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Saturday, April 17, 2010

"Can’t Cut Spending? Look Around the Globe"

You'll be shocked to discover that Tyler Cowen is in favor of a smaller government:

Can’t Cut Spending? Look Around the Globe, by Tyler Cowen, Commentary, NY Times: America's long-run fiscal outlook is bleak, mostly because of an aging population and rising health care costs. To close the gap between expenditures and revenue, we’ll likely see a combination of revenue increases and spending cuts. And we’ll need to focus especially on reducing spending, largely because that taxes on the wealthy can be raised only so high. ... Higher income tax rates would discourage hard work and encourage tax avoidance, thereby defeating the purpose of the tax increases.
The most potent way to add revenue is to impose a value-added tax. ... V.A.T.’s raise money so readily and so invisibly that they often climb to a range of 15 to 20 percent; politicians like the revenue, and voters don’t always notice the burden.
A move toward a V.A.T., however, also brings price inflation, a big increase in the tax-collecting bureaucracy and the emergence of favored sectors with exemptions or lower rates. Though we may well end up with a V.A.T., it isn’t obviously the best option.
Burdening citizens with much higher taxes would fundamentally change what this country is about. Our founders envisioned a government that would provide public goods but not guarantee everyone’s well-being against every possible obstacle. ...
Higher levels of government spending and taxation would also soak up resources that might otherwise foster innovation and new businesses. And sentiment would most likely turn ever stronger against those immigrants who consume public services and make the deficit higher in the short run. Current residents might feel more secure in a larger welfare state, but over time the loss of commerce and innovation takes a toll. ...
The macroeconomic evidence also suggests the wisdom of emphasizing spending cuts. ... The received wisdom in the United States is that deep spending cuts are politically impossible. But a number of economically advanced countries, including Sweden, Finland, Canada and, most recently, Ireland, have cut their government budgets when needed.
Most relevant, perhaps, is Canada, which cut federal government spending by about 20 percent from 1992 to 1997. ... To be sure, the spending cuts meant fewer government services, most of all for health care, and big cuts in agricultural subsidies. But Canada remained a highly humane society, and American liberals continue to cite it as a beacon of progressive values. ...
Canadian trust in government may have paved the way for government spending cuts... It's less obvious that the United States can head down the same path, partly because many Americans are so cynical about policy makers. ...
The issue of fiscal responsibility isn’t going away. So the question is now this: How deeply will we dig ourselves in before we create a more mature and more forward-looking political culture?

    Posted by on Saturday, April 17, 2010 at 05:40 PM in Budget Deficit, Economics | Permalink  Comments (42)


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