What's a Government Good for? Fiscal Policy in an Age of Inequality

USC CLASS Research Papers Series No. CLASS18-2

USC Legal Studies Research Papers Series No. 18-2

48 Pages Posted: 6 Feb 2018  

Edward D. Kleinbard

USC Gould School of Law

Date Written: February 5, 2018

Abstract

The debate surrounding the Tax Cuts and Jobs Act demonstrated the intellectual bankruptcy of U.S. fiscal policy debate. The TCJA has serious flaws as a matter of narrow tax policy, but it is more fundamentally flawed when viewed through the proper policy lens, which is overall fiscal policy – the net of government taxing and spending. The TCJA greatly exacerbates already untenable budget deficits. Its tax prescriptions are even more regressive when the spending cuts contemplated by the legislation itself are reflected. And the law’s regressivity is compounded further when plausible financing paths for these large deficits are included in the analysis. In particular, the “dynamic” growth analysis whose tax ramifications were part of the debate leading up to the law was predicated on enormous cuts to future transfer payments, and confused GDP growth with enhanced welfare.

This presentation urges a more holistic approach to fiscal policy debates. Fiscal policy is an exercise in applied economics, but also in applied moral philosophy. We define ourselves as a country through the covenantal bonds we construct for our society by means of the fiscal policies we adopt. Neither perspective is well served by the metrics applied today to legislation like the TCJA.

Tax policy is overstudied and overemphasized; sensible fiscal policy, by contrast, in particular the spending side of the equation, can address fundamental social problems like economic inequality, the stagnant incomes of the middle class, and disappointing economic mobility. Greater government investment in human capital leads to inclusive growth (more broadly shared growth) and faster growth than does the path that the United States now is following. Inclusive growth mediated by government investment thus yields a double dividend. A greater role for government insurance is economically efficient, by resolving the pervasive problem of adverse selection in private insurance markets and the impossibility of private markets insuring more existential fortuities. Government insurance also responds to the moral imperatives that animate the covenantal bonds through which we define our society. In the end, brute luck has more to do with the outcomes of our lives than most like to admit; well-designed insurance modulates the worst of these fortuities. The Market Triumphalist view that dominates much current debate rests on the denial of luck; what is required instead is the humility that comes with acknowledging the role of fortune, and with it a commitment to a more empathetic economy.

Suggested Citation

Kleinbard, Edward D., What's a Government Good for? Fiscal Policy in an Age of Inequality (February 5, 2018). USC CLASS Research Papers Series No. CLASS18-2. Available at SSRN: https://ssrn.com/abstract=3118406 or http://dx.doi.org/10.2139/ssrn.3118406

Edward D. Kleinbard (Contact Author)

USC Gould School of Law ( email )

699 Exposition Boulevard
Los Angeles, CA 90089
United States

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