“The simplest way to understand economics is that it is a reckoning with unavoidable tradeoffs. If you spend money on something, you may obtain something in return—but you lose the ability to use those resources on something else. In the world of politics, economics helps us weigh the merits of those tradeoffs. It answers the question: Do the benefits of a policy outweigh the costs? Sometimes the benefits are larger. Sometimes they are meager or even nonexistent. But there are always costs. To acknowledge this is merely to acknowledge reality.”
“White House press secretary Jen Psaki responded to a question about the tax impact of the $3.5 trillion spending plan now working its way through Congress by declaring that “there are some…who argue that in the past companies have passed on these costs to consumers…we feel that that’s unfair and absurd and the American people would not stand for that.”
When taxes are raised on corporations—the “companies” in Psaki’s response—corporations often respond by passing that tax on to others. In some cases, they pass costs to consumers. In others, as the Cato Institute’s Scott Lincicome wryly notes on Twitter, they reduce the amount they would have otherwise spent on wages. They have to pay more to do business, and so they make adjustments accordingly. Costs create consequences and tradeoffs.
Empirical research has consistently shown that a large portion of corporate tax increases is actually paid by labor down the line. There are some reasonable academic debates about the precise percentage of the tax paid by labor, and how that might change under certain circumstances. But there is little real debate about whether or not some of the costs are passed on. The point is that it happens. Workers, not owners, pay at least some share of higher corporate taxes.”
“a review of the literature about the impact of government spending on growth reveals that, generally, such spending crowds out the private sector. This dispels the hope that more spending will produce economic wonders.
Deficit spending will eventually result in higher taxes for future generations. That’s a profoundly unfair burden. Debt is also expansive in and of itself, as interest payments on an enormous amount of debt—even when interest rates are low—will result in a larger and expanding deficit. According to Brian Riedl at the Manhattan Institute, Congressional Budget Office data reveal that by 2049, “Interest payments on the national debt would be the federal government’s largest annual expenditure, consuming 42% of all projected tax revenues.”
Eventually, growing debt will also slow economic growth. Lower growth means fewer innovations, lower wage growth, and higher unemployment. It’s all-around bad news. Finally, higher debt could result in a debt crisis. These are good enough reasons for me to want to restrict the size of government and impose fiscal prudence.”
“Interestingly, recent concerns over inflation have highlighted one additional reason why higher debt is problematic. You see, when it comes to inflation, people’s expectations about the price trajectory in the next few years are what really matters. So, it matters less than we think that the current inflationary forces are likely transitory. If people believe that inflation is here to stay, they will try to protect themselves from it today, and we will indeed have inflation today.
Under that scenario, to get inflation under control, the Federal Reserve will have to raise interest rates. And this is where your debt levels matter. Higher interest rates result in a large increase in overall interest payments fairly quickly, as so much of our debt needs to be rolled over on a short-term basis. A sudden increase in interest rates would slow down the recovery, too, which hurts lower-income Americans.
If the Fed were immune to political pressures, this reality might not matter. However, we can expect that political pressure to be enormous. No administration would be happy to see a large increase in interest payments suddenly show up on its balance sheet followed by a large increase in the size of the deficit, especially if that administration is already planning to spend a larger amount of money in the first place. This pressure only grows under an administration that will resist any rate change that could hurt growth. The Fed may also be slow to act because it has made addressing inequality one of its priorities.”
“Do I know what expectations are and how long inflation will stick around? I don’t. But in truth, no one really does. That’s part of the point. In that context, fiscal prudence now is the best course of action, because with so much political pressure in the worst-case scenario, there will be fewer opportunities when the Fed must actually raise interest rates.”
“Five years after Los Angeles voters approved a $1.2 billion bond measure and a countywide sales tax hike to raise another estimated $355 million annually to solve its homelessness problem, there are more people living and dying on the streets than ever before.
Many of these men and women are both frequent targets and perpetrators of violence.
Mayor Eric Garcetti (D), who did not respond to our interview request, has partially blamed this failure on the pandemic, which slowed new housing construction and limited shelter capacity. It’s true that COVID caused a surge in homelessness, but the city’s plan was already failing.”
“The centerpiece of L.A.’s plan was to spend the $1.2 billion raised through Proposition HHH to build 10,000 supportive housing units over a decade. Even if the government were able to pull that off, it would merely put a dent in the problem in a city where more than 30,000 people are living on the streets and sidewalks according to the 2020 homelessness count.
Five years into the 10-year plan, just 14 projects are in service. Of the promised 10,000 supportive housing units, the city has completed fewer than 700.
It would take more than 30 years to house all of the people currently homeless in L.A. county at that pace, according to a federal court order.”
“Throughout the pandemic, the median view of good housing policy—supported by landlord associations, tenant advocates, and policy wonks of all ideological stripes—has been to have the federal government fund rent relief. That way, the providers of rental housing can pay their bills, and financially pressed renters aren’t forced onto the streets or into more crowded living situations.
Despite these funds being appropriated for rent relief programs, actually getting money to people continues to be a major challenge.”
“The party has changed and would much rather talk about the border than the budget, and cancellations than Congressional Budget Office scores. Of course, no Republicans will vote for Biden’s proposals and all will strenuously object, but that his plans won’t engender the fierce reaction they would have 10 years ago is yet another way in which the Overton window has shifted on deficit spending.
What happened to the GOP? The short answer is Donald Trump.
Beginning in the 2016 primaries, he demonstrated in vivid fashion that as the GOP coalition had become older and more working class, it didn’t care as much about spending restraint or entitlement reform as the party’s leaders had presumed.”
“Biden’s plan would see the federal government spend “what amounts to nearly a quarter of the nation’s total economic output every year over the course of the next decade”—a threshold that has never been hit since World War II, with the exception of 2020 and 2021—while also collecting “tax revenues equal to just under one-fifth of the total economy,” which would also near a record high.
That really sums it up. Record levels of spending that would well exceed even a historically high share of the economy devoted to funding the government.
While Biden’s proposal does not envision budget deficits rising as high as they did last year—when the government spent $3.1 trillion more than it collected in tax revenue—his budget calls for deficits of at least $1.6 trillion for the foreseeable future, the Times reports. The national debt measured as a share of the economy’s overall size will exceed the all-time record high of 113 percent, set during World War II, by 2024. And it will keep growing.”
“Like all presidential budgets, Biden’s is mostly aspirational; Congress will have the final say. But with Democratic majorities in both chambers, something similar to the president’s proposal is likely to be adopted.
After Republicans effectively traded away any claim to fiscal responsibility during the Trump administration by backing bigger budgets and higher deficits, Biden rode into office with the chance to spend big with fewer of the usual political impediments. In his joint address to Congress last month, Biden promised to build “a union more perfect, more prosperous, and more just.”
Apparently it will also require more spending, more taxes, and more borrowing.”
“while our infrastructure could certainly be modernized and could use some maintenance, it’s not crumbling. According to the World Economic Forum, U.S. infrastructure is ranked No. 13 in the world—which, out of 141 countries, isn’t too shabby, especially when considering the enormous size of our country and the challenges that presents.
Yet as Washington Post columnist Charles Lane notes, it would be more accurate to bundle European nations together, since they share a significant amount of infrastructure, which would move the United States into fifth place.
Moreover, while the American Society of Civil Engineers’ 2021 report card gave the United States a C-, this is its best grade in two decades—meaning that the quality of roads, bridges, inland waterways, or ports has been improving each year, without a congressional rescue plan. This fact doesn’t quite fit the crumbling infrastructure narrative that politicians and the media like to tout.
Academics also refute the idea that infrastructure is crumbling. Reviewing a large body of research in a National Bureau of Economic Research paper, Wharton University economist Gilles Duranton and his co-authors state: “Perhaps our main conclusion is that, on average, U.S. transportation infrastructure does not seem to be in the dire state that politicians and pundits describe. We find that the quality of interstate highways has improved, the quality of bridges is stable, and the age of buses and subway cars is also about constant.””
“in theory, government spending could lead to higher growth in the longer term. Unfortunately, legislators’ well-documented tendency to make decisions based on politics often leads them to favor projects that are outdated, expensive, and never profitable at the expense of private and profitable alternatives.”
“What forces, then, did drive the cost escalation? One key finding, the authors say, is that if a given community is wealthier, the state will wind up spending more to build a given mile of interstate. This effect increased over time.
To some extent, correlations of this sort might manifest themselves even if affluent neighborhoods do not exert any particular clout. Amenities that attract well-off residents, such as water views, may be the same ones highway builders take pains to avoid spoiling; municipalities may have reason to press for features such as noise barriers in places where property tax collections are high and officials have an incentive to keep property values from falling, and so forth.
Another possibility, however, is that wealthier persons are simply “more effective at voicing their interests in the political process.” The highway route gets diverted in a way that protects their amenity, but spoils some equally valued amenity in a less affluent neighborhood. The unwelcome extension is completed far behind schedule, with concomitant expense, because opponents have been skillful at working the system by stretching out hearings and reviews and then suing.”
“Brooks and Liscow pinpoint the early 1970s as the inflection point for increased spending on highway projects. What was happening around that time? The National Environmental Policy Act (NEPA), which requires environmental impact review for federally funded projects, was passed in 1970. California passed its considerably more stringent CEQA (California Environmental Quality Act) the same year, and it was signed by none other than Gov. Ronald Reagan. In 1972 and 1973, Congress added additional federal laws that provided key leverage in fighting construction projects on the basis of loss of species habitat and wetlands. The U.S. Supreme Court helped out with the 1971 case of Citizens To Preserve Overton Park v. Volpe, which multiplied the chances to go to court over development by curtailing judges’ deference to agency decision making. All of these laws and decisions have made it much easier for citizens to contest infrastructure projects, driving up their cost and delaying their implementation and completion.
Among Brooks and Liscow’s most interesting findings is this: The relationship between local resident income and project expense took off just as these changes in law were coming online. Before 1970, the two were related modestly enough that the correlation failed to score as statistically significant. It then proceeded to quintuple.”
“the new “citizen voice” laws brought some authentic benefits; objectors could bring genuinely useful information to the highway planners about ways to avoid environmental harm.”