The Myth of the Sustainable Public Budget

Nobel Laureate economist Paul Krugman caused a stir on ABC's This Week, expressing the following view to Christina Amanpour on the recommendations by the leadership of the US Debt Reduction Commission:

"Some years down the pike, we're going to get the real solution, which is going to be a combination of death panels and sales taxes. It's going to be that we're actually going to take Medicare under control, and we're going to have to get some additional revenue, probably from a VAT."

He later clarified his statement to be less provocative, noting that health care costs had to be better controlled and that there is a need for "several percent" more revenue, which might "most plausibly" come from a value added tax.

He went on to say that "And if we do those two things, we’re most of the way toward a sustainable budget." That is a very tall order. Any serious examination of government costs makes it clear that there is no such thing as a sustainable budget. The unit costs of government services routinely rise, frankly because in government competitive influences are largely absent. When government encounters financial difficulty, it looks for ways to cut services and raise taxes --- that is, ways to reduce customer service or to charge more for what it does. Regrettably, in government, the answer to every question seems to be "more money."

On the other hand, when companies in competitive markets run into fiscal difficulties, their survival requires that they find ways to attract customers and look for ways to lower their prices without cutting service.

Sustainability and government budgets are more often than not an oxymoron, except perhaps for the special interests who live off them (whether of the Right or the Left).