Donald Trump’s new tax plan has been scored by the Tax Foundation as increasing the national debt by $12T over ten years. This doesn’t seem compatible with the ferocious anti-debt Tea Party ethos nor that of responsible conservative governance. Bernie Sanders’s proposed orgy of all-you-can-eat government services has been scored (not entirely fairly, as failing to offset savings from personal health insurance premiums, yet, still, meaningfully) as costing $18T by the Wall Street Journal.
Because the T in trillion is so, well, demure, let’s unpack that for just a moment. One trillion dollars is a thousand billion dollars. One billion dollars is a thousand million dollars. So ten trillion dollars is ten million million dollars. That’s a lot of dollars whether from borrowing or, in Sanders’ case at least in part, taxing, with which to finance these ostentatious proposals. We in the media have not been nearly incredulous enough.
President Richard Nixon once (infamously) said “I am now a Keynesian in economics.” Moving right along, under the George W. Bush presidency, Treasury Secretary Paul O’Neill recalled Vice President Cheney, at a cabinet meeting, stating: “You know, Paul, Reagan proved that deficits don’t matter.” (And, pace Cheney, let it be noted that Ronald Reagan, in his farewell presidential address, highlighted his regret at his failure to bring down the deficit.)
So it would appear that two, and maybe the two, leading contenders for their respective parties’ nominations for president are Cheneysians now. What’s wrong with this picture?
Deficits matter and can best be brought down in a context of fast economic growth. Grandiosity never works.
As savant Peter Thiel said in a conversation last year with Bill Kristol:
I think Einstein apocryphally said that compound interest was the most powerful force in the universe. And if you can get something that has this snowballing effect going, it’s very powerful, whether it’s in technology or culture, politics, all sorts of aspects.
Or consider Seeger’s Law, named after an observation by the late, great, folksinger Pete Seeger. On his 90th birthday Seeger stated an axiom by which all candidates would do well to live:
Normally, I am against big things. I think the world is going to be saved by millions of small things. Too may things can go wrong when they get big….
And consider Sylvia Nasar reflecting in her grant historical study Grand Pursuit: The Story of Economic Genius on earlier thought on the earnings of workers: “Radicals claimed that (the cause of low wages and poverty) was the rapacity of employers, while Malthusians argued that it was the moral failings of the poor.” Nasar shows how the work of proto-supply-side economist Alfred Marshall crucially challenged both propositions:
Marshall proposed a different answer: low productivity. He cited as evidence the fact that, contrary to Marx’s claim that competition would cause the wages of skilled and unskilled workers to converge near substance level, skilled workers were earning ‘two, three, four times’ as much as unskilled laborers. … As technology, education and improvements in organization increased productivity over time, the income of the workers would rise in tandem. The fruits of better organization, knowledge and technology would, over time, eliminate the chief cause of poverty. Activity and initiative, not resignation, were called for.
The solution to the stagnation of working families lies in increasing productivity. Raising productivity is a recurring challenge. The solution to it does not lie in grandiose programs.
Donald Trump and Bernie Sanders are turning themselves into grotesque caricatures of what supply-side advocate Jude Wanniski once put forward as the “Two Santa Theory” of politics. Wanniski, writing in 1976:
The only thing wrong with the U.S. economy is the failure of the Republican Party to play Santa Claus. The only thing wrong with President Ford is that he is still too much a Hoover Republican when what the country needs is a Coolidge Republican.
These statements, seemingly absurd, follow naturally from the Two-Santa Claus Theory of the political economy. Simply stated, the Two Santa Claus Theory is this: For the U.S. economy to be healthy and growing, there must be a division of labor between Democrats and Republicans; each must be a different kind of Santa Claus.
The Democrats, the party of income redistribution, are best suited for the role of Spending Santa Claus. The Republicans, traditionally the party of income growth, should be the Santa Claus of Tax Reduction. It has been the failure of the GOP to stick to this traditional role that has caused much of the nation’s economic misery. Only the shrewdness of the Democrats, who have kindly agreed to play both Santa Clauses during critical periods, has saved the nation from even greater misery.
Wanniski was not trafficking in profligacy. His objective (largely realized, over time, as the Clinton budget surpluses fulfilled the promise of supply-side economics):
But as the Two-Santa Claus Theory holds that the Republicans should concentrate on tax-rate reduction. As they succeed in expanding incentives to produce, they will move the economy back to full employment and thereby reduce social pressures for public spending. Just as an increase in Government spending inevitably means taxes must be raised, a cut in tax rates—by expanding the private sector—will diminish the relative size of the public sector.
I, as myself then an outer circle member of the Jack Kemp supply side cabal (of which Jude was very inner circle), consider that grandiose monstrosities like the Trump tax reform plan emulate the form but do not replicate the essence of classical supply-side economics. This very much included high integrity monetary policy together with reduction of marginal tax rates from prohibitive levels in order to produce real economic growth.
Trump’s plan does not appear designed, as was Kemp-Roth, powerfully to boost economic growth across-the-board and reduce the demand for government services. Trump’s plan is, rather than the shrewdly (and even-handedly) generous Kemp-Roth, merely profligate to the point of promiscuous.
Meanwhile, Sen. Sanders’s outlandish promises of largesse to the poor and workers reaches such a point of extravagance as to raise eyebrows far above the forehead of establishment columnist David Fahrenthold in the Washington Post. Sen. Sanders’s proposals drew ridicule from British (long familiar with such antics by Labour) columnist Tim Worstall, writing in Forbes.com about Bernie Sanders and His Adventures With The Magic Money Tree. Few outside of those drinking the same Kool-Aid as Sen. Sanders come away from an examination of the numbers behind his proposals less than incredulous.
There are ways to restore vibrant, equitable, prosperity to America and the world. These ways do not involve grandiose contraptions.
So what to do? The direction I offered here in 2011 still applies and with even greater urgency:
Figure out how to get the economy growing at 4% (or even 5%) instead of its current stupefied 2% range? Extra growth compounds fast. Accepting stagnation … means that nobody prospers except at the expense of others. No wonder most Americans consider the country off track. Americans are committed to prosperity.
As economist Ike Brannon (and as has been here previously cited) observed: “The primacy of economic growth in generating tax revenue cannot be overstated: the fastest post-war increases in tax revenue growth occurred in 1997-2000 and 2004-2007, when revenues went up by nearly 50% in each instance. Tax rates did not go up at all during that time — the rapid increase in revenue occurred because we were in a sustained period of strong economic growth.”