Monday, May 30, 2016


At Reddit a title grabs my attention: This is what a Harvard economics professor thinks should be top of the G7 agenda.

The Harvard professor is Martin Feldstein. He wrote the article. Everything he says is either irrelevant or wrong.

No, I cannot so easily dismiss the article. On the topic "the unsustainable increase in the major developed countries’ national debt", Feldstein writes:
Raising marginal tax rates is both politically unpopular and economically damaging. In the US, there is scope to raise revenue without increasing tax rates, by limiting so-called tax expenditures – the forms of spending that are built into the tax rules rather than appropriated annually by Congress.

For example, an American who buys an electric car receives a $7,000 tax reduction. Larger tax expenditures in the US include the deduction for mortgage interest and the exclusion from taxable income of employer-paid health-insurance premiums.

Although eliminating any of these major tax expenditures might be politically impossible, limiting the amount by which a taxpayer could reduce his or her tax liability by using these provisions could raise substantial revenue. So I do my best to persuade my Republican friends in Congress that reducing the revenue loss from tax expenditures is really a way to cut government spending even though the deficit reduction appears on the revenue side of the budget.

Wait a minute. Who is this guy? Wikerpedia says

Martin Stuart "Marty" Feldstein (born November 25, 1939) is an American economist. He is currently the George F. Baker Professor of Economics at Harvard University, and the president emeritus of the National Bureau of Economic Research (NBER). He served as President and Chief Executive Officer of the NBER from 1978 through 2008. From 1982 to 1984, Feldstein served as chairman of the Council of Economic Advisers and as chief economic advisor to President Ronald Reagan (where his deficit hawk views clashed with Reagan administration large military expenditure policies).

Deficit hawk and Reagan advisor. So when he says "my Republican friends" it is not sarcasm. But he wants to raise taxes and call it a spending cut. I love the irony.

Everything Feldstein says is either irrelevant, wrong, or humorous by irony.


According to the Wikipedia page, Martin Feldstein was so focused on the deficit in the Reagan years that he even opposed Reagan's spending on the military. That is serious tunnel vision. So, Feldstein can't see the big picture.

Now he wants to increase taxes to reduce the deficit. He wants it so bad he's willing to pretend a tax increase is a spending cut. That's really the only option left, given the corner that Feldstein's Republican friends have painted themselves into.


Most people have a opinion on the Federal debt. Many, like "Tunnel-Vision" Feldstein, say it's a huge problem -- it's the problem. Some say it's no problem at all. Then there are wafflers like Krugman, who says yeah it's a problem but we should fix it later.

Me, I have a different thought. I think private debt is the problem. I think private debt has us so bogged down and messed up that we can't see straight.

I say we cannot know whether the Federal debt is a problem. There is no way to evaluate it, because private debt has things in such a sorry state.

Everybody has an opinion except me. I say I don't know. So the people who say the Federal debt is a problem think I disagree with them, and the people who say it's not a problem think I disagree with them. But I have no opinion on the matter. I have reserved judgement. People tell me I'm wrong because I don't agree with them. I don't even know if I agree with them or not. I see the situation as murky. We have to clean up the private-debt mess first. Then we will see if public debt is a problem.


Let's go paragraph by paragraph. I'll summarize Feldstein. Check my work if you want.

Paragraph 1: The G7 should address the explosion of government borrowing.

2: "The problem is bad and getting worse almost everywhere."

3. It's even worse in Japan than the US.

4. It's also bad in the eurozone.

5. Feldstein suggests that the money the government borrows never goes back into the economy: the money is no longer "available to finance productivity-enhancing business investment", he says. Bullshit. If Daddy Warbucks wants to put his money into savings rather than business investment, that's what he is going to do. But if he lends his bucks to the Federal government, the government is sure to spend it back into the economy -- if it hasn't already.

6. A list of additional problems attributed to the Federal debt.

And most problematic of all:

7. "Reducing deficits is obviously a task for those responsible for tax revenue and public spending: governments and legislatures."

Stop it right there. "Obviously"?? Deficits are "obviously" the result of spending in excess of revenue? Oh! I know where that comes from: If A is less than B, then A minus B is less than zero... If revenue is less than spending, there is a deficit. People seem to think this rule proves that the problem is a spending problem -- or a revenue problem.

It proves nothing. Here are the rules:

1. If A is less than B, then A minus B is less than zero.

2. If A equals B, then A minus B equals zero.

3. If A is greater than B, then A minus B is greater than zero.

These three rules tell us something about arithmetic. They tell us nothing about the economy.

Why is A less than B? Because the Democrats increased spending, say some. Because the Republicans cut taxes, say others. Did anybody stop and look at anything other than taxes and spending?

A few. Edward Harrison is one:

I was on RT’s Capital Account last night talking to Lauren Lyster about the euro zone debt crisis. At the end of the show, we came up against the deficit problem and the question about how it should be solved. I get frustrated by this topic because the whole framing of the problem presented in the media is wrong because it gets cause and effect totally backwards. The question the media asks is "how can government cut the government deficit?" The real question is "why are deficits high to begin with and what should we do about it?"

The media gets cause and effect totally backwards Harrison says. Many people do. The question is not how to reduce the deficit -- not how to make A less than B. That's not the question. The question is: Why is A greater than B? Why is spending greater than revenue? That is the question.

If we don't know why it's happening, we'll never figure out how to stop it.


The short wrong answer is "the other guys spent too much". That's plausible. Or, the short wrong answer is "the other guys taxed too little" -- which is really not plausible.

What evidence is there of too much spending? The evidence is that taxes are too high. According to the plausible answer, then, the problem cannot be that taxes are too low.

If the answer is not that taxes are too low, then the answer must be that spending is too high. Because it's the only other answer.

That's the plausible view: short, plausible, circular, and wrong. The plausible view evidently satisfies a lot of people. It doesn't satisfy me.

The trouble is, we are given only two possibilities: the two that fit the "A is less than B" rule. We are asked to choose between two possibilities, as if no other possibilities exist. Edward Harrison thinks other possibilities exist. So do I.

Remember: the "A is less than B" rule tells us something about arithmetic, but nothing about the economy. As Ed Harrison said:

The real question is "why are deficits high to begin with and what should we do about it?"

"A is less than B" doesn't answer the question.


Anonymous said...

Great analysis and insight, Art.The pic though is Marty Feldman and not Marty Feldstein. Everything else is spot on.

The Arthurian said...


"The pic though is Marty Feldman and not Marty Feldstein."

Yeah... I couldn't resist.