Don Boudreaux rightly points out that "debt financing does indeed allow politicians and voters today to saddle taxpayers tomorrow with the bill for today’s government expenditures" what is unseen, or perhaps seen and left unspoken, is that politicians also spend money on public investments that allows taxpayers tomorrow to live considerably more prosperous lives than taxpayers today. The biggest government consumption programs - Social Security and Medicare - are funded by current taxes, not borrowing.
Now - why does government make those public investments? Can't private actors make those public investments? To a certain extent, yes, but important externalities introduce obstacles to that, and representative government is one important institution that has emerged and evolved that solves some of these problems, as I highlight in this old post (a favorite of mine from 2011).
Now Don accepts externality logic. Indeed, he uses it in the next clause of that sentence: "the likely result of ready recourse to deficit financing is more unwise government spending than would occur if current spending had to be funded by current tax receipts."
This blog has never challenged that point, and has always emphasized the problems of political allocation. What I have trouble understanding is why Don accepts the externality logic on the one hand, but rejects it on the other? Why does he talk about the costs imposed on the future but not the benefits of public investment? I really, truly, don't understand.
I think we should say this: "Deficit spending gives the bill to future generations, so it can encourage overspending, but externalities in these investments encourages underspending. The total effect is ambiguous so we shouldn't (1.) count only the costs when we talk about deficit spending, we should also count the benefits, and (2.) not pretend that it's obvious this goes in one diretion or the other when it comes to social welfare".
Tuesday, January 3, 2012
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Daniel Kuehn: I think I've found Dr. Brady's basis for being opposed to deficit spending - accounting practices.
ReplyDeleteDeficit finance and loan expenditure appear to be technical terms...the former refers to running deficits based on tax cuts, while the latter seems to refer to spending based on funds in a capital budget.
http://www.amazon.com/review/RTMQX42626TR5
What I have trouble understanding is why Don accepts the externality logic on the one hand, but rejects it on the other? Why does he talk about the costs imposed on the future but not the benefits of public investment?
ReplyDeleteI have noticed something similar, he always touts the upside of globalization to the chinese worker, chinese capital, and american capital, but never mentions the downside to the american worker.
IB
I'm sorry, how was Boudreaux "accepting that externality logic" in the quote you gave?
ReplyDeleteSilas -
ReplyDeleteCosts are externalized, so more spending goes on than would otherwise go on. That's the definition of a negative externality.
Don has explicitly called government a negative externality in the past.
Even without accepting the MMT argument that you can finance deficit spending indefinitely, Don Bordreaux's argument is erroneous on multiple counts.
ReplyDelete* Dr. Brady explains one way (thanks, Blue Aurora).
* Krugman's own piece preemptively refutes Bordreaux, too:
"Now, the fact that federal debt isn’t at all like a mortgage on America’s future doesn’t mean that the debt is harmless. Taxes must be levied to pay the interest, and you don’t have to be a right-wing ideologue to concede that taxes impose some cost on the economy, if nothing else by causing a diversion of resources away from productive activities into tax avoidance and evasion. But these costs are a lot less dramatic than the analogy with an overindebted family might suggest."
* Bordreaux's parting shot, the “falling for the 'we owe it to ourselves' myth,” reveals a lack of familiarity with Krugman's actual writings: Krugman has explicitly said, recently enough for it to be easily available to Bordreaux when he wrote his letter, that the argument is actually about some Americans owing money to other Americans, and left the debate open in that direction “for another time” (to paraphrase). Stop burning straw men, please, Mr. Bordreaux
I think it borders on nonsensical to emphasize Don Bordreaux “rightly points out” debt financing “saddles” taxpayers at the same time it is a net benefit. While it is true – debt is a (potential) liability for the future – it also provides net benefits, a realization Don studiously avoids. The pejorative risks misleading casual readers into thinking that deficits are net liabilities. The situation is even better than analogy to private finance – mortgages – would suggest, since the multiplier effect benefits government policy goals; money leaving a household to pay for a mortgage is “lost” in a simple accounting. Postponing or neglecting expansionary spending would leave us in the throes of thrift, and the goal is to improve the economy so that labor becomes meaningfully competitive, and to create more opportunities for private businesses; more bang for Uncle Sam's bucks would indicate that the situation on both fronts had been allowed to deteriorate even further.
The very rudimentary "foregone outputs" argument Don Bordreaux makes begs the question - what makes private sector outputs "valuable" when public sector outputs are apparently not? This smacks of Stanley Lebergott cooking the New Deal record on unemployment, giving revisionists more truthy statistics to bake with. In the words of Jonathan Chait: "So, if you worked twelve hours per day in a coal mine hoping not to contract black lung or suffer an injury that would render you useless, you were employed. But if you constructed the Lincoln Tunnel, you had an anxiety-inducing make-work job." It is simply never explained why we need be jealous of the government's undermining confidence in the private economy by supplying demand when the private sector should very rightly be viewed with low confidence for supplying jobs. Yet this does not imply any fundamental antipathy towards business.
He makes another argument, which is again forestalled; this time by Prof. Mitchell. It is wrong to think that amassing a surplus today will allow non-expansionary spending in the future – I wonder if Don Bordreaux would actually agree with this; certainly some ultralibertarian might because it would seemingly invalidate all government expenditures. One can try to shift the discussion to democratic preference for expenditures made possible, but unfortunately the same result – heating up of the economy – will result for private expenditures as well (as Bill Mitchell pointed out at the same time).
A nagging thought to add: One of the most perplexing features of the neoliberal or Austrian literature I have seen is its lack of open engagement with idealism – its own or any. When proponents of MMT or Keynes seek to make a case for a fiscal regime, they do not just engage with the nature of the current state of affairs - that would be the naturalistic fallacy. They seek a justification for any social engineering proposed. There are examples from the last few weeks: Paul Krugman writes about economics not being a game; Bill Mitchell writes that MMT is anti-crony - and more topically, in his answer to his self-stated question, argues a moral case for preferring MMT when answering his rhetorical question, Why do we want governments?
ReplyDeleteWhen the austerity-expansionists talk about ideals, they usually start by spinning encomiums of thrift; salutes to "gainful" employment; paeans to hard medicine. When you consider that their predictions for the triumph of austerity have not taken, what are virtues for households and microeconomics become blighting, and suddenly there is a gaping hole in the moral logic of their thought. The virtues become vices, and "morals" shimmer in the distance over the shifting sands of "the way things are."
It is also interesting to consider that Don and others haven't attacked the "genuine cost" of reckless private spending on top-tier luxury goods, even though one can definitely point to ways in which entire industries can be built up on the false promise of sustained spending - private jets and yachts are surprisingly relevant (see High Beta Rich, which I've referenced before, by Robert Frank) which have an impact on the non-luxury market for the classic reasons of market saturation (especially easy to show in the case of jets) and sunk costs, including those of companies that thought they'd have stable gigs serving elite clients, and of the workers who pinned their hopes to that company.
Even when these private investments (on luxury goods) fail, private industry is rightly biased against effectively serving it. Banks see that foreclosing on private jets is a fool's errand when the aircraft are in low demand and excessively supplied, and so apparently attempt to continue pulling money out of the mortgage; they have no such compunctions about foreclosing on homes even in a disastrously upended market, because (most) homes are relatively cheap and relatively, universally, liquid.
By definition government must be a reliable source of spending, unless deficit terrorists without an understanding of what it means to be responsible for translating democratic preference into action, or an understanding of the implications and responsibilities that go with being the sole source of money in the economy, decide that it is a good defense to renounce that power.