The American public debt and the fairness question

Whenever there is a large build-up of public debt, the question of inter-generational fairness becomes paramount. Actually, it is slightly more complicated than that. In addition to inter-generational fairness, it raises questions about the kind of society we want to have, that is, the question of intra-generational fairness also becomes relevant. Specifically, the level of egalitarianism in society is an issue that cannot be avoided if one wants to address this question seriously.

Let us address the second issue first. One has to answer the question – why do we have a welfare system at all ? Several answers can be given. It should be a no-brainer that the desire to have a humane society should be a major motivator for having a welfare system. However, given the paralysis of the system when it comes to making welfare systems solvent or strong now and for the future, one wonders whether, as a matter of statistics, these humanitarian instincts are dominant or not in a country like the United States. Other more cynical-sounding reasons can be proffered, like economic efficiency reasons. Different societies have different emphases when it comes to this question. The fact that Congress after Congress in the United States, Republican and Democrat, have gone along with the current kinds of levels of public spending is proof that the democratic system has voiced its opinion that the current welfare system is something desirable.

Next, let us address the question of inter-generational fairness. At small levels of public debt relative to GDP or to tax revenue, inter-generational fairness is not a burning issue. However, at high levels of public debt like we have currently in countries like the United States and Japan, inter-generational fairness becomes a crucial question. Most reasonable people will agree that, as far as possible, current generations should pay for current expenses. Because if they do not, and if the public finances have to be made solvent in the future, then future generations will have to shoulder the burden. An exception may be made for developing economies, which tend to have much higher growth rates, and which often have urgent needs for building infrastructure. When the government of a developing country goes for a large spending spree on infrastructure and accumulates a huge debt, it is typically done with the justification that the growth resulting from these projects will raise more than enough future revenues to pay back the debt. The same argument does not apply to developed economies, which tend to have much lower rates of growth. Therefore, with current realities, it is impossible to justify a large build-up of public debt and a large shortfall of tax revenues if one cares about inter-generational fairness. Even in a developing country, a government must be held accountable if it goes for excessive build-up of public debt without at the same time creating the conditions necessary for rapid future growth.

Are these issues intertwined ? To some extent, but not so much as to confound public policy in a country that cares for fairness, humaneness and stability. So, this article ignores the question of how these issues, the one of humaneness, the one of economic efficiency and the one of fairness, are interlinked. It does little to add any further clarity to the discussion, especially in a situation of debt-to-GDP ratios that approach 100% or higher.

Optimists are incorrigible when it comes to their optimism. I am sure there are some who will think along lines like this – since the current rich, who are not paying enough taxes to cover current expenditure, will most likely bequeath a part of their wealth to their progenies, some amount of fairness will be restored due to the inheritance tax. This argument will work only if the current rich want to and will indeed bequeath a substantial part of their wealth to their progenies. If instead, the current rich spend most of the wealth that they get to keep due to the elitist tax cuts of the last decade, then inheritance tax will be unable to restore the balance in the public finance. No one in their right minds will entrust the future health of the public finances to such questionable sources of revenue. Inter-generational fairness is unlikely to be restored by this method.

The question of how deep tax cuts should be if they are implemented in response to recessions is something that has not be subjected to careful analysis. In addition, there is the question of how long deep tax cuts should continue, especially when they threaten to lead to a huge build-up of public debt. Neither the question of intra-generational fairness nor the question of inter-generational fairness will become such big headaches if more carefulness is observed when cutting taxes. Similarly, neither of these questions will assume the level of exigencies if the political system can muster the will to reverse deep and prolonged tax-cuts when common sense dictates so.