Economical arithmetic*

by John Q on January 9, 2011

I’m at the American Economic Association meeting in Denver, and just attended a panel of the great and serious discussing the US budget deficit. The numbers are pretty impressive – on current projections, US government expenditure (properly measured) is likely to be around 25 per cent of national income (around 3 trillion/year) and the default budget deficit is around 10 per cent of national income. While current and former CBO directors went over the usual options, it struck me that I had seen those numbers before.

Roughly speaking, the share of US national income going to the top 1 per cent of the income distribution has risen from 15 to 25 per cent over the past decade, mostly because of the growth in size and profitability of the financial sector. As I’ve argued before, this payment to the top percentile can be seen as a kind of tax paid by the population as a whole for the benefits of living in the kind of economy that has developed over the past few decades of financialisation. (Please check irony alerts before responding!)

Clearly, any attempt to claw back some of this money to fill the budget hole would have what economists call “incentive effects”. More precisely, it would necessitate a big contraction of the financial sector. Judging by the reaction of the assembled experts when I raised this point (all declined to respond), this is literally unthinkable.

* I’m alluding to Richard Feynmann’s joke that, in view of the size of budgets, we should talk about “economical” rather than “astronomical” numbers.