Friday, May 07, 2010

Reagan's true legacy

If any publication was the official pamphlet of the Reagan Revolution back in the 1980s and before, that publication would have to be
The National Review. So it's pretty epic that The National Review recently printed a four-page article lambasting the Reagan economic approach and smashing the conventional wisdom that it was good for our country. Williamson writes:
There are two schools of thought about the Reagan tax cuts. The conventional conservative view: They spurred investment, entrepreneurship, and real economic growth, helping to resuscitate the post-Carter economy, and, by doing so, they paid for themselves. The conventional liberal view: They were an ill-considered product of starve-the-beast ideology and produced crippling deficits, inaugurating a new era of fiscal irresponsibility only briefly transcended during the golden years of the Clinton presidency.

Here’s a different take: They never happened.

Properly understood, there were no Reagan tax cuts. In 1980 federal spending was $590 billion and in 1989 it was $1.14 trillion...Looked at from the proper perspective, we haven’t really had any tax cuts to speak of — we’ve had tax deferrals.
This is the concept of "Ricardian Equivalence" (actually invented in its modern form not by David Ricardo, but by Robert Barro). The idea is that cutting taxes without cutting spending makes it necessary to raise taxes (or default on your debt or produce inflation) in the future; and since people, being rational, realize this, they act as if the tax cuts never happened.

Now, I don't believe the theory of Ricardian Equivalence is quite correct. But conservatives do! They use it as the main reason why stimulus spending won't boost the economy. But if stimulus doesn't work, the Reagan tax cuts didn't work either.

Williamson goes on to say that the political success of Reagan's tax cuts caused the Republicans to lose any sense of fiscal responsibility...that the seeds of 2001 were sown in 1981:
Bush and the concurrent Republican majorities in both houses of Congress didn’t manage to cut spending, either. Part of that was circumstances — 9/11, Afghanistan, Iraq, the subprime meltdown — but part of it was the fact that a poorly applied supply-side analysis has infantilized Republicans when it comes to the budget. They love to cut taxes but cannot bring themselves to cut spending: It’s eat dessert first and leave the spinach on the table.
A good point. But in my opinion, the collapse of Republican fiscal responsibility is merely the latest instance of a problem that democracies always face sooner or later: everyone wants government services but no one wants to foot the bill, so they make the kids foot the bill. Williamson concurs:
There is some evidence that [fiscal irresponsibility] is both bad politics and bad policy...the deficit is now truly terrifying, and, fortunately for Republicans, it is owned by Barack Obama and Nancy Pelosi.
So, in order to keep the deficit-fueled electoral gravy train running, the Grand Old Party o' Deficits keeps blaring the lie that tax cuts pay for themselves:
Despite all those pro-growth tax cuts, our deficits continue to grow faster than our economy...even during periods of strong economic growth, there has been nothing to indicate that our economy is going to grow so fast that it will surmount our deficits and debt without serious spending restraint. This should be a shrieking klaxon of alarm for conservatives still falling for happy talk about pro-growth tax cuts and strategic Laffer Curve optimizing.

Some people are more sensible about that Laffer Curve talk. Laffer, for instance. Arthur Laffer, whose famous (and possibly apocryphal) back-of-the-napkin diagram launched supply-side tax policy, readily concedes that the growth effects of tax cuts are oversold in the political debate. “Does every tax cut pay for itself? No."...

[The idea that tax cuts pay for themselves is] a just-so story, a bedtime fairy tale Republicans tell themselves to shake off fear of the deficit bogeyman. It’s whistling past the fiscal graveyard.

The exaggeration of supply-side effects — the belief that tax-rate cuts pay for themselves or more than pay for themselves over some measurable period — is more an article of faith than an economic fact. But it’s a widespread faith: George W. Bush argued that tax cuts would serve to increase tax revenues. So did John McCain. Rush Limbaugh talks this way. Even Steve Forbes has stepped into this rhetorical stinker from time to time. Reagan knew better — his Treasury Department predicted significant revenue losses from his tax-rate cuts — but his epigones preach a different gospel.
In summary:
Nobody votes for Scrooge. Tax cuts give Republicans an opportunity to distribute economic benefits through the tax code the way Democrats distribute them through appropriations, and the exaggeration of the supply-side effect gives them an opportunity to pretend like those benefits are cost-free...

So, what should conservatives do [to become responsible and still win elections]? One, abjure magical thinking about tax cuts. Two, develop a rhetoric in which “spending” and “taxes” are synonyms, so a federal budget with $1 trillion in new spending means $1 trillion in new taxes — levies on Americans today or on our children tomorrow, with interest.
If conservatives did this, that would be great. But why should they? The path of infinite deficit spending is somewhat easier and far more rewarding than the kind of return to responsibility that Williamson urges. sure, it'll end up crashing the country, but the country is rich enough that the real crash won't come until after the current generation of Republican politicians is retired or dead.

In any case, what does this say about Reagan's legacy? History shows that in a democracy, balanced budgets need bipartisan consensus; you just can't stick one party with the job of being fiscally responsible and expect it to do that job. Before Reagan we had a bipartisan consensus in favor of fiscal responsibility; each party agreed not to become "Santa Claus" if the other one wouldn't. Reagan broke that pact. He changed the GOP's political strategy to a Santa Claus strategy, and it's proven impossible for the GOP to change back. And so Reagan condemned America to spiraling deficits and eventual sovereign default.

Thanks a lot, Gipper!


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