Economic Austerity is Not Good for You: Forgetting the Lessons of History

Who would have thought cutting government spending in the middle of a slump would lead to lower growth? Anyone with half a brain that's who. I'm not talking about Australia here, but Britain. However, Britain provides an example of what could have happened in Australia if simple-minded austerity politics had operated as per the Coalition's critique of Labor's fiscal expansion during 2008-09. Certainly the fact that the Chinese didn't believe in austerity helped our cause as well.

While China certainly came to the rescue after the slump, according to Treasury (see this also), it is the fiscal expansion that kept Australia out of recession during 2009. Despite revisionist views that it was all about China, it was fiscal expansion that helped Australia to avoid a downturn in business and consumer confidence during 2008 and 2009, which may have led to a negative spiral of increasing unemployment and declining consumption.

Here as a reminder is how bad things were late last decade on a global scale

As Steve Morling and Tony McDonald point out:

As stark as these annual growth figures are, they disguise the speed and extent of the decline in the second half of 2008. In through-the-year terms, world growth fell from 3.8 per cent in the June quarter 2008 to -2.8per cent in the March quarter 2009, a 6.6 percentage point turnaround. The extent of the slowdown over this period was quite similar in the advanced and emerging economies.

A couple of other charts from their paper make interesting viewing.

The first chart shows that the fiscal expansion, hit when it was needed most, during the second half of 2008  and first half of 2009.

If the global economy goes pear shaped in 2012-13, then the government should and probably will make the government contribution to growth help us avoid the severe downturn that will occur elsewhere. Still, what happens in China matters more and more, not just the direct impacts of Chinese demand on Australia but the indirect effects of Chinese demand for the goods and services of other Asian countries, which also helps us to keep growing. Even if Asia has decoupled from the rest of the world (which in the medium term I don't think it has), the countries of Asia have not decoupled from each other.

This second chart shows that the downturn badly affected China as well and our major trading partners in general. During this period of time, Australia was not being saved by China or the rest of Asia.

On a per capita basis Australia's growth performance was not as exemplary. Remember that GDP per capita is a much better measure of progress than aggregate GDP, which can be bolstered, as it has been throughout Australian history, by population increases.

Another interesting chart shows the differences between Australia's economic structure and the OECD average. In the 1980s these differences were seen as likely to lead to Australia falling down the rankings of of advanced economies. Now they are seen as a fundamental factor in our economic success. It is possible, if Australian policy-makers don't work to diversify the economy, that in 20 years time we might be making the same arguments about the Australian economy that were made in the 1980s.

Labor's determination, therefore, to produce a surplus sooner rather than later is not the same thing because of Australia's better and sustained recovery (so far) from the downturn on the back of Asian demand (remember the Asia story is much more than just China). The government was right to get the budget balance in order, while the sun's been shining. Indeed, they might have had a better shot at this if they'd raised taxes on mining profits sooner rather than later.

Wayne Swan and Treasury realise that if global growth falls off a cliff then they have room to manoeuvre to again support the economy through fiscal expansion (i.e. government spending).

While there may be too much focus on Europe's possible negative effects on Australia at the moment, it's important to remember that Europe as a whole accounts for about 40 per cent of global GDP. (The European Union itself is a larger economy than the United States).

The difficulty in the face of a return to a renewed global recession might be in ignoring those who believe that governments should be more like virtuous households - with a keen saving and protestant work ethic.

Instead they will have to make a case that increasing government spending will be a necessary move to avoid a downward economic spiral that could be caused by stupidly believing that austerity is a suitable policy during a slump. Expect the Coalition to go on about unsustainable public debt. Just make sure you realise that this is rubbish. The aim of government fiscal and monetary policy during a downturn should be to maintain aggregate demand. The Rudd government and the Reserve Bank did a good job during the last global recession, let's hope that they do an equally fine job during the coming downturn.

The major example of stupid austerity has been Britain, which has gone from bad to worse as far as growth is concerned. Paul Krugman nicely captures the perverse reasoning in the UK of so-called "expansionary austerity", wherein advocates argued that cuts in government spending would encourage confidence in the business sector and lead to investment, jobs and finally consumption. Krugman begins by quoting UK PM, David Cameron:

“Those who argue that dealing with our deficit and promoting growth are somehow alternatives are wrong,” declared David Cameron, Britain’s prime minister. “You cannot put off the first in order to promote the second.”

But this is faith of the highest order, based on the same sort of logic as the Laffer Curve.

How could the economy thrive when unemployment was already high, and government policies were directly reducing employment even further? Confidence! “I firmly believe,” declared Jean-Claude Trichet — at the time the president of the European Central Bank, and a strong advocate of the doctrine of expansionary austerity — “that in the current circumstances confidence-inspiring policies will foster and not hamper economic recovery, because confidence is the key factor today.”

Such invocations of the confidence fairy were never plausible; researchers at the International Monetary Fund and elsewhere quickly debunked the supposed evidence that spending cuts create jobs. Yet influential people on both sides of the Atlantic heaped praise on the prophets of austerity, Mr. Cameron in particular, because the doctrine of expansionary austerity dovetailed with their ideological agendas.

Instead what has happened has been - surprise, surprise - lower growth. According to a recent National Institute of Economic and Social Research press release:

output [in Britain] grew by 0.1 per cent in the three months ending in December after growth of 0.3 per cent in the three months ending in November. This implies the economy expanded by 1 per cent in 2011, half the rate of growth experienced in 2010 (2.1 per cent).

Krugman highlights an interesting graph from the NIESR (but doesn't show it) that reveals that in terms of growth Britain is doing worse than during the Great Depression.

Last week the National Institute of Economic and Social Research, a British think tank, released a startling chart comparing the current slump with past recessions and recoveries. It turns out that by one important measure — changes in real G.D.P. since the recession began — Britain is doing worse this time than it did during the Great Depression. Four years into the Depression, British G.D.P. had regained its previous peak; four years after the Great Recession began, Britain is nowhere close to regaining its lost ground.

Here's the graph:

Given the rhetoric of the Conservatives one would think that Britain's public debt situation is unparalleled. In terms of British history it is not even close to the high debt levels of the past.

The problem for the present and near-term is that low growth is not confined to Britain, which is still an important economy in the global scheme of things despite its long term relative economic decline. Other still important economies are also doing poorly.

Italy is also doing worse than it did in the 1930s — and with Spain clearly headed for a double-dip recession, that makes three of Europe’s big five economies members of the worse-than club. Yes, there are some caveats and complications. But this nonetheless represents a stunning failure of policy.

And it’s a failure, in particular, of the austerity doctrine that has dominated elite policy discussion both in Europe and, to a large extent, in the United States for the past two years.

O.K., about those caveats: On one side, British unemployment was much higher in the 1930s than it is now, because the British economy was depressed — mainly thanks to an ill-advised return to the gold standard — even before the Depression struck. On the other side, Britain had a notably mild Depression compared with the United States.

Even so, surpassing the track record of the 1930s shouldn’t be a tough challenge. Haven’t we learned a lot about economic management over the last 80 years? Yes, we have — but in Britain and elsewhere, the policy elite decided to throw that hard-won knowledge out the window, and rely on ideologically convenient wishful thinking instead.

Krugman goes on to talk about the United States, whose policy-makers he believes need to be more focused on expansion, despite the high level of government debt. Those following the US debate know that many economic and political commentators believe that there needs to be austerity à la Britain if the United States is going to break out of along period of low growth.

But this is madness, at least in the short-term. Krugman is thankful that the Obama Administration did not follow the expansionary austerity stupidity.

Which is not to say that all is well with U.S. policy. True, the federal government has avoided all-out austerity. But state and local governments, which must run more or less balanced budgets, have slashed spending and employment as federal aid runs out — and this has been a major drag on the overall economy. Without those spending cuts, we might already have been on the road to self-sustaining growth; as it is, recovery still hangs in the balance.

And we may get tipped in the wrong direction by Continental Europe, where austerity policies are having the same effect as in Britain, with many signs pointing to recession this year.

The infuriating thing about this tragedy is that it was completely unnecessary. Half a century ago, any economist — or for that matter any undergraduate who had read Paul Samuelson’s textbook “Economics” — could have told you that austerity in the face of depression was a very bad idea. But policy makers, pundits and, I’m sorry to say, many economists decided, largely for political reasons, to forget what they used to know. And millions of workers are paying the price for their willful amnesia.

Too many people think of an economy as just a big household. It's a good thing for families to increase their savings during a downturn - it's a little boring perhaps, but a good idea - because if times get even worse, i.e. if you lose your job or get fewer hours, then extra savings will perhaps help you and your family get through tough times.

This is not true, however, for an economy as a whole. The more people save the less they spend, leading to what Keynes called the 'paradox of thrift', wherein ‘virtuous’ efforts to reduce debt cause a decline in demand and a downturn in the economy. 

Remember that GDP = private consumption + gross investment + government spending + (exports − imports). That is:

GDP  = C  + I + G + (X - M)

Simple maths would tell you that if you reduce private consumption or government spending and don't get a corresponding increase in investment, then the end result will be an economic contraction.

The problem for Australia, as I highlighted recently, is the end of the debt-fuelled growth model that spurred growth from the early 1990s til 2007. This is a major structural change for the Australian economy, although it might be better seen as the end of an earlier structural change that began with financial liberalisation and gathered pace as credit markets expanded over the 1990s and kept going until 2007 when the music stopped and not everyone found a chair.

As I outlined in that late 2011 post:

The growth of household debt as a percentage of disposable income grew rapidly over the 1990s and 2000s rising from:

48% in September 1990 to 156.7% in June 2007 to 150.8% in September 2011.

Debt for housing is 89.7 % of total household debt.

Investor housing debt is 29% of total household debt.

Interest payments as a percentage of disposable income reached a high of 13.4% in June 2008 to a low of 9.3% in June 2009 to 11.4% in September 2011. (see my article Structural Shenanigans for graphics).

So ... household debt remains at high levels and the inability to continue to grow debt even further undermines an important source of growth over the past 20 years.

Think about it.

The growth that occurred after the recovery of the 1990s recession was augmented, buttressed and sometimes driven by the expansion of household debt by around 100% of disposable income.

If we were to have the same favourable conditions over coming years this would mean that household debt as a percentage of disposable income would have to go to 250% of income.

While I've always been a keen user of credit cards, even I couldn't sustain the amount of debt repayments as a percentage of disposable income that this level of debt implies.

While households in aggregate have less room to move in terms of increasing GDP (the C part of our GDP equation), government in Australia (the G part of the equation) has much more room to move if things go badly in Europe, Asia and the United States.

We must hope that those successful communists in China keep managing their economy in such a way that benefits Australians. Over the short and medium-term it continues to be important that we debate the wisdom of increasing reliance on the mining sector and on China.

No Bubbles in Sight?

For those wishing for an antidote to negative news on the housing market, the person to read is Christopher Joye. (The institution to follow for optimism on debt is the Reserve Bank of Australia). I must admit that despite a lot of study, I simply have no idea whether there is a bubble or not in the Australian and Chinese housing markets. (After being a long time pessimist I fear being too optimistic and being wrong again in reverse).

Luckily I'm not paid to be either an optimist or a pessimist. What I think is obvious is that increased debt does lead to increased vulnerability as the RBA Governor recently warned about.

But that doesn’t mean it would be wise for that build-up in household leverage to continue unabated over the years ahead. One would have to think that, however well households have coped with the events of recent years, further big increases in indebtedness could increase their vulnerability to shocks – such as a fall in income – to a greater extent than would be prudent.

It may be that many households have sensed this. We see at present a certain caution in their behaviour: even though unemployment is low, and measures of confidence have been quite high, consumer spending has seen only modest growth. This may be partly attributable to the fact that the stimulus measures of late 2008 and early 2009 resulted in a bringing forward of spending on durables into that period from the current period (though purchases of motor vehicles by households – a different kind of durable – have increased strongly over recent months). But the long downward trend in the saving rate seems to have turned around and I think we are witnessing, at least just now, more caution in borrowing behaviour. Of course this will have been affected by the recent increase in interest rates but the level of rates is not actually high by the standards of the past decade or two. We can’t rule out something more fundamental at work.

We can’t know whether this apparent change will turn out to be durable. But if it did persist, and if that meant that we avoided a further significant increase in household leverage in this business cycle, it might be no bad thing. Moreover if a period of modest growth in consumer spending helped to make room for the build-up in investment activity that seems likely, perhaps that would be no bad thing either.

Fortunately, however, for those who don't like to sit on the fence like I (and the Governor it seems) do, there are definite proponents of boom or doom that you can read. For doom read Steve Keen; for boom (but not bubble) read Christopher Joye.

Joye's arguments are very persuasive and he always brings interesting data to the table. But I'm still concerned about the level of private debt in Australia. Most commentators are much more focused on public debt (partly because economists as a bunch are generally anti-govt and pro-market as a first principles assumption).

The problem with private debt is that there is no political constituency to develop policies to keep it down, as there is with public debt. Despite democratic pressures that encourage higher spending and lower taxation - what the Marxist James O'Connor in the 1970s called the "fiscal crisis of the state" and what others on the right called the "crisis of democracy" - eventually governments have to face the judgement of those from whom they borrow or tax.

While the 1980s did not signal the demise of the state as many predicted it did stop the growth of the state - at least while growth remained subdued. As Lindert (2004: 22) points out: "For all the often-reported “crisis” or “demise” of the welfare state, all one really sees after 1980 is a slowdown, not a decline, in the shares of GDP that welfare-state taxpayers put into such programs."

Recent events have shown just how important states remain in the global economy and I'm imagining that the last few years will show a considerable growth in the size of the state throughout the world. But as in the 1980s, this growth cannot continue and the constituencies in favour of fiscal retrenchment are reasserting themselves despite the uncertain nature of the recovery. Last week's G20 meeting was divisive compared to previous meetings and the major divide was over appropriate fiscal stances. (Just quietly those pesky global imbalances are unlikely to go away with the Germans tightening policy and the Americans keeping things pretty loose.

Retrenchment is well under way in Europe as countries as diverse as Greece and Ireland deal with fiscal crises. The Irish have decided to take harsh medicine and as a consequence the Irish population is going through hard times. Greece is another story and the major problem is actually building up a decent tax base. In other words, Greek authorities need to get people to pay tax. The Germans are major advocates of fiscal retrenchment, much to the annoyance of the United States.

One of the excellent points made by David Lindert (2004: 6) in his seminal study of social spending Growing Public is that governments are constrained by democracy:

There is no clear net cost to the welfare state, either in our first glance at the raw numbers or in deeper statistical analyses that hold many other things equal … It turns out there are many good reasons why radically different approaches to the welfare state have little or no net difference in their economic costs. Those reasons are many, in terms of an institutional list, but they boil down to a unified logic: Electoral democracy, for all its messiness and clumsiness, keeps the costs of either too much welfare or too little under control.

But what are the restrictions on the expansion of private debt? Governments have encouraged the growth of debt through taxation policies for housing and company debt.  And financial liberalisation has massively increased access to credit. Don't get me wrong. I'm not anti-financial liberalisation. I would much rather live in an era where access to credit is not rationed and the financial sector is innovative and consumer oriented. But like all good things there is need for balance.

Rather than deal with the consequences of private debt in Australia, governments have attempted to underpin debt through subsidies, guarantees and . There is a good reason for this - any major pay down of debt in Australia will lead to lower spending. Now I hope that the optimists are right, but in the back of my mind is the continuing worry about what level of debt is too much.

Undoubtedly Australia has survived a very big stress test, but it did so by increasing public debt to maintain private debt. As Keynes supposedly once said: "the unsustainable cannot be sustained".


Reference:
Peter H. Lindert (2004) Growing Public: Social Spending and Economic Growth since the Eighteenth Century, Cambridge, Cambridge University Press.

The Debate between Expansionists and Restrictionists

Right now there is an important debate going on in the United States and Europe between those who think the major aim of economic policy at the moment should be to do something about growing fiscal deficits and those who believe that the major aim should be to maintain economic activity.

Mohamed El-Erian argues that we need to go beyond what he calls "the false growth vs austerity debate" He argues that at this his weekend’s G20 meeting

In one corner stand the “growth now” camp, arguing that expansion is a pre-requisite to service their debt sustainably. Without it tax receipts implode, investment is turned away, and meeting future debt payments is harder. This camp abhors Europe’s shift towards austerity, questions Tuesday’s tough UK budget, and urges countries like Germany to adopt expansionary policies. Some advocate additional fiscal stimulus even for high deficit countries, like the US.

This debate he argues is "incomplete" and backward looking and countries need "to adopt both fiscal adjustment and higher medium-term growth as twin policy goals."

Squaring the circle of growth and fiscal stability needs policies that focus on long-term productivity gains and immediate help for those left behind. This means first enhancing human capital, including retraining parts of the labour force, and increasing labour mobility. Then new emphasis on infrastructure and technology investment is needed, with greater support for scientific advances that promise increased productivity. Finally all nations must begin an honest assessment of the social frictions coming in the next few years. In some countries (like the US) this means an urgent bolstering of social safety nets.

...

The world is facing deep structural challenges yet its leaders are stuck in a short-term, cyclical mindset. Until they break out of it we will see little more than fruitless discussions, national policy flip-flops, and a troubling lack of global policy harmonisation. Without action our future will be disappointing global growth and periodic sovereign debt crises. Let us hope this, if nothing else, is enough to bring the two camps together.

Paul Krugman is a major protagonist in this debate on the side of the expansionists. He is very critical of such views, implying that this is simply restrictionism.

In The Long Run, We Are Still All Dead

So, reading Mohamed El-Erian, I’m somewhat at a loss about what he’s actually saying; what, exactly, is the policy recommendation? But in any case, here’s what struck me: he writes,
The world is facing deep structural challenges yet its leaders are stuck in a short-term, cyclical mindset.

I disagree. If anything, we’re suffering from the opposite problem. Talk to German officials about high unemployment and the looming threat of deflation, and they ramble on about the demographic challenge and the cost of pensions.

I mean, why shouldn’t we be focused on the business cycle? We’ve suffered the worst cyclical downturn since the Great Depression; in terms of unemployment and output gaps, we have recovered almost none of the lost ground. Millions of willing workers are idle because of lack of demand; let them stay idle, and we can turn this into a long-term structural problem, but right now it is precisely a short-term, cyclical problem.

So saying that we need to focus on the long term, and not worry our little heads about trivial short-term issues like the highest long-term unemployment rate since the Great Depression, may sound like wisdom — but it’s actually folly.

Oh, and one more point — not about El-Erian, but about quite a few policymakers and economists: the attempt to shift the discussion away from the short run is not, as often portrayed, an act of vision of courage. On the contrary, it’s an act of cowardice, an attempt to evade responsibility for a disastrous state of affairs that we could fix, but choose not to.

Keynes had it right:

But this long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again.

What is most interesting for me as I read these debates are the implications for Australia. And just how different the situation is in Australia. This seems to be another 'world' that they are writing about. This is increasingly being explained by the argument that the global financial crisis should be seen as the North Atlantic financial crisis. (NAFC doesn't have as sweet a ring as GFC and makes me think of a football club from Adelaide).

Australia's fiscal position is relatively sound and the nature of the political debate in Australia ensures that even the small level of public debt is seen as a 'problem' that requires immediate action. One of the reasons why the Rudd govt introduced the Super profits tax was to bolster the ability of the budget to return to surplus sooner than originally planned.

We are in a very good position right now, but as always we continue to be vulnerable. Our success (and we could do better) has been built upon long-term growth and increases in national income bolstered by the terms of trade effect (relative increases of export prices over import prices). But eventually what happens in Europe and the United States matters to Asia and to us. China has continued to expand because of a huge fiscal stimulus and in turn growth in Europe and the United States has been bolstered by budgetary stimulus, financial guarantees and bailouts, and low monetary policy.

Without govt efforts the world would now be in a deep financially-induced depression. This is what the restrictionists and ant-govt zealots need to realise. Equally, however, expansionists need to (eventually) think about the growth of govt debt. This will involve both sides of the fiscal equation - spending and taxing.

We now live in a more globalised world economy. One of the benefits of that is that increased growth and the advancement of many developing countries with China and India showing rapid rates of growth. But globalisation increases vulnerabilities to negative effects as well. The aim of the G20 should be to foster the increased economic cooperation necessary to manage an increasingly globalised world economy. But international cooperation is no easy thing! States will have to continue looking after their own interests first, but a bias towards expansion in depressed areas will be beneficial for globalisation in the long-run.

Government Spending, Deficits and Debt

There's been a lot of spurious stuff written recently about the dangers of deficit financing during the Great Recession. Reading some of the more alarmist stuff one would be forgiven for thinking that the world didn't just dodge a huge bullet - a major systemic financial collapse and a serious depression in the developed world, which would have eventually engulfed the whole world. The negative feedback possibilities were extremely scary. Massive fiscal stimulus made a big difference. As growth returns money will need to be paid back. My major concern is with indebtedness across the system, rather than in the govt sector.

The more alarmist writers always refer to govt debt in gross terms rather than in net terms.
Those interested in the detail can read the earlier post "Public Debt (for Nerds)". What really matters is net debt or more to the point net financial worth and net worth.

There is no doubt that govts cannot keep borrowing indefinitely, just like households and corporations.
One of the main differences between public andf private, however, is the capacity to fix finances through taxation. In the US in the 1990s, Clinton shifted the US debt position relatively easily and then Bush messed it up again.

For an excellent counter-intuitive account of these issues see Robert Frank's article "How to Run Up a Deficit, Without Fear" 

Frank drily notes that:

there are really only three basic truths that policy makers need to know about deficits: First, it’s actually good to run them during deep economic downturns. Second, whether deficits are bad in the long run depends on how borrowed money is spent. And third, eliminating deficits entirely would not require any painful sacrifices.

What! You ask, surely this can't be true? The first point comes directly from Keynes who correctly argued that in times of recession govts should do what they can to bolster spending.

Consumers won’t lead the way, because even those who still have jobs are fearful they might lose them. And most businesses won’t invest, since they already have more capacity than they need. Only government, Mr. Keynes concluded, has both the motive and opportunity to increase spending significantly during deep downturns.
Of course, if the government borrows to do so, the debt must eventually be repaid (or the interest on it must be paid forever). That fact has provoked strident protests about government “bankrupting our grandchildren.”
It’s an absurd complaint. Failure to stimulate the economy would mean a longer downturn. That, in turn, would mean longer stretches of reduced tax receipts, increased unemployment insurance payouts, and depressed private investment. The net result? Higher total public borrowing and a permanent decline in productivity compared with what we would have had under effective economic stimulus.

But govts do have to pay the debt back as the economy recovers.

At full employment, extra borrowing often compromises future prosperity, just as critics say. On President George W. Bush’s watch, for example, the national debt rose from $5 trillion to $10 trillion. Some of that borrowing paid for an expansion of Medicare prescription coverage and a financial bailout a year ago, but most went for a war in Iraq and tax cuts that largely just allowed for additional consumption. Our grandchildren will be forever poorer as a result.

What matters is what govt borrowing is used for - govts can usefully make productive investments that will benefit future generations.

After decades of neglect of the nation’s infrastructure, attractive public investment opportunities abound. It’s been estimated, for example, that eliminating bottlenecks on the Northeast rail corridor would generate $12 billion in benefits at a cost of only $6 billion. These are present value estimates. When government undertakes such investments, our grandchildren become richer, not poorer.

Frank then suggests correctly that in normal times, govts should pay for productive investment with savings rather than borrowings.

But they’d be richer in the long run if we paid for those investments with our own savings rather than with borrowed money, for that would allow our grandchildren to benefit from the miracle of compound interest. Many fiscal hawks insist that the only way to eliminate deficits and pay for additional investment is by cutting government spending. But as California’s experience suggests, that approach often backfires. Government programs have constituents. Those that get the ax are often not the least valuable ones, but those whose supporters have the least influence. California’s schools, once among the nation’s best, are now among the worst.

The solution, of course, is taxation. A dirty word for many, but essential for not only a civilized society but a productive one as well.

To eliminate deficits, we need additional revenue. The encouraging news is that we could raise more than enough to balance government budgets by replacing our existing tax system with one that taxes activities that cause harm to others. Called Pigovian taxes by economists — after the English economist Arthur Cecil Pigou — such levies create a burden that is more than offset by the reductions they cause in costly side effects of everyday activities.
When producers emit sulfur dioxide into the atmosphere, for example, the resulting acid rain harms others. As the 1990 amendments to the Clean Air Act demonstrated, the most efficient and least intrusive remedy was to tax sulfur dioxide emissions. Doing so entailed no net sacrifice, because solving the same problem by prescriptive regulation would have been much more costly.
Similarly, when motorists enter congested roadways, they impose additional delays on others. Here, too, taxation is the best remedy. The time that congestion fees save is more valuable than the fees are burdensome.
When the transactions of financial speculators fuel asset bubbles, they increase the risk of financial meltdowns. A small tax on those transactions would reduce this risk.
When drivers buy heavier vehicles, they increase others’ risk of dying in accidents. This risk would be lower if we taxed vehicles by weight. Carbon dioxide emissions contribute to global warming. Here as well, taxation offers the most efficient and least intrusive remedy.
Anti-tax zealots denounce all taxation as theft, as depriving citizens of their right to spend their hard-earned incomes as they see fit. Yet nowhere does the Constitution grant us the right not to be taxed. Nor does it grant us the right to harm others with impunity. No one is permitted to steal our cars or vandalize our homes. Why should opponents of taxation be allowed to harm us in less direct ways?
Taxes on harmful activities would be justified quite apart from any need to balance government budgets. But such taxes would also generate ample revenue for the public services we demand, quieting the ill-considered commentary about deficits.
In the meantime, however, such commentary continues to render intelligent political decisions about deficits less likely. For example, 58 percent of respondents in a recent NBC News-Wall Street Journal poll said the president and Congress should worry less about bolstering the economy than keeping the deficit down, while only 35 percent said economic recovery was a higher priority.
If we really want to bankrupt our grandchildren, that poll charts a promising course.