September 17, 2024
The Washington Post gave us one of its standard deficit scold pieces yesterday. As we know, the Washington Post editorial board is absolutely the most serious of the “very serious people.” They are always worried about the debt and deficit. So, let’s have a little fun with the folks.
First, we can deal with the issue of whether the deficit is too large. There is a pretty simple answer to that. Is there any evidence that it is driving inflation?
If we were back in 2021-2022 when we had serious supply constraints because of the pandemic, the Post would have a pretty good case that the deficit was contributing to inflation. However, it is much harder to make that case now. Inflation has been slowing for the last year and a half and is now almost back to the Fed’s 2.0 percent target. In fact, if we exclude housing, which lags the market, CPI inflation would be just over 1.0 percent for the last year.
High interest rates are playing a role in slowing growth, so we can argue that we could have lower rates with a lower deficit, but we can also have lower rates with the current deficit, as the Fed will tell us tomorrow. It’s also worth noting the current 3.65 percent interest rate on 10-year Treasury bonds is lower than the rate at any point in the late 1990s when we were running budget surpluses.
In short, perhaps the Fed would give us somewhat lower interest rates if we knocked a few hundred billion off the deficit, but it’s not clear that a 0.1-0.2 percentage point drop in rates would be any big deal from the standpoint of benefitting the economy.
Then we have the issue of the debt. Yes, this is growing, but interestingly, according to the Congressional Budget Office (CBO), the long-term picture actually looks slightly better today than it did before the pandemic. The main reason is that CBO now projects healthcare costs will grow at a slower pace than they had projected in 2020.
This is noteworthy for two reasons. There has been a sharp slowing in health care costs since the passage of the Affordable Care Act (ACA). As a result, we are spending hundreds of billions a year less, saving more than $3000 per family, than had been projected before the bill was passed.
The other reason this is noteworthy is that we would have close to a balanced budget if our per capita health care costs were comparable to what other wealthy countries pay. While our system has become less wasteful over the last fifteen years, we still spend close to twice as much per person as people in other wealthy countries. There is plenty of waste that can still be wrung out of our healthcare system.
There are two questions to address on the debt. The first is the issue of whether we will face a crisis from the debt-to-GDP ratio getting too high.
The key point on this one is that we have been here before. During the Great Recession, two Harvard economics professors became international celebrities with a paper that purported to show that GDP growth slows sharply when the ratio of the national debt to income exceeds 90 percent. This paper was used as a rationale for austerity in the U.S., the EU, and elsewhere.
It turned out that the main result in the paper was driven by an Excel spreadsheet error. When this was corrected, their 90 percent threshold disappeared.
While others have argued that there is still some crisis threshold, it is not clear why that would be the case. If the United States has a healthy economy, with strong growth and moderate rates of inflation, it is not clear why we would ever face a crisis of investors being unwilling to buy U.S. government debt. Also, as many have noted the Federal Reserve Board can always buy debt if there are few buyers in private markets.
If we were facing a real economic crisis, say plummeting output due to war or climate-related factors, that would be a path towards runaway inflation, but in that case the problem would be the war or the climate-related factors, not the debt. The point here is that our priority should be maintaining a strong economy and then we won’t have to worry about the debt-to-GDP ratio getting too high.
Also, if the economy is growing rapidly, then the debt-to-GDP ratio will be growing less rapidly or even shrinking. That is the story of the drop in the debt to GDP ratio from 116 percent at the end of World War II to less than 40 percent by 1980. The government ran deficits almost every year during this period, but strong growth reduced the ratio of debt-to-GDP.
The other issue with the debt-to-GDP is the interest burden on the debt. We will spend almost $900 billion this year (3.1 percent of GDP) on interest. This is a lot of money that could be better spent on childcare, housing, or in many other areas. But it takes many years of serious austerity before we can make much of a dent in these interest payments.
Furthermore, there is little reason to believe that we are up against hard budget constraints if we want to spend more in these areas now. In other words, if we had the political will to spend another $50 or $100 billion a year on a child tax credit or some other worthwhile program, we could do it even without some offsetting tax increase or budget cut.
Government-Granted Patent and Copyright Monopolies
The other point worth making about the concern over interest payments is that it is very selective. One way the government pays for goods and services is by writing checks. We spend cash and directly add to the deficit and debt. However, the government also pays for a lot of things by granting patent and copyright monopolies. This is the way in which the government pays for innovation in most areas as well as a wide variety of creative work.
The rents from patent and copyright monopolies are huge, almost certainly much larger than the interest we pay each year on the government debt. In the case of prescription drugs alone they likely come to over $500 billion a year. If you add in the additional spending on medical equipment, computers, software and other items we are likely well over $1 trillion annually.
For some reason the Washington Post literally never talks about the burdens created by these government-granted monopolies. The decision to endlessly whine about interest burdens on the debt, but to ignore the much larger amounts paid each year in patent and copyright rents, is a political one. The Post will have to give its own explanation for this call, but it is important for the rest of us to recognize to ignore these burdens that we are handing down to our children.
Taxing Returns to Shareholders Instead of Profits
It’s also worth noting that if we want to raise more revenue there is an easy route that even the Washington Post editorial board should like, if they are being honest in their professed concerns. While the nominal corporate tax rate is 21 percent, we actually collect much less revenue that this tax rate would imply. This is because corporations have become experts at finding ways to avoid or evade the corporate income tax.
There is a way to circumvent their scheming and wipe out the tax gaming industry. We can switch the basis for the corporate income tax from profits to returns to shareholders (dividends plus capital gains). The advantage of this switch is that the amount that companies pay out in dividends and how much their stock appreciates are factors that are completely transparent. They can be found on dozens of financial websites. By contrast, corporate accountants tell us what corporate profits are.
We can set whatever tax rate Congress considers appropriate, but if it is applied to returns to shareholders, we can be sure that the IRS will actually get it. And by putting the tax gaming industry out of business, we will be freeing up resources (labor and capital) that can instead be used in something productive.
If the Washington Post wants to actually be serious, instead of just giving us the same old deficit hawk schtick, it could promote the idea of taxing stock returns. The tax on share buybacks was a useful first step. But don’t hold your breath.
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