Mankiw's Problem with Deficit Neutrality
From Greg Mankiw:
Imagine you have a friend who has a budget problem. Every month he spends more than he earns. His credit card bills are piling up. He is clearly on an unsustainable path. Then one day he comes to you with an idea.
Friend: I am going to take off a few days from work and fly down to Bermuda for a quick vacation.
You: But isn't that expensive? Won't that just add to your growing debts?
Friend: Yes, it is expensive. But my plan is deficit-neutral. I have decided to give up that half-caf, extra-shot caramel macchiato I order at Starbucks twice every day. I really don't need that expensive drink. And if I give it up for the next three years, it will pay for my Bermuda trip.
You: Well, then, how are you going to solve the problem of your growing debts?
Friend: I am going to figure that out as soon as I return from Bermuda.
You: But in light of your budget problem, maybe you should give up Starbucks and skip the Bermuda vacation. Giving up Starbucks could be the easiest way to start balancing your budget.
Friend: You really aren't any fun, are you?
This conversation is meant to illustrate why claims of deficit-neutrality in the healthcare reform bill should not give much comfort to those worried about the U.S. fiscal situation. Even if you believe that the spending cuts and tax increases in the bill make it deficit-neutral, the legislation will still make solving the problem of the fiscal imbalance harder, because it will use up some of the easier ways to close the shortfall. The remaining options will be less attractive, making the eventual fiscal adjustment more painful.