Brad DeLong’s Fiscal Manifesto

Brad DeLong is fed up with vague hand-waving from technocrats, Bob Rubin very much included, who call for the government to make difficult decisions without being remotely explicit about what such decisions might entail. So he comes up with his own seven-point “platform for the bipartisan technocrats of the center”, which “everybody centrist and deficit-hawkish in the reality-based community should be willing to commit to today.”

It’s a provocative and very useful contribution to the fiscal debate, if only because it has exactly zero probability of ever being enacted. But the thinking behind it is solid:

The principal sources of uncertainty in American economics right now are three: we don’t know how the long-run fiscal gap will be closed (but we think it will be), we don’t know how our health-care system will be reformed and transformed (but we know it will be), and we don’t know what our policy toward global warming will be in a generation (but we know that we will have one). The best things the government could do to diminish uncertainty would be to: (1) commit immediately to the full implementation of the version of RomneyCare-plus-cuts-in-Medicare-and-taxes-on-gold-plated-health-plans that was this year’s PPACA, (2) commit immediately to a long-run climate policy in the form of a carbon tax coupled with research incentives for future energy technologies, and (3) commit immediately to a plan to cover the long-term fiscal gap.

The most striking part of DeLong’s plan is not the strict 10-year PAYGO, which would apply not only to extending middle-class tax cuts but also to a second stimulus. Instead, it’s the carbon tax. In contrast to most proposals out there, DeLong’s carbon tax would not be revenue-neutral: half of it — about $73 billion per year, or $635 per household — would go straight to deficit reduction, rather than being used to fund extra spending.

The other half of the revenues from the carbon tax would be used to match extra contributions to Social Security accounts — you could add up to 2% of your Social Security wages to your account, which would then be matched two-for-one by carbon tax revenues.

That, of course, leaves nothing to offset the regressive nature of the carbon tax, the burden of which is disproportionately borne by poor families in rural areas. (And in fact it’s worse than that: poor black families have significantly larger carbon footprints than poor white families, which makes a carbon tax not only regressive but also racially highly charged.)

If you were building a national taxation structure from scratch, you’d definitely include a carbon tax in there somewhere — and probably some kind of Tobin tax, too, not to mention a wealth tax and possibly some kind of consumption tax as well. But of course we’re not building anything from scratch, and the implementation of any new tax is always going to be politically fraught, especially in an environment where most Republicans are never going to vote for any new tax of any description. (See California’s fiscal situation for a good example of where that leads.)

All of which just goes to underline that the likes of Rubin talk gravely about the importance of profound fiscal reform, they know — or they should know — that there’s no way it’s ever going to happen.

DeLong, then, has performed two important services here. He’s translated technocratese into stark policy proposals, and he’s demonstrated that the technocrats in question might as well be talking about giving every US family a free unicorn for all that their wishes will ever come true. Let’s hope (against hope) that when the technocrats continue the debate, they’ll have been paying attention to both messages.

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Felix Salmon is an Audit contributor. He's also the finance blogger for Reuters; this post can also be found at Tags: , , , , ,