After posting this item a couple of hours ago, I received an e-mail from “Paul Krugman.” Here’s my reply to that e-mail:
Dear “Paul Krugman”:
While I doubt that you’re the Paul Krugman, your argument against my most-recent blog post is both fair and one that Krugman himself likely would raise.
You argue that if Uncle Sam taxes Americans an extra $1 billion in order to raise my personal income by $1 billion, that Americans as a group, in fact, are not made worse off – that, while some Americans are made worse off, my benefit “counterbalances fully enough the cost imposed on” other Americans so that this tax and expenditure together impose no net burden on Americans as a group.
I disagree, although I see that that my example doesn’t clearly enough reveal the net harm.
So suppose instead that Uncle Sam decides to level the Rocky Mountains. That program (whatever its merits or demerits) would require the use of enormous amounts of capital and human labor. To direct these resources to the task of razing the Rockies would require a huge government expenditure – say, $10 trillion dollars.
Suppose Uncle Sam hires only American workers and buys only American-owned resources to raze the Rockies. Suppose further that Uncle Sam finances this program exclusively by raising taxes. An extra $10 trillion in taxes is raised, and every cent is spent successfully leveling the Rockies.
According to Krugman, because “we” received every cent that “we” paid to level the Rockies, the net burden to “us” as a group of leveling the Rockies is zero! The program is costless! But clearly that conclusion is incorrect.
Massive quantities of valuable, real resources are used up to raze the Rockies. The workers and resource owners didn’t pay for these resources to be used in this way (as these workers and owners voluntarily contributed, for pay, to the effort). Taxpayers paid; and the cost can be reckoned in the foregone value of whatever it is those workers and resources would have produced had they not instead been used to raze the Rockies. The net cost to Americans of razing the Rockies clearly is $10 trillion – a cost that doesn’t disappear simply because the tax payments by some Americans of $10 trillion were received fully as income payments by other Americans.
Donald J. Boudreaux
Note, btw, that my argument above – which is simply the argument that Jim Buchanan revived in 1958 after that argument had been confusingly dismissed, especially by Keynesians, in the early and mid 20th century – says nothing directly about the merits or demerits of deficit financing. Projects funded with public debt might well be agreed by every one, even God, to be worthwhile – and worthwhile to fund with debt. But even unambiguously worthwhile projects have a cost, and that cost does not vanish simply because the recipients of repaid debts are citizens of the same country as are the people taxed to repay these debts.