Monday, September 19, 2005

More Links on Katrina and Fiscal Policy

My last post raised a number of interesting questions elsewhere in the blogosphere. Here is a sampling:

Todd Zywicki picks up the theme at Volokh Conspiracy:
One can raise legitimate questions in principle about whether this is the type of activity for which it is appropriate to engage in deficit spending. I think a case can be made that this may be, because of the "lumpiness" and unexpected nature of the liability, that may be appropriate to smooth over a period of time (like fighting a war or investing in capital projects).

But a larger point implied here seems like a sound one to me--one problem with running chronic deficits during ordinary times or on ordinary pork-barrel spending is that it makes it more difficult to justify additional deficits in times where deficit spending is appropriate (arguably such as fighting a war or rebuilding one of the nation's most important cities and ports). To paraphrase Spinal Tap, if you are already on "10" for deficit spending what do you do when you need that extra "push over the cliff"?

He provides a precautionary reason for keeping deficits low when possible--so that they have room to go higher without excessive disruption when disasters strike. Commenter Robert Schwartz also notes that much of the rebuilding goes for capital projects, suggesting some reason for longer term financing. I'll disagree to some degree below--the owners of those capital projects are still the current generation of taxpayers, whether privately or publicly. He goes further to suggest taxes on gasoline to provide current financing.

Jacob, posting at an interesting new blog called "Everyone's Illusion" takes issue with what is becoming my tagline, "If taxes are bad, deficits are surely worse." He makes an argument based on Ricardian Equivalence that is answered quite well by PGL at Angry Bear. There are circumstances under which a higher public deficit would be completely offset through higher saving in the private sector. I've never been convinced that these circumstances apply in practice, even though they closely approximate the behavior of the Samwick household (consumption is set at a level far below permanent income and is unaffected, so far, by changes in tax policy). There are simply too many people not saving enough in the present generation to meaningfully offset the debts we are passing along.

But Jacob certainly has a point--I should not be so ambiguous in my use of that line that I appear to always prefer taxes to deficits. Here is where the line is valid: in situations like the current one, where an administration is considering whether to finance a discretionary expense for the benefit of current generation of taxpayers by raising taxes or enlarging the government's debt, it will seek to make arguments against raising taxes.

These arguments can pertain to efficiency or equity. The arguments against taxes on the basis of efficiency are the generic arguments about the virtues of financing a smaller government. These arguments are not relevant when considering a shift from current to future generations. Taxes are distortionary and reduce economic activity today, and they will have the analogous impact in the future when resources must be found to service or repay the addtional debt issued in their place.

And if we are in a situation, as we currently are, where the expenditures to be financed go directly to benefit members of the current generation, the equity considerations are paramount. When a dollar is spent to rebuild New Orleans, property owners (i.e., those who have ownership of the assets that are rebuilt) will benefit. Future generations will pay them for the future use of these assets through the market for goods and services--commodities that pass through the port, hotel rooms in New Orleans, housing in New Orleans, food in the French Quarter. They should not also have to pay for them through higher taxes.

Brad DeLong sums it up pretty well--calling me an unhappy fiscal camper--focusing on the seeming absence of logic for why we now have to offset some proposed new spending but we did not, so it seems, for other Administration priorities.

But the best is yet to come. From Stan Collender's "Budget Battles" column, dated 9/20/2005. The teaser:
President Bush either is wrong, mistaken, or misleading: The significant additional federal spending because of Hurricane Katrina absolutely will not be offset with cuts to other programs.

There are two reasons.

First, there isn't enough "unnecessary" spending or waste, fraud and abuse in the budget to pay for the federal costs of Katrina, which are now expected to total at least $200 billion in fiscal 2006 alone.


The second reason other spending won't be cut to offset the costs of Katrina is that attempting to do so would significantly slow the process of providing federal aid.
Read the whole thing.

Bloogle this post


PGL said...

Nice summary of the posts that followed your very principled ones. And thanks for the kind mention of Angrybear!

Fat Man said...

"the owners of those capital projects are still the current generation of taxpayers, whether privately or publicly."

The classic accounting criterion for determining whether an expenditure is capital is whether it will result in an asset that will have a useful life of more than one year. The term generation is pretty vague it could be 20 years or 30, but I know of no case where an asset life must be nearly that long in order to be capitalized. The IRS requires some buildings to be depreciated over a life of 39 years, but realisic economics would suggest that very few facilities can go that long without a complete overhaul.

I still think the government needs more revenue and I still thing a $2.00 or $2.50 gas tax is the right way to raise it.

Anonymous said...

Bush scares the heck out of me when he uses the word "prioritization", and I voted for him and donated money to Republicans.

I have little confidence in Bush the central figure prioritizing for everyone. He moved to the right since the election. He goes easy on Rumsfeld and hard on others. Why?