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Deficit Problems Jude Wanniski May 9, 2003 |
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From: Jude Wanniski jwanniski@polyconomics.com
To: James K. Galbraith <galbraith@* * * * *.edu>
Re: Deficit Problems
May 09, 2003 3:16 pmDear Jamie:
I'm opposed to any effort to solve deficit problems in the short run. By the rules of accounting, if the private sector wants to restore its balance sheets, which it does, the public sector deficits have to rise. The more the better, right now, to keep up activity and especially to prevent states and localities from cutting services and raising taxes (adding to the deficits in the private sector, which will only cause them to cut back more).
EVEN THE ANTICIPATION OF THE TAX CUTS IS HELPING SOLVE THE DEFICIT PROBLEM AT EVERY LEVEL OF GOVERNMENT, AS THE STOCK MARKET RISES AND THE NATIONAL ECONOMY BEGINS TO TURN FROM CONTRACTION TO EXPANSION. I AGREE THERE SHOULD BE NO EFFORT TO DIRECTLY SOLVE THE DEFICIT PROBLEM, BUT THERE IS THAT INDIRECT EFFECT WHEN LOWER TAX RATES ON CAPITAL LEAD TO A BIGGER ECONOMY.
I'm not completely opposed to a temporary tax break for business investment. If you look at the accounts it is clear that the business sector is being squeezed very hard right now. Though I am skeptical of just how much good it will do given the excess capacity out there, & in general would prefer to get as many licks in for revenue sharing as possible before conceding anything else.
OF COURSE I AGREE WITH YOU ON REVENUE SHARING, BUT THAT IS ONLY A BAND-AID. IF YOU WANT TO WIN A NOBEL PRIZE, YOU SHOULD BE THINKING OF CURING THIS UNUSUAL MALADY IN THE WORLD POLITICAL ECONOMY. (THEY WON'T GIVE ME ONE BECAUSE I DON'T HAVE A PHD, SO I WILL TELL YOU AND YOU CAN SPLIT THE PRIZE MONEY WITH ME. HUH?) I THINK YOU SHOULD BE ADVISING DEMOCRATIC POLITICAL LEADERS THAT THEY ARE DIGGING THEMSELVES INTO A DITCH BY OCCUPYING THE FISCAL RESPONSIBILITY ROLE THE GOP PLAYED FOR ALL ITS YEARS IN THE WILDERNESS. GOLDWATER LED THE FIGHT AGAINST THE JFK TAX CUTS (WITH YOUR DAD EGGING HIM ON, AS I RECALL). WE DO NOT NEED A TEMPORARY "TAX BREAK" FOR BUSINESS, BUT A LIFTING OF ALL TAX RATES THAT DISCOURAGE CAPITAL FORMATION. THAT'S THE ONLY WAY TO MEET THE REAL POLITICAL PROBLEM OF HOW TO FINANCE THE SENIORS WHEN SS RUNS 0UT OF ITS SURPLUSES IN A FEW YEARS AND THE TRUST FUNDS HAVE TO BE SUPPLIED BY GENERAL REVENUES. HOW DOES THE NATIONAL ECONOMY SUPPORT ONE RETIREE WITH TWO WORKERS WHEN THREE ARE REQUIRED TODAY. ONLY A 50% INCREASE IN THE K/L RATIO WILL DO THE TRICK. YOU MUST AGREE WITH THAT.
On the other hand, I'm generally skeptical about arguments based on aggregate capital constructs, and so don't see what the link is from K/L ratios to budget deficits. If you have a minute, clue me in to your reasoning.
I'LL SEND YOU AN EXCHANGE I JUST HAD WITH A FINANCIAL REPORTER FOR A MAJOR NEWSPAPER. AND DO LOOK AT MY WEBSITE TODAY, A SUPPLY-SIDE UNIVERSITY LESSON THAT ANALYSES THE ARTICLE IN THE CURRENT ISSUE OF FORTUNE ABOUT THE RETURN OF THE SUPPLY-SIDERS. ONE CANNOT REALLY UNDERSTAND THE SUPPLY MODEL WE USE IN A CASH-FLOW FRAMEWORK, WHICH IS AT THE CORE OF THE KEYNESIAN MODEL (EXCEPT FOR JMK'S 'ANIMAL SPIRITS.') LINDSEY AND MANKIW AND FELDSTEIN ARE ALL CASH-FLOW ECONOMISTS, TAKING MONEY FROM ONE POCKET WHERE IT IS NOT BEING USED AND PLUNKING IT INTO ANOTHER WHERE IT WILL BE USED. THEY SIMPLY DISAGREE WITH LIBERAL KEYNESIANS ON THE "POCKETS" THAT SHOULD BE INVOLVED. IN OUR MODEL, THE FINANCIAL MARKETS WILL NOT PERMIT UNUSED CAPITAL FROM BEING FORMED WHEN THE RETURNS HAVE BEEN DIMINISHED BY GOVERNMENT MISMANAGEMENT OF MACRO POLICY. TEN MILLION PEOPLE ARE UNEMPLOYED AND WOULD LIKE TO HAVE JOBS AT GOOD WAGES AND A MILLION BUSINESSES HAVE EXCESS CAPACITY AND WOULD LIKE TO USE THAT CAPACITY, AS WELL AS UNUTILIZED TRADE CREDIT. BUT TAX RATES ON CAPITAL RETURNS WON'T LET THAT HAPPEN. THERE COULD BE SOME RELIEF IF THE FED FIXED THE DOLLAR TO GOLD AT $350, ABOUT WHERE IT IS, AS THIS WOULD REDUCE THE MONETARY RISKS IN THE SYSTEM. BEST IF BOTH WERE DONE AT THE SAME TIME. FIX THE DOLLAR/GOLD RATE AND ELIMINATE THE CAPGAINS TAX AND THE SECOND TAX ON CORPORATE DIVIDENDS.
JUDE