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December 6, 2009

Will Deficits Bankrupt Our Grandchildren?

Robert Frank says complaints that running deficits to offset downturns will bankrupt our grandchildren are "absurd":

How to Run Up a Deficit, Without Fear, by Robert H. Frank, Commentary, NY Times: Few subjects rival the federal budget deficit in its power to provoke muddled thinking.
It’s a pity, because there are really only three basic truths that policy makers need to know about deficits: First, it’s actually good to run them during deep economic downturns. Second, whether deficits are bad in the long run depends on how borrowed money is spent. And third, eliminating deficits entirely would not require any painful sacrifices. ...
The first proposition comes from ... Keynes, who argued that when total spending falls well below the level required for full employment, the economy won’t recover quickly on its own. Consumers won’t lead the way... And most businesses won’t invest... Only government ... has both the motive and opportunity to increase spending significantly during deep downturns.
Of course, if the government borrows to do so, the debt must eventually be repaid (or the interest on it must be paid forever). That fact has provoked strident protests about government “bankrupting our grandchildren.”
It’s an absurd complaint. Failure to stimulate the economy would mean a longer downturn. That ... would mean ... reduced tax receipts, increased unemployment insurance payouts, and depressed private investment. The net result? Higher total public borrowing and a permanent decline in productivity...
Once the economy is back on its feet, deficit logic changes. At full employment, extra borrowing often compromises future prosperity, just as critics say. ...
But the reverse would be true if government borrowing were used for productive investments. After decades of neglect of the nation’s infrastructure, attractive public investment opportunities abound. ... When government undertakes such investments, our grandchildren become richer, not poorer. ...
To eliminate deficits, we need additional revenue. The encouraging news is that we could raise more than enough to balance government budgets by ... tax[ing] activities that cause harm to others. Called Pigovian taxes ... such levies create a burden that is more than offset by the reductions they cause in costly side effects of everyday activities. ...

When producers emit sulfur dioxide into the atmosphere,... the resulting acid rain harms others. As the ... Clean Air Act demonstrated, the most efficient ... remedy was to tax sulfur dioxide emissions. ... Similarly, when motorists enter congested roadways, they impose additional delays on others. Here, too, taxation is the best remedy...

When the transactions of financial speculators fuel asset bubbles, they increase the risk of financial meltdowns. A small tax on those transactions would reduce this risk. ... Carbon dioxide emissions contribute to global warming. Here as well, taxation offers the most efficient and least intrusive remedy.
Anti-tax zealots denounce all taxation as ... depriving citizens of their right to spend their hard-earned incomes as they see fit. Yet nowhere does the Constitution ... does it grant us the right to harm others with impunity. No one is permitted to steal our cars or vandalize our homes. Why should opponents of taxation be allowed to harm us in less direct ways?
Taxes on harmful activities would be justified quite apart from any need to balance government budgets. But such taxes would also generate ample revenue for the public services we demand, quieting the ill-considered commentary about deficits. ...

[See also: "Bogus Arguments about the Burden of the Debt"]

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