Apparently, it is my weekend to pick on Greg Mankiw. Fortunately for him, that is like the mouse taking a swing at the cat (and the cat is a big one, not like Garfield big, all fat and lazy, but like a catamount, something with a "fierce spirit, savage attacks, and lightning quick moves").
Mankiw makes an excellent point this morning: we can't ignore a big budget deficit. Unfortunately, he missed a great opportunity to propose a decent solution.
From Mankiw's NY Times piece on Obama's budget (What's sustainable ...?):
Because of technological progress, population growth and inflation, the nation’s income and tax base grows over time. If the government’s debts grow at or below that pace, servicing the debt will not become a major problem. That means the government can run budget deficits in perpetuity, as long as they are not too large. ...The troubling feature of Mr. Obama’s budget is that it fails to return the federal government to manageable budget deficits, even as the wars wind down and the economy recovers from the recession. According to the administration’s own numbers, the budget deficit under the president’s proposed policies will never fall below 3.6 percent of G.D.P. By 2020, the end of the planning horizon, it will be 4.2 percent and rising. ...
The president seems to understand that the fiscal plan presented in his budget is not sustainable and, as such, is not really a plan at all. That is why the budget prominently calls for a fiscal commission that will be charged with “identifying policies to improve the fiscal situation.” The goal, the budget says, is “to stabilize the debt-to-G.D.P. ratio at an acceptable level once the economy recovers.”
In other words, President Obama’s long-term fiscal strategy is to appoint a commission to figure out a long-term fiscal strategy.
It is impossible to say what such a commission will propose, and voters probably won’t know until after the midterm elections this year. But Nancy Pelosi, the House speaker, gave a hint in an interview last October when she said a value-added tax was “on the table.” ...
YET despite its efficiency compared with other taxes, a VAT does not offer a free lunch. It would raise consumer prices, lower real wages, discourage work and depress economic growth. It would also break President Obama’s pledge not to raises taxes on the middle class.But unless the president revises his spending plans substantially, he will have no choice but to find some major source of government revenue. Ms. Pelosi’s suggestion of a VAT may be the best of a bunch of bad alternatives. Unfortunately, in this new era of responsibility, the president is not ready to face up to the long-term fiscal challenge.
One major source of revenue is from a carbon tax or carbon permit auction revenue. Yet, being efficiency freaks, some economists can't help but to suggest that the revenue should be "recycled" by lowering income taxes or corporate taxes or giving it back to households in dividend checks.
Here is Mankiw in his carbon tax piece for the NY Times from 2007 (One answer to global warming):
The scientists tell us that world temperatures are rising because humans are emitting carbon into the atmosphere. Basic economics tells us that when you tax something, you normally get less of it. So if we want to reduce global emissions of carbon, we need a global carbon tax. ...
The idea of using taxes to fix problems, rather than merely raise government revenue, has a long history. The British economist Arthur Pigou advocated such corrective taxes to deal with pollution in the early 20th century. In his honor, economics textbooks now call them “Pigovian taxes.”Using a Pigovian tax to address global warming is also an old idea. It was proposed as far back as 1992 by Martin S. Feldstein on the editorial page of The Wall Street Journal. Once chief economist to Ronald Reagan, Mr. Feldstein has devoted much of his career to studying how high tax rates distort incentives and impede economic growth. But like most other policy wonks, he appreciates that some taxes align private incentives with social costs and move us toward better outcomes.
Those vying for elected office, however, are reluctant to sign on to this agenda. Their political consultants are no fans of taxes, Pigovian or otherwise. Republican consultants advise using the word “tax” only if followed immediately by the word “cut.” Democratic consultants recommend the word “tax” be followed by “on the rich.”
Yet this natural aversion to carbon taxes can be overcome if the revenue from the tax is used to reduce other taxes. By itself, a carbon tax would raise the tax burden on anyone who drives a car or uses electricity produced with fossil fuels, which means just about everybody. Some might fear this would be particularly hard on the poor and middle class. ...
So, today would have been a great day to propose the use of carbon tax or permit revenue to help out with the funding of the government. Instead, Mankiw went all political and fussed at democrats for raising taxes.
