Mar

6

In his "Essay on the Funding System" (1820) Ricardo concluded that raising money from taxes did nothing to "save" the government the cost of borrowing. Whether the Crown borrowed the money and paid it back with interest or raised the excise immediately, the effect on the public would be the same. With consols yielding 5% (and having, as they did, an infinite maturity but the usual amortization of 45 years) "there is no real difference in either of the modes, for 20 millions in one payment, 1 million per annum for ever, or £1,200,000 for forty-five years are precisely of the same value. To raise the money immediately the excise would have to be increased; and nothing in human experience suggested that the government would the reduce taxes once it had collected the 20 millions. As a result people would be saving more and spending less in anticipation of permanently higher taxes, and the higher excise rates would produce less revenues than the exchequer (or our current CBO) would predict.

If, instead, the government borrowed the money, more taxes would have to be collected to pay off the interest. But, people's wealth would be undiminished and their expectations about taxes would remain unchanged. As a result the excise would be able to collect, from growth, enough additional revenue to amortize the debt. Ricardo was himself somewhat puzzled by this result; it was confirmed by the facts he had gathered from the experiences of the Napoleonic Wars, but he wondered if the "equivalence" that he had found should be relied on as an economic law. Ever since then economists have emphasized Ricardo's doubts and done their best to ignore the inconvenient evidence.

Reagan had the advantage of understanding Ricardo without ever having read him. As President he had the temerity to reduce the level of growth in government spending in his first budget (1983). His compromise with Speaker O'Neill required the government to commit the sin of continuing to borrow more money to pay the bills already due. Still worse, it resisted the call to virtue by "conservatives" (sic) who wanted to balance the budget by taking more from the people who already paid the taxes taxes. For the next 5 years Federal spending grew but at less than half the percentage growth in private sector wages, incomes and output. This is now entirely attributed to Reagan's dumb luck.

In he year of the Clinton-Bush election, President Bush had already displayed his family's inimitable political tone-deafness by raising tax rates; and candidate Clinton did his best to follow suit by arguing that the rich had not been taxed enough. (One can hear echoes of the Hoover - Roosevelt contest over who would be less profligate.) Yet, in the next 6 years, largely because of the 1994 Congressional revolt, outlays by the Federal government increased at only 20% of the rate at which the economy grew.

We seem to have come to the same place once again. The prospect of ever increasing deficits has made people look for places to squirrel their money away, in bonds, stocks and now - possibly - in real estate. And now, for the first time in 15 years, there is a hint that the government might reduce the rate of growth in its spending. It will be a miracle, of course, if that happens. Given the current intellectual certainty that Keynes had the final explanation for how the earth and the other planets move (never mind Mercury, er, the record of the United States from 1869-1899), it will be even more surprising if economic growth revives. What can be guaranteed is that future textbooks will explain such growth, like that in the 1990s, as attributable solely to the tax increases courageously fought for by a Democrat President.

Here is Ricardo's essay.

The reference to Mercury is a crude shout out to Einstein and Arthur Stanley Eddington. The BBC movie about them is definitely worth seeing. Caution: in typical fashion the BBC offers a postscript which consigns Eddington to obscurity for having, like Darwin, managed to strengthen his faith in God through his scientific discoveries. For us fans of cosmology that brought a laugh. It is precisely Einstein's determinism, which gave strength to his Socialist convictions, that now seems quaintly dated. Eddington's speculations about the universe being "mind-stuff" are, on the other hand, precisely where physics seems to be going.

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