MAKING DEFICIT REDUCTION SEXY
One of the saddest things about Paul Krugman's self-destruction is that we could really use the old Paul Krugman about now-- honest, genuinely thoughtful, wry, and with a way of turning abstruse economic truths into something not only intelligible but entertaining to the lay reader (as opoosed to bitter, hateful, grim, and blindly and self-deceptively partisan). Who is going to do that job now that Paul Krugman is (intellectually and morally) gone?

To be specific, we need someone to articulate that to cut taxes while increasing spending is not really cutting taxes at all. It's merely shifting the tax burden to borrowers, who suddenly have to compete with the government to borrow money, and therefore must pay higher interest rates.

In the case of inflation, we have come to understand this. If the government can't or won't tax, but it still wants to spend, one "solution" is to print money. This seems so transparently stupid now that none of us worry that even the most mindless president or Congress would do it, but it hasn't always been so. Dozens, perhaps hundreds of regimes, governments, and administrations walked right into that trap in the course of the 20th century. Not until 1990 did Latin America finally overcome its addiction to inflation. In the past two decades, inflation has vanished, worldwide, with what from a historical perspective is startling suddenness.

Inflation appears to be a way to avoid taxation. But really it is just another tax. It is a tax on a certain kind of behavior: holding money. Money is less valuable this year than last year, so anyone who held money during that time has been-- silently, invisibly-- taxed.

Deficits are also a tax. And I don't mean on future generations-- "put it on the grandchildren's credit card," as Dean says. Deficits push up long-term interest rates. Think about it this way. Business leaders, at any given time, have a wide range of investments they can make-- for concreteness, let's say, a wide range of factories they can build (although the real set of business investments is much more diverse). To build a factory, they have to borrow a lot of money over the long term, say, 10 to 25 years. They anticipate different rates of return for different investments; 20% for some, 15% for some, 10%, 8%, 5%, and so on. Think of it as a continuum. An investment will be profitable if and only if its rate of return is higher than the long-term interest rate. If I can borrow money at 8%, I will make all the investments with an anticipated return above 8%, none of those below. If the interest rate falls to 7%, I will make more investments, namely those with rates of return between 7% and 8%. If it rises to 10%, I will reduce my investment, by forgoing those investments with returns between 8% and 10%.

And so, just as inflation, which seems to foolish governments like a way to avoid taxation, is really an insidiously invisible tax on holding money, so deficits, which foolish governments think are a way to cut taxation, are really an invisible tax on long-term borrowing, and in particular on business investment.

All right, I've said what the argument could be, but I haven't really made it convincingly enough to sway the press. This is the kind of argument that ought to begin in the academic research-- I suspect it already has-- and then filter into the public debate through pundits who understand economics but can make it intelligible and readable, or, better yet, economists who are uncharacteristically good writers: a rare breed, of which Paul Krugman used to be the most shining example. If Paul Krugman had played his cards differently, he could be the sort of figure that conservative Republicans would listen to, the sort of person who would be quoted across the political spectrum. He might even have been able to convince a lot of Republcans to oppose the Bush tax cut. Instead, hatred of Bush became the gun that he put to his own head, he massacred his intellectual credibility, and he lost his good name and with it his opportunity to influence the public debate. Reading him now makes me want to weep with shame. I am convinced that only a full-fledged, public apology could restore Krugman's reputation now. If he did that-- "I was led astray by the atmosphere of the New York Times, I apologize; but let me go back to my old style and explain the problem with deficits and see what you think"-- maybe he could still help to stem the red ink. But will he? Of course not. His brilliance as an economist turned to hubris, and hubris has blinded him.

Well, enough weeping over Krugman. The pundits need to stop complaining about the deficit and figure out a way to give the issue political traction. Here's an imaginary candidate's speech on the subject:

I want to speak today about one of the US's greatest assets. It is a military asset more powerful than any weapon system, and has been a critical part of victory in most of the wars of the past two or three centuries. It is also an economic asset, and, when we choose to use, can set the wheels of the economy spinning in a thousand different half-invisible ways. This asset lies at the very heart of American power, and if we want to make ourselves a great nation, if we aspire to continue our world leadership, nothing is more important than to invest in this asset, which the Bush administration has foolishly neglected. I am speaking of fiscal solvency.

You'll hear a lot of people say that we need to control the deficit because we shouldn't pass these debts on to our grandchildren. Forget the grandchildren. If economic growth continues, our grandchildren will be much richer than we are, and they can afford it. If running deficits was a good way to grow the economy, it would be in the grandchildren's interest as well as our own. But they're not.

George W. Bush says he cut taxes. He didn't. You're still paying the tax. You're paying the tax in the form of weaker stock prices. You're paying it if you travel abroad, in the form of a weaker currency. You're paying it in the form of jobs that were not created because the government was borrowing money instead of the private sector, because lenders were putting their money into wasteful government spending instead of productive private investment. There's no such thing as a tax cut without a decrease in spending. Bush just shifted the tax burden. Instead of taxing people directly, he taxed them in back-handed, insidious ways...

Hmm... It sounds like Rush Limbaugh. Not an argument the Democrats are well equipped to make...

Got a phone call, gotta go. I might be back later.