Semi-Daily Journal

don't be stupid, Brad. the statement makes sense. you just have to understand what is being said. they don't want to look like they are using the deficit as a hammer to argue against the spending. the deficit will be paid off later. what they argue with is the spending itself. they realize that with more cuts in spending there can be even more cuts in taxation, with the resultant growth of the economy. they are not arguing that it won't get paid for, they are saying that they want to pay even less, and the runaway spending is making this impossible. stop being willfully ignorant.

Is it possible some of the right-wing are playing a more long-ranging game here? Perhaps they have realized that they are due to lose the next cycle of national elections, and they will do anything to make sure that their Democratic successors are saddled with as big an economic crisis as possible.

That gives them every opportunity to then sit back and point out all the things that the Democrats are doing wrong (say in 2008 or so), obstructing at every turn, and thereby severely shorten the time that Democrats are back in power?

It all depends on the inattention or short attention span of the American public. How can they go wrong?

So, Sean, I guess you think that all that deficit spending is free? Perhaps you should try that on your credit cards this Christmas, and get back to us on how that works.

Perhaps you haven't realized that once the Fed eventually raises interest rates, and the outlays we have to spend on interest payments increase, that means interest payments are an element of government spending that HAS to increase, unless we decide to default on the national debt. Thus we end up with even MORE dramatic pressure on future budgets to cut spending, more than would be present otherwise if we adopted a rational balance between income and outgo.

It just goes to show you how lazy the press is and/or how indifferent the public is that even though Bush's own economic advisors were saying that the claim that the tax cuts would increase revenue, essentially making up for what was cut, was nonsense, nobody made a big deal.

Alan, that's a very cynical idea, but I'm intrigued. Why do you say that?

Brad --

I believe the WSJ is implicitly arguing that major economic problems can flow from the size of the national debt, not the size of a single year's deficit. One year's deficit is much smaller than the debt balance.

I think the WSJ is saying is that one year of living beyond our national income is affordable. The problem is that one year of overspending is apt to lead to continuing overspending, which eventually becomes serious indeed.

Brian,

Only because that is the only way to make sense of what the right-wingers that are in control are doing. I am not saying that all of them agree with it, but I suspect that there are many of them that are horrified by the fiscal nightmare our government has become. However, the right wing component that is in charge is very good a quashing dissent.

Now it is possible that some of these guys realize that the demographics that Judis and Teixeria document show that their guys will be voted office soon. In short, if they know how unpopular they really are, what are they going to do about it? Undermining the competition is certainly one option they are adverse to using, so why not in this way?

I meant to type "voted out of office soon."

"Don't be stupid, Brad... They are saying that they want to pay even less, and the runaway spending is making this impossible. Stop being willfully ignorant."

Whew! Imagine accusing Brad of being willfully ignorant. Guess I am just as willful and ignorant. This statement is comical however unless you propose abandoning America's defense and social safety net. My guess actually is you favor abandoning Social Security, Medicare, and Medicaid. Yuch!

Love ya, Brad. We go about ignorant together.

The "radical right" purpose of an endless deficit is a rationale for slicing social benefit spending to ribbons. Who needs public education anyway? Duh.

Cutting taxes can work when coupled reduced spending. When you cut taxes and increase spending the money from the tax cuts gets absorbed by the t-bills and not the economy.

Small businesses are the economic engines and they don't go to the stock market for funding, they go to banks. With the savings rate down the tubes, the banks don't have the money to lend to start-ups and the venture capitalists got nailed in the dot.com mess.

Big business gets all the benefits and breaks and they continue to shed jobs and head overseas.

I just love how the article puts "deficit" in sneer quotes, like it's some figment of the pinko liberal imagination. A modest proposal: reduce taxes to zero, then the economy will grow infinitely fast!

Dear Sean

You are miss interpreting what Brad wrote. he objects to the line "we are not complaining about the deficit". Basically he thinks that anyone who recognises "federal outlays will have to be financed somehow" should complain about the current deficit. He is not arguing at all that, other things equal (such as services provided by the government) it is good to have low public spending. He is arguing with the idea that unsustainably low tax rates are good given "federal outlays will have to be financed somehow". Rhis would be true even if incentive effects of taxes were very important.

Now even the WSJ editorial writers are not silly enough to argue that, given the huge tax cuts, public spending will automatically decrease, given the topic of their article -- the huge increase in non defence discretionary spending following and along with huge tax cuts.

It seems that to get beyond the gamma quadrant to the delta quadrant one has to look elsewhere.

"Ah. But if the 'deficit' isn't a problem, why do spending increases mean that you have to raise taxes in the future? You only have to raise taxes in the future if it is important to reduce the deficit,"

Hello? Surely you mean "to finance either the spending increases or the growing debt that will result from borrowing to finance them" don't you?

To finance $1 of gov't spending the gov't can either collect $1 of tax or borrow $1 and finance that borrowing with future taxes collected to pay the interest on it. Of course, the future interest on the borrowed $1 when discounted to current value is worth exactly $1.

Which means the tax cost of $1 of gov't spending is exactly $1 either way: $1 in tax collected up front or $1 current value collected through a stream of future taxes.

So if current spending remains unchanged but current taxes are reduced, total taxes collected to finance that spending remain unchanged -- any reduction in current taxes is exactly offset by an increase in future taxes used to finance the resulting borrowing. The total tax cost is a wash at current value.

But if gov't spending increases then taxes must increase too -- either through higher current taxes or increasing taxes applied to pay the interest on growing debt used to finance it, one way or the other. The total tax cost *increase* exactly corresponds to the increase in spending -- even if you never 'reduce the deficit'.

This is what Milton Friedman means when he criticizes those who put cutting taxes ahead of cutting spending by saying "The true cost of government is spending". Gov't spending increases *do* increase taxes necessarily, without any future effort to 'reduce the deficit'. And the last I heard Friedman lived in California, not the Gamma Quandrant. (Though to some of us easterners they sometimes seem pretty much the same, I admit).

Which puts the WSJ's comments on the money: "The thing to worry about is actual spending".

Of course, Friedman also considers the increased deadweight economic cost of the increased taxes forced by increased gov't spending in the "cost of gov't." But then Prof Krugman does too. After all, he recently noted, "[A]n assertion that no economist would dispute: Taxes reduce the incentive to work, save and invest".

And I figure that when Profs. Friedman and Krugman agree about something it has *got* to be true!

Gov't spending increases compel net tax increases in a way that current tax cuts without spending increases do not -- and so undercut the incentive to work, save, and invest in a way that the latter do not.

With huge promised spending increases coming fast down the pike at us this should really be the issue of the hour -- the effect of the promised spending increases, not current tax levels, on the economy.

As The Economist put it when it got to the bottom line in its recent story "How to Stop Governments Going Bust" ...

"If governments are to avoid going bust, politicians will have to grasp the nettle. They must cut back on the over-generous promises they have made to their citizens..."

http://www.economist.com/printedition/displayStory.cfm?Story_ID=2227506

The issue that matters is tomorrow's spending.

Reagan, Bush Sr. and now Jr., have had the habit of using the public debt as the key tool for driving prosperity. There was about one trillion in public debt when Reagan took office, there is about six trillion today. On the face of it, this is an economic atrocity.

Of course the economy is growing. If all three arms of the economic structure are borrowing and spending, the economy will grow. But growth based on spending is a dead end. Where's the growth based on investment?

If, as a country, we had the savings to support our public debt this would not be such a problem but as individuals we're as undisciplined as our public entities so we have to depend on Europe, Canada, China and Japan to act as our bank. That financial dependence won't likely paint a more robust future for the US.

And finally to answer the core question: Is the WSJ staff stupid? Why they're idiots, they can't even ask the right question. It's not about the relationship of debt and taxes, it's about the relationshp of debt and dependence.

Also regarding Jim Glass' comment about Friedman and Krugman agreeing...I think economists have a broad field of economic agreement that transend politics. If we had a "conservative" or "liberal" politician that followed sound economic policy, we could much more easily work out our social/political differences.

Even during the great peak in American tax paying, when we had a "surplus for as far as the eye can see", we were generating a deficit financed by overpayments of social security and the federal employee retirement trust fund.

Of the several hundred politicians in office, couldn't one of them have stood up and told the truth? Could not one major media outlet have made it head line news? I guess not.

Debt of the magnitude we've taken on over the last 20+ years is not a positive force in American society.

Jim Glass: "Which means the tax cost of $1 of gov't spending is exactly $1 either way: $1 in tax collected up front or $1 current value collected through a stream of future taxes.
...
The total tax cost is a wash at current value."

Well, to the government perhaps. To the taxpayers, it amounts to a generational transfer of wealth from future taxpayers to current taxpayers (kinda like Social Security).

fling93: "Well, to the government perhaps. To the taxpayers, it amounts to a generational transfer of wealth from future taxpayers to current taxpayers (kinda like Social Security)."

This appears to be the case based on the accounting, but monetary shenanigans cannot transfer real wealth from future generations to ourselves today. The resources devoted to making war in Iraq and Afghanistan aren't being used for some other purpose. Regardless of how we tax ourselves or how we formally measure deficits, the products and labor used for war cannot be used to build TV sets or clean the environment or for any other purpose. We can formally borrow money from the future, but we cannot borrow actual labor and goods from the future.

ISTM the real problem of letting the national debt grow is the risk to the economic system. One way or another, the economic system will recognize a growing national debt -- usually with inflation. If the the debt grows to the point where world bankers lose respect for the dollar as a stable currency, there could be very serious consequences.

From the soundest of fiscal policies through 2000, we have turned to the most reckless policies. We are engineering a mass transfer of wealth to the most wealthy, and assuring less national prosperity in future. The amount of debt accumulation will grow and grow from already high levels, but there must be a limit at some point. There need not be a crisis simply a market recognition that there is a limit, then either taxes will climb sharply or spending for social benefit programs will fall sharply. I do not wish to live in a middle class Alabama household with scant public services and no decent social safety net.

Alan Greenspan will deeply regret encouraging us to "waste" the federal budget surplus.

Of course the editors of the WSJ are idiots. They're JOURNALISTS, for goshsakes! If they weren't idiots they'd be doing something productive with their talents like writing romance novels or television soap operas. But hubris and ego-gratification have driven them into perverting those talents into commentary.

Or is there a newspaper that is NOT prone to making illfounded pronouncements?

Simply understand who the Wall Street Journal wishes to influence and why. The WSJ editorial page writers care nothing for truth, only for advancing a radical right agenda to end the New Deal and Great Society and so abet an America with a declining middle class. Happy are the wealthy with the WSJ.

I knew there was a reason I liked your blog.
They are stupid.

anne, you so often have comments which are totally true and very debatable: We are engineering a mass transfer of wealth to the most wealthy,
This is so true, both terrible crony capitalism and market oriented rewards for wealth creation together. But then and assuring less national prosperity in future.
THIS is highly suspect. Differences in future national prosperity are most likely based on quantity, and quality, of current investment. Gov't investment is often low return investment; gov't current consumption is neutral. Private investment is more often high return investment.
(See differences between Japan's and the US's rates of return on investment).
Also, the rich invest far more than the middle class or the poor. So cutting taxes on the rich will increase investment more than cutting taxes on the poor.

I also think you're right that the: purpose of an endless deficit is a rationale for slicing social benefit spending or privatizing current entitlements so that they are sustainable. The fact is that the middle class claims to want benefits for the poor, to be paid for by the rich, but only when it's really benefits for the middle class -- who also end up paying most in taxes, anyway. So it's very inefficient. It's also dishonest by just about everybody.

Why NOT have middle class folks pay, directly & privately, for the middle class benefits? Forced savings: pensions, health costs, unemployment. Not "insurance", with a lottery to get other people's money, but your own money, saved or borrowed (with tax guarantees?), for your own benefits.

Those guys at the WSJ, the intellectual Stosstruppen of the wealthiest and most powerful. Noam Chomsky can be a doctrinaire idiot when he puts his mind to it, but his analysis of the American media in Manufacturing Consent and Necessary Illusions, gets more and more relevant as I age. The propaganda model is basically true. The Wall Street Journal is THE servant of power. If the powers that be say deficits are terrible well the WSJ says Deficits are terrible. If the powers that be say "deficits" are irrelevant, well then deficits are irrelevant.

Oceania is at war with Eurasia. Oceania has always been at war with Eurasia.
------------------------------------
I also would like to respond to:
"Why NOT have middle class folks pay, directly & privately, for the middle class benefits? Forced savings: pensions, health costs, unemployment."

The answer is that it contributes to economic instability by placing all the risk on individual economic agents: read families. I would like to expand on this but that would take too much space in the blog. I will leave a few bullet points for others to pick up:
- Private social service delivery is in the aggregate more expensive than Public service delivery. Proof: US Health Care % of GDP
- Private economic activity is not inherently good and Governement activity inherently bad. Take the moral judgement out of economic cost benefit calculations.
- SS can easily be fixed with increase in retirement age. We live longer now, lets ajust.
- The Rich are just a likely to consume tax cut as they are to invest.
- It is only when the Rich are taxed above 50% total income that their ability to perform their investment function falters.
- When do tax cuts begin generating negative returns for economy as a whole? Aren't there limits to tax cut benefits? If there are no limits, why aren't tax free countries economic powerhouses?

As of 11/26/2003 the debt is $6,915,109,204,609.24

That is rather 7 trillions, not 6.

The rich may invest more, but how much of those inversions do never get out of the financial world?

Let's not forget that many important advances start in small outlets.

DSW

Pouncer wrote: "Of course the editors of the WSJ are idiots. They're JOURNALISTS, for goshsakes!"

From personal experience, I can say this is absolutely wrong. The top editors of the WSJ, and the writers of the editorial page, are not journalists. In the politest sense, they are pundits. Really they are mad right-wing ideologues who willfully ignore much of what is written by the real journalists reporting in their own newspaper. The reporters who make the WSJ such a good paper always say that the editorial page people never read their own paper. Those on the editorial page retort not that they read the paper, but that instead, the journalists should read the editorial page.

What that tells me is that the editorial page people are proud not to read the real news, and also think the reporters should pay more attention to their own bizarre opinions (like "We need the gold standard again") rather than facts, figures, data, real info.

Bascially, the good reporting of the Journal's news team is subsidizing the rantings of a bunch of wackos who unfortunately control the whole organisation.

Paulo, http://whosecapitalism.typepad.com/

Jim Glass wrote, "[A]n assertion that no economist would dispute: Taxes reduce the incentive to work, save and invest".

Uh huh. And how does taxing away economic rents (when feasible) do that?

Furthermore, how much *empirical evidence* is there for disincentive generated by raising the top marginal personal income tax rate from, say, 39% to 50%?

"Jim Glass wrote, '[A]n assertion that no economist would dispute: Taxes reduce the incentive to work, save and invest'".

Nope, Paul Krugman wrote it. Jim Glass merely quoted it and noted the source.

"Furthermore, how much *empirical evidence* is there for disincentive generated by raising the top marginal personal income tax rate from, say, 39% to 50%?"

Well, the rule of thumb in the textbooks is that deadweight loss from taxes = square of the tax rate. So by that measure increasing the tax rate by 28% (50%/39%) would increase the deadweight cost of taxes to the economy by 64% (50%^2/39%^2)

Of course there's lots of more detailed analysis of the subject about, some of which says that all things considered the textbook rule of thumb underestimates the economic cost of income taxes by a good bit. E.g.:
http://econpapers.hhs.se/article/tprrestat/v_3a81_3ay_3a1999_3ai_3a4_3ap_3a674-680.htm

Jim, doesn’t your analysis assume an inflation-free world? Or more precisely, unanticipated inflation. If the government can create a future inflation and this is not reflected in current interest rates, then it can pay back the money with cheaper dollars. Governments have to borrow to finance wars, and surprise surprise we get high inflation shortly after the war spending ends. Weimer repudiated Germany’s WW I debts by hyper inflation in the 1920s.

Folks, my marginal income tax rate is not 39% but 35%. Just got a nice reduction. And, since the dividend and long term capital gains tax is 15% and I have a healthy amount, lower the average tax I will pay considerably. My payroll tax stops in the $80 to $85 thousand range, and I earn far far more. Well, I will pay about 20% in total taxes. No complaints....

The point is that I am taxed about the same on average as a person with an income 1/10 of mine and lots less wealth. We no longer have a progressive tax system, at least for higher income people.

Taxes were no problem for me during the Clinton Administration, but they are quite a bit less for me now under the Bush Administration. I would not complain a bit about going back to where we were in 2000.

http://finance.reuters.com/financeArticle.jhtml;jsessionid=LW3XUGOKUMDVQCRBAELCFEY?&storyID=3908223&newsType=eurMktRpt&menuType=worldIndices

"The U.S. authorities are not unhappy about the dollar's decline and will maintain this position until either the trade position has stabilised or the dollar's weakness starts to undermine the treasury market," said Bear Stearns chief European economist David Brown.

"We think that we are a very long way away from this situation and hence dollar weakness has many, many months, if not years, to run."

This European economist, apparently, thinks that the Bush deficit won't be a liability for years to come.

"Jim, doesn’t your analysis assume an inflation-free world? Or more precisely, unanticipated inflation. If the government can create a future inflation and this is not reflected in current interest rates, then it can pay back the money with cheaper dollars..."

The government can inflate away debt incurred in the past to finance a big one-time past expenditure, like WWII, sure. But it can't inflate away the real cost of ongoing current programs and current real spending levels that will continue (and rise) indefinitely into the future.

The surging claims of SS, Medicare, etc., on the economy will be in real terms and rise for decades. (We just increased them fruther, in fact.) To try and "inflate away" a current, indefinitely conintuing real expenditure level (rather than a past-incurred debt) requires not just a dose of unanticipated inflation but continuous unanticipated accelerating inflation. And it seems unlikely that inflation can be continuously accelerated for 40 years without investors coming to aniticipate it. ;-)

The "it can be inflated away" notion if anything reinforces the WSJ's point of view. In 2015 the politicos will indeed be able to reduce the cost of the debt incurred until then by arranging a nice one-time dose of inflation, increasing nominal interest rates by say two or three points, should things come to that.

But going forward from there, they are not going to be able to use inflation to escape the cost of the continually rising current and future real claims of SS, Medicare, etc., on the real economy, no matter how they are financed, using debt or not. So looking at it this way too the big issue is future spending, not current debt.

"Weimer repudiated Germany’s WW I debts by hyper inflation in the 1920s."

Yes -- but the claims of the baby boomers are inflation-indexed. ;-)

And Weimar's politicians found it much easier to repudiate its bond holders than future American politicians will find it to repuidate the baby boomers and AARP.

Jim, A very good answer indeed, well, stated and I agree completely. If I remember correctly back in the 1970s, Israel got itself into high inflation with indexing. And as an Israeli minister said on American TV at the time, “we have created a system positive feedback.” I was impressed that a politician would understand the concept of an unstable feedback control system.

If utilization of capacity is at around 75%, in what specific ways will there be new capital investment?

David: "ISTM the real problem of letting the national debt grow is the risk to the economic system."

True enough, I figured that was obvious, and the comment I was addressing assumed that taxes would be increased in the future to address that risk, and since future dollars are discounted, the whole thing is a wash. To the government, it is, but my point is that it wasn't the whole picture.

fling93: "To the taxpayers, it amounts to a generational transfer of wealth from future taxpayers to current taxpayers (kinda like Social Security)."

David: "This appears to be the case based on the accounting, but monetary shenanigans cannot transfer real wealth from future generations to ourselves today. The resources devoted to making war in Iraq and Afghanistan aren't being used for some other purpose."

It doesn't matter what purpose the money goes towards. When current taxpayers pay a relatively low tax rate and the government runs a deficit, the accumulating debt must eventually be addressed, typically by raising taxes in the future (just like Bush Sr. and Clinton did). So current taxpayers keep more money (and thus can buy more TV sets for themselves) whereas future taxpayers will keep less of their money, regardless of whether the government spent that money on a war or on pork rinds.

So that's a transfer of wealth. Less direct and less egregious than Social Security, but a transfer of wealth nonetheless.