It is well known in economics that it does not matter how governments choose to finance their spending. Suppose the government budget is $3.6 trillion. Whether they raise $3.6 trillion in taxes today and borrow none, or raise $2.3 trillion in taxes today and borrow $1.3 trillion or whether they raise no taxes today and borrow $3.6 trillion, the impact on the opportunities of “typical” Americans are identical. (Maybe I’ll show the proof of this in a future post).
However, the behavioralists (the “Nudgers”) also recognize that the typical consumer often makes mistakes – especially when presented with consumption(and tax) opportunities that are immediate versus into the future. For example, I am very likely to tear into 5 pounds of chocolate after not eating for a day despite knowing that I should not do it. Similarly, even though the above tax/borrowing policies have no differential impact on the financial condition of the typical American, the idea of paying taxes today rather than in the future seems to be more horrific since it is immediately felt. Therefore, consumers and voters irrationally support borrowing to finance any given level of government spending as opposed to raising taxes today. While this should not matter if government spending is fixed, it actually does matter in real life. When consumers think that borrowing to pay for government goodies is “free” over time they will be more amenable to increases in government spending (to kick the can down the road). In other words, consumers and taxpayers really don’t want the high spending that they seem to be voting for, if it were not for the blinders of their irrationality, they would have chosen much higher rates of current taxation and over time lower levels of government spending.
Therefore, if the Nudgers were consistent in their policy applications and were truly trying to improve consumer well being and not just raise their own status, or raise the legitimacy of the view of those who adore the beneficent and awesome powers of the state, then it seems a pretty clear implication that we should be regularly nudged to understand that taxation and borrowing are equivalent. Once the spending has been committed, how we finance it is totally irrelevant. How should we do this? I can imagine passing laws that show this sort of information on someone’s paycheck, and we must read it before being able to deposit it. Anyone have any better ways of enforcing this nudge?
Another way of putting all of this is that I actually believe that feeding the beast, rather than starving the beast is the more effective way to kill government programs. Basic economics suggests it. It’s a wonder a Republican would ever have taken the other view.
Milton Friedman was right in starving the beast, who has become obese from base.-line budgeting.
Unless we grow, you and I and our children cannot hope to enjoy any sort of prosperity. This is achievable, provided we do not break windows helter skelter every day.
[…] is the last episode in the series. And for those interested in reading more about why such a proposal might be a good idea, I reprint […]