Who Cares About the National Debt?

By James Kwak

Not Greg Mankiw. Or, to be precise, not “Republicans.”

This past weekend Mankiw wrote a column for the Times laying out the arguments for a carbon tax. They are so well known and so obviously correct that I won’t bother repeating them. (A tradable permit system could work equally well, depending on how it is designed.)

In addition, many people think that the national debt is a serious long-term problem. A carbon tax (or a tradable permit system where permits are auctioned off) would obviously bring in revenue. In White House Burning, we estimated this at about 0.7–0.9 percent of GDP by the early 2020s (citing Metcalf, Stavins, and the CBO).

So what’s the problem? According to Mankiw:

“The crucial point is what is done with the revenue raised by the carbon fee. If it’s used to finance larger government, Republicans would have every reason to balk. But if the Democratic sponsors conceded to using the new revenue to reduce personal and corporate income tax rates, a bipartisan compromise is possible to imagine.”

Republicans like to say that they are opposed to deficits and that debt is evil. (Debt ceiling, anyone?) But when confronted with a proposal that makes perfect economic sense and reduces deficits, they reject it—on the grounds that it would “finance larger government.” Instead, they insist on offsetting the tax increase—which, remember, is economically efficient standing on its own. Essentially, Mankiw’s argument (OK, he’s placing it in the mouths of “Republicans,” but he’s a Republican, too) is that a carbon tax is good, but additional tax revenue that would reduce the deficit is bad.

This is absurd. The argument necessarily relies on the premise that deficits cannot be reduced: increase tax revenues, and spending will just go up, leaving the deficit the same. If the deficit is fixed, then even spending cuts are pointless; the money saved will just get spent someplace else. (If you assume that new tax revenue will automatically get spent, then the same assumption must apply to savings from spending cuts.) As a further corollary, tax cuts will not increase the deficit; instead, they will cause spending to fall to offset the reduced revenue.

Unfortunately, not just the Republican congressional delegation but also one of the party’s most prominent economists has accepted this absurdity as a fact. Which is why the single most obvious thing we could do to protect the world for future generations and reduce deficits has no chance of happening anytime soon.

 

 

18 responses to “Who Cares About the National Debt?

  1. Anyone who talks about the national debt without mentioning entitlements is an idiot.

  2. I need a couple days to think about this.

  3. well if we used the method to calculate national debt that some use for business, we would discover they are all bankrupt too

  4. “A tradable permit system could work equally well, depending on how it is designed”

    Not really. A carbon tax would be easier and cheaper to administer, allow broader coverage (you’re not really going to include, say, household energy use in your tradable permit system, are you?), and less susceptible to gaming by affected industries.

  5. I also love how doing what Republicans want is defined as “a bipartisan compromise”.

  6. “They are so well known and so obviously correct that I won’t bother repeating them.”

    So it takes an appeal to authority to believe that a carbon tax is the correct thing to do. The earth voted with it’s temperatures, and there has been no warming for 15 years. So, no need for a carbon tax. How about cuttiing spending to reduce the debt. Probably get some GOP support there.

  7. “They are so well known and so obviously correct that I won’t bother repeating them.”

    Ah, I’m not sure what you mean by that. I can think of two reasons why a carbon tax is probably a bad idea:

    1. If your rationale is that the carbon tax is a form of “sin” tax, I think the jury is still out on that. I for one am on the fence regarding the concept of man-made global warming. And you can’t say something like “90% of scientists believe man-made global warming is a fact,” (or something to that effect) because I don’t believe the number is so lopsided, and even if it was that lopsided, the consensus opinion could be wrong. I can think of numerous situations where scientific opinion was this lopsided….and was later shown to be either wrong, or inconclusive. (e.g., eugenics in the U.S. in the 19th century and in Europe in the 20th century, efficacy of Keynsian economic policies, etc.) Of the only 2 bona fide scientists who I personally know, both believe man-made global warming is improbable. I am not a scientist by the way.

    2. Even if man-made global warming is, in fact, occurring, I don’t understand why one should create a new tax (say a global tax) without some guaranteed reduction in other taxes (or, depending on your perspective, reductions in spending). Some people believe that, the deficit and national debt notwithstanding, the federal government is an insatiable spender and that politicians love to spend OPM (other people’s money) and therefore it is bad policy to increase taxes of any kind without some sort of reduction in other taxes, or reduced spending. Similar to the debate regarding global warming, I’m not sure where I come out on this argument. But nevertheless, I believe it is a valid argument.

  8. Enjoy your writings, but here you’re off base. I too share the reservations of others who have commented about whether global warming has any validity. However, what I want to comment on two things. First, the fat cats you deplore in writing about the big banks would make out like bandits in a tradable permit system. Second, and over and above other comments about entitlements, etc., look at California to see what the Dems do when they get their hands on more tax money. Prop 30 was a boondoggle extraordinaire and shows what happens when you give those clowns more money to play with. This state won’t break off when the Big One hits, as it will have already slid into Greece.

  9. In April 2005, the Financial Times published the letter below in which I, somewhat reluctantly, because I am from an oil rich country, asked “A sensible country would raise the tax on petrol (gas for you americans), so what is US waiting for?

    http://teawithft.blogspot.com/2005/04/sensible-country-would-raise-tax-on.html

  10. James: A carbon tax is a monetary system. We don’t know how to operate the present monetary system, because we don’t know how to generate the essential bookkeeping proof and audit trail that would expose the raft of Ponzi Schemes that occur when dollars are used as gambling chips. So what are we going to use to control the abuse that is sure to come with the carbon tax?

    Would it not be more intelligent to take the time and the effort to learn what a bookkeeping framework of rules is and how it balanced accounts for six centuries, prior to storing data in SQL databases that commingle bookkeeping’s value with the rights to that value’s ownership? It is time to learn and to return to bookkeeping basics.

  11. More deficit nonsense. If the public sector doesn’t run a deficit then the private sector must – you surely don’t think the balance of payments will reverse so that is the only alternative. Government spending + Private Spending + Current Account balance = 0. What do you propose to do about all the private debt needed to keep the sector accounts in balance?

    See Wynne Godley to learn about the mechanics of economic sector accounting.

    lff

  12. The national debt is not a negative thing. It’s existence doesn’t create problems, but is just normal in an economy which is still struggling to “recover”. There are many who seem to believe that we are recovering from the now five year old crisis, but that just isn’t true. They would point to the stock market, which is bogus proof, since the run up in stock prices over the last five years has occurred primarily as a function of bank financial support (QE’s) provided by the FED. They would also point to massive corporate profits, but those are, in many cases simply a function of the savings created by a totally slack labor market. The recovery simply is not happening in about 90% of the nation. Tens of millions are still either unemployed or massively under employed, and that simply isn’t improving regardless of those who point at the latest 7.2% rate (which doesn’t begin to account for those who remain out of the market because there’s no use in looking for work when it doesn’t exist. I would actually argue that we need a larger deficit, because the government controls the only possibility to stimulate our economy back into action. Lastly, one must note that interest rates (and US Bond rates) are still depressed, since the money available is still seeking a way to earn.

  13. As a Venezuelan, I have often thought about placing a ship selling tax free gas (petrol) in the Mediterranean, a la Radio Caroline, to assist European gas buyers, but, unfortunately, that is not so easy :-)

  14. Although derivatives and shadow banking are indirectly related to the debt and/or deficit issues, one could argue it has a much larger impact (by multiples) than the carbon tax would. (by the way, I am pro carbon tax).

    If you look at what caused the deficit to jump drastically from 2008 onward, outside of maybe military spending, you’d be hard pressed to find a bigger factor than the bailout for derivatives and CDS corruption at the TBTF banks and “dealers”. But now Jack Lew (the most economically illiterate J E W that I’ve ever been aware of in my life) is now sticking his head up Gary Gensler’s nether-regions because Mr. Gensler is one of the FEW regulators with the balls to ACTUALLY perform the functions of his job.

    Gensler’s reward for DOING HIS DAMNED JOB for the taxpayers??? A clueless Zionist bureaucrat (who wouldn’t know the full implications of derivatives if the encyclopedic definition of derivative was put inside a tefillin and the dumba$$ was forced to wear it for 6 months) calling Gensler up to his office near the White House and lecturing him over something (derivatives) Jack Lew doesn’t know jacksh*t about.

    http://www.bloomberg.com/news/2013-09-04/how-the-bank-lobby-loosened-u-s-reins-on-derivatives.html

    http://www.bloomberg.com/infographics/2013-09-04/banks-push-back-against-swap-rules.html

    WORDS OF STRONG ADVICE TO MR. GENSLER. IF JACK LEW WANTS THE TBTF BANKS TO RUN ROUGHSHOD OVER THIS COUNTRY’S BALANCE SHEET, GIVE HIM THE NAMEPLATE FROM YOUR OFFICE DOOR WITH THE OFFICE KEYS AND TELL JACK LEW HE CAN HAVE THE DAMNED JOB AND EXPLAIN TO TAXPAYERS IN 2020 (or year 20??) WHY HE WAS (IS) SUCH A D*CKHEAD

  15. “If it’s used to finance larger government, Republicans would have every reason to balk . . . ” – Mankiw

    If that’s putting it into the mouths of Republicans, it’s with Mankiw’s blessing.

  16. Anyone who mentions entitlements without promoting national health care is an idilot.