At EconLib Scott Sumner points out something interesting and distressing: the federal deficit as a percentage of GDP relative to the unemployment rate is incredibly high. Historically, a low rate of unemployment is associated with a balanced budget. Not today. Here’s his prediction:
I stand by my claim that (at the time) 2019 fiscal policy was the most reckless in American history, even though each of the next 4 years ended up being even more reckless. In terms of vertical distance above the dotted line, 2020 was the very worst, then 2021, then 2023 (estimated—red dot), then 2022, and then 2019 (roughly tied with 2009.)
The consequence of the reckless fiscal policy will not be a financial crisis. Nor will it be a default. Even the permanent monetization of the debt is unlikely, in my view. The most likely consequence will be higher future taxes and slower economic growth. This will lead to reduced living standards. It might also push politics in a more “populist†direction, with consequences that are difficult to predict (but unlikely to be desirable.)
When you combine the extraordinary spending over the last four years in the presence of historically low unemployment rates, that’s the result. The problem I see is that a lot of the spending is “baked in”: interest on the debt, healthcare spending, and Social Security. We can reduce defense spending but doing so without reducing our commitments is hard to accomplish.
Raising taxes on the rich is easier said than done. You can raise the marginal rates but that won’t necessarily increase revenue. If higher taxes are indeed the likelihood, much of those will necessarily come in the form of increasing the taxes of the not particularly rich. They’re a lot easier to tax.
I wonder why Dr. Sumner doesn’t think that “permanent monetization of the debt” is the obvious solution to the problems that are being created?
If I were betting, I would bet on Weimar level hyper inflation.
Followed, of course, by dictatorship.
Actually, the government is far gone into delusion that a dictatorship is the only possibility.
Meanwhile, after threatening to burn the economy to the ground over the debt ceiling, Republicans have proposed new tax cuts.
The taxes to cut are capital gains taxes.
https://en.wikipedia.org/wiki/File:Federal_Capital_Gains_Tax_Collections_1954-2009_history_chart.pdf
Declines in the rate result in greater capgains realizations and and tax receipts. And vice versa.
We have faced this issue for years. Many a lawyers Christmas has been ruined closing a business owners sale ahead of anticipated capgains increases.
Drew: Declines in the rate result in greater capgains realizations and and tax receipts.
Yes, the ol’ tax cuts will pay for themselves plan. Unfortunately, even though there is a slight economic benefit, it is not enough to make up the difference in tax receipts. Frankly, you can’t reasonably complain about the deficit while cutting taxes.
Whatever its merits it’s politically impossible. You can’t have “make the rich pay their fair share” your mantra and cut the capital gains tax.
The effects of cutting captains are at best temporary. People do shift income around if the know a cut is coming but there is not good evidence of sustained effect.
Also, it is worthwhile looking at Drew’s chart so you can understand why he is wrong. What you see is that cap gains revenue mostly varies with GDP. You see that with the circa 1986 surge it occurs several years after the cap gains cut. There is a very long upwards slope before the cut circa the 1999 surge. The surge circa the 2007 years begins well before the cut. Note that the revenue drops after 1999-2000 while the cap gains rate does not change.
I understand wanting to believe that cutting cap gains will have a positive effect on revenue but there isn’t any empirical proof it works.
OT- Interesting piece on how to pay for care at rural hospitals. It’s a difficult issue and a lot fo them are failing.
https://angrybearblog.com/2023/06/a-potentially-better-way-to-fund-rural-hospitals#comment-3213934
Steve
“We can reduce defense spending but doing so without reducing our commitments is hard to accomplish.â€
I am not sure what that means. No matter what one thinks of the wisdom of US policy with respect to Russia or China; the current adversarial relations and resultant arms buildup will require significant increased military spending; probably at least 50-60% in real terms… not cutting it.