10/23/10 5:41 PMFiscal Policy: If You Want to Play the Hand, You Have to Ante Up... - Grasping Reality with Both Hands

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Grasping Reality with Both HandsThe Semi-Daily Journal of Economist J. Bradford DeLong: Fair, Balanced, Reality-Based, and Even-HandedDepartment of Economics, U.C. Berkeley #3880, Berkeley, CA 94720-3880; 925 708 0467;delong@econ.berkeley.edu.

Economics 210aWeblog ArchivesDeLong Hot on GoogleDeLong Hot on Google BlogsearchAugust 09, 2010

Fiscal Policy: If You Want to Play the Hand, You Have to Ante Up...

Glenn Hubbard, writing in the Wall Street Journal, wants "President Obama [to]... commit to retainingthe low tax rates Congress passed in 2003."

Seems to me that he wants to play his hand without anteing up any of his chips.

Thus for me the dominant consideration is that this is the Wall Street Journal trying, once again, toweaken and impoverish America by raising the long-term debt and its burden on the economy. If therewere PAYGO-style offsets on offer to fund the extension of the "low tax rates Congress passed in 2003,"then we could talk. But there aren't any offsets. There never were.

I've watched this blowing open the deficit and destabilizing America's long-term finances for thirtyyears. America is poorer and weaker because of it. And I am tired of it.

If we were in a world in which Glenn Hubbard and the Wall Street Journal had PAYGO-style offsets oneither the spending or the revenue side to offer in order to fund the tax cuts to produce permanentdifferential low tax rates on capital income and permanent low tax rates on high-income individuals,then we could talk about all the other considerations that should affect our decision.

Those considerations would be, in rough order of magnitude:

Taxes on capital income and on the rich are to a substantial degree taxes on thrift and enterprise,which have powerful external benefits to everyone--and we would much rather tax thrift andenterprise lightly if at all.These taxes are paid by the rich, and if you had asked us before we were born, before we knew whoour parents are going to be, before we knew whether we would be rich or poor, we would all havesaid we wanted taxes on the poor and middle class to be low and taxes on the rich to be high--therich can, after all, afford to pay.These taxes on capital income and on the rich are to a substantial degree taxes on luck and onsuccessful rent-seeking--and thus we want such taxes to be high.Cutting taxes temporarily now, even taxes on the rich and on capital income, is a fiscal stimulus--and given the politics we need every stimulus to the economy we can get.Cutting these taxes, however, is a particularly weak fiscal stimulus--we would rather do almostanything else with the money.

But we are not in a world where Glenn Hubbard and the Wall Street Journal offer PAYGO-style offsetson the spending or the revenue side to fund the reductions in taxes necessary to create the permanentlow tax rates that they seek. And I am very tired of seeing the Wall Street Journal try, yet again, toweaken and impoverish America by raising the long-term debt and its burden on the economy. I'vewatched this for thirty years. America is poorer and weaker because of it. And I am sick of it.

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10/23/10 5:41 PMFiscal Policy: If You Want to Play the Hand, You Have to Ante Up... - Grasping Reality with Both Hands

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At the end of his article, Glenn Hubbard pleads:

Deficit reduction is a legitimate object of concern. But if this concern is the dominant one, I amaware of no serious analysis that would claim smaller costs to the economy—in lost output andforegone economic growth—of raising capital income taxes as opposed to increasing other taxes orlimiting deductions or reducing federal spending...

So what other taxes would he raise? What categories of spending would he cut? Show us the money andwe can talk.

But I know of no serious analysis that claims, I do not believe that there could be a serious analysis thatclaims, net benefits to the economy--in higher output and faster economic growth--from yet furtherunbalancing the long-run finances of the American government

Brad DeLong on August 09, 2010 at 11:23 AM in Economics, Economics: Fiscal Policy, ObamaAdministration, Politics | Permalink

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Brian J said...How about raising taxes on financial transactions, as Dean Baker has suggested again and again, andpollution, or something else like it, or gradually phasing out the home interest mortgage deduction andfarm subsidies rather than raising income taxes? I'm pretty confident most Democrats would jump atthe chance to increase revenue like this. And why would any serious conservative economist pass up thechance to eliminate worthless distortions, reduce pollution, and collect more revenue without inflictingwhatever negative effects an income tax increase would have on the population?

Reply August 09, 2010 at 11:35 AMDaniel Shaviro said...I've made my life a lot better by permitting my WSJ home subscription to expire. I just don't need theblood pressure surge I used to get at breakfast from eyeballing their editorial page.

Reply August 09, 2010 at 11:56 AMJim said...The whole debate on deficits is false. The reality is that we don't need to borrow or tax in order tospend since we control the currency. We should spend while we have unemployment and unusedresources and reduce spending when we have reached capacity, thereby controlling inflation. These areideas that have a long history but seem to have been forgotten. We need to step out of the iron cage offinancial orthodoxy, a necessity for which I've written at length on my blog.

Jimcommentsongpe.wordpress.com

Reply August 09, 2010 at 12:11 PMMin said...DeLong: "But I know of no serious analysis that claims, I do not believe that there could be a seriousanalysis that claims, net benefits to the economy--in higher output and faster economic growth--fromyet further unbalancing the long-run finances of the American government"

Of course not. :)

10/23/10 5:41 PMFiscal Policy: If You Want to Play the Hand, You Have to Ante Up... - Grasping Reality with Both Hands

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But what do you mean by "unbalancing"? In general do we not want counter-cyclical fiscal policy?Doesn't that lead to temporary unbalancing? Should we be looking at 8 year or 12 year movingaverages? Also, as long as the gov't issues debt for dollars, the source of relatively permanent money inour economy is gov't debt. Shouldn't it grow at a fairly steady rate, as the economy grows?

Reply August 09, 2010 at 12:20 PMNylund said...If we let the top Bush rates expire, we could use that money as a form of fiscal stimulus with muchstronger effects. That could be tax cuts to the middle and lower class, it could increase in safety netbenefits or state and local aid to prevent the firing of cops, firefighters, etc. (in the conservative utopiaof Colorado Springs, the cops admit that there is now a 25% chance that all patrol cars will be busy ifyou call 911, but hey, it beasts paying taxes!)

What absolutely amazes me though is that right now the top income earners in America have eneffective tax rate of 17% and this has had a very negative effect on the national debt, yet there are amillions of people who are a few hundred million short of being in that income group arguing that, ifanything, those people should pay even less taxes, even if it increases the present and future taxburdens of everyone else (who likely have an effective tax rate much higher than the 17% paid by therichest Americans).

In short, somehow, the obscenely have gotten vast swaths of Americans who struggle to make endsmeet to give up even more of their present and future income so that the billionaires can get a few moremillion each. Not only that, they've gotten these people it to the extent that they get mad as heck if youdare try to stop it.

Reply August 09, 2010 at 12:51 PMJochanan said...There's really no economic formula for the political distortion that has been caused by the reduction oftaxes on the rich that began about 30 years ago. But it's effects have been disastrous.

Reply August 09, 2010 at 01:10 PMMichael Pettengill said...Why isn't anyone arguing "the Bush tax cuts proved the greater wisdom of private spending overwasteful government spending as can be seen in the much improved economy resulting from the privatesector creating jobs rebuilding the roads, bridges, water and sewer, and power grids that were neglectedwhen liberals ran government. Thanks to the private spending on infrastructure, employment is atrecord highs. Thanks to private investment, the US has ended its dependency on foreign oil. Thanks toprivate investment, we have millions of well trained teachers providing free high quality education tothose who are in low income areas of not only the US, but in nations around the world."??

Oh, right, the Bush tax cuts and Republican deregulation de jure and de facto have delivered no jobgrowth in a decade, the worst deficits, and the most dismal economy since 1930.

Instead of predicting the economy that followed the 1990 and 1993 tax hikes, today we have the samewrong predictions of double dip jobless recession from the early 90s. If those predicting the 2000 taxeswould be disastrous were wrong in 1993, why aren't they wrong today?

Reply August 09, 2010 at 02:46 PMhoward said...i want glen hubbard to stfu forever in shame for his many acts of intellectual cowardice and dishonesty,but i'm afraid i have little chance of seeing that happen.

Reply August 09, 2010 at 05:35 PMJonathan said..."Taxes on capital income and on the rich are to a substantial degree taxes on thrift and enterprise,which have powerful external benefits to everyone--and we would much rather tax thrift and enterpriselightly if at all."

Somewhere in Free Fall Stiglitz says in passing that there is no economic justification for specialtreatment for capital income. He didn't say why.

Myself, I'm in the "luck and rent-seeking" camp.

Reply August 10, 2010 at 09:01 AMComments on this post are closed.

10/23/10 5:41 PMFiscal Policy: If You Want to Play the Hand, You Have to Ante Up... - Grasping Reality with Both Hands

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10/23/10 5:41 PMFiscal Policy: If You Want to Play the Hand, You Have to Ante Up... - Grasping Reality with Both Hands

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