Neil H. Buchanan

Taxes, Saving, and Macroeconomics

In response to increasing calls for policies to raise the U.S. saving rate, proposals are once again being offered in Congress to change the tax base from income to consumption. Beyond the important issues of income distribution (that is, outright unfairness) inherent in such a plan, it would simply not work. Indeed, it is based on a fundamental mismeasurement of what counts as saving in the U.S. economy. The logical sequence underlying this proposal is wrong at two crucial points: lowering or eliminating taxes on saving is unlikely to increase saving, and higher saving would be unlikely to increase investment in any case (and would, more likely, decrease investment). The usual crowding-out logic is based on limited evidence and inadequate theory. Finally, the interaction between monetary and fiscal policy is currently perverse. Contractionary fiscal policy (which is what is implied by these proposals) will not be counter-balanced by timely and adequate monetary stimulus. The Federal Reserve is likely to wait too long to respond, either due to excessive caution about the effectiveness of the fiscal policy change or to take advantage of an opportunity to lower inflation still further before allowing the economy to recover.

Generational Theft: U.S. Fiscal Policy Does Not Cheat Future Generations

Despite the oft-heard claims that current generations are stealing from future generations by running fiscal deficits, this author holds that both theory and evidence suggest that this is either not true or not knowable. Intergenerational justice is not an appropriate way to analyze fiscal issues. Now, in particular, such an analysis is misleading and damaging. Spending by the government helps to improve the economy, which encourages businesses to invest in future productivity, which is the only way to make future generations wealthier than their parents. This virtuous cycle is even stronger if the governments spending is itself used to invest in future productivity.

Will the United States government ever again have a functioning budgetary system

It is an honour to have been invited to contribute a keynote article for this year’s volume of the Economic and Labour Relations Review (ELRR). For over two decades, ELRR has provided an important outlet for economic research and commentary of the highest order. It is, therefore, a great pleasure to have been given this opportunity to share my views on the budget situation in the United States, to try to explain to an international audience how my country has brought itself to the brink of political stasis and economic catastrophe. In this article, I will attempt to summarise the political economy of the current budgeting process in the United States. This will involve some description of the underlying fiscal realities facing the country; however, because the political situation has recently become so completely divorced from those realities, the discussion necessarily focuses on the crisis of governance that has gripped the United States in the last few years. In so doing, I offer my best prescription of what the United States should do to pull back from this self-imposed political insanity. I offer no predictions as to what will happen next, but I hope that readers will come away with at least some sense of why this seemingly inexplicable crisis is happening now, and what would have to happen to restore our system to a politically sustainable path. It hardly needs to be said (although I will say it anyway) that the stakes of this crisis could not be higher. No matter what one thinks of the influence of the United States on the global economy or geopolitical affairs (subjects on which reasonable people can find much to criticise – and, it must also be said, much to commend), a dysfunctional government in the United States is bad for everyone. Even if the global influence of the United States is inevitably going to decline over the course of this century, a sudden (or even a slow-motion) collapse of the US economy would bring pain and potential ruin to people around the world. The answer to the question posed in the title of this article – ‘Will the United States government ever again have a functioning budgetary system?’ – might seem obvious: It

Good Deficits: Protecting the Public Interest from Deficit Hysteria

President Obama has come under increasingly fierce criticism for the size of the federal budget deficit, as both Democratic and Republican politicians loudly proclaim that federal spending should be cut. This article explains why such anti-deficit fervor is misguided and simplistic, and why, perhaps counter-intuitively, cutting government spending can hurt the country, rather than help it, in both the short run and the long run. In the short run, cutting deficit spending can be disastrous to the economy, especially if the economy is already in decline. In addition, because the federal budget fails to separate spending that provides long-term benefits to the economy – such as spending on education and infrastructure – from spending that provides no long-term benefits, it is just as politically expedient to cut valuable spending as it is to cut waste: both types of spending cuts reduce “the deficit.” Thus, indiscriminate cuts in government spending will reduce the deficit, but could also harm our long-term prospects. This article proposes a novel solution to this problem: The creation of an independent agency to fix the current incoherent and damaging budgeting process. The “Growth Budgeting Board” could eliminate indiscriminate and poorly-timed spending cuts, protect valuable investments from the budget ax, and discipline the political process to avoid gamesmanship and abuse.

A User's Guide to Proposals to Replace the U.S. Tax System and Strangle Fiscal Policy

This article reviews several familiar plans to alter the structure of taxation, including the flat tax, a VAT, and the USA Tax. With the significant exception of a simplified income tax system, every plan to replace the current U.S. federal tax system would move us in precisely the wrong direction. These plans would abandon income taxation entirely in an attempt to solve problems that do not exist, and they are based on a flawed ideal of a neutral tax code. The companion to these plans is an even more misguided set of proposals (some in the form of constitutional amendments) that could severely limit future fiscal policy.