Wednesday, January 07, 2009

Borrowing is borrowing 

I was reading this post by Ed Morrissey this morning and thought it's both right and wrong. Right, in that any lockbox is hypocrisy. The current Social Security surplus is estimated to be $155 billion in fiscal 2009. That number is already being spent. The new forecast for 2009 puts the deficit at $1.2 trillion, or almost 9% of GDP. $180 billion of that deficit comes from TARP, netting out the present value of troubled assets that the government plans to recover.

You may as well say the lockbox on Social Security was spent on TARP; the Social Security fund is being stocked with Treasury bonds anyway at this point. What actually will pay for the funds to be given to households as grants -- Ed's right here, too: The money isn't a tax rebate, since there are no taxes paid by many of its recipients -- will be additional borrowings from whomever we can borrow from. That's most likely going to be international countries such as BRIC -- Martin Wolf concludes as much yesterday -- though Russia's part of that will be small for the foreseeable future.

You might say tax cuts are tax cuts, and right now we need them so what the heck? let's borrow from BRIC and devil take the hindmost. But that would be wrong. Tax cuts that just allow consumers to purchase more means just the kind of flow Wolf discusses. We hand a dollar to a family making $30,000 a year, and it spends perhaps $.20 of it on imported goods. That's an old-fashioned Keynesian injection with a real leakage in the circular flow. Peter Ferrara shows that it's the same thing we did last winter. On the other hand you can have a tax rate decrease such as the corporate tax rate cut Larry Kudlow is seeking. It's much cheaper, it leaks less, and it has the potential for a bigger bang for the buck. (I'm not as enamored as Kudlow by the business tax breaks currently pushed by the Obama team. They do nothing for the fellow with the new idea ready to take advantage of a marketplace suddenly with lots of elbow room. The circular flow still applies; Hal Varian argues for stimulating private investment to use the savings that households are generating to replenish their portfolios ... and thus argues for investment tax credits.

Deciding what paid for government spending, or whether such-and-such a group is having money returned or getting a grant, is fun politics but not very useful economics. What matters is changing the size of government spending and the impact of different tax rates on economic activity. If you told me the corporate tax rate was being reduced "in order to rebate some of the payroll taxes corporations pay", I'd not complain about hypocrisy.

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