In response to my last post a reader alerts me to an old post from Steven Landsburg where he says
There seems to be this idea floating around that raising taxes is sort of like earning more income, and can therefore also be a path back to fiscal sanity. But that’s wrong. Raising taxes is not at all like earning more income; instead it’s very like visiting the ATM.
Here’s why: The government’s chief asset—in fact, pretty much its only asset—is its ability to tax people, now and in the future. The taxpayers are the government’s ATM. Make a withdrawal today, and there’s less available tomorrow.
[…]
So when the president appoints a commission on fiscal responsibility, as he did a couple of weeks ago, I find myself hoping that its members understand this simple point—and worrying that they don’t. Fiscal responsbility means spending less. Taxes have almost nothing to do with it.
Landsburg, wants us to think of government revenue generation in the context of the whole economy, which for our purposes is a closed system. If the government takes more then there is less left for other purposes.
This is a fine way of looking at things but then we have to make sure that all of our definitions hang together. In particular you have to be consistent in what you mean by fiscal irresponsibility
In the beginning of the post he says
Suppose that year after year, you spend more than you earn. You are worried that you’ve become fiscally irresponsible. Which of the following is not a path back to fiscal sanity for your household?
- Spend less.
- Earn more.
- Stop at the ATM more often so you’ll have more cash in your pocket.
Do we all understand why the answer is C? Good. Now let’s try another one.
Suppose that year after year, your government spends more than it collects in taxes. You are worried that it’s become fiscally irresponsible. Which of the following is not a path back to fiscal sanity for the government?
- Spend less.
- Collect more taxes.
The answer is not A. Spending less—at least spending less on things you don’t need—can certainly be a path back to fiscal sanity for a government just as it is for a household.
In the first bolded passage he is using the common sense of fiscal irresponsibility. You are spending more than you earn or conversely earning less than you spend.
In the second bolded passage based on he is changing the the usage. Remember he wants to look at a unified government and economy. In that case the government is only spending more than it earns, if it is spending more than its asset yields.
As a very first approximation that means the yield on the government’s asset is the GDP of the United States. That means the government is being irresponsible if it consistently spending more than the entire economy of the United States produces.
If we want to be more accurate we have to adjust that, because the government could not tax 100% of GDP. There is some upper limit to how much the government could possibly tax. Yet, using Landsburgs framework, the government only becomes irresponsible when it crosses that limit and does so year after year.
Moreover, in Landsburg’s framework the deficit tells you nothing about the governments irresponsibility. It only tells you about the timing of taxation. A larger deficit is implicitly just pushing taxes into the future.
We can work the entire problem in this framework. You just don’t want to switch frameworks in the middle. You don’t want to suggest that government revenue being below government spending is a sign of fiscal irresponsibility if you are considering the entire taxing authority of the US government as its fundamental asset base.
The larger point here – and it applies to issues like the trust fund – is that the framework we use doesn’t change the answer to problem if we are consistent. Different frameworks appeal to different intuitions and you can get messed up if you switch in the middle, but you can’t make the fundamental relationships change by restructuring the grammar of the conversation.
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Friday ~ April 15th, 2011 at 2:48 pm
Apex
I am generally in favor of cutting spending and prefer not to raise taxes when possible. But this idea that raise taxes is like going to the ATM when you don’t have enough money strikes me as the kind of mistake a kindergartner would make?
I don’t understand how anyone credible could claim something like that. What if taxes were 1%? Would increasing them to 1.1% be like going to the ATM? If so we have been at the ATM for 100 years. You can’t say that any increase in taxes from the current level is like going to the ATM.
Its the same problem the laffer curve has. Obviously there is a point at which the laffer curve rolls over and becomes negative. But that is not to say that any increase in taxes reduces revenue? If so taxes as close to zero as possible should maximize revenue and I would hope anyone who would think about that for more than 10 seconds would realize who stupid that sounds.
Friday ~ April 15th, 2011 at 4:18 pm
brucetheeconomist
Is’nt this basically a discussion about Ricardian Equivalence? Or am I missing something else?
Friday ~ April 15th, 2011 at 4:22 pm
Lord
It’s not that government runs a deficit, but whether its real debt is growing, and not due to the business cycle, but over the long term.
Friday ~ April 15th, 2011 at 10:52 pm
Steven E. Landsburg
As a very first approximation that means the yield on the government’s asset is the GDP of the United States. That means the government is being irresponsible if it consistently spending more than the entire economy of the United States produces.
Well, that’s certainly an extreme form of irresponsibility. But that’s not the only way to be fiscally irresponsible. If I earn $50,000 a year and spend $45,000 of it on sports equipment when I have three children who I choose not to feed, I think I could be fairly accused of fiscal irresponsibility.
Government is fiscally irresponsible when it diverts resources away from better uses toward less good uses, and does this a lot. There’s room for plenty of disagreement about what are better uses and what are worse uses, and plenty of disagreement about what “a lot” means — so there’s room for plenty of disagreement about whether the government is, at any given moment, being fiscally irresponsible or not.
But I think the fact remains that *if* the government is fiscally irresponsible, it cannot change its degree of irresponsibility by switching back and forth between pay-as-you-go and deficit financing. The fiscal irresponsiblity is in the spending, and if you don’t change the spending you haven’t changed the fiscal irresponsibility.
Saturday ~ April 16th, 2011 at 12:49 pm
Lord
Fiscal irresponsibility can go both ways though. Just as if you earn $50,000 a year, spend $45,000, and bury $5,000 in the backyard. Should the government decide to follow everyone else and hoard their money and pay down its debt when everyone else is trying to do the same, everyone will end up worse off not better. In particular, it needs to act rationally when everyone else is not and invest when the real rate tells it a positive return is virtually assured.