Deficit Hawks are Like Protectionists

Everybody knows that, in the aggregate, trade increases welfare. We can quibble about how to aggregate welfare across individuals, but at least in a Kaldor-Hicks sense, trade increases welfare. In that aggregate welfare sense, trade is a free lunch, and that lunch is wasted if nobody eats it. But protectionists argue that the redistributive effects of trade can often be bad enough to outweigh the aggregate advantage. Trade can hurt certain parties that one may wish not to hurt. The overall pie is larger, but someone’s share may be smaller.

When an economy has slack resources, as the US economy – as well as the world economy – clearly does now and likely will even more in the immediate future, there is no aggregate welfare cost to using up those resources, so any benefit society receives is, in the aggregate, free. In an aggregate welfare sense, slack resources are a free lunch, and that lunch is wasted if nobody eats it. Deficit hawks talk about the cost to taxpayers and the cost to future generations and all that. But let it be noted that fiscal stimuli during times of slack resource use make the overall pie larger, and any objections must rest on the premise that the new division of the pie leaves some particular party with a smaller slice despite the larger pie. It’s pretty much analogous to the argument for protectionism.

You can argue about whether resources are truly slack. There is a labor/leisure tradeoff, you might say, so there is always a cost to employing those supposedly slack resources. I warn you not to make that argument, because I will counterattack by taking a more extreme position than I took originally: not only are the resources slack; they are more than slack. In an aggregate welfare sense, you actually get a bonus for using up those resources, even if they don’t produce anything. It seems obvious to me that the emotional pain involved in unemployment typically outweighs the value of the additional leisure. (I know you’ll give the counterexample of your cousin who had always wanted to learn to play the guitar and he finally got the chance when he lost his job: but your cousin is not typical.) Add in the search costs, and it’s a slam-dunk. At this point I might be willing to compromise and say that the resources are just plain slack, not “hyperslack,” if you agree to abandon once and for all the labor/leisure argument.

Now I also hear echoes in my head saying, “There is a cost to using those resources, because, even if they are in some sense slack, the additional demand will shift the Phillips curve and raise the expected inflation rate.” Dude, that’s not a cost! Have you noticed that the nominal 10-year Treasury yield is trading less than 100 basis points above the comparable TIPS? How you noticed that the price of oil has fallen by more than 50% over the space of a few months, and that other commodity prices have fallen dramatically too? Have you studied what happened in the US in the early 1930s, and in Japan in the late 1990s? Gimme that expected inflation, Baby, and give it to me hard!

OK, sorry for the vulgarity, but back to the original point: just like the protectionists, the deficit hawks must be concerned about the redistributive effects of deficits, since the aggregate effect is to increase welfare. But while the protectionists actually have a pretty good argument (at least at the national level, in developed countries) as to why the redistributive effects are bad and might be expected to outweigh the aggregate effects in terms of importance, the deficit hawks’ arguments seem pretty lame to me.

The main issue would seem to be redistribution from future generations to the current generation. Here’s a point I made a couple of years ago, but I’ll repeat it: in the history of capitalism, there has been a consistent long-term trend of increasing welfare, by pretty much any reasonable measurement. You can complain about some of the things that have gotten worse, but the fact is, the19th century really sucked for most people, and the 18th century sucked even worse. And compared to the 1990s, the 1920s sucked, too. Unless we expect the trend to suddenly reverse itself, the likelihood is that future generations will be, in the relevant sense, richer than the current generation. So the deficit is a transfer from relatively rich future generations to the relatively poor current generation. I would hope that those future generations could spare a few extra pennies for such miserable folk as we. Especially since it is our blood, sweat, and tears that will have made them so rich. It is through no merit or toil of their own that they will come of age using microprocessors that run 1000 times faster than the ones we use today.

There are other arguments, but they’re even lamer. There is the idea that we will be paying interest to the Chinese for decades, as if that constituted a transfer of wealth from the US to China. It’s actually just the opposite. We are paying chicken shit interest to the Chinese, because they are so eager to keep their currency weak that they willingly overpay for US assets. Meanwhile, any reasonable capital investment by the US government will produce higher returns. Maybe we use the money for consumption rather than capital investment, but that the just brings us back to the “future generations” argument.