December 02, 2017
The Republican tax bill is an abomination. It gives hundreds of billions of dollars in tax breaks over the next decade to the country’s richest people. The Trump family alone stands to pocket more than $1 billion from the reduction in the estate tax and other provisions in the bill.
Furthermore, instead of making the tax code simpler, it creates all sorts of new gaming opportunities. Corporations will have enormous incentive to have their profits show up in tax havens, where they will be able to escape U.S. taxation altogether.
The new rules on pass-through businesses means that anyone is a complete schmuck if they don’t arrange a 23 percent tax deduction by having their pay come through their own pass-through. And the repeal of the Johnson Amendment means that rich people will now be able to get taxpayers to subsidize their unlimited campaign contributions by donating to the Church of Republican Politicians.
But one argument repeatedly made by opponents of the bill — that it imposes some huge burden on children — is just painful to see. What do these people think they are saying when they make this assertion?
There are two ways in which we can say that a deficit/debt is will hurt our children. The first is by slowing economic growth and therefore making the economy and our kids less wealthy in the future than they otherwise would be. The route through which this is supposed to happen is that deficit pushes up interest rates and crowds out investment, thereby slowing productivity growth. (We can also see a rise in the value of the dollar, which means larger trade deficits and more foreign debt.)
There are no projections that show any substantial negative effect in this way. In fact, most projections show at least a modest positive boost to growth. So this one doesn’t make any sense.
In fact, if we want to talk about making our children poorer due to slower growth, the Peter Peterson deficit hawk gang wins the grand prize here. By limiting efforts to stimulate the economy following the Great Recession, they left the economy permanently poorer. Potential output is $6,200 per person lower than what had been projected pre-crisis. Much of this loss should be laid at the doorsteps of the Peter Peterson deficit hawk gang. (Their whining about deficits in the pre-crisis period also helped to crowd out warnings about the risks posed by the housing bubble.)
The other way in which the debt can impose a burden on our kids is that it creates a claim to government revenue in the form of future interest payments. But how about we take a look at the size of the claim? Yeah, $1.5 trillion is a REALLY BIG NUMBER (remember when the NYT committed itself to putting numbers in context?), but what does it mean in terms of commitments of future revenue?
Currently, interest payments on the debt net of the money rebated by the Federal Reserve Board, come to approximately 0.8 percent of GDP. That compares to more than 3.0 percent of GDP in the early 1990s. That sum apparently didn’t bankrupt us 25 years ago, so why should we be shaking in our boots over the current burden?
Yes, adding $1.5 trillion will increase the burden. If we assume an average interest rate of 3.0 percent, that comes to $45 billion a year. In a decade that will be equal to less than 0.2 percent of GDP. Can the kids take it?
Let’s make some comparisons here. First, the Federal Reserve Board is selling off its assets. This means that instead of the interest being paid back to the government, it will be paid out to private individuals. In other words, it increases the burden of the debt on our kids. As best I can tell this fact has gotten absolutely zero attention as the Fed has made plans to sell off much of its $4 trillion in holdings.
For another more important comparison, let’s think about patent and copyright monopolies. These monopolies are one of the ways in which the government pays for things. Specifically, the government tells Pfizer or Microsoft to spend money innovating and it will pay them by giving them a monopoly on their innovations.
We can argue whether this is good or bad policy. (I argue it’s really bad policy in chapter 5 of my [free] book Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer.) What is not arguable is that these government-granted monopolies create a burden on our kids in the same way that interest on the debt creates a burden on our kids.
How is it any different if we tell a drug company that it has a monopoly that allows it to jack up the price of its drugs by one-hundred fold over the free market price than imposing a tax of 10,000 percent on the drug? Either way, we are requiring people to pay hugely more for the drug than if it was sold in a free market.
It turns out that the amount of money that the government commits us to pay in the future with patent and copyright monopolies dwarfs the amount of money we spend on interest on the debt. In the case of prescription drugs alone, we will pay more than $450 billion this year for drugs that would likely sell for less than $80 billion in a free market. The difference of $370 billion is almost 2.0 percent of GDP.
And this is just prescription drugs. If we add in the cost of patent and copyright monopolies in medical equipment, software, and a wide range of other areas it would surely be at least two or three times as high. So, how can a serious person yell about the burden on our kids created by adding $1.5 trillion to the debt over the next decade but completely ignore the much larger burdens being created by government-granted patent and copyright monopolies?
To be clear, there will be ways in which the debt can actually make our kids worse off. For example, if we want universal pre-K education or free college, the tax cutters will turn back into deficit hawks and say we can’t afford these programs that will help our kids. But, this is not because of any economic reality about debts or deficits being too large, it is about lying politicians who don’t want to do anything to help anyone’s kids but their own.
Let’s keep our eye on the ball here. The problem is lying politicians who work for the rich, not the size of the debt.
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