JONATHAN CHAIT MAY 11, 2010
I've been lamenting that the conservative fixation with tax cuts has created a situation where conservatives can't even advance their own ideological interests. To sum up the discussion to date: National Review's Kevin Williamson wrote an article decrying the "magical thinking" of supply-side economics. I lauded his article, and then followed up asking why conservatives are so hostile to the cut spending and raise taxes trade on offer by the deficit commission, given that spending levels and not tax levels are the true measure of the size of government.
Williamson's first reply was a bit discouraging:
Taxes are, on average, what, 18 percent of GDP? Spending is now 45 percent of GDP and going up? So, if Team Williamson agrees to a (roughly) 50 percent real increase in taxes, to around 25 percent of GDP, Team Chait still has to agree to something close to a 50 percent cut in spending, to around 25 percent of GDP. I’m not good at Hill-type political analysis, but I don’t see a model of American electoral possibilities that makes that happen.
As Williamson soon acknowledged, those numbers are wildly wrong. But he clung to his same defeatist position:
The real numbers are more like this: federal spending, 25 percent of GDP; federal revenue, 15 percent of GDP; deficit, 10 percent of GDP. ...
Closing the gap from revenues that equal 15 percent of GDP and spending that equals 25 percent of GDP still looks pretty hard to me. To repeat yesterday's thought-experiment, say we construct a point-by-point trade-off, equalizing spending and revenue at 20 percent of GDP. I don't see Republicans supporting a 33 percent tax increase or Democrats supporting a 20 percent spending cut.
Let me make a few points. First, the deficit is currently 10% of GDP, but it's projected to shrink to less than half that within a few years as the economy recovers. Indeed, shrinking the deficit before then, while unemployment hovers around 10%, would be a terrible idea. So it's not a 10% gap, it's more like a 4-5% gap. Moreover, you don't need to balance the budget. Merely shrinking the deficit to a level lower than GDP growth -- say, 2% of GDP -- would do a lot of good.
So now we're down to raising taxes by 1.5% of GDP and cutting spending by 1.5% of GDP. That's not all that hard. In fact, recent history suggests that as the economy recovers, the deficit will shrink even faster than CBO projects.
Now, it's true that creating the political will for such changes is difficult. But a big part of the reason it's difficult is that conservatives reject out of hand any bargain that includes tax increases. Conservatives revolted against the 1990 budget agreement, which included some tax hikes and significant spending restraint. Republicans unanimously denounced Bill Clinton's 1993 deficit reduction as an economy-killer that would increase spending and the deficit. Here's what actually happened:
See that period in the 1990s, when the light blue spending line goes down and the dark blue revenue line goes up? That's the effect of the deficit reduction deals that conservatives continue to regard as unthinkable. Now, you might say it's a reflection of the 1990s business cycle, and that's partly true. But contrast it with the 1980s business cycle, when the deficit got big and stayed big. Or the 2000s business cycle, when revenues collapsed and only partly recovered even at the peak of the business cycle. The one period of time when federal spending actually declined on a continuous basis was when policymakers had implemented tax hikes. That's the period when George H.W. Bush and Bill Clinton were clawing back the Reagan tax cuts. The periods when outlays were rising were when tax cutters Ronald Reagan and George W. Bush were in the saddle.
This is not a coincidence. The only way to get spending cuts is to get political cover from Democrats. And the only way to get Democrats on board is to support spending cuts is to pair them with shared sacrifice. Conservatives tend to wave this away with one form of magical thinking or another. Sometimes they employ the old supply-side voodoo. Sometimes it's stuff like this, from Jonah Goldberg:
My attitude toward tax increases is a bit like the argument over illegal immgration. But instead of securing the border first, I'm for cutting spending first. Then, we can talk about increasing taxes.
Again, there's no feasible plan to do this. Republicans tend to paint their party's inability to reduce spending as a failure of will. Williamson falls for this fallacy, too:
Is Chait being too easy on Republicans? They'd love to reduce the deficit entirely through spending cuts? Then why didn't they do it when they had the chance?
I really do think that Karl Rove and Dick Cheney would like to reduce spending. It's just that they wanted to cut taxes even more, and those two goals are in tension. They could have made a deal with moderate Democrats to trim spending and lose the tax cuts, but they refused to do that because such a deal is anathema to conservatives. The conservative movement is committed to a policy of maximal upper-level tax cuts, and the deficits that go with it are a price they're willing to pay. It won't stop until conservatives understand that this policy is insane and self-defeating.