The elusive Goldilocks principle

CBO reports on options to address the fiscal cliff that looms on January 1, 2013 as numerous tax rates are set to increase. Not too cool, not too hot, just riiiiiiiiight is an elusive standard to address the number one policy priority of 2012 (not harm the economy, move toward a credible long range plan to stabilize the deficit/debt). Many have said do nothing and the deficit problem is fixed, but that ignores the timing of the fix and how it will impact the economy.

So, what we need is a reasoned deal that does not harm the economic recovery, but that takes credible steps to raise taxes over time, and reduce spending as compared to default levels over the next several decades (particularly health care costs). From the prologue of my book:

As we head into the 2012 election, the task remains the same: we need to undertake policies to improve our economy in the short run, while seeking a long-run plan to move slowly toward a balanced budget in the future. To achieve the latter will require some profound reform of our health care system and an increase in the proportion of the economy collected in taxes. There are other issues to be gotten straight, but without addressing those two realities (taxes are too low given any plausible level of federal spending and projected health care costs too high absent reform) we will never again have anything near a balanced budget.

We will get to it next week….

Author: Don Taylor

Don Taylor is an Associate Professor of Public Policy at Duke University, where his teaching and research focuses on health policy, with a focus on Medicare generally, and on hospice and palliative care, specifically. He increasingly works at the intersection of health policy and the federal budget. Past research topics have included health workforce and the economics of smoking. He began blogging in June 2009 and wrote columns on health reform for the Raleigh, (N.C.) News and Observer. He blogged at The Incidental Economist from March 2011 to March 2012. He is the author of a book, Balancing the Budget is a Progressive Priority that will be published by Springer in May 2012.

7 thoughts on “The elusive Goldilocks principle”

  1. It’s hard to take anything anyone says about taxation seriously since it all assumes that the present paradigm (taxing things we want more of … Work/wages, savings, trade, and investment) is the way to go, rather than taxing things we want less of (pollution, consumption of no renewable resources, especially pollution sinks, creation of hazardous wastes, public health detriments).

    We all know how hard it is to make a negotiated breakthrough in a zero sum contest.

    Essentially, our tax policy is less than zero sum already. Not only is my gain at your expense and vice versa, but the actual total is ratcheting downward inexorably, as the real wealth on which we depend is squandered, abetted by insane tax policies that are the legacy of a very different time, when the resources seemed infinite and the people few.

    Real progress on the tax policy front would mean figuring out which sector of the economy should be first transitioned away from our insane “stomp on the gas and brake pedals at the same time” tax system and into a green (Pigovian) tax regime and how to overcome the vested interests that profit from the present dysfunction.

    Work to abolish taxes on goods (meaning socially desired things such as listed above) and to shift them onto bads, and use Georgist land value taxation to recycle excess wealth. Until we do that we’re just playing beggar thy neighbor.

  2. Your two versions of the first half of the double aim are very different: “not harm the economy” versus “improve our economy in the short run”. I’m with the second; mass unemployment today (which harms longer-term prospects through discouragement and skills obsolescence) is a graver evil than an increased debt burden, provided you put in place a decent long-term stabilisation plan. French health care, Australian carbon taxes, and Clinton-era income tax rates should do it. Where do I collect my fee?

    1. yes, I too hope we could take measures to make the economy better….I guess I am showing some uncertainty about exactly what policies those would be. In short, sign me up for measures we can take to get to 3.5% GDP growth. Going back in time, we shouldn’t have been shedding govt jobs during such bad unemployment and the feds passing money to states would have been a better course. We could still correct that, but it seems unlikely. What I propose on health care is not so far off of France…

  3. Maybe what we need is for Pelosi and Reid to create a real leftist budget, and then throw a hissy like the right always does. That window needs to move left for any of this to ever happen. Maybe we can learn from the GOP in this one little way.

    1. Maybe they don’t create a real leftist budget, (Any budget at all!) because they’d be throwing the hissy fit over failing to be reelected if they ever voted for a budget you’d like?

      Sometimes Goldilocks is screwed. Sometimes there’s no amount of the hair of the dog that bit you that threads the way between alcohol poisoning and hangover. Sometimes you just have to sober up and recover the hard way.

      We’ve been stimulating the economy for decades now. Mindlessly linear models say that doesn’t matter, that there shouldn’t be any point beyond which piling on more stimulus won’t work. But the economy doesn’t have to care about the models. Maybe stimulus has just reached the point of diminishing returns?

  4. “We’ve been stimulating the economy for decades now.” Clinton ran a primary budget surplus, and therefore a decreasing debt-to-GDP ratio: fine at the time, because it was based on the then facts. Are you perchance referring to the reckless and dishonest economic policies of GW Bush? His stimulus consisted of an unfunded war plus tax cuts heavily weighted to the rich, which raised the deficit without boosting production and employment. All multipliers are not born equal.
    “Maybe stimulus has just reached the point of diminishing returns?” Or maybe it hasn’t, as Chesterton said of Christianity, really been tried – the increase in federal spending under Obama has been roughly matched by cuts at state and municipal level under balanced-budget rules.

    1. “A primary surplus”; A “primary surplus” is a surplus except for the fact that you were running a deficit. The distinction between a “primary surplus” and a “deficit” is utterly irrelevant unless you’re planning on repudiating the debt you’re borrowing the interest payments on. Unless you’re proposing to do that, talk of “primary surplus” is just a distraction.

      And we only achieved that dubious distinction by a combination of gridlock verging on open warfare between the branches, and an economic bubble. I suppose I’d be willing to see Congress impeach Obama, but arranging for a bubble to produce the revenue could be difficult, and inherently unsustainable.

      But I suppose the left will never give up on crediting Clinton with a budget ‘surplus’.

      As I said, we’ve been running a deficit, stimulating the economy, for longer than most people have been alive.

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