Do Deficits Matter?

Law professor Daniel Shaviro's Do Deficits Matter? covers just about every issue associated with the topic of public debt, including, say, optimal savings rate, the limitations of fiscal stabilization policy, and generational accounting. The book is meticulously researched, and fair in its presentation of all sides, none of which get short-changed by the author. As a reader you are therefore given the chance to draw your own conclusions. Shaviro comes down against a constitutional balanced budget amendment. This reader finds his considerations of the actual 1995-1997 proposal rather lawyerly and therefore unconvincing (a modern-day lawyer could probably pick the U.S. Constitution itself apart as having lots of holes), but the important thing is that Shaviro's exposition allows you to make up your own mind. For the most part, the book is highly accessible. Occasionally you'll run into a sentence like "In short, the Madisonian response to faction involved spatial centralization of government alongside institutional decentralization" (p. 289) to describe strong federal government and separation of powers, but those are rare exceptions. It is refreshing to see a prominent thinker from the left concede three points traditionally made by the right. * Debt-driven fiscal stimulus policies are flawed in both theoretical concept and practical efficacy: "even most Keynesians now recognize that the case for an actively countercyclical fiscal policy is extremely weak" (p. 10). * Public debt constitutes a burden on future generations: "younger individuals and future generations will end up paying for government spending on behalf of older individuals and current generations", a phenomenon Shaviro labels "tax lag" (p. 4). * The very fact that government is able to borrow inherently leads to a larger government sector than would be the case without borrowing: "tax lag tends to increase government spending by reducing its perceived (and real) cost to current voters" (p. 146). Public debt is like a giant redistribution scheme that transfers wealth from future generations to earlier ones. This is okay with Shaviro because future generations are likely to be wealthier than today's, e.g. because of continued developments in technology. Although he stipulates that this is not sure, it is certainly not unreasonable to deem this likely. But the fact that Shaviro has no qualms about this intergenerational redistribution scheme reveals a liberal bias. What makes public debt unethical is the fact that future generations end up facing a financial burden that is the result of spending and borrowing decisions in which they had no participation. Just because someone else is wealthier than you are does not mean you are therefore justified to go ahead and take part or all of that wealth without that person's consent. Still, if you can see past the author's personal view -- and his overall exposition is for the most part so fair, nonpolemical, and accessible that i

Shaviro has written an excellent and informative book about a (seemingly) important issue. The book nicely summarizes much of economic literature in non-technical terms. I would highly recommend this book to anyone (including non-specialist economists who want a quick introduction to this area).My one complaint is that the book -- as is clear from the introduction -- is very U.S. centric and has only a few references to other countries. For example, the discussion of why shifting powers to the states might limit the size of government (since they can not print money and therefore can not run persistent deficits and can only tax so much before taxpayers move to escape high taxes) seems to go against the experience of some other federal countries (e.g., Brazil) where the states seem willing to be quite profligate (perhaps relying on federal bailouts).

According to the author, "over the past twenty-five years, the deficit debate among economists has grown increasingly discordant, reflecting the issue's increasing prominence, the growing size of reported deficits, and the collapse of 1960s Keynesianism." Daniel Shaviro is professor of law at New York University and a former legislation attorney with the Joint Committee on Taxation of the United States Congress. There are few lawyers who write like economists (or better) and Shaviro's mastery of the development of economic thought is both judicious and impressive. Nevertheless, if we can judge the state of economic arguments by papers presented at the annual convention of economists, there would seem to be a reduction in papers even dealing with the the Federal budget deficit. At the end of 1997, most policy-makers are celebrating the virtual elimination of the deficit, and the question becomes one of whose taxes should be cut? In this respect, Shaviro's rather conservative position seems to be one of accepting $200 billion deficits for some time. In my view, a great deal of the skeptical view of economists with regard to the Federal deficit has been the result of the heroic writings of the Classical Keynesian, Robert Eisner, former President of the American Economic Association, reinforced by the last writings of Nobel Prize winner William Vickrey. Shaviro treats Eisner's writings with critical respect and even admits a certain renaissance in Keynesian thinking as a result of the prediction failures of the monetarists, including the rational expectations and real business cycle extensions of neo-classical thinking. This reviewer was pleased to see a younger political economist take the views of Abba Lerner seriously, particularly his pathbreaking article on "functional financs." Shaviro maintains that "Lerner was perhaps the leading early post-World Waw II Keynesian economist in the United States, not a marginal figure or a crank." If true, how does one explain the endless peregrinations of Professor Lerner searching for tenure? One little-recognized contribution of Lerner was his recognition of what he called "supply-side inflation" in the seventies, something also understood by the British Keynesian, Sir Roy Harrod, and the Canadian economist John Hotson, who labeled the Harrod insight as the "Harrod dichotomy." Milton Friedman's reassuring claim that "we are all Keynesians now" permitted the eclipse of the Lernerians in theoretical discussions and the continuation of the dogmatic monetarist belief that inflation is always a question of too much money in the system. More importantly, it resulted in the popularity of Paul Volker's "licking of inflation" with a little-noticed jump of real interest rates in the early eighties and the continued fawning approval of his successor, Alan Greespan, despite the fact that Greenspan has given up the use of monetary aggregates to determine his monetary policy decisions. Shavi