Mankiw's Ransom Note

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JONATHAN CHAIT FEBRUARY 18, 2010

Mankiw's Ransom Note

Former Bush economic advisor Greg Mankiw has compiled a list of what conservatives should demand in return for cooperating on a commission to reduce the budget deficit. His first demand, "Ensure that the commission is as much about shrinking government as raising revenue," is perfectly reasonable. Liberals would like to close the deficit by raising taxes, conservatives would like to do it by cutting spending, but neither could get their way without cooperation by the other. So the final deal would have to meet halfway.

After that, Mankiw's list gets very unreasonable very fast. He demands that the new taxes apply to consumption rather than income -- which is to say, he wants new taxes to hit the poor and middle class more deeply than the rich. On top of that, he demands cuts in income taxes and corporate taxes, plus a total repeal of the estate tax. Which is to say, he wants to change the American tax code from one that (slightly) transfers income from the rich to the poor to one that transfers income from the poor to the rich.

Why does Mankiw believe Democrats would agree to a massive upward transfer of wealth in exchange for a deal that slashes government spending? Here's his reasoning:

The fiscal commission is giving the Democrats something of very high value: political cover for a major tax hike.  If Republicans are going to give them that, they should get something very big in return.

This is bizarre for a couple reasons. First, as every economist knows, to spend money is to tax. Even though every dollar in spending is not being matched in current taxes, those taxes are only being deferred. In the short run, you can hold down taxes by running deficits, but in the long run, the spending level is the only thing that matters. If there's a deal to raise taxes and reduce spending, that is a long-term reduction in the tax burden.

Second, Mankiw ignores any benefit from a lower deficit. (I guess we shouldn't be surprised, coming from a Bush administration economist.) Indeed, he accurately depicts the benefit to Democrats of providing political cover for a tax hike, but ignores the benefit to Republicans of Democrats providing political cover for a spending cut. Go ahead, Republicans -- try to cut a half trillion dollars a year out of the federal budget without Democratic cover. It'll be easy. Really! Try it!

On a pure policy level, I'd be happy with a straightforward compromise that reduced the deficit with a half and half mixture of tax cuts and spending cuts, and made the tax code neither more nor less progressive. But I don't think that kind of agreement is sustainable given the current ideological composition of the Republican Party, which is almost completely indifferent to fiscal responsibility. If the Obama administration does pull off the sort of agreement I'd agree to, and the deficit does come under control, it will just clear the decks for Republicans to pass another deficit-exploding tax cut the next time they take power.

The GOP's theological opposition to tax hikes makes any deal like this theoretical anyway. I don't see any major change getting done until the country is on the verge of, or actually experiences, an actual debt crisis that bites into business's bottom line. The attitude of even conservative non-elected officials like Mankiw ("Maybe I'll agree to a huge spending cut if it's accompanied by a big tax cut for the rich and a massive tax hike for the poor and middle class") just shows how impossible a deficit reduction deal is right now.

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posted in: jonathan chait, bush, greg mankiw, republican party

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