We should tax the private sector sufficiently to free the resources that we find desirable for the government to command, but no more than that. This is likely to entail a stable debt/GDP ratio in a growing economy.
—Robert Eisner, The Misunderstood Economy
A stable debt to ration in a growing economy assumes that the growth is stable and does not depend on short or medium term factors. The current problem is that it is quite likely that a structural change is under way as we speak. If housing actually does trigger recession, then US will either have to cut government spending or increase taxes in the face of recession. In this situation it might be the absolute numbers that start to matter, not the relatives.
Posted by: A Tanatar | 22 December 2007 at 08:55
Unfortunately, no one agrees on where the line should be drawn for what government is allowed to do.
Posted by: Gil | 22 December 2007 at 09:09
Yes, this "favorite quote" can be interpreted to justify any given tax rate given that "the resources that we find desirable" is undefined. For instance, who is "we"?
Perhaps Steve posted this as an example of ditzy economics?
Posted by: Splashman | 22 December 2007 at 16:28
Robert Eisner was a noted Keynesian economist, who died in 1998.
The quote was selected for its smug irony.
Keynesian socialists strongly favor big-government 'liberating' the property of private citizens -- to fund the unlimited 'desires' of the wise & noble government 'commanders' {..dictators}.
Eisner reflexively stated such nonsense, being oblivious to its totalitarian basis.
Posted by: Wazak | 22 December 2007 at 19:00
Keynesian thinking still rules most public debates on the economy. I cringe whenever I hear that we need a tax cut to "stimulate" the economy. I think fiscal conservatives shoot themselves in the foot whenever they use this logic to support lower taxes.
Posted by: Jason | 23 December 2007 at 03:15
Eisner got at least one thing right: a steady debt/GDP ratio means the "debt load" is getting no worse. Economists on the left, right, and in between have confirmed that to me (I keep asking, and I keep getting the same answer.) Anyone who understands fractions knows that if GDP grows, debt can grow at the same rate, with no change in the ratio. We can, in other words, run permanent deficits with permanent, long run growth.
How we should "achieve" the deficit is hotly debated. Cut taxes? Raise spending on war prevention? Offer an X-prize for obsoleting the internal combustion engine? More incentives for math, science, & technology education? Other growth-enhancement incentives? We have a lot of choices. What we shouldn't be arguing is whether deficits and debt, per se, are undesirable -- as Eisner tried to tell us. He was correct.
Posted by: Steve | 25 December 2007 at 14:14
Steve, you say that in principle we can run a long run growth with long run deficit and discuss different scenarios for achieving that deficit (i.e. lowering taxes). Would not it make more sense to lower the deficit and then reduce taxes to lower the ratio? Wasn't the whole deficit thing largely started to lower the taxes in the face of no growth? What will happen, if, due to temporary distortion in growth, a deficit will have to be increased to get things going - would, in the "long run" terms it be more sensible to reduce the ratio back to before the increase or to let it remain on the post-increase level?
Posted by: A Tanatar | 25 December 2007 at 15:51
Why is lowering the deficit a desirable thing? (Note: Smaller deficits are not correlated with lower interest rates; larger deficits are not correlated with higher interest rates.)
Posted by: Steve | 26 December 2007 at 15:57