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11 IRET Policy Bulletin 1 (1983)

handle is hein.taxfoundation/iretpbul0001 and id is 1 raw text is: P El1 Note: Nothing written here is to be construed as necessarily reflecting the views of IRET or as an attempt to aid or hinder the passage of any bill before Congress. institute forresearch on the ceconomics f taxation l 1725 K Street, N.W. */ /Ur/l OSuite 1103 Washington, DC 20006 (202) 223-6316 A LITTLE MORE ON CROWDING CUT We've been at some pains this year to try to disabuse our economic policy makers of a lot of mistaken notions about deficits. We hold no briefs for deficits, but we very strongly believe that if policy makers are really concerned about the bad economic effects incorrectly attributed to deficits, they need to know what fiscal variable actually does do the economic mischief. We've shown that the historical record adamantly refuses to support any statistically reliable relationship between deficits and interest rates, that if this is the crowding-out nexus which policy makers have in mind, they're following a blind analytical trail. We've also shown that there's no reliable connection between our budget deficits and inflows of capital from abroad which allegedly escalate the dollar's foreign exchange value, crumble our trade balance, and thereby impair our economic recovery. Our objective was to clear the analytical tracks of a lot of theoretical debris, so that we could demonstrate that what preempts the nation's saving, hence reduces the resources committed to capital formation, is not the deficit but government spending. In our Economic Report #19, DEALING WITH THE DEFICIT; ARE TAX INCREASES THE ANSE?, we focused on the relationships among government spending, taxes, deficits, gross private saving, gross national saving, and private investment, presenting in table form a summary of what happens to saving and investment under differing budget outcomes, and showing that government spending, itself, is the out crowder. A little elaboration is needed to nail down this conclusion. The direct crowding out effect results from government purchases of goods and services; the remainder of government spending -- transfer payments of one sort or another -- may indirecly contribute to crowding out by virtue of the effects of some of these outlays in raising the costs of market-directed uses of one's time and capabilities compared with so-called leisure uses, thereby eroding the economy's total output capacity. And much of the budget revenues comes from taxes which raise the cost of saving compared to the cost of consumption, in this way also contributing heavily, albeit indirectly, to crowding out. But, to repeat, the direct crowding out stems from the government's purchases of goods and services.