax money is collected from people who would have spent all of it.

N'est-ce pas?

says...

So, James Kroeger, if the government took every penny you made, would you be inclined to start a new business? Would you work as hard as you do today?

[James Kroeger]

So, James Kroeger, if the government took every penny you made, would you be inclined to start a new business? Would you work as hard as you do today?

I'll assume that you do not actually mean every penny, since that would be an absurdity not worthy of discussion. But let's assume you are asking me if I would start a new business even if my gross profit were taxed at a very high percentage.

My answer would be yes, I would, if I believed that I could beat the competition and that I could possibly end up experiencing a dramatic increase in my purchasing power. That is something that would be virtually guaranteed IF I actually had an idea that would beat the competition AND I was able to earn a net profit that would exceed my opportunity costs.

says...

I did mean every penny and it is absurd. But so is this:

"a tax increase is NEVER contractionary"

Which was my point.

[Outside the Box]

"...if we are careful to limit the spending to projects that are expected to produce a high return."

Is this even possible under a system that funds political campaigns primarily with special interest group money? Simply eliminating the low return projects currently extant would free up vast resources for high return projects. It seems to me that we would have to reform campaign financing before there was any real hope of politicians concentrating upon high return projects. Possibly an amendment throwing the lobbies out of Washington would help. Followed up by a public education campaign to show the public which projects are high return, so they tell their representatives to vote for those.

[Outside the Box]

Taxing capital reduces the ability of entrepreneurs to increase productive capacity of the nation. Gov spends money just fine, but gov is not very good at producing food, cars, and such. To produce more in the future, most capital must remain in the hands of capitalists.

[anne]

Never have any Senators and Representatives been more serious about deficit reduction than Democrats are right now. Democrats are attemtping to end the occupation of Iraq, to end a $2 trillion and more nightmare, to end $14 billion a month spent directly on Iraq. How could Congressional Democrats be more responsible than this?

Why do we never ever think of ending a tragic insane occupation in terms of the material cost involved? Why do those who think of guns and butter, never think of the cost of guns being used daily, needlessly?

[anne]

The problem Republicans have created is military spending, spending on the tragic insanity of occupying Iraq, cannot even be questioned, while Medicaid is evidently just the sort of social benefit program that can be attacked. So, we are surging in Iraq at costs human and material beyond imagining while we are cutting Medicaid in the South and infant mortality has increased.

[anne]

Notice that whether completely by chance or partially, Mark Thoma has set down a series of posts meant to show or simply showing the astonishing trade we are going through between butter and guns. The cost of guns in Iraq is evidently rising infant mortality in Mississippi.

http://delong.typepad.com/sdj/2007/04/falling_indicat.html

Brad DeLong:

"Cut Medicaid enrollments by 50,000, by 1/7. 42,000 babies born in Mississippi each year. For the share who die to jump from 0.97% to 1.14%... That's a less than 1/3000 chance. That's worth saying."

[James Kroeger]

I did mean every penny and it is absurd. But so is this: "a tax increase is NEVER contractionary"

Actually, I stand by the statement. In terms of the immediate effects of a tax increase, it is never contractionary. At worst, a decrease in spending is exactly matched by an increase in spending. Other variables can and do come into play, and believe me, I am quite happy to discuss them...

[gordon]

Though far from being an expert on US budgets, I notice what appears to be a revealing pie chart at the Centre on Budget and Policy Priorities website here. If I read it rightly, the Bush deficits (since 2001) arise almost entirely from a combination of tax cuts and military spending increases.

If you believe (eg. with Robertdfeinman, above) that military spending is excessive, you have given yourself some room to move in the direction of expenditure-side deficit reduction. If you believe that budgets include a lot of corporate welfare and other sorts of pork, you give yourself more room to move. If you are a greenie and think that the budget includes a lot of perverse subsidies to polluting and unsustainable enterprises, you give yourself still more room to move. How much room in total? I don't know (the answer is probably somewhere on the Centre on Budget and Policy Priorities' website, but I can't find it), but it's probably a lot. Conclusion: there is a lot to cut other than what's commonly described as "welfare".

says...

James Kroeger,

How can you stand by your statement that a "tax increase is NEVER contractionary" but acknowledge that a 100% tax rate is absurd and would stop people from working? I think a reasonable phrasing is that "a moderate tax increase from a moderate tax rate won't be contractionary in the near term". To prove my point in a slightly less absurd way: imagine we switched to a 80% flat tax tomorrow. How many working spouses would quit their jobs since they would no longer make up for childcare expenses? Your statement is as indefensible and demonstrably false as the insistence that tax cuts ALWAYS pay for themselves.

[anne]

Gordon's reading of the budget deterioriation since 2001, is the reading of Paul Krugman or my reading. The deterioration has apparently been caused by the increase in defense related spending and tax decreases, though this is continually denied by Republicans.

[kthomas]

says,

Your brainwashing is complete.

I'm guessing you're actually Neal Cavuto...you're style of debate is very similar.

If you want to keep all your hard-earned money, then don't pay any taxes. Better yet, move to the Bahamas with the rest of the Ayn Rand crowd.

We'll take you back, but my Uncle Sam will have a hefty tax bill waiting for you.

says...

kthomas,

I'm not sure what you are talking about. I'm only pointing out that taxes CAN BE contractionary. Whether or not a tax increase is worthwhile will depend on what it is used for.

says...

like to encourage you, Mark, to re-think this assumption. It is simply not true that tax increases slow the economy; precisely the opposite is true.
In the short run, economic growth is nothing more than an increase in aggregate spending. We can all agree about that, can't we? When governments increase the amount of taxes that are collected from households, the ultimate result is either no change in aggregate spending or a net increase in aggregate spending. If the taxes are collected from people who would have spent all of that money, then there is no net increase...the government's increased spending is exactly matched by the decline in private spending that would occur.

"But if the new taxes are collected from individuals who would have saved some portion of the money that they handed over to the government, then the net effect is an increase in aggregate spending because money that would have been saved---taken out of the economy---ends up getting spent by the government. That is a net increase in total spending---economic growth, any way you look at it."

This is one of the most ridiculous things I have ever heard.

The more money I keep, the more I spend or the more I save, both being positive outcomes. Socialistic taxation suppresses investment, both from consumers and business.

When will the mesmerized drones realize Clintons tax policy was not the reason for the Dot Com expansion which was the lichpin for "his" economy?

[Student]

This claim:

"Taxing capital reduces the ability of entrepreneurs to increase productive capacity of the nation."

elaborated, seems to be the basis on which right wing economists have convinced themselves that capital income should not be taxed. Mankiw, for instance, has written a paper proporting to prove that even those with no capital income will be better off if capital income is untaxed.

I haven't formed a final opinion on this, and would welcome comments. But my preliminary view is that it's false. Two quick points: 1) the rate of capital taxes has not been lower in a long time, and neither has the rate of capital formation, and 2) capital actually seems to be used to improve the productitity of India and China more than the US.

Also, what BW said about the median wage.

[reason]

Ceterus paribus everywhere.

Everything is connected! In normal circumstances, in a normal country budget deficits increase the cost of borrowing, and/or depress the exchange rate. These effects can offset the keynesian stimulus of tax decreases or the keynesian braking effect of tax increases (i.e. simple crowding out - there is a more complex crowding out to do with real wages).

Lets just say in most cases the theoretical impact is conditional.

[reason]

P.S. The US at present doesn't seem to behave like a normal economy in normal times.

Maybe this is part of the explaination.

http://financialsense.com/fsu/editorials/2007/0424.html

(I thought I would throw it the room because the argument is an important one and is almost never addressed).

[James Kroeger]

Your statement is as indefensible and demonstrably false as the insistence that tax cuts ALWAYS pay for themselves.

I'm willing to admit that my statement is almost as indefensible and demonstrably false as the much celebrated Law of Demand, which states that demand and prices are inversely related.

Are prices and demand always inversely related? Of course not. But the fact that some exceptions to the rule can be identified does not invalidate the value of the generalization that is taught to every soul who dares to take a course in economics.

All else equal---in any kind of scenario we can imagine being remotely possible in our experience---an increase in government spending that is financed by a tax levied on savers is ALWAYS going to result in a net increase in aggregate spending. Part of the reason for this is because not all money that is saved is lent out to borrowers (one rather obvious reason for this is the fact that approximately 10% of all the money that is deposited in commercial banks must be held in reserve). Do the math.

One exception at the extremes of our imagination that I'd be willing to acknowledge (unlikely that any of us would see it in our lifetimes) is the possibility that a government facing hyperinflation might increase taxes on consumers and then simply keep it out of the economy by not spending it or using it to pay past debts.

Your effort to seize upon some imaginable exception in the hope that it might invalidate the value of the generalization I am making is quite typical of the method of the Republican economist. These obfuscators are fond of ignoring the most important variables that are most likely to come into play in the macro economy, but then they will take a really minor variable---like 'expectations'---and exaggerate its importance beyone all reason, building entire models around them.

What is amazing to me is how credulous most 'Democrat economists' are when confronted by these specious arguments. It really does become quite tiresome.

[James Kroeger]

"Taxing capital reduces the ability of entrepreneurs to increase productive capacity of the nation."...I haven't formed a final opinion on this, and would welcome comments.

It depends on what you mean by 'capital.' If you are referring to capital gains taxes, then no, an increase in capital gains taxes is unlikely to affect the productive capacity of the nation in any way. This is because such a tax is applied to nothing more than the profit made when an asset that was purchased at a lower price is sold at a higher price. Such a transaction does nothing to improve economic efficiency. Money exchanges hands between rich people and little else occurs.

These are the kinds of transactions that occur when stocks are bought and sold on secondary markets (NYSE, NASDAQ). Almost none of the money spent on these purchases ends up in the hands of firm managers, so they can't use it to invest in new machinery, etc. The only time corporations obtain money for investments from sales of their stock is when they sell them to underwriters/investment banks prior to an IPO. Likewise, the sale of real estate for a profit does virtually nothing to improve economic efficiency.

The one time when a tax on 'capital' is likely to affect the productive capacity of the country in a negative way is when corporations are taxed on their excess profits. I really don't have an objection to completely eliminating the corporate income tax. So long as firms use their profits for legitimate business expenses, we all benefit. But if they want to distribute those profits to shareholders, that's when I say we should tax the hell out of them.

[reason]

James Kroeger...
much as I admire many of your ideas, I don't think the distinction between distributed profits and retained profits is a valid one. Distributed profits may well be reinvested in another business where the investment would be more valuable. It is better to be consistant and encourage all investment via depreciation allowances. I am all for depreciation allowances where the timing of claiming the allowance (up to the full value of the capital investment) can be chosen by the firm in order to reduce cash flow issues for growing firms. But all income should be taxed somewhere along the line. Yes you could wait until it is distributed, but beware of buybacks, supplementary share issues and other hidden dividends.

[ken melvin]

Taxes are the price payed for playing the game.

[wjd123]

Two criteria to justify deficit spending, and why Bush can't meet either.

If you are going to use it, then help pay for it.

One way to justify deficit spending is the criterion of fairness. Borrowed money should be spent on things that the next generation should be able to use, and tax cuts for the rich aren't one of them. The justification is that if the next generation will be able to enjoy the benefits of today's spending, it's not unfair for them to share in the cost.

However this justification for deficit spending is, unfortunately, a very leaky faucet. For instance, Bush could justify his deficit spending to run the war by claiming that the next generation will be able to enjoy the benefits of a more peaceful Middle East.

No matter how absurd that justification appears today, in the politics-over-all universe of the Bush Administration it would be become a mantra: For out children's sake, we can't afford to lose.

One could respond to this justification with the argument that because of the Bush Administration's incompetence, we will end up paying ten fold the amount for victory than was necessary. Therefore, even if our children would be able to enjoy the benefit of a more peaceful Middle East, they are being overcharged for it.

Overpaying for what we get is one very good reason why the American people shouldn't suffer fools lightly: the fiscal deficit ends up being that much more of a burden on our children.

A stitch in time saves nine.

Another next generation way to justify deficit spending is the criterion of necessity. For instance, one out of seven children in America live in poverty. Helping these children now, will pay dividends later on for the next generation allowing it to spend its tax dollars on something other than the problems that can arise from children growing up in poverty.

Bush, who campaigned on the promise not to allow the problems of his administration to be passed on to the next, should find this justification for deficit spending close to his heart since it's a parallel one: not to allow the problems of this generation to be passed on to the next being parallel to the desire expressed in his campaign promise.

The underlying message of his campaign promise was that he would be competent where others weren't. He has broken that promise big time. As I said before it's unfair to our children to suffer fools lightly.

[wjd123]

Can anyone tell me where I can find the protocols for this site so I can italicize, bold, and blockquote.?

[reason]

Just use standard HTML
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[bob mcmanus]

"I can't argue that an increase in taxes will not have negative consequences for the economy. There are special cases where that is true, but in general increasing taxes will slow the economy."

Thank you, Wilder & Kroeger. I thought I was the only one confused by this statement by the host.