Who Cares About the National Debt?

Not Greg Mankiw. Or, to be precise, not “Republicans.”

This past weekend Mankiw wrote a column for the Times laying out the arguments for a carbon tax. They are so well known and so obviously correct that I won’t bother repeating them. (A tradable permit system could work equally well, depending on how it is designed.)

In addition, many people think that the national debt is a serious long-term problem. A carbon tax (or a tradable permit system where permits are auctioned off) would obviously bring in revenue. In White House Burning, we estimated this at about 0.7–0.9 percent of GDP by the early 2020s (citing Metcalf, Stavins, and the CBO).

So what’s the problem? According to Mankiw:

“The crucial point is what is done with the revenue raised by the carbon fee. If it’s used to finance larger government, Republicans would have every reason to balk. But if the Democratic sponsors conceded to using the new revenue to reduce personal and corporate income tax rates, a bipartisan compromise is possible to imagine.”

Republicans like to say that they are opposed to deficits and that debt is evil. (Debt ceiling, anyone?) But when confronted with a proposal that makes perfect economic sense and reduces deficits, they reject it—on the grounds that it would “finance larger government.” Instead, they insist on offsetting the tax increase—which, remember, is economically efficient standing on its own. Essentially, Mankiw’s argument (OK, he’s placing it in the mouths of “Republicans,” but he’s a Republican, too) is that a carbon tax is good, but additional tax revenue that would reduce the deficit is bad.

This is absurd. The argument necessarily relies on the premise that deficits cannot be reduced: increase tax revenues, and spending will just go up, leaving the deficit the same. If the deficit is fixed, then even spending cuts are pointless; the money saved will just get spent someplace else. (If you assume that new tax revenue will automatically get spent, then the same assumption must apply to savings from spending cuts.) As a further corollary, tax cuts will not increase the deficit; instead, they will cause spending to fall to offset the reduced revenue.

Unfortunately, not just the Republican congressional delegation but also one of the party’s most prominent economists has accepted this absurdity as a fact. Which is why the single most obvious thing we could do to protect the world for future generations and reduce deficits has no chance of happening anytime soon.

This piece is cross-posted from The Baseline Scenario with permission.