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Nov 28 2016

Math Problems

One problem people have with Economics is understanding ‘future math’ and by that I mean how decisions today effect outcomes at some specified (or not so much) time yet to come.

One way this concept is used to lie to you is to increase your perception of present costs by aggregating cumulative costs over time. An example of this is substituting the 10 year impact of policies for immediate results, for example stating that something is going to cost $1 Trillion.

I’ll even be charitable and use the F-35, a project that is an enormous boondoggle and complete waste of money because it doesn’t work, not because of the ultimate price tag, as my poster child. $1 Trillion is the projected cost over a 30 year period of utility. The average cost per year is a much more reasonable (though still outrageous because, as I mentioned, it’s entirely outclassed and ineffective) $33 Billion, with initial expense somewhat higher at the beginning because of development and much lower at the end because of production efficiencies and the transition from actually making planes to simply making spare parts for them.

But a lot of useful things are not done because of this dishonest inflation too. Another way that ‘future math’ is used to lie is outlined by Dean Baker today-

Quick Lesson on Silliness of Concerns Over Government Debt
Dean Baker, Center for Economic and Policy Research
27 November 2016

The Peterson Foundation, along with its allies at the Washington Post and other media outlets, have long worked to fan irrational fears about government debt just as Donald Trump and other demagogues have fanned racism and xenophobia. One small positive of a Donald Trump presidency is that it may provide a teachable moment on the meaninglessness of such fears.

First, the infrastructure is supported through a tax credit rather than direct spending. If we spent $1 trillion directly then this would add $1 trillion to the debt. We will then have to pay the interest on this debt as long as it is outstanding. (Currently, the real interest rate on government debt is nearly zero, since the inflation rate is almost as high as the long-term interest rate.)

But if we give the tax credit (Trump has proposed a tax credit of 82 cents on the dollar), then we have added zero dollars to the government debt. However, we will collect less money in tax revenue in future years. Given his plan, we will collect $820 billion less in revenue over the period where the tax credits are cashed in. Other things equal, this will raise our debt in future years by $820 billion compared to a situation where we did not have the infrastructure spending, but at least for initial scoring purposes we can say that it didn’t add to the debt, so the Peter Peterson–Washington Post crew should be happy. (The boost to output from greater productivity should add to tax revenue in future years, but this would be the same regardless of whether we paid for the $1 trillion in spending through borrowing or a tax credit. If the economy is below full employment, there will also be a boost to demand, and therefore output, as a result of this spending, but again this is independent of how we finance the spending.)

(L)et’s think about the tolls for a moment. Suppose the government paid for the infrastructure and used tolls to recoup part of the cost. The tolls are then future revenue to the government, just like any other tax. But with Trump’s plan people pay the tolls to private companies, so the money doesn’t go to the government. In Peter Peterson–Washington Post land we are supposed to be worried about the burden to our children of the tolls collected by the government, but somehow the burden imposed by the private companies don’t count.

If this seems like a relatively minor accounting quirk to use against the deficit fear mongers, consider the case of government granted patent monopolies. This is a mechanism through which the government funds research. It gives companies monopolies on the products they sell that allows them to charge far more than the free market price. In the case of prescription drugs we will spend more than $430 billion this year on drugs that would cost 10–20 percent of this amount if they were sold in a free market without patents or related protections.

This is a difference of between $340–$390 billion, and that is just for prescription drugs. But the Peter Peterson-Washington Post types would have us ignore this massive burden in the form of higher drug prices because these are not taxes imposed by the government. In other words, the only burden on our children they want us to think about is the burden of government taxes. They are happy to ignore any other burden that reduces their standard of living.

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