- Democrats are opposing Republican tax cuts partly on the basis that they will expand the US budget deficit.
- That’s the wrong argument to make — not just now but in any low-inflation environment.
- The right argument against the plan is that it’s skewed toward the wealthy and includes changes that won’t benefit the economy.
- “There are better ways to invest in our economy,” says Stephanie Kelton, a former chief economist for the Senate Budget Committee’s Democratic staff. “Investing in our nation’s infrastructure, education, and R&D would do more to boost future productivity than trickle-down tax cuts for the rich.”
There are a few lines you can take to argue against tax cuts, including the idea that they benefit mostly huge companies and rich Americans.
Here’s the wrong one: In the weeks leading up to Thursday’s reveal of the Republican tax plan, Democrats have been harping on about higher budget deficits and a resulting “entitlement crisis” as a key justification for opposing President Donald Trump’s tax plan.
It’s enough that Ylan Mui of CNBC has taken to calling Democrats the “new deficit hawks.”
For the Democrats to take this line against the tax cuts is a mistake for three reasons. First, it’s hard for voters to understand, even when it’s dumbed down into the old trope of “you wouldn’t run your household like this.”
Second, it’s bad economics. Unlike households, governments can run big deficits, and they should be doing so especially when inflation is as low as it is today. Doing so can help spur economic growth, and the Democrats know this because it was a key lesson of the post-financial-crisis recovery.
Economists can and should argue over the best uses of that deficit — spending that boosts the economy versus tax cuts that line the pockets of the rich — but that’s a tangential argument for those not currently in power.
Third, there are much better objections about the harm this tax plan could cause — such as leading to greater inequality and more struggles for the middle class — or the false promises (such as that it will lead to higher wages) it’s being pitched with.
“The deficit is an abstraction that is pretty much meaningless to anyone other than an economist or budget wonk,” says Dean Baker, an economist who is the codirector of the liberal Center for Economic and Policy Research in Washington.
“To my view, the issue is that the Republicans are looking to take money from programs people care about and need, like Medicare and Medicaid, and use it to give tax breaks to rich people. This is concrete and people can understand it.
“The deficit is not. And of course as an economic matter, it is not clear that a larger deficit would be a bad thing — although I do have to say, we are likely getting close to full employment, so we probably don’t want too much larger of a deficit.”
‘It would explode’ the deficit
Here’s the kind of thing Democrats have been saying.
“The longer we wait to address the debt in a serious manner, the more the safety net frays, and the harder this crisis will be to address,” Sen. Ron Wyden of Oregon said last month.
Chuck Schumer, the Senate minority leader, wrote in a recent op-ed article that the proposal “helps the rich at the expense of the middle class, it would explode the deficit, and it hasn’t gone through a thorough, bipartisan process.”
At least he got two out of three right.
Stephanie Kelton, a former chief economist for the Senate Budget Committee’s Democratic staff, laid out the case against these arguments nicely in a recent New York Times op-ed article.
“Are the proposed tax cuts a huge giveaway to the rich? Most definitely,” wrote Kelton, a professor of public policy and economics at Stony Brook University. “Will they, as advertised, create a booming economy with benefits that trickle down to everyone else? I don’t think so. Trump’s plan will widen the country’s already dangerous wealth and income gaps, and because the gains go mostly to those at the very top, the tax cuts won’t do much to promote broad-based consumer spending or overall job growth.”
That, Kelton says, should be enough to reject the plan.
“But it would be unwise to oppose tax cuts, or any other federal legislation, simply because they add to the deficit,” she warns.
Kelton and other economists of wide-ranging political stripes argue that the biggest mistake politicians make is comparing government spending and budgets to those of households. The analogy appears sound, but it’s really apples and oranges. Unlike families, who may lack sufficient funds to pay their bills, governments that control their own currencies can always print money to meet their obligations.
Therefore a default is technically impossible. The only risk is inflation, if excessive bond issuance leads to rising prices. But the US economy has been suffering chronically from the opposite problem — and inflation rate that has consistently fallen short of the Federal Reserve’s 2% target for five years, pointing to an economy that is still operating below potential and reflecting stagnant wage growth for much of the population.
Social Security can never run out of money — really
I asked Kelton why, given her counterintuitive argument that deficits don’t really matter, Americans should take her word for it. Her reply: Don’t. Instead, listen to what Alan Greenspan, the prominent Republican former Federal Reserve chairman who is a purported deficit hawk, had to say on the matter.
In March 2005, he was pressed by a young congressman named Paul Ryan about the need for privatizing Social Security because of the prospect of a looming “entitlements crisis.” Greenspan replied rather bitingly that there was no such thing or even a remote possibility.
“I wouldn’t say that the pay-as-you-go benefits are insecure in the sense that there’s nothing to prevent the federal government to create as much money as it wants and pays it to somebody,” Greenspan told an incredulous Ryan.
“The question is how do you set up a system that assures that the real assets are created which those benefits are employed to purchase. So it’s not a question of security — it’s a question of the structure of the financial system.”
That’s what Democrats should be saying, rather than regurgitating the old Republican rouse — which even the GOP is willing to abandon when it’s convenient — about a looming government debt crisis that never comes.
Republican talking points
“Instead of repeating talking points that reinforce the idea that Social Security is somehow financially unsustainable, Democrats should play Greenspan’s remarks on a loop. They should call attention to what Greenspan said — under oath — about the program’s long-term sustainability,” Kelton said.
“Instead of accepting the premise that Social Security is in trouble, Democrats should accept Greenspan’s challenge — put forward an agenda that will do more to promote future growth than anything the Republicans are offering.”
The financial crisis was instructive on this count. Many critics of both the federal government’s fiscal stimulus and the Federal Reserve’s bond purchases worried that the country was getting so deep into debt that one of two things was bound to happen: a crisis in the Treasury market or a bout of runaway inflation. Nine years into the recovery, Treasury yields remain near historic lows and inflation is not only contained but remains worryingly low.
That last point is key: It’s not that folks like Kelton and Baker believe there is no risk to government spending. They simply argue that the only risks are the misallocation of resources and inflation — not some amorphous “debt crisis” or default of the sort some politicians and market analysts have shouted about.
Unlike Greece, which actually did default on its debt because of a lack of control over its own currency, the US could default only by choice. Trump flirted with that choice once as a candidate — but quickly backed away from the threat after he realized the catastrophic market and economic consequences such a debacle would have.
Listen to the Oracle
In August 2011, after the US’s credit rating was downgraded for the fist time following a prolonged impasse over the US debt ceiling, Greenspan was asked during a “Meet the Press” interview about the issue of “unfunded liabilities” and “entitlements.”
His response again spoke volumes: “The United States can pay any debt it has because it can always print money to do that, so there is zero probability of default.”
So what should Democrats be focused on if not deficits? On that count, Trump actually has the right idea: They should be focused on boosting economic growth. Unlike Trump, however, Democrats need to be concerned about other matters like distribution, wage growth, and the quality of social services necessary to underpin a sustainable economy. That includes everything from the wider availability of high-quality education and health, childcare, elderly care, and other key services that are neglected by a government more focused on external conflict than domestic strife.
“What if we choose policies that will help us to build a more productive economy? If we were having the right debate, we would be laser-focused on this challenge,” Kelton said.
“I doubt very much that Trump’s tax cuts — which are heavily skewed in favor of the very rich — would come out on top. There are better ways to invest in our economy. Investing in our nation’s infrastructure, education, and R&D would do more to boost future productivity than trickle-down tax cuts for the rich.”