A Question About “Tax Cuts Must (Usually) Be Paid For”

In a kerfuffle between two groups of economists, both of whom as far as I can tell, currently want the same policy–deficit spending to give people jobs–Brad DeLong writes:

Cutting spending in the future when you would not otherwise have done so is paying for today’s tax cuts. Raising taxes in the future when you would not otherwise have done is is paying for today’s tax cuts. Introducing non-price rationing to diminish aggregate demand–as a way of telling people: “You know that money you loaned us and we promised to pay back with interest so that you could then spend it? Well, guess what? You can’t spend it!”–is paying for today’s tax cut with a rather sneaky future tax. And so are wage and price controls. And so is the implicit tax on holdings of government debt via explicit inflation.

Now the terms on which you pay in the future for today’s tax cuts are wildly variable, and it is the business of fiscal policy for the government to be a good steward for taxpayers and set things up so that the terms on which the government pays for what it does are as attractive as possible. And there certainly are times–like right now–when at the margin at least it looks as though additional government purchases are at least at the margin free, in what we hope is only a once-in-a-lifetime opportunity.

But odds are that the tub will fill. And odds are that larger government deficits over the next twenty years will bring the date at which the tub fills and policy has to change closer in time. And it would be only prudent to have a plan for how to push off the time at which we will have to deal with the full bathtub or at least to have a plan for how to deal with the full bathtub.

I would look from a different perspective. We have both a massive unemployment and underemployment crisis combined with a rapidly decaying infrastructure. Solving both of these problems will require deficit spending. But as we start doing so, we will bump up against real economic limits: workers, raw resources, construction infrastructure and so on. At that point we will either have to cycle back spending or raise taxes, or else run the risk of inflation; one could call this ‘austerity’, if so inclined (aside: politics aside, why there is little discussion of a much more fine scale income tax, with substantially higher top rates as an automatic inflation countermeasure escapes me).

So I don’t disagree with DeLong (and I’m not sure that many MMTers would). But his language bothers me, because the focus seems to be on the deficit per se, not on its consequences. Because once we start viewing deficit spending (and tax cutting) in terms of their real-world consequences, not just as budget accounts, we wind up thinking about policy very differently. Solving today’s unemployment problem and infrastructure collapse (not to mention smaller, less sexy, but important problems) become much more important.

Do I think that we would be able to successfully throttle back down the road? Don’t know (did I ever mention a more graduated and higher income tax?). But by using ‘budgetary’ language instead of ‘real’ language, I’m fairly certain today’s problems will continue to linger.

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2 Responses to A Question About “Tax Cuts Must (Usually) Be Paid For”

  1. Min says:

    I responded to DeLong’s original post, but now I see that I overlooked his reference to inflation as a sneaky, implicit tax. I disagree. Inflation is our friend.

    A few years ago I ran across something on the internet that I have not been able to find again, about some French king centuries ago rewarding someone with a large yearly income, several thousand livres. And it was in a form that was inheritable. Over time, with all the political changes in France, it was forgotten. But several years ago some gov’t bureaucrat discovered it, and the French gov’t, despite the French Revolution and other changes, still honors it. Its current value per year is less than a Euro. (Nobody has bothered to claim it. ;))

    My point is that is exactly how we want gov’t obligations to work over time. The gov’t continues to stand behind them, but their value approaches zero. Surely the French do not want to shell out over a hundred thousand Euros per year because of some favor done to some ancient king. We don’t want a situation like that of the Continental Dollar, either, which became worthless in a few years. (Thomas Paine’s comment, “Did you expect a war for free?” is heartless.) But Americans today enjoy the benefits of the American Revolution. Why shouldn’t we bear some of the cost? Inflation is a way of spreading the cost over time, with future generations bearing very little of it. Inflation is our friend. Besides, it is the way the world works, as the French example shows.

  2. Min says:

    “once we start viewing deficit spending (and tax cutting) in terms of their real-world consequences, not just as budget accounts, we wind up thinking about policy very differently. Solving today’s unemployment problem and infrastructure collapse (not to mention smaller, less sexy, but important problems) become much more important.”

    Indeed. It is curious how, in the abstract, economists downplay money, focusing on the real economy of goods and services. But once they start talking about gov’t debt and taxes, money assumes overriding importance. Economists like Krugman and DeLong do talk about the real economy, but they always issue a disclaimer about debt and taxes. OC, such rhetoric does not get very far against the debt and deficit fear mongers.

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