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David Brooks: Enjoy Deficit Reduction

April 02, 2010

By Harley Brooke-Hitchins

David Brooks had a column in yesterday’s New York Times, arguing (in part) that the closing of America’s fiscal imbalance needs to be reframed as a happier activity. Unfortunately, I think he’s a bit too optimistic:

[T]he whole deficit hawk brand needs a makeover. Those people are a bunch of schoolmarms: “You’ve been bad. Eat your broccoli. Accept a lower standard of living.”

This is still a Billy Mays nation, thank God. The message has to be: “America can be richer and shinier!” Debt reduction has to be about renewal and prosperity, not pain and sacrifice.

The trouble with Brooks’ plan is that closing deficits isn’t fun. Sorry to be such a schoolmarm, but I’d say a key problem with American discourse about fiscal issues is our unreasonable expectation that we can, in fact, have it all: low taxes and generous entitlements.

Fiscal rebalancing can’t be part of that idea, because it will raise taxes and make entitlements less generous. It will necessarily involve Americans adjusting their expectations about what they will pay to government and what they will get back.

In fact, Brooks’ next paragraph lays out what course you might take to close the fiscal gap, and it doesn’t sound very rich or shiny.

That means deficit reduction has to be embedded in policies that produce growth. Michael Graetz of Columbia University has proposed replacing the current awful tax code with a value-added tax of 14 percent, cuts in the corporate tax rate, and a fair income tax with two simple brackets kicking in over $100,000. Many people have ideas to streamline the welfare state. The message has to be: we can afford to have a thick safety net, if it is more efficient.

On the tax side, Brooks (via Graetz) is proposing to raise taxes as a share of GDP, while using more efficient taxes that produce less economic drag. Essentially, he would grow the “revenue burden” of taxation (the number of dollars remitted to taxpayers by the government) while hoping to shrink the “excess burden” of taxation (the amount of useful economic activity foregone due to mis-incentives created by taxes).

Economically, this is a plausible idea. Revenue burden does not represent economic loss: it just shifts economic activity from the private sector to the public sector. Excess burden represents actual economic losses. So, a dollar of excess burden is more problematic than a dollar of revenue burden. And it is possible to shift the tax code to raise one without raising the other. (The details of this could form the substance of another post, but basically, tax systems with broad bases and low rates tend to have a favorable ratio of revenue burden to excess burden.)

But it’s important to remember where this does not get you. A high revenue burden with low excess burden may not be an outsize drag on the economy, but it does reduce after-tax personal income. So, tax increases are still painful for individuals if not for the economy as a whole.

Of course, those taxes make government services possible, and if those services are valuable, they might be a good deal in exchange for higher taxes. But Brooks isn’t proposing to expand government services—he wants a tax increase that will make it possible to continue providing existing services. Somehow, I doubt people will perceive more taxes for the same programs as un-painful, even if we convince them a tax increase won’t dampen GDP growth.

Brooks’ comment on the spending side is even less inspiring. He talks vaguely about the need to “streamline” the welfare state and make it “more efficient.” But what does that even mean?

It’s hard to imagine a government program more efficient than Social Security, about 98% of whose costs go out in the form of checks to recipients. Firing bureaucrats at the SSA is not going to get us very far in closing the budget gap. Any savings in Social Security will involve sending out fewer checks or smaller checks—we can call that “efficiency” but it’s really just a shrinking of the program.

On the Medicare side, real efficiency improvements are possible, through reforms that reduce provision of care that is unnecessary or not cost effective. There are a number of ways to achieve this—putting seniors on more parsimonious private plans, increasing co-payments, “Death Panels”—and some of these are even good policy. But historically, “we’re going to give you less of that health care that you’re consuming too much of anyway!” is not a message that American seniors have taken well.

Basically, I think Brooks has taken on a doomed project here, of trying to reframe fiscal rebalancing as a non-painful activity. The upside of fiscal rebalancing is that it will stave off a future, deep recession and possibly a sovereign debt crisis. You take steps to avoid disaster because disasters are bad, not because disaster-avoidance is rewarding in itself.

The downside of fiscal rebalancing is some combination of higher taxes and less generous entitlements. Convincing people to like this is a fool’s errand. Instead, we need to convince people that it is necessary. Unfortunately, I think that will only happen when fears about the economic effects of high debt turn into actual economic damage due to high debt. But for now, we should be pointing to Greece and saying “Don’t let this happen here!”

Original Source: http://agenda.nationalreview.com/post/?q=NjM5ODA0NDVmYzNmNjVlOWZiNmNmYjhiNWMzZjA4NDQ

 

 
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