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Friday, February 12, 2010  

Once More, with Feeling

In a comment on my post on the Ryan Roadmap, TAE issues a challenge:

On one day you tell me that reducing the deficit isn't really important as long as we increase GDP faster than we increase the deficit...the next day you argue that we need to raise taxes (or at least not cut taxes) to handle our "ballooning fiscal obligations."

So should we care about the deficit or not? You need to make up your mind, and either spend into oblivion or start standing up with fiscal conservatives and take a hard line against deficit spending.

So I'll give this whole topic one more try. Large short-term deficits don't matter, but growing long-term deficits--that is, deficits that grow faster than our ability to pay them, that is, than GDP--are very bad.

Consider this analogy. Say you're an independent contractor of some kind who depends on a car for jobs. Your car breaks down. While the car is broken down, your income is diminished, but you don't have enough money saved to pay for repairs with cash. So what do you do? Do you wait until you have enough saved up to get your car repaired? That would be a bad idea, since your ability to earn income is severely diminished by not having a car. So you'd probably borrow money from a bank or your parents or someone in order to get the repairs done now and pay down the debt gradually. For that one or two months directly effected by the lost income and the cost of repairs, your budget sheet would look terrible, because you're spending way more than you're taking in. But it would be money well spent and borrowed because it would allow you to continue to earn a living.

That's a short-term deficit spike. If the deficit is being run for necessary reasons, it's actually a good thing.

On the other hand, if your grocery bill is expanding every month, faster than your income, such that at some point in the not-too-immediate but foreseeable future it will take up your whole income and more, you've got a serious problem. This is a long-term deficit. It isn't increasing or enabling your income, and while everyone needs and likes food, people need other things as well.

What we have going right now is a striking short-term deficit caused by a breakdown. The economy went into recession, which depressed revenues (income). The counter-measures (repairs) necessitated by the recession, from TARP to Fannie/Freddie to the ARRA to higher unemployment compensation and food stamps, have spiked the spending from roughly 2009-2011. Now you can argue that not all of these measures were wisely designed or prudently implemented, but few mainstream voices argue that significant and costly intervention was unnecessary. The car had to be fixed, or we'd be facing a yet more catastrophic loss of income.

As it happens, we have significant long-term grocery costs that keep rising. Some of this is in the form of domestic discretionary and military spending, but the big bill is in entitlements. Unless our economy grows at an implausibly fast pace for decades on end, we will need to reduce the growth of our grocery bill or reduce other expenditures to cover it.

Very roughly speaking, what we've seen from Congressional Republicans, centrist Democrats, and much of the media establishment is a lot of moralizing about the car repairs and their effect on the present budget but a lot of hand-waving about the grocery bill. It seems to be far too much to expect of people who edit newspapers to grasp the difference between one-time costs and ongoing, increasing ones.

Paul Ryan, to his credit, stepped into the breach and offered a vision of how to curtail the growth of the grocery bill. It amounts to radically reducing the quantity of groceries going to the poor and the elderly, among others.

What Democrats have generally proposed is something different. Rather than just cap the Medicare grocery bill and let people fend for themselves, they've proposed putting some new systemic constraints on how that money is spent. They've also proposed redirecting resources from some parts of the household (high-value insurance plans, high-income households) to the poorer and sicker people. In the medium-term, this will require more revenue than current policy gets us and more constraints on cost than are currently proposed, but it's a start.

As far as I can tell, there are four general approaches to fixing this:

1) Massive benefit cuts for the old, poor, and sick; no tax increases (Ryan)
2) Massive tax increases, no changes to entitlements
3) Some tax increases, some program modifications and cuts to restrain cost growth (Center for American Progress)
4) Just default and let China decide for us.

I prefer 3). And there's no reason this needs to be an all-liberal affair. Conservatives love taxing lower-income people via payroll and consumption taxes. In fact, a major part of Ryan's plan is to abolish the corporate tax and replace it with a tax on buying food and clothing. I would be happy to see a consumption tax and even a payroll tax increase so long as it isn't coupled with the abolition of guaranteed old-age health care even for the unlucky and unwise. I'd add a bracket or two at the top end of the income ladder so that the marginal rate doesn't top out above $250,000. We'll need to change Social Security in some fairly minor ways and we'll need to rethink Medicare pretty seriously. This will inevitably involve something that could be called rationing.

What is depressing, however, is that as American politics is currently configured, such a long-term plan would have to be an all-Democratic deal. Republicans refuse to contemplate increases in income taxes under any circumstances. On this, Paul Ryan is no different than anyone else. And until he and others in his position change their mind, we're headed straight for scenario 4, in which our creditors get to decide what our tax and spending priorities should be.

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posted by Benjamin Dueholm | 2:12 PM
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