Quit Bitching, Start Talking

Niklas Blanchard touches on the big problem I wrote about in a post from today, “Can’t Cut Spending, Can’t Tax, What Now?”:

Now, I’m not one to wake up in the middle of the night worrying about the Debt:GDP ratio, or the absolute level of public debt. I’m also not one to characterize the debt as “stealing from the next generation”. It’s definitely worth contemplating the nature of the debt.

Like any debt, the public debt exists so that we can finance the our current expenditure (mostly) on club goods with our productivity growth as a society later.

He goes on to explain how the most important thing is productivity growth rate, which the US is lagging on and struggles to bring up compared to other regions of the world–greatly due to the fact our productivity is so high as it is. The rate, however, is more important.

Why is this a problem for the US and not countries in Europe? Because of their lower levels of growth, there is a lot of low-hanging fruit for those countries to pick off in order to increase their productivity growth rates. The US, seemingly (from the above graphs), not so much.

He then counts potential solutions that don’t really hit the nail on the head.

Then there is the prospect of inflating away portions of our debt. This is also called “monetizing debt”. As Arnold Kling notes, however, you can’t expect a “fool for a lifetime*”. The bond market will not continue to accept higher levels of inflation while maintaining current yields — as they did in the 70′s

Then he touches on the same solution advocated by plenty of realistic, practical economists who understand both the problem stated in the OP and my second post: the welfare state is unsustainable with the status quo and is here to stay–and we need a better tax to deal with it.

Thus, if the goal is to have a robust welfare state, the US will have to learn to tax and transfer much more efficiently. However, the likelihood of this coming to pass during a period in which we sift through the problem with any semblance of reason is very near zero — so what we’ll probably end up seeing is something akin to the situation Greece is in (from the perspective of climate, not choices).

Blanchard wrote in a previous blog (which he links to in the preciously cited blog):

Another category of taxes that are very efficient are “value-added taxes“, which have been in the news as of late. All of these are better alternatives to taxing income and capital (as we do now). And, contrary to what you may read from the leftist-liberal blogosphere, they can be made highly “progressive” through very simple income targeting schemes and means-tested benefits.

Although we never hear it, we should replace income and capital taxation (both personal and corporate) with these taxes, along with keeping a payroll tax. We would be able to meet our obligations, broaden the tax base, and raise more income for the goods which we decide are best delivered through the “club of everyone”.

The problem is that the public tends to be very ignorant of the solutions to these problems. As was very evident in one thread in a political forum I frequent, where people simply bitched and moaned, saying (incorrectly) that the Obama administration was going to implement a VAT tax, people fall back to incoherent statements and accusations, limiting the possibility of having a reasonable conversation to meet goals and craft plans.

Instead of bitching and moaning, people need to start advocating efficient tax systems such as VAT but make sure their representatives understand it has to be a replacement, not in addition, to the income tax–and that anything else is just unacceptable.

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