I hate to sound like a deficit hawk, but…

I’d like to elaborate on this post more soon with more detail (and fun graphs), but the topic of fiscal policy and continuing federal budget deficits has been on my mind lately. My thoughts are:

  1. The economy is operating close enough to full potential that any Keynesian deficit-financed stimulus would potentially be counterproductive at this point. Similarly, continued annual deficits increasingly run the risk of crowding out private sector spending as resources are used to fuller capacity. If crowding out were to occur, interest rates would almost certainly rise, hurting growth. Though economic slack does remain, we should be increasingly cautious about running large-ish deficits in the coming years.
  2. Our long-term debt sustainability issues (which are our actual problems) certainly are not helped by short-term debt accumulation. Though acceptable in times of economic downturn and during recovery, short-term debt accumulation is less acceptable when an economy is both growing and has almost returned to near full operating capacity. If we continue to run structural (e.g. cyclical = 0) deficits, as we have for the past four decades, even in good times, our capacity to deal with the coming surge of entitlement spending will be greatly diminished. In many ways, though, we’re already too late on this regard.
  3. It might even be optimal to try to run a balanced or even more than balanced (e.g. surplus) budget for a few years. Normally, the rule-of-thumb is that, in the long run, annual debt growth (which roughly equal annual deficits) must be equal to or less than annual economic growth in the long-run (indicating that even balanced budgets are technically required for sustainability). Though this is now the case at the moment, our current deficit of around 3% of GDP is only small enough to about stabilize our debt/GDP ratio of around 75%, not reduce it. And arguably, reductions in debt/GDP would be preferable soon to give us more room for the coming entitlement spending and any future recessions we might encounter (and also to reduce the risk of a debt crisis).
  4. At the very least, we should continue to try to reduce our structural budget deficits while promoting long-term government investments (for example, in infrastructure, R&D, etc.). At the present time, further fiscal stimulus would seem inappropriate; the window for action has passed.
  5. Reduction of budget deficits is not only about timing, but rates of change (which is where the calculus comes in). Any plan must not just offer targets and amounts, but how quickly those targets and amounts are to be achieved and any feedback loops that might ensue
  6. None of the presidential candidates offers a viable long-term deficit reduction/debt stabilization plan, which is appalling. Indeed, many (especially Trump and Sanders) would dramatically increase our rate of debt accumulation in a very unsustainable way. Though many candidates offer proposals for productive spending, both that spending and, more crucially, the coming increase in mandatory program spending should be at least partially paid for, via tax increases or spending cuts. None elaborate on such a plan.

In my world, the government would:

  1. Enact reforms to mandatory programs (e.g. Social Security, Medicare, Medicaid) that progressively reduced benefit growth and raised more dedicated revenue (for example, by increasing the payroll taxes’ income cap)
  2. Reduce wasteful spending in the form of corporate subsidies (e.g. agricultural, fossil fuel), DOD procurement waste, redundant programs (for example, many overlapping government assistance programs)
  3. Raise general revenue (via reductions in excludability of health insurance from taxation, gradual phase-out of mortgage interest deduction, caps on deductions/deductability of some items, etc.)
  4. Modestly raise spending on direct R&D and R&D tax credit, transportation (highway) funding, job training programs

A more detailed discussion of the fiscal situation and solutions I would endorse will follow soon. But I thought it would be good to write down my general thoughts on the matter.

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Defining Definitions in our Election Discourse

This post’s main purpose is to serve as an outlet of frustration over the muddling of definitions that is particularly prevalent in this election cycle. Prior to 2015, Americans’ understanding of the meaning and beliefs of different political ideologies already seemed confused (in my opinion). However, the rhetoric of political candidates has not helped. In particular, my complaints lie mainly with Bernie (who, for some inexplicable reason, has still not conceded to Clinton’s insurmountable delegate lead in the Democratic nomination). People seem to think he has done a service for the country by helping to “de-stigmatize” the word socialism, which is considered to be a much more prevalent ideology and economic system in Western European countries. However, I think that he has actually made things worse for political discourse by 1) confusing people about what pure, traditional economic socialism really is 2) by confirming the false belief among many that American liberals are actually best defined as socialists, when I’d argued they’re much more pro-capitalism than pro-socialism and 3) Potentially de-emphasizing needed attention on the very real destructiveness that pure socialist economics has historically wrought on societies and the many lessons that they entail. I will begin by laying out the different terms and what I think the definitions truly are before proceeding to the other arguments noted above.

  1. Socialism: Bernie Sanders likens himself as a socialist at heart. But is he really best described as that? My definition of socialism falls along with the economic, traditional definition of socialism. Particularly, it entails the “common ownership and control of the means of production”, typically by the state (although historically, many variations of socialism have appeared in which other entities, institutions, or the masses themselves own and control the means of production). The means of production are any economic inputs (typically tangible and physical) used to create economic value or output. They can include machinery, factories, roads, infrastructure, educational institutions, etc. In my mind, if Bernie Sanders was truly a socialist, he would advocate for the government to both own and control virtually all of the means of production (including businesses, factories, etc.) This would entail a program of large-scale nationalizations of industry. Aside from “nationalizing” (better termed as a national replacement) of health insurance and 100% public funding/control of tertiary education, however, he has no such program, and largely keeps in place private ownership and control of the means of production (e.g., he allows for businesses to continue to be privately owned and operated). Consideration of the fact that all societies have different ratios of private and public ownership of the means of production leads to the important point that these ideologies and policies do lie along a spectrum. But in describing whether he better fits a socialist mold or a capitalist mold, he’s arguably more pro-capitalism than pro-socialism in general. Only his advocacy of nationalized health insurance and tertiary education would make him truly relativelymore socialist than other candidates, per my definition. Instead, his policies reflect interventionism within the confines of a predominantly capitalist economic framework that he’d like to keep intact (e.g. the taxation and regulation of a capitalist economy, with other interventions in the form of government spending). As a result, he’s much better described as a social democrat or an American liberal than a socialist…
  2. Social Democracy/American Liberalism: First, it’s important to note that these two terms are not the same. But they are quite similar. Essentially, both argue, in consideration of my definition of socialism, in a capitalist mixed economy with heavy amounts of government intervention (taxation, spending, regulation). Although these ideologies do entail some elements of pure socialism (e.g. public roads, public schools, national health insurance, etc.), they are far from pure USSR-style socialism, as private industry is still prevalent (indeed, dominate) within their prescribed economic systems. Now, granted, the taxation and regulation of capitalist institutions that they advocate for entails some control of these private means of production by the state. But not full control by any means, and certainly not actual ownership, as pure, traditional socialism would entail. It is also true that social democracy did start out as an ideology of gradual reform of capitalism into a system of socialism via democratic means over time. Now, however, like American liberalism, it’s essentially the definition stated above, with an emphasis on income redistribution and social justice. Therefore, in social democracy and American liberalism, capitalism still reigns, and given Bernie’s proposals, he best fits within these categories (which, by the way, I’m far from the first person to notice or argue).

A few things to derive from above:

1) These terms are all pretty vague and overlapping, even utilizing the narrowest of definitions. There’s technically no 100% correct description to be found for different candidates and economic systems.

2) Economic systems typically contain a mixture of capitalist and socialist elements. In my view, it’s the extent that some elements dominate that truly characterizes systems and people’s political ideologies (e.g., if more common ownership of the means of production prevails in an economy or a person advocates for mostly common ownership, it’s a socialist economy or the person is socialist, respectively). This observation of non-purity can also lend support for a dialogue of relativity (e.g., someone or some economy is relatively more socialist or relatively more capitalist than another).

3) In my opinion, the taxation, regulation, and spending of social democratic and American liberal policy aren’t exactly socialist elements (at least, not pure elements; perhaps quasi-elements). Rather, I would argue they are forms of interventionism within a fundamentally/overwhelmingly capitalist framework (private ownership of the means of production). Thus, Bernie is a social democrat/American liberal, and American liberals are not truly socialists.

4) It should be clear that, even in overwhelmingly capitalist America, true socialist elements do exist that actually serve useful functions. Public roads, public schools, public infrastructure, etc. are indeed prevalent in all overwhelmingly capitalist economies and can technically be characterized as true examples of socialist ownership and control. What really matters is what economic means of production are private versus public and balance of the ratios in determining economic and societal well-being.

All of this is also not to say that the taxation, spending, and regulation advocated for by social democrats and American liberals do not have some negative consequences, even if such interventions are not really “socialism” (e.g. system is still mostly privately owned/controlled). And it’s especially not to say that purely applied, across the board economic socialism is not destructive, when it clearly has been in the past (USSR, China, Vietnam, etc.) The economic misallocation of resources stemming from predominate state socialist ownership and control (and the ensuing incentive and signalling problems) brought upon massive economic hardship and destruction of human well-being in multiple countries throughout the 20th century. That’s what’s truly concerning to me. Although socialism shouldn’t be the taboo word it has been, considering it is found to be functioning within American society at this very moment, people should be very weary of the extent of its application and for which segments of the economy it is applied to. The very same can be said for capitalism, too. Thus, we need to shy away from puritanical, black versus white thinking – with its all-or-nothing propositions – and finally let informed, pragmatic thinking lead the way.

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