EconLog

Two Models of Government, 2003-01-19

In Paul Krugman's model, government spending is given, and tax cuts increase deficits.

It's O.K. to run a deficit during a recession, as long as the deficit is clearly temporary. But both the numbers and the administration's search for excuses tell us that there's nothing temporary about the red ink. On the contrary, we'll probably be on a deficit bender until the baby boomers retire — and then it will get much worse.

In Milton Friedman's model,

History suggests that Washington spends whatever it receives in taxes plus as much more as it can get away with.

Virginia Postrel pointed out that this story and this sidebar in USA Today seem to confirm Friedman's model, at least for state and local governments.

State governments are struggling to pay for expensive programs that were approved or expanded during the economic surge of the late 1990s. Although the economy began to cool in 2000, state and local spending has continued to grow, increasing by an annual rate of 4.2% in the first nine months of 2002.

Discussion Question. How would economists prefer to determine the level of government spending and taxation?

Discussion Question.