Friday, February 07, 2003

2050 Fiscall Projection

Prof. Brad DeLong comments on my recent post regarding the validity of 50 year projections:
50-year projections are hard, but not that hard. We have the demography fairly well understood. We expect further progress in medical science and further escalation of medical costs. The big uncertainties are (i) big wars, and (ii) the overall pace of productivity growth.

Those create huge variances around fifty-year projections. But that does not mean that such projections are not worth making. Indeed, the people I know who work on Social Security routinely call for projections out into the indefinite future.
He also had a thoughtful note about getting snarky in defense of/attacking certain political segments and the effect this has on one's reputation. That's good advice for everyone.

I want to mention cutting government spending. Taxes create dead weight loss by driving a price wedge between producers and consumers and thus preventing transactions that would have happened from happening. This slows down growth and results in less money for everyone. This effect also becomes geometrically larger as the tax rate grows, so a 5% tax does not create much loss, but a 40% tax creates lots (about 60x more than a 5% tax). This is a good reason to want lower taxes.

But how do you cut spending to afford those tax cuts? Public support for the Arts (consumed by the rich) is as vociferously defended as welfare (consumed by the poor) and every body feels that their pet program has to be kept no matter what. Politicians expand public services when the economy is doing well even though those services might be less in demand. In short, there is no political will to ever cut spending -- unless of course the electorate is knee deep in red-ink and don't want their taxes any higher. How do you create this red-ink? Deficit spending, baby! It's not pretty, it's not clever, and it's not cheap (you pay through higher interest rates), but the benefits may still outweigh the costs. I'd like to see better mechanisms to control and reduce spending.

Arnold Kling and Brad DeLong have more good posts on the subject.


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