Friday, July 23, 2010


I've talked tax cuts recently. Here's a profoundly different take from Kevin Williamson in the May 3rd National Review:
There are two schools of thought about the Reagan tax cuts. The conventional conservative view: They spurred investment, entrepreneurship, and real economic growth, helping to resuscitate the post-Carter economy, and, by doing so, they paid for themselves. The conventional liberal view: They were an ill-considered product of starve-the-beast ideology and produced crippling deficits, inaugurating a new era of fiscal irresponsibility only briefly transcended during the golden years of the Clinton presidency.

Here’s a different take: They never happened.

Properly understood, there were no Reagan tax cuts. In 1980 federal spending was $590 billion and in 1989 it was $1.14 trillion; you don’t get Reagan tax cuts without Tip O’Neill spending cuts. Looked at from the proper perspective, we haven’t really had any tax cuts to speak of -- we’ve had tax deferrals. Reagan and his congressional allies had an excuse in the considerable person of Speaker O’Neill. But George W. Bush and the concurrent Republican majorities in both houses of Congress didn’t manage to cut spending, either. Part of that was circumstances -- 9/11, Afghanistan, Iraq, the subprime meltdown -- but part of it was the fact that a poorly applied supply-side analysis has infantilized Republicans when it comes to the budget.
Read the whole thing.

More recently, Williamson also wrote:
Three programs -- Social Security, Medicare, and Medicaid -- consume 100 percent of federal revenue, and everything else is paid for with borrowed money. This is why we cannot balance the budget by cutting military spending, foreign aid, food stamps, etc. There is not going to be a serious project to address our deficit/debt problem without deep, painful entitlement reform, and the longer we wait to admit that fact and get going on it, the worse it is going to be.
See also Heritage Foundation (twice), MaxedOutMama and Veronique de Rugy.


Jim Baird said...

I wouldn't worry about it. The Federal government is a currency issuer; properly spekaing, it does not "borrow" money. (Bond sales are a monetary operation, not financing) And since public debt = private savings, a large deficit is actually necessary when private savings desires increase as they have.

Waht we should be doing is something like a full payroll tax holiday until the deficits gets high enough to recover - but since the dems seem to be allergic to tax cuts, we'll probably get some more piddling little speding increases that don't do much of anything.

if you're interested in a different take on things, you can check out this:

Geoffrey Britain said...

Jim Baird said...???

"I wouldn't worry about it."

Unless this was a lame attempt at humor, further explanation is in order.

Please explain how printing money in excess of assets held isn't borrowing?

How does public debt necessarily equal private savings?

When 'desire increases' (oddly put) for private savings how is a large deficit dependent or necessary?

How will a full payroll tax holiday result in deficits getting "high enough to recover"???

Carl said...

Jim's link is to an article by Warren Mosler. Mosler, a super-car maker, is running for the Connecticut Senate seat as a Tea Party independent. He doesn't appear in the pre-election polls, which show over 90 percent of likely voters expected to vote for either Blumenthal, the Democrat and overwhelming favorite, and McMahon, the Republican. Mosler's raised and spent just over $100,000.

Mosler wants to eliminate payroll taxes, which isn't a terrible idea, though I'm not sure whether he would eliminate Social Security, Medicare/Medicaid and other programs those taxes fund (otherwise increasing the deficit as GB says). More importantly, Mosler argues that (page 11, emphasis in original):

Federal government spending is in no case operationally constrained by revenues, meaning that there is no "solvency risk." In other words, the federal government can always make any and all payments in its own currency, no matter how large the deficit is, or how few taxes it collects.

Mosler overlooks the cost of capital (if perceived risk of default rises, interest rates for borrowing go up, increasing spending), nor has he paid attention to Greece. Lenders, and rating agencies, do not ignore solvency risk and thus vary the interest rates they demand for loans (i.e., T-bill purchases).

Worse, he says this (page 12):

Let’s start by looking at what happens if you pay your taxes by writing a check. When the U.S. government gets your check, and it’s deposited and "clears," all the government does is change the number in your checking account "downward" as they subtract the amount of your check from your bank balance. Does the government actually get anything real to give to someone else? No, it’s not like there’s a gold coin to spend. You can actually see this happen with online banking -- watch the balance in your bank account on your computer screen. Suppose the balance in your account is $5,000 and you write a check to the government for $2,000. When that checks clears (gets processed), what happens? The 5 turns into a 3 and your new balance is now down to $3,000. All before your very eyes! The government didn’t actually "get" anything to give to someone else. No gold coin dropped into a bucket at the Fed. They just changed numbers in bank accounts -- nothing "went" anywhere.

Simply put, this is wrong. Taxes turn into government spending, and since there's no connection between the tax any individual pays and government benefits he receives, the money does go somewhere. Moreover, the Federal Reserve isn't the government's uber-bank, making Mosler one of those "Fed conspiracy"-types (like the pro-gold standard, economically illiterate Ron Paul).

The first quote from Williamson--tax cuts without spending cuts are merely tax deferrals--makes a valid point. Not Mosler's.