Brad DeLong’s fiscal manifesto

By Felix Salmon
November 9, 2010
Brad DeLong is fed up with vague hand-waving from technocrats, Bob Rubin very much included, who call for the government to make difficult decisions without being remotely explicit about what such decisions might entail.

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Brad DeLong is fed up with vague hand-waving from technocrats, Bob Rubin very much included, who call for the government to make difficult decisions without being remotely explicit about what such decisions might entail. So he comes up with his own seven-point “platform for the bipartisan technocrats of the center”, which “everybody centrist and deficit-hawkish in the reality-based community should be willing to commit to today”.

It’s a provocative and very useful contribution to the fiscal debate, if only because it has exactly zero probability of ever being enacted. But the thinking behind it is solid:

The principal sources of uncertainty in American economics right now are three: we don’t know how the long-run fiscal gap will be closed (but we think it will be), we don’t know how our health-care system will be reformed and transformed (but we know it will be), and we don’t know what our policy toward global warming will be in a generation (but we know that we will have one). The best things the government could do to diminish uncertainty would be to: (1) commit immediately to the full implementation of the version of RomneyCare-plus-cuts-in-Medicare-and-taxes-on-gold-plated-health-plans that was this year’s PPACA, (2) commit immediately to a long-run climate policy in the form of a carbon tax coupled with research incentives for future energy technologies, and (3) commit immediately to a plan to cover the long-term fiscal gap.

The most striking part of DeLong’s plan is not the strict 10-year PAYGO, which would apply not only to extending middle-class tax cuts but also to a second stimulus. Instead, it’s the carbon tax. In contrast to most proposals out there, DeLong’s carbon tax would not be revenue-neutral: half of it — about $73 billion per year, or $635 per household — would go straight to deficit reduction, rather than being used to fund extra spending.

The other half of the revenues from the carbon tax would be used to match extra contributions to Social Security accounts — you could add up to 2% of your Social Security wages to your account, which would then be matched two-for-one by carbon tax revenues.

That, of course, leaves nothing to offset the regressive nature of the carbon tax, the burden of which is disproportionately borne by poor families in rural areas. (And in fact it’s worse than that: poor black families have significantly larger carbon footprints than poor white families, which makes a carbon tax not only regressive but also racially highly charged.)

If you were building a national taxation structure from scratch, you’d definitely include a carbon tax in there somewhere — and probably some kind of Tobin tax, too, not to mention a wealth tax and possibly some kind of consumption tax as well. But of course we’re not building anything from scratch, and the implementation of any new tax is always going to be politically fraught, especially in an environment where most Republicans are never going to vote for any new tax of any description. (See California’s fiscal situation for a good example of where that leads.)

All of which just goes to underline that the likes of Rubin talk gravely about the importance of profound fiscal reform, they know — or they should know — that there’s no way it’s ever going to happen.

DeLong, then, has performed two important services here. He’s translated technocratese into stark policy proposals, and he’s demonstrated that the technocrats in question might as well be talking about giving every US family a free unicorn for all that their wishes will ever come true. Let’s hope (against hope) that when the technocrats continue the debate, they’ll have been paying attention to both messages.


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And what, Felix, is wrong, exactly, with proposing to give every U.S. family a free sparkly unicorn for Diwali?

Posted by delong | Report as abusive

Did you we just had an election.

Posted by LennyH4747 | Report as abusive

If you are going to have a carbon tax, it has to be totally simple and linear. You pay for what you use, no more, no less.

That is how petrol taxes in Europe work and that is the only way to really cut back on fossil fuels.

It’s not really regressive, just fair. Al Gore will be paying the most, you and I will pay somewhere in the middle, me with my minivan and you with your travel, and the poor will pay the least.

Posted by DanHess | Report as abusive

I was linked here from Brad’s site, but he doesn’t let people disagree with him in his comments, so I’ll respond here:

He goes off the rails right away with this: “we don’t know how the long-run fiscal gap will be closed (but we think it will be)”.

As a deficit dove, he is for fiscal stimulus now, but see government debt as somehow in the same category as private debt, needing to be “paid back”. Thus, the “long term fiscal gap”.

There is no such thing. The fact that Delong thinks there is shows that he has no understanding of the monetary system as it currently exists. A sovereign currency issuer such as the U.S. creates money by spending and destroys it by taxing. The only reason such an entity needs to tax is to remove purchasing power from the economy in order to make room for it’s spending without causing inflation. It’s not to “raise money”, since a currency issuer has no more need for “revenues” in its own currency of issue than the New York Subway needs points to put on your Metrocard.

The Federal government always has the power to make any and all payments in it’s currency of issue. If health costs continue to go up (as is likely, no matter what reforms are put in place), we may find that Government is taking up a larger share of GDP and taxes will need to be raised to cool down the economy – but that would only be once we are running at full employment and full capacity utilization. At that point, it wouldn’t be a big deal.

The only real issue is: will the real resources be there to take of the old and sick in 50, 60, 70 years? If there are, the Government will be able to enact income transfers to provide them to people who can’t afford them. If they aren’t, then no amount “fiscal rectitude” or “10 year paygo” plans, now or then, will be able to provide them.

Posted by JimBaird | Report as abusive

>> poor black families have significantly larger carbon footprints than poor white families . . .

Okay, I’ll bite. You throw this out without support, and I can’t for the life of me figure out why it may be so (or if in fact it even is so). Rural versus urban, different definitions of poor, different housing? I don’t have a clue. Any thoughts?

Posted by Curmudgeon | Report as abusive

@Curmudgeon, I hope Felix does respond with detail, but I think more modern cars and more insulated and natural gas-heated houses are good reasons to think that an upper middle class family has a smaller carbon footprint.

Posted by Dollared | Report as abusive

I agree with Jim. DeLong thinks we have a gold standard.

For whatever reasons, Felix just ignores MMT…

Posted by petertemplar | Report as abusive

@Curmudgeon, I’m not entirely sure myself on all the reasons, but I think it’s mainly geographical — that poor black families tend to live in coal-mining regions while poor white families are more likely to get their energy from less carbon-intensive sources like natural gas or even nuclear or hydro.

Posted by FelixSalmon | Report as abusive

Felix, you are almost certainly right that the upper NW of the US (etc.) is more energy efficient (and less racially integrated), but PLEASE back it up.

I’d put the Tobin tax above this anyway on triage. And just make everyone pay SS on 100% of their income (sacrilege!).

And Unicorns #1. … but that’s just me.

Posted by Tangerinebunny | Report as abusive

@felix, hmmm, probably more poor white where I grew up poor (sw PA), but I can see it south of the Mason-Dixon line. In New England, where I live now, it’s an eclectic combination of home heating oil, natural gas, nuclear, and hydro (imported from Hydro Quebec).

Posted by Curmudgeon | Report as abusive

Felix, dude.

“poor black families tend to live in coal-mining regions”

What?? In whose universe?

West Virginia, the heart of coal country, is 96% white.

Poor blacks are overwhelmingly likely to live in inner cities, take metros and buses, and live in apartments and public housing.

Poor whites are overwhelmingly found in the countryside, with West Virginia being a reasonable representation. They live in detached homes or trailers that need more carbon to heat and cool and must drive great distances often.

Does this even need to be said?

It is almost certain therefore that a carbon tax would be harder on poor whites than poor blacks.

Posted by DanHess | Report as abusive

And to think how you have attacked Gretchen Morgenson!

Posted by DanHess | Report as abusive