Debt brake debates are back following the German court ruling. While lot of the criticism is misplaced, it is fair to say that the law works worse than expected.
I’ve no dissent from the idea (empirically, I have no basis to judge) that a debt limit plus lots of “cheating” might be worse than no limit at all.
I do not understand the idea of “sub-par” in “Right now the debt brake is leading Germany to cut spending and increase taxes relative to what the government would want.” That seems to be a definition a debt limit and the idea that because of myopia, the government will “want” too much debt. Is this just pointing out that a limit may not be optimal in all situations? If the government has an opportunity to invest in an activity with present costs and future benefits such that the “project” has an NPV >0, passing up this opportunity would reduce real future income. In recession with the MC of inputs < market prices and low borrowing rates, such opportunities may be quite common. [I’m assuming that no low-dead-weight loss tax is available.]
I agree that a deficit/debt limit need not mean that “Germany” cannot invest. On the contrary If monetary policy follows a inflation target, a reduction in government debt, ceteris paribus, means more private debt, orsumable mostly to finance private investment. The issue is where does a deficit finance investment with the higher return?
On the other hand, crises can be the impetus to tax reform. Specifically, climate change would be best addressed with a tax on CO2 emissions and taxes on business income should be shifted to taxes on the personal income of business owners.
Yeah, I was trying to say that sometimes (and maybe even now) the limit on how much you can borrow might not lead to best possible outcomes. Exactly as you say, you might have project with positive NPV.
100% agree on crises potentially leading to reform. If only we would ever get to carbon tax...
I’ve no dissent from the idea (empirically, I have no basis to judge) that a debt limit plus lots of “cheating” might be worse than no limit at all.
I do not understand the idea of “sub-par” in “Right now the debt brake is leading Germany to cut spending and increase taxes relative to what the government would want.” That seems to be a definition a debt limit and the idea that because of myopia, the government will “want” too much debt. Is this just pointing out that a limit may not be optimal in all situations? If the government has an opportunity to invest in an activity with present costs and future benefits such that the “project” has an NPV >0, passing up this opportunity would reduce real future income. In recession with the MC of inputs < market prices and low borrowing rates, such opportunities may be quite common. [I’m assuming that no low-dead-weight loss tax is available.]
I agree that a deficit/debt limit need not mean that “Germany” cannot invest. On the contrary If monetary policy follows a inflation target, a reduction in government debt, ceteris paribus, means more private debt, orsumable mostly to finance private investment. The issue is where does a deficit finance investment with the higher return?
On the other hand, crises can be the impetus to tax reform. Specifically, climate change would be best addressed with a tax on CO2 emissions and taxes on business income should be shifted to taxes on the personal income of business owners.
Hey, thanks for leaving a comment!
Yeah, I was trying to say that sometimes (and maybe even now) the limit on how much you can borrow might not lead to best possible outcomes. Exactly as you say, you might have project with positive NPV.
100% agree on crises potentially leading to reform. If only we would ever get to carbon tax...