Thinking Out of the Box on How to Fix the Deficit

Fred Clark has a really neat idea about how to Fix the deficit. Implementation is a bit tricky, but it has all sorts of good properties if one could pull it off.

For background, consider Kevin Drum's pithy observation that — unless we go down the road of giving rich people more tax cuts at the expense of poor people's kids — everything you really need to know about the deficit is captured in one chart on p.4 of this testimony by the Congressional Budget Office.

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10 Responses to Thinking Out of the Box on How to Fix the Deficit

  1. From Fred:

    “The biggest short-term deficit problem, after all, is unemployment.”

    Ah, no: The biggest deficit problem, period, is that raising taxes costs votes, spending buys votes, so politicians have a built in incentive to run deficits, and kick the political pain down the road as long as possible. Anything that increases revenues will simply result in deficits at a higher overall level of spending, unless something is done to address this problem.

  2. michael says:

    The deficit is, I think, a long-term problem (and a real one). The first piece of evidence for it not being a short-term problem is the current interest rate on Treasuries (very low). The second piece of evidence for it not being a short-term problem is the inflation rate (low too).

    In the short term, as a neo-Keynsian, I think the right sort of deficit spending can actually be good — the right sort being the kind that creates jobs and builds things of lasting value.

    As a result, the imbalance you note is indeed a long-term problem, but whether it is a short-term problem is less clear. To the extent it produces tax cuts for rich people — which are not very efficient as stimulus and don’t build anything lasting other than family dynasties — I agree with you.

  3. Vic says:

    “I think the right sort of deficit spending can actually be good — the right sort being the kind that creates jobs and builds things of lasting value.”

    Yes, but it is difficult, if even possible, to think of a scenario where Government can create a job that is not being paid for by Government money. Even if Government employs private contractors to do the work, and that contractor has to hire 30 people for the job, you have NOT created jobs through the private sector, which is the only job creation that really matters.

    Why does only private sector job creation count? Because it is being paid for by money directly gained by selling a product or service as a product – it comes from economic action. In contrast, Government doesn’t create anything. It creates no product that anyone wants to buy and it has no money that was voluntarily given to it in exchange for anything. When government “creates” a job, it can ONLY be done through the use of tax revenue, which is by deffinition, money siphoned out of the private economy. Money in the private economy IS used to create products that people will voluntarily buy, and money collected in the private sector IS used to create jobs that don’t get funded by removing money from anyone else. The reason this is better is that there is no finite pile of money somewhere: The private sector can (and has) grow at whatever rate it is able to do so, the Government can ONLY grow at the expense of the private sector. Every job created by Government, directly or indirectly, can only come from money that could have been used to create a job in the private sector instead. And considering the higher Governmental expense of moving, accounting, maintaining, and then paying someone, at a higher rate than the equivalent non-public sector job, you often lose the capability of 1.5-2 private sector jobs for every “created” Government job.

    This is so fundamental, I am amazed that anyone still is unclear on it.

    So if job creation is the goal (and I agree that it is), then the best way to do it is to encourage the private sector to create jobs, since they can do so with much greater ease than Government, and don’t sacrifice OTHER private sector jobs to do so.

    How do you do that? By signaling to the investors and job creators that it is in their interest to create jobs, rather than hold the money for other uses (i.e. paying taxes). In other words, STOP giving signals that regulations are going to change, that employers will have unknown direct and indirect Governmental expenses in the coming years, that current tax relief that they enjoy is going away – or maybe not going away – or is going away…etc. In a phrase: “create more certainty.” If investors and job creators don’t feel, as they do now, that the future impact of Government on their money is ever changing and uncertain, they will be more likely to invest and create jobs. Right now there is a HUGE pile of cash, larger than the deficit, being sat on rather than used, because the owners of it can’t tell how much the Government is going to confiscate from them in the future to pay for their deficit spending habit, it’s acting as a giant emergency fund. The real goal, is to free up all that cash. You do so by not making it look like a Government target.

    Think of it this way: What if your employer came to all of you and said that they were going to engage in a worthy project to help the poor of Miami. The University, in pursuit of that goal was going to take an amount, as determined by a committee, from your paycheck over the next few months, again determined by the committee. Factors considered by the committee might include such things as household income, relative income, tenure status, community need, and any other factors as yet undetermined. Depending on all this, the University would deduct an amount between 2% and 15% from your paychecks for an undetermined period. You might agree with this as a worthy goal, but I am suspecting that you would be upset that the amount was so undeterminable, that you have no way to determine how to budget for the expense, and that this really blows a hole in your Spring vacation plans, since if they hit you with 10+%, that blows what extra money you have for a vacation. And note that EVEN if you consider the overall goal of helping the local poor to be a worthy one that you would gladly support, this is a separate issue from the uncertainty created by the system in place to collect the funds. In order for you to budget efficiently, you might say, you need to know how much the University was going to take. Without knowing, you might be tempted to budget as if 15% were going to be taken, then just hope for the best. (when investors do this, they create giant cash reserves that are effectively doing nothing, and jobs decline – and that’s the problem right now.)

    And if you think that “rich people” basically only create family dynasties, you are REALLY out of touch. First, you don’t know who “rich” for tax purposes is referring to (most of the “rich” for tax purposes, are businesses – and you WANT businesses to be rich for a lot of reasons, not least of which is job creation potential). And you obviously don’t have a clue as to what the sources of the wealth of the richest individuals actually is. This is not the 1890’s Michael.

    And even if you think rich people are just a bunch of greedy jerks who are just trying to accumulate even more money (as if that’s your business to control anyway), so what? The only way that rich people are going to accumulate more money is by: 1). Selling something that someone wants to give money for, or 2). Getting a return on investment in someone that is selling something that someone wants to give money for. In either case, jobs are created, so the ecomony wins.

    Meanwhile, Government MUST stop spending so much more than it takes in. All EXCESSIVE Government spending is doing is creating more uncertainty in how it will be paid for.

  4. michael says:

    Yes, but it is difficult, if even possible, to think of a scenario where Government can create a job that is not being paid for by Government money. Even if Government employs private contractors to do the work, and that contractor has to hire 30 people for the job, you have NOT created jobs through the private sector, which is the only job creation that really matters.

    Vic is in the grip of Say’s law. He hasn’t, or won’t, engage with the neo-Keynsians.

    But never mind that. Vic: here’s a scenario for you: the WPA in the Depression. Building a bridge in a useful place today. Doing bio-medical research in a government lab (if in fact there are discoveries). And so on.

    Now I have to do some work. In a private-sector non-profit.

  5. Vic says:

    I see you still blindly just defend certain postions, while clearly not having any actual argument. And I see that Yale apparently didn’t give you a good history perspective either.

    I didn’t say anything about equalibrium theory. Why you find it necessary to invoke is beyond me. Like I said, you just feel the need to defend things that you don’t actually understand by lashing out at other things that you also don’t understand. “Gee, someone might have insulted Keynes, I better call him a supply-sider again and mention Friedman, or somebody supply-sidee like that!” Whatever.

    Look, if the problem, as we both agree, is jobs, and the source of that problem is that businesses are holding onto cash rather than hiring workers (which is the case), then how do you solve that problem.

    Under your way, you’d allow Government to take that cash from businesses, find work to do, and hire these workers. But then you’d lose significant amounts of cash in all the extra waste that Government necessarily entails, to say nothing of the higher cost overall of a Government versus a non-Government worker.

    Conversely, you could encourage businesses to spend the money thay have (which is what creates jobs), rather than sit on it. Under that rubric, businesses being more efficient than Government, because they lose profit through waste (Government has no disincentive to waste), hire more workers, produce more product (another thing Government can’t do), and everything starts moving again.

    That’s the essential choice.

    If you are implying in your pithy argument that a Bridge is a “product” and so Government CAN produce things that people want, then you are simply wrong. Government projects such as bridges and roads are not products, they are infrastructure. The best they can do is influence the real economic decisions being made in the private sector (where plants might locate, the efficiency of the local economy, etc.). But building a bridge, all by itself, is an economic drain, not a boon. The building of a bridge can only be helpful if it is needed by the private sector, but if it is not, then it has drained useful resources to non-useful effect.

    If building a bridge is a helpful economic activity by itself, then the best way to recover the economy is to divide the unemployed into two teams: One team can go around safely blowing up bridges, while the second team can follow behind and build new bridges. Sort of a variation of Bastiat’s broken window scenario. It can’t work because all of the money it requires to buy explosives, then build the new bridge, and employing the people involved, costs MORE than employing MORE people in the private sector who are not doing useless work.

    I see you have no intention of every actually defending your view. (I know…it’s beneath you) And once again I note that this Blog (which must serve SOME purpose for you other than ego) could be so much more interesting if you didn’t take your ball and go home every time you felt put upon to defend yourself. This is just an exchange of ideas – and you are even unwilling to do THAT? This is just the sort of thing to spark some interest in this blog, and you know it. Or are you too used to 20-somethings bowing to your intellect every day to appreciate that you don’t have the final say on everything?

    If the past is any guide, hoever, you are done here and will never engage another argument until you find some other talking-point topic to lay out, then run away from. I have never met a fellow lawyer so unwilling to defend his ideas as you are. You seem to thing that nodding your head and saying “Keynes” with a knowing wink says it all. You bore me.

  6. michael says:

    The topic is the federal deficit. With a side order of stimulus. The original item noted a suggestion for a novel way to attack the long run-deficit, which is currently projected to grow primarily because of medical costs.

    We are now firmly sidetracked on the question of deficit spending — ie spending which adds to the total deficit. In the long term, the only ways to fix the deficit are spend less or tax more, although tax more may not be painful if one can grow the economy enough to spread the necessary tax over a bigger economy.

    In the short term, due to the present economic conditions, things are not normal. Unemployment is high; production is low. Lending is low. Velocity of money may be low too. Banks either don’t dare lend, don’t have cash to lend, or prefer to hold Treasuries, even at negative rates of interest in some cases, because they are suddenly so risk-averse. We have a liquidity crisis, and the Fed is in a liquidity trap (interest rates at or near zero). This is a time for fiscal policy, aka deficit spending.

    Deficit spending (as opposed to the debt overhang) is a situation in which at a given moment in time the government spends more than it takes in (primarily via taxes). There are two basic ways a government can do that: it can borrow (effectively time-shifting the tax to the future), or it can print money which in normal times — but not now (at least up to some point we don’t seem to be remotely near) given the odd economic state we find ourselves in — can be seen as tax on all stocks of money, since it devalues the currency.

    Thus, and please pay attention here today, this is NOT a situation where the government pays for extra spending by increasing taxes (or, as you put it, “allow Government to take that cash from businesses”) — at least not in the short term. If the government is borrowing — in normal times — one should worry about a crowding out effect, ie the government borrowing crowding out private borrowing (although the size of the effect varies). But right now there’s a major liquidity shortage, and huge surplus capacity in the productive sector (unused equipment) and major unemployment, so crowding out is not a worry either.

    The next issue is, what government spending is most stimulative? You think direct government spending is given to “waste”. I think it varies enormously with the spending. And I think a lot of corporate spending is “waste” too. It’s complicated. But you like slogans. (For example, whether a government employee is more expensive than a comparable private sector employee is pretty complicated. I suspect it’s probably true for the janitors, as the federal ones get decent benefits (and I’m fine with that) and the outsourced ones do not. I’m also sure the opposite is true for lawyers: the government gets great legal talent and on the whole pays much less for it than the law firms bidding for the same talent.)

    A government can build a bridge by hiring all the labor, or it can outsource to contractors (which is what we usually do nowadays). There are arguments about which is more efficient. For markets other than commodity markets — it really is better to buy your paperclips on the open market rather than to make your own — the literature on privatization suggests the case for private v. public is surprisingly ambiguous. So I don’t here take a position on the insource/outsource question. In either case, the jobs are stimulative: wages to the unemployed have a much higher stimulative effect than tax cuts to people in the top 2% of the wage curve.

    In either case, direct bridge or outsourced bridge, the capital investment has additional long-term worth if it increases commerce and/or reduces transport costs. Yes, you do get the first stimulus by building bridges in the desert, blowing them up, and building them again. But the nice thing about building a useful bridge is that you also get the downstream payoff, which by growing your GDP may act as an offset to the cost of paying off the bonds issued to pay for the bridge. (And in the case of big scientific discoveries once in a while might even exceed it if you are lucky. The internet, after all, was designed primarily on government subsidies and government contracts.)

    All this has taken us quite far afield from Fred Clark’s original observation, however.

    As for engagement with your polite and carefully reasoned arguments, I don’t know if you have a day job or any sort of life, but if so I wonder whether this is how you talk to real people when you are not hiding behind a pseudonym. I sign my work; I’m not ashamed of my views. You don’t sign yours. Then again, given the tone and content, that may be be a sign of wisdom.

    I will, however, give you credit for one correct prediction: this will be my last comment on this thread.

  7. Vic says:

    I agree this topic is the federal deficit. But…

  8. Vic says:

    The above “Vic” is not me.

    I applaud the fact that you bothered to write a fairly decent post on this topic. I simply lack the desire to engage you further on things – since you don’t care to engage opposing viewpoints, and usually you just give up and leave, I don’t feel engaging you is really worth my time. I don’t know why you HAVE a blog, if that’s your practice, but I suppose that’s your business.

    I actually do post under my name, I simply mask my email (as many on the Interwebs do) because I have no desire to have some bot find it and send me more spam than I can handle. Maybe that is the equivalent of posting behind a pseudonym to you. If so, you’re just going to have to lump it because that’s the best you get.

    Maybe I’ll stop by another time, but for now, if you won’t play on your own blog, why should anyone else?

  9. Keith says:

    Vic,

    It may not be my place to say, as this isn’t my blog and I’m just one of the lowly bowing 20-somethings you reference above, but your “discourse” often reads more like hostile talking points and personal attacks. If your sole purpose here is to be a unwavering antagonist, I’m just wondering why you bother following Professor Froomkin’s blog at all.

  10. Tom says:

    Here Here, Keith.

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