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Of Good And Bad Deficits

Robert Skidelsky explains the differences between “good and bad deficits.”

Government deficits incurred on current spending for services or transfers are bad, because they produce no revenue and add to the national debt. Deficits resulting from capital spending, by contrast, are – or can be – good. If wisely administered, such spending produces a revenue stream that services and eventually extinguishes the debt; more importantly, it raises productivity, and thus improves a country’s long-run growth potential.
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From this distinction follows an important fiscal rule: governments’ current spending should normally be balanced by taxation. To this extent, efforts nowadays to reduce deficits on current spending are justified, but only if they are fully replaced by capital-spending programs. Indeed, reducing current spending and increasing capital spending should be carried out in lock step.

Around The Dial – February 21, 2012

Economic policy reports, blog postings, and media stories of interest:

• Uwe Reinhardt mulls ways of reforming health care payments.
• Off the Charts breaks down “the new unemployment insurance deal.”
• Paul Krugman puzzles over arguments about the safety net.
• Working Economics looks at the Recovery Act’s successes.
• The Center for American Progress analyzes statistical budgets.

A New Zombie Argument?

Working Economics doesn’t buy the argument that inequality is due to more working spouses in high-income households.

The first thing to note is that the presence of a working spouse, even a highly paid one, can potentially impact household income inequality but says nothing about the tremendous divergence of individual wages over the last few decades. Household incomes aggregate the labor income of all household members (which depends on how many members work, how much they work and how much they are paid), non-labor income (capital gains and so on) and any pensions, government transfers and other income. As we know,  the top 1 percent of households managed to more than double its share of national income between 1979 and 2007. Josh Bivens and I have argued that the dynamics underlying growing household income inequality are rising wage inequality, rising inequality in receipt of capital income (capital gains, dividends and so on) and the shift toward more capital income and less wage income. The demographic factor of working spouses is about how people combine into households and does not address and certainly cannot explain the huge increase in the wage growth of the top 1 percent of wage earners versus every other group.

Tough Times In Rural North Carolina

A new report from the North Carolina Budget and Tax Center analyzes the budget challenges facing the state’s rural communities.

Too often lost in annual budget debates is the fact that local governments are far from self-supporting. While local government taxes – particularly the property tax and local option sales taxes – constitute a significant share of revenues for governmental operations, local revenues account for just one-fifth of annual public school funding, on average, in North Carolina counties. In historically rural counties, local revenues averaged 19 percent of total 2010-2011 funding for public schools, compared to 22 percent in historically urban counties. Complicating this issue are various legal and economic constraints on local governments’ ability to raise revenue when costs are shifted to them from the state or federal level. If North Carolina lawmakers continue to pursue a fiscally unsustainable, cuts-only approach to state budgeting, the strain on local government budgets will effectively force negative outcomes such as job losses and reductions or eliminations of services and supports for individuals and families that will weaken economic recovery. The results of sustained and dramatic budget pressures on local governments have already manifested across North Carolina and beyond in the form of severe personnel and core service cutbacks in hundreds of jurisdictions.

Editor’s Note

Policy Points is taking the day off in honor of the Presidents Day holiday. Normal posting will resume on Tuesday, February 21, 2012.

Thank you for your interest in the blog!