Dr. Mankiw posts about cap and trade being used to cut the deficit. Although this happens very rarely, I disagree with him. As I wrote about yesterday, the deficit is not the problem; spending is. At this point, the deficit is a sunk cost, and raising taxes to cut it down is actually more spending, not less. We could eliminate the deficit by spending 100% of GDP and taxing 100% of GDP, but as the laffer curve tells us that is a very bad idea. If the causes which the President proposes have a high rate of return (higher than the interest rate on our debt, to be precise), they are more pressing than debt reduction. The real problem is that government spending has a rate of return much less than the private market, especially when the present value of future innovation is considered. Of course, the debt will have to be paid down at some point, so we will have to endure a period of higher revenues than are necessary to sustain the country. But if debt reduction is the real goal, Obama needs to cut some programs, not just “freeze” expenditures which are not growing.

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