Stimulating The Scolds

by digby

Robert Frank had an excellent article in this week-end’s NY Times about the stimulus. It’s a shame that he has to waste his time writing things that should be obvious, but he does:

In a recent column in Forbes magazine, the economist Lee Ohanian of the University of California, Los Angeles, a stimulus opponent, explained why he believes that increased government spending wouldn’t help the situation. The problem, he says, is that “the higher taxes on incomes or expenditures that ultimately accompany higher spending depress economic activity.” Because the short-run stimulus program has been financed with borrowed money, not higher taxes, Mr. Ohanian must have in mind future taxes needed to pay off stimulus-related debt.

His argument, and that of stimulus opponents generally, thus boils down to this striking contention: As the government spends borrowed funds, consumers will start to realize that the resulting debt spells higher taxes in the future, which will lead them to curtail their current spending. Those cuts will offset increased government spending, leaving no net stimulus.

Although there may be people who would actually spend less now to hedge against uncertain future tax bills, it’s unlikely that you know any of them. As behavioral economists have been saying for decades, that’s just not the way most people act. Hardly any consumers even know how big the national debt is, much less how it will affect future taxes.

MORE important, there are good reasons for believing that stimulus spending will make people’s future tax payments lower, not higher. Yes, government borrowing adds to the national debt. But if the stimulus also hastens the downturn’s end, it will accelerate the growth of future incomes and tax revenue. In that case, the net effect would be to reduce future taxes, compared with what they would have been without the stimulus.

And even if we run with the notion that stimulus spending will increase future taxes, it doesn’t follow that consumers will cut back on spending now. After all, we know that most people already fail to save enough for their retirement. Why would they alter their behavior to hedge against uncertain future taxes?

They don’t. “Deficit” is a word that stands for “something terrible I don’t understand.” There is no logic to it. People couldn’t tell you what it means and why they fear it, but they just know they must.

I mentioned this on a panel I was on in Pittsburgh, recounting the townhall in 1992 in which they asked Poppy if he could tell people how the deficit had affected him personally. And it was considered quite the gaffe when he couldn’t do it. But who could? (The truth of the matter is that Poppy is one of the few who are affected by the deficit because like most wealthy Americans he’s heavily invested in bonds, but that’s a different question.)

The Deficit Scolds have successfully manipulated the public into fearing a boogeyman, but it doesn’t make any sense. Progressive politicians would do themselves a big favor if they started to challenge this shibboleth instead of pandering to it. It’s a fundamental cause of the legislative paralysis we see in DC today.

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