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The Agenda

NRO’s domestic-policy blog, by Reihan Salam.

Stiglitz’s Rules



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Joseph Stiglitz’s prescription for deficit reduction is so broad that I think the Bowles-Simpson plan and many center-right alternatives would fit under its capacious umbrella, though I imagine he’d reject the particulars.

First, spending on high-return public investments should be increased. Even if this widens the deficit in the short run, it will reduce the national debt in the long run. What business wouldn’t jump at investment opportunities yielding returns in excess of 10 percent if it could borrow capital—as the U.S. government can—for less than 3 percent interest?

I certainly don’t see overpaying the federal workforce by as much as 22 percent as a high-return public investment, and I think the same can be said for a wide range of public sector initiatives. Consider, for example, the productivity gains we could achieve in K-12 education if we embraced educational savings accounts, Gold Star teachers, and other measures designed to increase the autonomy of public school teachers and parents. Increasing spending on, say, biogerontological research designed to delay the offset of age-related diseases would deliver considerable bang-for-buck. Overall, it seems that we could comfortably increase the level of high-return public investment while reducing overall expenditures. 

Second, military expenditures must be cut—not just funding for the fruitless wars, but also for the weapons that don’t work against enemies that don’t exist. We’ve continued as if the Cold War never came to an end, spending as much on defense as the rest of the world combined.

Bowles-Simpson seemed to offer a sensible roadmap in the defense space.

Following this is the need to eliminate corporate welfare. Even as America has stripped away its safety net for people, it has strengthened the safety net for firms, evidenced so clearly in the Great Recession with the bailouts of AIG, Goldman Sachs, and other banks. Corporate welfare accounts for nearly one-half of total income in some parts of U.S. agro-business, with billions of dollars in cotton subsidies, for example, going to a few rich farmers—while lowering prices and increasing poverty among competitors in the developing world.

This, of course, raises the question of how we should regard high-return public investments that the private sector might be better suited to make. Stiglitz suggests that the U.S. federal government is too generous to the pharmaceutical sector and the extractive industries, which I’ll happily accept, though we might disagree on the relevant mechanisms.

 

Creating a fairer and more efficient tax system, by eliminating the special treatment of capital gains and dividends, is also needed. Why should those who work for a living be subject to higher tax rates than those who reap their livelihood from speculation (often at the expense of others)?

Finally, with more than 20 percent of all income going to the top 1 percent, a slight increase, say 5 percent, in taxes actually paid would bring in more than $1 trillion over the course of a decade.

I tend to think that capital gains and dividends should be treated differently, following Glenn Hubbard and many other economist. Yet it’s worth noting that Bowles-Simpson did indeed “eliminate the special treatment of capital gains and dividends”; it raised average tax rates for affluent households living in high-cost metropolitan areas, eliminating the unfair tax subsidies for those regions; and it did this while lowering marginal tax rates, improving work incentives across the board. I’d be delighted to see Professor Stiglitz embrace this approach.

There’s only one problem: It wouldn’t benefit those at the top, or the corporate and other special interests that have come to dominate America’s policymaking. Its compelling logic is precisely why there is little chance that such a reasonable proposal would ever be adopted.

It’s not obvious to me that this broad approach wouldn’t benefit those at the top, as well as everyone else.  



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