Crossposted from The Stars Hollow Gazette
When Real Interest Rates Are Negative, Taxing Is More Costly Than Borrowing
By Matthew Yglesias, Slate
Posted Friday, Jan. 18, 2013, at 1:15 PM ET
A good article about public policy ought to be making some kind of non-obvious point about the world in order to get people to think about things differently. Simply responding by saying that the suggestion sounds funny is absurd.
You don’t say.
Let’s break this down. You’re the mayor of a city. A storm strikes and ruins a whole bunch of your police cars. Now you need to buy new ones. You have two options for paying for the cars-you can borrow the money and pay the bill ten years from now, or you can raise taxes and pay right now. The case for paying later is pretty clear. In ten years’ time your city’s overall economic output will be higher so the burden of paying off the loan then will be lessened. On the other hand, the case for paying now is also pretty clear-lenders generally expect interest payments in exchange for their loans so the total cost of the debt option is higher. But wait! The city’s accountants show up and point out that it’s currently possible for the city to borrow at a negative real rate. Suddenly the interest costs are off the table as a reason to prefer paying sooner.
So what’s left? Nothing. The city will be richer in ten years, so pay then. The logic becomes especially compelling when you recognize that the city’s income will grow more rapidly under the lower-tax regime that encourages more investment in residential and commercial property and more business activity.
…
Perhaps Linker and I disagree about what kind of reductions in Medicare and Medicaid spending would be optimal, but I have no disagreement that they should be reduced to below their currently projected levels. That said, under any scenario the government is going to be spending money in 2013. The question on the table was should we finance that spending with taxes or should be finance it with borrowing. My view is that with real interest rates below zero, it makes sense to tax less and borrow more. This has literally no relationship to my view about the appropriate level of future government spending.
Moron.
Hat tip Dr. Duncan Black formerly of the London School of Economics, the Université catholique de Louvain, the University of California, Irvine, and, most recently, Bryn Mawr College.
It’s funny how the issues changes but the language stays the same. Liberals, in being perfectly right about many things, are silly and irresponsible children.
1 comments
Author