Who on God’s earth would have ever expected NY Times in-house conservative Ross Douthat to champion the most cutting edge of Bernie’s economic policies? But in an OpEd over the weekend, Confessions Of A Columnist, that’s exactly where he went! “I want to use this confessional column,” he wrote, “to reach back to the early Obama years, and the arguments I made then that assumed the urgency of deficit reduction, the pressing need for honest liberals to champion major tax increases and for honest conservatives to go all-in for major entitlement reform.” Sounds like he’s been reading Stephanie Kelton! “I was not,” he continued, “the fiercest of deficit hawks, not a hard-money type or an inflation-panicker. But as a non-economist staring at Congressional Budget Office projections and at examples of fiscal crisis from Greece to California, it seemed reasonable to make deficit cutting a near-term priority from 2010 onward, to offset the surge of Great Recession spending with a period of belt-tightening.”
But now I think this reasonable view was wrong. Not completely, in the sense that many of the deficit-reducing policies I supported-- means-testing entitlement programs, eliminating tax breaks for the wealthy and upper middle class-- I still support, because I think the money involved is presently misspent. But I was wrong in the priority that I gave the deficit relative to other issues, wrong to discern a looming “fiscal precipice,” wrong in some of the criticism I leveled at both George W. Bush and Barack Obama for failing to care enough about balancing the nation’s books.The best time to make deficit reduction a priority is when the inflation rate and the bond market give you some indication that you are headed for a dangerous inflationary spiral. Such indicators were conspicuously absent eight years ago, but many people I talked to (including people in the Obama White House) argued that it was important to reduce deficits pre-emptively, because the spiraling could happen too quickly for policymakers to effectively respond. At that point I believed them; now I think they had overlearned lessons from the 1970s that did not apply in 2010.Instead, in hindsight the most important economic argument of the early Obama years was between two schools of thought that agreed we should put more money into the economy and only disagreed about how to do it-- the Keynesians who wanted massive government spending and the market monetarists who favored looser monetary policy. Today, both sides of that debate look far better than the strict fiscal and monetary hawks, and the endless arguments about Bowles-Simpson look like an interesting exercise that did not deserve so much swarming attention from politicians and the press.There are always real limits on what government spending or tax cuts can accomplish and how far they can go. A society only has so much productive capacity, dumb tax cuts can be hoarded and dumb spending used to enrich special interests or subsidize social pathology, and too much spending can eventually induce inflation.But those limits are not established by an arbitrary deficit target. Instead, a rich and powerful country with a stable government and control over its own currency (which is to say, not a prisoner of the euro) should be willing to live with a loose fiscal policy when wage growth is disappointing and inflation low, and it should debate tax and spending changes on their own terms-- will this money be put to good use?-- rather than pursuing a balanced budget for its own sake.That low-inflation, slow-growth context prevailed under Obama; to a lesser extent it still prevails today. There will doubtless come a time when deficit scolds make essential arguments, but of late they haven’t-- and when I was one of them, I now believe, I was making a mistake.
I asked Stephanie Kelton for her thoughts on Douhat’s column, if she felt at all vindicated after the non-stop abuse she’s taken from the establishment for her ideas that are only now getting mainstream acceptance. “The bottom line,” she responded, “is that this is not just about being right about austerity. Any economist of the Keynesian variety easily got that right. This is about understanding how the monetary system works. It’s not enough to be right about deficits in a depressed economy. You have to be right for the right reasons. We were. It didn’t have anything to do with ‘bond markets’ allowing the US to run bigger deficits or any of that. Paul Krugman is (rightly) celebrated for leading the charge against austerity and pushing back against the debt scolds during the Great Recession. That was never an unconventional macro view— any mainstream Keynesian argued the same thing. But now he is warning that ‘Deficits Matter Again.’ Douthat’s piece is not coming from the Krugman wing of the Keynesian approach. It’s coming from the MMT wing, which draws more on the insights of Abba Lerner than John Maynard Keynes. And Douthat isn’t alone. Earlier this month, Matt Yglesias wrote a nearly-perfect piece that clearly drew heavily on the MMT arguments (again, no credit was given to those of us who worked tirelessly to get these ideas into the mainstream). The messengers are getting short-changed, but the message is getting out. And that makes me pretty optimistic about what we can accomplish in 2018.”She then suggested I read Josh Mound’s piece from last July, The Democrats Are Eisenhower Republicans, something Mound has been seeing from an economic perspective, just as I was seeing it from a political perspective.
For the last fifty years, the Right has waged a war on “objective” fiscal analysis in order to further their goal of upward redistribution. Republicans and their conservative allies invoke mainstream studies when they undermine progressive policy ideas, then discard those same analyses when they get in the way of their agenda.In contrast, Democrats have touted themselves as denizens of the “reality-based community” and “the party of fiscal responsibility,” as Bill Clinton often put it.The result is that, for decades, the parties have operated according to completely different rules on taxing and spending.When Republicans put forward unrealistic tax and budget proposals, they waive away projected deficits by improbably claiming that economic growth will cover the massive shortfall. When Democrats are in power, they treat “pay fors” and budget balancing as paramount and CBO analyses as sacrosanct. And whenever a progressive figure like Bernie Sanders steps outside the neoliberal budgetary consensus, elected Democrats and liberal pundits join conservatives to smack down their proposals as “unrealistic.”The predictable upshot of this policymaking asymmetry is that Democrats have spent the last forty years trimming their sails, inadvertently underwriting the GOP’s next tax cut.Jimmy Carter’s austerity funded Ronald Reagan’s top-heavy tax cuts. Bill Clinton’s austerity funded George W. Bush’s top-heavy tax cuts. And now, the deficit reduction Obama worked so hard to achieve in the second half of his presidency will likely help fund Donald Trump’s top-heavy tax cuts.Throughout the 1950s and ’60s, members of the incipient conservative movement bristled at the GOP’s balanced-budget orthodoxy, as embodied by President Dwight Eisenhower. Republicans’ fear of inflation, they argued, drove the GOP to balance the budget at all costs, unwittingly helping Democrats grow the size of government.Some on the Right-- advancing what would become known as the “starve the beast” strategy-- began insisting that Republicans put all their focus on slashing taxes, rather than balancing the budget. Any deficits that resulted from tax reduction, these conservatives argued, would serve as a check on Democrats’ spending plans.“I honor the Republicans for putting what they regard as the national interest ahead of partisan considerations. But I believe that they have been shortsighted in judging the national interest,” libertarian economist Milton Friedman wrote in a Newsweek column in 1968. “True fiscal responsibility requires resisting every tax increase and promoting tax decreases at every opportunity. That is the only way to put an effective ceiling on Federal spending.”Friedman already had many right-wing Republicans on his side. He’d helped GOP presidential nominee Barry Goldwater craft his tax plan in 1964, which called for a 25 percent across-the-board slash in federal personal and corporate income taxes. Goldwater made no promises about balancing the budget, suggesting only that the fantastic growth spurred by his tax cuts would eventually swell tax receipts. This admission, as the New York Times put it, made Democrat Lyndon Johnson “look like the very model of a fiscal conservative” — which was precisely the point, from Friedman and Goldwater’s point of view.Just four years earlier, in his 1960 book Conscience of a Conservative, Goldwater had argued that “principled” conservatism meant putting “spending cuts . . . before tax cuts.” “If we reduce taxes before firm, principled decisions are made about expenditures,” Goldwater wrote, “we will court deficit spending and the inflationary effects that invariably follow.”But now, under the guidance of Friedman, Goldwater was courting deficits for a political purpose. The drop in revenue brought about by Goldwater’s sweeping tax cuts would “put steady and effective pressure on Congress to hold down spending,” Friedman wrote.Even more crucially, the distribution of Goldwater’s tax cuts heavily favored the GOP’s base. “Senator Goldwater’s proposal,” the Christian Science Monitor noted, “would have the effect of giving high-income persons and corporations a relatively bigger tax break than middle-bracket taxpayers.” The GOP nominee promised to go further in his pursuit of upper-income tax cuts, too. Anticipating the modern Republican fixation on the “flat tax,” Goldwater called the progressive income tax “confiscatory” and pledged to scrap it-- “the sooner . . . the better.”Goldwater’s landslide loss to Johnson in the general election put his fiscal program on hold for some time. But the power vacuum generated by Nixon’s resignation ten years later allowed movement conservatives-- including Ronald Reagan, who’d famously delivered a televised speech on Goldwater’s behalf in 1964-- to assume the leadership of the rudderless Republican Party.As part of their overhaul of the GOP, Reaganite conservatives would make the Friedman-Goldwater vision of upwardly redistributive tax cuts financed by ballooning deficits (to hamstring future Democratic spending ambitions) the GOP’s primary policy goal.Perhaps the most influential articulation of the burgeoning Republican consensus on fiscal policy came in the form of a 1976 piece by Wall Street Journal columnist Jude Wanniski.Only two years prior, Wanniski had been at the Two Continents restaurant in Washington DC, with Gerald Ford’s chief of staff, Donald Rumsfeld, and deputy chief of staff, Dick Cheney, when economist Arthur Laffer drew a curve plotting top marginal tax rates against tax revenue. Laffer argued that past a certain threshold, taxes on the rich were self-defeating because they discouraged work and investment. At that point, he said, trimming top marginal tax rates would stoke economic growth-- generating, counterintuitively, more revenue than before.It was a contention that echoed Goldwater’s campaign trail claims, and that had roots extending at least as far back as Andrew Mellon, the treasury secretary for Republican presidents Warren Harding, Calvin Coolidge, and Herbert Hoover. In 1978, Wanniski would dub it the “Laffer Curve” and make it the centerpiece of his “supply-side” manifesto, The Way the World Works.But in 1976, Wanniski was focused on the politics of taxation, not its economic effects. He called his philosophy the “Two-Santa Claus Theory.” “The Democrats, the party of income redistribution, are best suited for the role of Spending Santa Claus,” Wanniski wrote. “The Republicans, traditionally the party of income growth, should be the Santa Claus of Tax Reduction.” The problem, Wanniski held, was that the GOP had been “playing into the hands of the Democrats, who know the first rule of successful politics is Never Shoot Santa Claus.”In Wanniski’s view, Republicans erred because of their paralyzing fear of budget deficits and inflation. “The political tension in the marketplace of ideas must be between tax reduction and spending increases,” Wanniski argued, “and as long as Republicans have insisted on balanced budgets, their influence as a party has shriveled, and budgets have been imbalanced.” The conclusion was inescapable: “Republicans should concentrate on tax-rate reduction.” Cut, cut, cut-- and limit Democrats’ ability to introduce new spending programs.…President Jimmy Carter-- despite calling for a higher capital gains tax while running for president in 1976-- was, in many ways, the personification of this new centrist neoliberalism. And many conservative Democrats in Congress were sympathetic to lowering taxes on investment income. The combination of the Republicans’ “Tax Blitz” campaign and a concerted lobbying effort from business groups like the Chamber of Commerce, the National Association of Manufacturers, and the American Council for Capital Formation made the passage of Steiger’s bill a fait accompli.The conservatives backing the capital gains reduction weren’t shy about its distributional effects. “Who will benefit from my amendment? Taxpayers in the upper bracket would benefit,” Steiger frankly admitted. He wasn’t kidding. The final version of Steiger’s plan, which was signed into law by Carter, gave a four-person family making $20,000-- just above median income-- approximately $100; a taxpayer making over $200,000 saw a tax reduction of more than $25,000.By the 1980 presidential campaign, Carter had assumed the role of “green eyeshade” fiscal scold and Reagan the role of sunny spendthrift.In late 1978, Carter had told the nation that the country was facing a “time of national austerity” that would require “difficult and unpleasant” belt-tightening. Throughout the rest of his presidency, Carter made clear that he believed his role as a president in a time of high inflation was to be “fiscally responsible in reducing the Federal deficit.”He opposed any spending increases or further tax cuts, including indexing federal income tax brackets to inflation-- one of the few tax changes that would’ve disproportionally helped low- and middle-income taxpayers.Reagan, in contrast, not only pushed a version of the Kemp-Roth rate cuts during his presidential campaign, he also favored indexation. He denied that his tax cuts would cause the deficit to balloon or that additional austerity was needed to fight inflation. Instead, he promised to replace the “eerie, ghostly silence of economic stagnation, unemployment, inflation, and despair” with the “confident roar of American progress and growth and optimism.”Ironically, the only area in which Carter claimed to support more generous provisions than Reagan was in tax cuts for business. The inversion of the parties’ fiscal roles was complete.Once in office, Reagan used language nearly identical to Friedman’s to justify tax cuts that would send the deficit spiraling.“Over the past decades we’ve talked of curtailing government spending so that we can then lower the tax burden. Sometimes we’ve even taken a run at doing that,” Reagan told the nation in a televised address one month after taking office. “But there were always those who told us that taxes couldn’t be cut until spending was reduced. Well, you know, we can lecture our children about extravagance until we run out of voice and breath. Or we can cure their extravagance by simply reducing their allowance.”When the CBO predicted huge deficits from Reagan’s cuts, the White House reacted just as the GOP is today. “That’s them practicing what they’ve been preaching for the last thirty years,” Reagan groused. “Their figures are phony.” The administration even attempted to oust CBO director Alice Rivlin and replace her with someone more pliable.Despite the bill’s regressive effects, a majority of Democrats in the House and the Senate voted for Reagan’s Economic Recovery Tax Act of 1981. It was the largest tax cut in post–World War II history, and it exploded the deficit. Yet it did little to spur the growth that supply-siders had promised. As studies by the CBO, the Joint Committee on Taxation, and the Joint Economic Committee all found, Reagan’s cuts made the federal tax system less progressive and worsened income inequality. Between 1980 and 1983, the bottom half saw their after-tax incomes fall while the top 1 percent enjoyed a more than 20 percent increase.In the end, Carter’s legacy was laying the fiscal groundwork for Reagan’s giveaway to the rich.The next Democratic president, Bill Clinton, would make the same mistake.…[I]n typical “supply-side” fashion, the tax windfall for the rich blew a hole in the budget. By this time, the idea that there was no political downside to growing the deficit had become the Republican conventional wisdom. As Vice President Dick Cheney told Treasury Secretary Paul O’Neill, “Reagan proved deficits don’t matter.”The Bush deficits had the intended effect on Democrats, too.When Barack Obama took office, the deficit was enormous and the country was entering the deepest recession since the Great Depression. Obama initially pursued a more ambitious agenda than either Carter or Clinton, but both his stimulus package and the Affordable Care Act were scaled back in an effort to avoid sticker shock. And after his health care law passed, Obama shifted into deficit-reduction mode. He appointed a “bipartisan” National Commission on Fiscal Responsibility and Reform that only heightened deficit hysteria, and he worked to strike a deficit-reducing “grand bargain” with John Boehner that would’ve slashed Social Security.Now, Obama’s fiscal probity is likely to be undone by Trump and the Republicans in Congress.…[T]he the top-heavy tax cuts contained in the GOP’s ACA repeal bill and Trump’s tax plan would mark yet another “Two Santas” victory for the Republicans.And this time they’re pulling out all the stops.The Republican ACA repeal plan is essentially a tax cut for the rich disguised as a health care bill. The richest 1 percent would enjoy a more than 2 percent bump in their after-tax incomes, while few in the 99 percent would see any tax benefits. Translated into dollar terms, the most recent Senate GOP bill would provide a tax cut of a few hundred dollars for most people and a quarter of a million dollars for the top one-tenth of 1 percent. And the price? Tens of millions of people losing their health insurance and the virtual destruction of the Medicaid program.…Republicans have made clear time and time again that they don’t care about the deficit. And Democrats shouldn’t either. Rather than fixating on the GOP’s shaky math, Democrats should highlight the cruelty of shoveling money to the rich at a time when inequality is soaring and millions languish in poverty.Fiscal policy is ultimately about distribution, not growth or deficits. Republicans understand this. Unfortunately, Democrats don’t.Instead of worrying about crafting practical, deficit-neutral proposals, Democrats should be bold and single-mindedly focus on downwardly redistributive taxing and spending. Go for Medicare for All, public child care, green jobs. Propose popular programs, and don’t worry about the cost. If the GOP raises deficit concerns, waive them away by predicting fabulous economic growth, just like Republicans do.And if, once enacted, the progressive programs do end up increasing the deficit? Let the next Republican president worry about balancing the budget.
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