Ashok Rao has an interesting blog post about the relevance of Ricardian economics. (See Matt Yglesias' comments on these issues here). One thing that Ashok argues for is replacing the current property tax regime with a land tax. He explains really well why this is beneficial in economic terms, but it is worth discussing the practical consequences of this sort of shift in policy.
When local governments assess property values, they usually try to determine the market value of your property--how much you could currently sell it for. This assessment implicitly considers both the value of the land, and the value of the structure. According to the Minneapolis government website, land value makes up about 20-25% of the total property value assessment. (Minneapolis--where I live--also considers property classification, but lets ignore that for now).
The problem with this scheme is that it disincentivizes the productive use of land. Let's say you currently own a piece of vacant land in downtown Minneapolis. Doing nothing with the land will keep your property taxes low, but you also won't make any profits. Building an office or apartment building will cause your property taxes to skyrocket, but you will presumably make some decent profits. But let's say you want to keep your property taxes low, but also want to make some profits. You build a parking lot! And now downtown Minneapolis is filled with half-used parking lots, that are taxed at very low rates despite their prime locations.
Now what if we taxed land value? If this were the case, and you owned a vacant piece of land in downtown Minneapolis, you would pay the same tax rate regardless of how you used the land. This would make sitting on the empty property a terrible choice, building a parking lot a bad choice, and building a large useful structure a great choice.
This also has another important consequence that is often overlooked. By shifting to a land value tax, the overall tax burden on residential property will shift from multi-unit structures to single family homes.
Lets say you are a developer who owns a piece of vacant property right now, and are deciding between building a single family home or a multi-unit building.* Under the current property tax regime, a multi-unit building may be more valuable, but it will also be taxed more heavily. This will result in a greater number of single family homes being built than is optimal. By switching to land tax system, the taxes will remain the same regardless of which type of structure is built, this should lead to fewer single family homes and more multi-unit structures.
This will benefit those who live in multi-unit structures (who are often renters, and usually less wealthy) in two ways. First, if more multi-unit structures are built, rents will go down. Second, the overall tax burden will shift away from multi-unit structures--whose taxes are payed by the renters through rent--to single family homeowners. The best way to picture this is to imagine you have a single family home and a multi-unit structure siting adjacent to each other. Because they are next to each other, their land values are likely the same. Under the current property tax regime, the multi-unit structure owes more in taxes than the house. In a land tax regime, both the multi-unit structure and the house owe the same amount in taxes.**
Overall, a land tax regime would increase density, incentivize the productive use of land, lower the tax burden on those who live in multi-unit structures, and increase the tax burden on those who occupy single family homes. Import Its an idea that progressives should get behind.
*obviously zoning laws matter for these types of decisions, i'm ignoring them to make the post simpler
** This can also be conceptualized another way. Suppose that all the land in a city were worth the same amount, and all the property was residential. Under a land tax regime, each parcel would pay the same amount in taxes, regardless of how many people lived on it. This would mean each individual's tax burden would be directly proportional to how densely populated the structure they occupied was. This would incentivize density, and reduce tax burdens on those living in multi-unit structures. Which, as I mentioned above, are often less wealthy individuals.
Friday, 10 May 2013
Thursday, 9 May 2013
The Reform Conservatives
Ryan Cooper has a good piece discussing the small group of conservative writers who are attempting to reform the GOP. He is far more optimistic about their chances than Jonathan Chait was in his article last year about the destruction and exclusion of GOP moderates. My one disagreement with Cooper's piece is that he tries to draw too neat a parallel between current efforts and those of the New Democrat/DLC crowd in the late 1970s-early 1990s:
The Democratic Party’s equivalent period of soul searching played out quite differently. As early as the late 1970s, a major rethinking of traditional liberal ideas and policies about crime, welfare, entitlement programs, and much more was under way at magazines like the Washington Monthly and the New Republic—this at a time when Democrats controlled both houses of Congress and the White House. In 1984, only four years after Ronald Reagan’s first presidential win, reformist Democrats had their own popular primary candidate, Gary Hart. In 1985, the centrist-reform Democratic Leadership Council was founded. By 1988, two charter members of the DLC, Al Gore and Richard Gephardt, were running for president. By 1992, a former DLC chairman, Bill Clinton, won the office.
Compare this to Republicans. It’s two decades after Bill Clinton’s first presidential victory, and there is still no Republican equivalent of the DLC. During last year’s GOP primary, the only candidate who ran as a moderate reformer, Jon Huntsman, garnered almost no party support, quit in disgust, and started advocating for a third party.Its worth pointing out that "neoliberals" and the DLC were responding to, what they believed to be, real policy failures of the Great Society. The pushback was against actual measures in place, not just party orthodoxy. Why does this matter? Well, I think it really affects the GOP reformers chances of success. The Bush administration was no conservative equivalent of the second Johnson Administration. His domestic policies included an expansion of medicare and a federal education initiative. Conservatives in the GOP can, rightly, argue that the a real dismantling of the welfare state has never been tried. As a result, reformers are left arguing against a GOP agenda that is 1) mostly hypothetical, and 2) constantly shifts in response to the political winds and the proposals of Barack Obama. This leaves them a much greater challenge than that facing the DLC, who could point to actual policies in place, and argue that they needed to be reformed. As a result, it often feels like the reformers are stuck arguing about the message, rather than the substance. And this makes their actual criticism of the GOP (through no fault of their own) less coherent and unified.
An Open Question for Health Wonks
Sarah Kliff has a good post on why Democrats are holding back on selling Obamacare as a success. The short answer is that Obamacare hasn't really begun yet, so most Dems are waiting until people can actually go sign up for healthcare on the exchanges before they promote its benefits. Good plan.
But this leaves me with a question: Are Democrats concerned that people won't sign up for the healthcare exchanges? It doesn't seem out of the realm of possibility that moderately healthy Republicans will personally boycott their use (at the urging of party leaders) as a way to protest the law. Could this happen at a scale that triggers the, so called, "death spiral"? I remember this Alec Macgillis piece from a few years ago, but I would be interested to know if strong political opposition to Obamacare is raising concerns.
But this leaves me with a question: Are Democrats concerned that people won't sign up for the healthcare exchanges? It doesn't seem out of the realm of possibility that moderately healthy Republicans will personally boycott their use (at the urging of party leaders) as a way to protest the law. Could this happen at a scale that triggers the, so called, "death spiral"? I remember this Alec Macgillis piece from a few years ago, but I would be interested to know if strong political opposition to Obamacare is raising concerns.
Wednesday, 8 May 2013
The Metaphysical Club
I just finished The Metaphysical Club by Louis Menand, and really I enjoyed it. The book was a bestseller and won the Pulitzer prize a number of years ago, so I'm sure lots of people have already read it, but I wanted to discuss it anyway.
The book tells the story of four individuals (Oliver Wendell Holmes, Charles Sanders Pierce, William James, and John Dewey), who were involved in the development of American pragmatism as a school of thought. Instead of simply discussing their individual contributions, the book gives four mini biographies and attempts to show how their respective situations--the time, place, and people they encountered in their lives--influenced the ideas they developed.
I would recommend this book for anyone who enjoys philosophical ideas, but finds actual philosophical text to be a little dry. The book is able to present these ideas in an accessible way by tying them to biographical accounts of their originators. As a result, a large portion of the book is a a vivid description of some really interesting characters in the post Civil War period--including brilliant thinkers, outright charlatans, and vicious racists.
One of the main takeaways is that it's important to evaluate an idea within its historical context. Pragmatism was, in many ways, a conservative response to the Civil War. The Civil War, and the failed Reconstruction project, were viewed as the tragic result of idealism over practical thinking. As a result, the generation who grew up during the Civil War needed a philosophy that encouraged reconciliation and tolerance. This resulted in pragmatism. Pragmatism was popular for a number of years, but faded during World War II and the Cold War, when the global struggle between democracy and totalitarian regimes required a different frame through which to view the world.
Over the past few years, I have become increasingly interested in economics and debates about economic policy on the blogosphere. When I first began exploring some of these debates, I was amazed at how unconvincing some of the "supply-side" theories of the great recession were. More specifically, people like John Taylor would advocate fiscal and monetary tightening, and justify this policy based on their experience during the 1970s. But as anyone with a basic knowledge of economic history knows, The 1970s were a period of high inflation and high interest rates, whereas now we have low inflation, and low interest rates. Whatever the merits of Taylor's macroeconomic stabilization ideas (and I don't believe there are many) they quite clearly couldn't be justified as appropriate now based on the experience of the late 1970s. I'm not a big fan of "supply-side economics", but its clear that the ideas were developed and became popular in the wake of some of the supply side problems of the 1970s. I suspect that some of the supply siders are in some ways blind to. or wish to downplay, the changed circumstances. They believe that their ideas (lower marginal tax rates, labor market reforms) are universal economic problem solvers, when in fact the time and place for the primacy of those ideas has passed, and we need to focus on boosting aggregate demand.
The development of ideas can't be divorced from their historical context. And when evaluating the applicability of ideas, the historical context of their development should be considered and compared to the current one.
The book tells the story of four individuals (Oliver Wendell Holmes, Charles Sanders Pierce, William James, and John Dewey), who were involved in the development of American pragmatism as a school of thought. Instead of simply discussing their individual contributions, the book gives four mini biographies and attempts to show how their respective situations--the time, place, and people they encountered in their lives--influenced the ideas they developed.
I would recommend this book for anyone who enjoys philosophical ideas, but finds actual philosophical text to be a little dry. The book is able to present these ideas in an accessible way by tying them to biographical accounts of their originators. As a result, a large portion of the book is a a vivid description of some really interesting characters in the post Civil War period--including brilliant thinkers, outright charlatans, and vicious racists.
One of the main takeaways is that it's important to evaluate an idea within its historical context. Pragmatism was, in many ways, a conservative response to the Civil War. The Civil War, and the failed Reconstruction project, were viewed as the tragic result of idealism over practical thinking. As a result, the generation who grew up during the Civil War needed a philosophy that encouraged reconciliation and tolerance. This resulted in pragmatism. Pragmatism was popular for a number of years, but faded during World War II and the Cold War, when the global struggle between democracy and totalitarian regimes required a different frame through which to view the world.
Over the past few years, I have become increasingly interested in economics and debates about economic policy on the blogosphere. When I first began exploring some of these debates, I was amazed at how unconvincing some of the "supply-side" theories of the great recession were. More specifically, people like John Taylor would advocate fiscal and monetary tightening, and justify this policy based on their experience during the 1970s. But as anyone with a basic knowledge of economic history knows, The 1970s were a period of high inflation and high interest rates, whereas now we have low inflation, and low interest rates. Whatever the merits of Taylor's macroeconomic stabilization ideas (and I don't believe there are many) they quite clearly couldn't be justified as appropriate now based on the experience of the late 1970s. I'm not a big fan of "supply-side economics", but its clear that the ideas were developed and became popular in the wake of some of the supply side problems of the 1970s. I suspect that some of the supply siders are in some ways blind to. or wish to downplay, the changed circumstances. They believe that their ideas (lower marginal tax rates, labor market reforms) are universal economic problem solvers, when in fact the time and place for the primacy of those ideas has passed, and we need to focus on boosting aggregate demand.
The development of ideas can't be divorced from their historical context. And when evaluating the applicability of ideas, the historical context of their development should be considered and compared to the current one.
Monday, 29 April 2013
Expectations, Monetary Policy, and Austerity
Mike Konczal has a piece at Wonkblog arguing that we are witnessing a great natural experiment that will help us determine whether expansionary monetary policy can offset contractionary fiscal policy:
Ryan Avent responded, noting that most monetary policy advocates were encouraged by the recent Fed actions, but almost no one argued that they would be sufficient.
Ryan Avent's post is worth reading in full, but I would add one thing. Market monetarists (and other monetary policy advocates) believe that the most important aspect of monetary policy is the expectations channel and the explicit statements from the Federal Reserve. What Ben Bernanke says is as important as what the FOMC does. With that in mind, it is worth looking at Bernanke's actual comments about fiscal tightening. Here is what he said about the fiscal cliff:
The joke is that Ben Bernanke agrees with Mike Konzcal that monetary policy can't offset fiscal tightening. The market monetarists just believe they are both wrong.
I don't want to pretend this doesn't set a really high bar for falsifiability of market monetarist ideas, it does. I also agree with Mike Konzcal, that as a practical matter, active fiscal stimulus combined with a federal reserve that tolerates higher inflation is probably a more credible way to boost nominal spending expectations. But as a theoretical matter I don't think the first few months of 2013 settle anything.
We rarely get to see a major, nationwide economic experiment at work, but so far 2013 has been one of those experiments — specifically, an experiment to try and do exactly what Beckworth and Ponnuru proposed. If you look at macroeconomic policy since last fall, there have been two big moves. The Federal Reserve has committed to much bolder action in adopting the Evans Rule and QE3. At the same time, the country has entered a period of fiscal austerity. Was the Fed action enough to offset the contraction? It’s still very early, and economists will probably debate this for a generation, but, especially after the stagnating GDP report yesterday, it looks as though fiscal policy is the winner.Paul Krugman agrees.
Ryan Avent responded, noting that most monetary policy advocates were encouraged by the recent Fed actions, but almost no one argued that they would be sufficient.
Ryan Avent's post is worth reading in full, but I would add one thing. Market monetarists (and other monetary policy advocates) believe that the most important aspect of monetary policy is the expectations channel and the explicit statements from the Federal Reserve. What Ben Bernanke says is as important as what the FOMC does. With that in mind, it is worth looking at Bernanke's actual comments about fiscal tightening. Here is what he said about the fiscal cliff:
I hope it won't happen, but if the fiscal cliff occurs, as I've said many times, I don't think the Fed has the tools to offset that event.And here is what he said about the sequester:
Given the still-moderate underlying pace of economic growth, this additional near-term burden on the recovery is significant.What Bernanke was saying was that the public shouldn't expect the Federal Reserve to increase monetary stimulus in a manner sufficient to offset fiscal tightening and keep nominal spending on track. For those who believe the expectations channel is paramount, the fiscal tightening of 2013 should damage the recovery, because Ben Bernanke said it would.
The joke is that Ben Bernanke agrees with Mike Konzcal that monetary policy can't offset fiscal tightening. The market monetarists just believe they are both wrong.
I don't want to pretend this doesn't set a really high bar for falsifiability of market monetarist ideas, it does. I also agree with Mike Konzcal, that as a practical matter, active fiscal stimulus combined with a federal reserve that tolerates higher inflation is probably a more credible way to boost nominal spending expectations. But as a theoretical matter I don't think the first few months of 2013 settle anything.
Friday, 26 April 2013
You go to the sequester with the Democratic Party you have
Ezra Klein has a good piece on the decision by the Democratic party to allow a bill that would ease the pain of sequestration for the FAA:
The basic philosophy of the Democratic party is that capitalism basically works but under-produces public goods, over-produces negative externalities, can become unstable if not properly regulated, and can lead to gross inequality. Their governing philosophy is that government can effectively overcome these problems through a combination of regulation, the pricing of externalities, the subsidization of public goods, and the provision of a progressive social safety net.
The Republican party has a political philosophy that is less concerned about the weaknesses of capitalism. But more importantly, they also believe that government is incapable of solving these problems effectively. And this is what they focus on politically. Republicans seek to demonstrate that government is wasteful, corrupt, and ineffective at solving problems, and so the less government the better. This is a good strategy because Americans are generally more skeptical of government than other wealthy, democratic countries.
With this is mind, it is easy to see why the Democrats aren't going to be very good at the type of political chicken the Republicans have mastered. By allowing FAA delays to continue, the Democrats help the Republicans (albeit, in a small way) make the case that government is incompetent and doesn't work. Now I don't want to let the Democrats off the hook. It strikes me that it was probably worth it to hold the line in this particular case, as Klein notes:
But a big lesson is that these types of standoffs are stacked against the Democratic party, and they should do everything to try to avoid them.
One could imagine an alternate universe with a more aggressively leftist Democratic party. This party could have been the one in summer 2011 that was refusing to raise the debt ceiling (and pay wealthy bondholders), unless the government increased stimulus spending. This would be a party willing to more aggressively harm the interests of the business class, in order to secure benefits for the poor. But that would be a different Democratic party than the one we have, and probably one less likely to secure large majorities.
Effective, non-corrupt governance is hard, and most places throughout history and the world have been/still are terrible at it. A few countries in the world, for a brief moment in time, have managed to build effective institutions and establish good norms of governance. The United States is one of them. The Democrats have shouldered the burden of continually demonstrating this. And as long as they do, they will always be the center-left technocrats who cave on these issues.
Recall the Democrats’ original theory of the case: Sequestration was supposed to be so threatening that Republicans would agree to a budget deal that included tax increases rather than permit it to happen. That theory was wrong. The follow-up theory was that the actual pain caused by sequestration would be so great that it would, in a matter of months, push the two sides to agree to a deal. Democrats just proved that theory wrong, too.For the most part, I agree with this analysis. But its worth pointing out that the different tactics adopted by the Democrat and Republican parties reflect different underlying philosophies of government, and longer term strategic aims.
...
It is worth noting how different the Democrats’ approach to sequestration has been to the GOP’s approach to, well, everything. Over the past five years, Republicans have repeatedly accepted short-term political pain to win the leverage necessary for long-term policy gain. That’s the governing political principle behind their threats to shut down the government, breach the debt ceiling, and, for that matter, accept sequestration. Today, Democrats showed they’re not willing to accept even a bit of short-term pain for leverage on sequestration. They played a game of chicken with the Republicans, and they lost. Badly.
The basic philosophy of the Democratic party is that capitalism basically works but under-produces public goods, over-produces negative externalities, can become unstable if not properly regulated, and can lead to gross inequality. Their governing philosophy is that government can effectively overcome these problems through a combination of regulation, the pricing of externalities, the subsidization of public goods, and the provision of a progressive social safety net.
The Republican party has a political philosophy that is less concerned about the weaknesses of capitalism. But more importantly, they also believe that government is incapable of solving these problems effectively. And this is what they focus on politically. Republicans seek to demonstrate that government is wasteful, corrupt, and ineffective at solving problems, and so the less government the better. This is a good strategy because Americans are generally more skeptical of government than other wealthy, democratic countries.
With this is mind, it is easy to see why the Democrats aren't going to be very good at the type of political chicken the Republicans have mastered. By allowing FAA delays to continue, the Democrats help the Republicans (albeit, in a small way) make the case that government is incompetent and doesn't work. Now I don't want to let the Democrats off the hook. It strikes me that it was probably worth it to hold the line in this particular case, as Klein notes:
The result is that sequestration is no longer particularly politically threatening, but it’s even more unbalanced: Cuts to programs used by the politically powerful will be addressed, but cuts to programs that affects the politically powerless will persist.This is a really horrible outcome, and the most vulnerable in our society will suffer because of these cuts.
But a big lesson is that these types of standoffs are stacked against the Democratic party, and they should do everything to try to avoid them.
One could imagine an alternate universe with a more aggressively leftist Democratic party. This party could have been the one in summer 2011 that was refusing to raise the debt ceiling (and pay wealthy bondholders), unless the government increased stimulus spending. This would be a party willing to more aggressively harm the interests of the business class, in order to secure benefits for the poor. But that would be a different Democratic party than the one we have, and probably one less likely to secure large majorities.
Effective, non-corrupt governance is hard, and most places throughout history and the world have been/still are terrible at it. A few countries in the world, for a brief moment in time, have managed to build effective institutions and establish good norms of governance. The United States is one of them. The Democrats have shouldered the burden of continually demonstrating this. And as long as they do, they will always be the center-left technocrats who cave on these issues.
Did the Bush Tax Cuts Make it More Difficult to Deal with the Recession?
A number of political commentators have spent the week evaluating the presidency of George W. Bush. I agree with the liberal consensus that, all said and done, Bush was a really bad president. But I find one aspect of the liberal critique unpersuasive. A number of commentators claim that the Bush tax cuts hampered our ability to respond to the 2008 financial crisis with appropriate fiscal stimulus. For example, Jonathan Chait:
Despite high debt levels, the U.S. government would have no trouble enacting a deficit financed stimulus plan. Interest rates are some of the lowest they have ever been, and there has been no appearance of the dreaded "bond vigilantes" demanding greater fiscal prudence. Nor has there been any evidence of looming hyperinflation. Some have cited economic studies suggesting that higher debt leads to slower growth. But Excel problems with Reinhart & Rogoff's study aside, the bigger issue is that (as they note) their empirical work doesn't demonstrate that high debt causes slow growth. Overall, there is just little evidence that extra debt racked up by the Bush tax cuts were a real economic barrier to more aggressive fiscal stimulus.
Whether or not the Bush tax cuts made fiscal stimulus more difficult politically is a tougher question to answer definitively, but there are a few facts that suggest it didn't. When Obama was trying to pass the American Recovery and Reinvestment Act ("the stimulus"), he faced exceptionally strong opposition from Republicans. As Mike Grunwald recounts in his great book "The New New Deal", the basis of the opposition was political--the Republicans didn't want to deal with Obama and came up with a strategy to reject any plan he brought forward. As a result, the bill passed the house with no Republicans votes, and only narrowly avoided the filibuster with the support of three Republicans. One could argue that the Republicans were mainly concerned with debt levels, but both House and Senate Republicans had stimulus plans around the same size as Obama's. During the 2008 election, Mitt Romney had the largest stimulus plan. This suggests that Republicans weren't primarily concerned with debt, and so in an alternate universe where the Bush tax cuts never happened, it is unlikely likely that they would have supported a bigger stimulus.
But could Obama's stimulus have been bigger without the Bush tax cuts? As Grunwald describes, the size of the stimulus was originally constructed based on assumptions that underestimated the size of the collapse. However, ultimately the bill was capped by four senators (Nelson (D), Snowe (R), Specter (R), Collins (R)) who negotiated together to keep the bill at $800 billion dollars. How did they decide on that number? It's hard to say, but based on Grunwald's reporting the number was just basically something they all agreed to. Nowhere in the reporting do I remember aggregate U.S. debt levels being their main consideration, rather they were focusing on the size of this particular bill. Furthermore, all four of these Senators voted in favor of the Bush Tax cuts (except one "no" vote by Snowe on the 2003 cuts), so its hard to credit their decision to cap the stimulus as being based on fiscal prudence.
Two years, and a few smaller stimulus bills, later, the Republicans retook the house. During the lame duck session, congress passed the cumbersomely named Tax Relief, Unemployment Insurance, and Job Creation Act of 2010, along bipartisan lines (with most of the "no" votes coming from Democrats). The bill basically traded a temporary extension of the Bush tax cuts, in exchange for extending unemployment insurance, adding a payroll tax cut, and extending a bunch of items from the stimulus package. This was the only major bipartisan stimulus effort that was successfully enacted during Obama's tenure. And its arguable that it was made possible by the Bush Tax cuts, whose expiration forced the Republicans to the table. It's possible that, absent the Bush tax cuts, Obama still could have come up with a deal, but it would have been much harder to thread the needle between Democrats, who opposed the higher end tax cuts, and Republicans, who weren't interested cooperating with Obama. At the very least, the expiring Bush tax cuts framed the deal-to-be nicely and brought everyone to the table.
A few weeks later, the Republicans took over the House and have largely refused to deal with Obama. Stimulus has been out of the question. Obama may have been less eager to turn toward deficit reduction if the aggregate debt level was lower, but I'm skeptical for a few reasons reasons. First, most of Obama's focus has been on reforming entitlement programs, whose long term actuarial balances aren't really affected by the Bush tax cuts. Second, even with lower aggregate debt, debt/GDP ratio would have still shot up in 2008-10 (though not as high) and deficits would still have been very large. It's likely that their still would have been public pressure to reduce deficits. The idea of austerity always seemed like more of an ideological bias than a practical response to economic conditions. Third, even without Obama's rhetorical support for balanced budgets, I doubt he could have made a stimulus deal with the House Republicans.
The Bush tax cuts were bad policy. They were regressive. They increased deficits exactly when they shouldn't have (during a period of strong economic growth). The Heritage Foundation and the Bush Administration claimed they would pay for themselves, and they didn't, revealing flaws in supply-side economic thinking. When the economy finally recovers, and interest rates return to normal levels, that borrowing will have to be paid for.
But they didn't create the financial collapse. And they didn't hamper our ability to use fiscal stimulus to promote recovery. The response to the financial collapse was the result the political conditions of 2009-2011.
Update: A response from 4:17am
His massive increase of the structural budget deficit, which ballooned to over a trillion dollars before President Obama took office, left the United States less fiscally equipped to respond to the economic crisis . . . (emphasis mine)And Dylan Matthews:
It’s also worth noting that Bush was increasing the deficit at a time when the economy was expanding — which is exactly the opposite of what Keynesians believe makes sense, and which also made it more difficult for the country to respond to the recession. (emphasis mine)This could be true for two reasons, both of which seem unsupported: 1) the accumulated debt could have created economic barriers to more fiscal stimulus; or 2) the accumulated debt could have created political barriers to more fiscal stimulus.
Despite high debt levels, the U.S. government would have no trouble enacting a deficit financed stimulus plan. Interest rates are some of the lowest they have ever been, and there has been no appearance of the dreaded "bond vigilantes" demanding greater fiscal prudence. Nor has there been any evidence of looming hyperinflation. Some have cited economic studies suggesting that higher debt leads to slower growth. But Excel problems with Reinhart & Rogoff's study aside, the bigger issue is that (as they note) their empirical work doesn't demonstrate that high debt causes slow growth. Overall, there is just little evidence that extra debt racked up by the Bush tax cuts were a real economic barrier to more aggressive fiscal stimulus.
Whether or not the Bush tax cuts made fiscal stimulus more difficult politically is a tougher question to answer definitively, but there are a few facts that suggest it didn't. When Obama was trying to pass the American Recovery and Reinvestment Act ("the stimulus"), he faced exceptionally strong opposition from Republicans. As Mike Grunwald recounts in his great book "The New New Deal", the basis of the opposition was political--the Republicans didn't want to deal with Obama and came up with a strategy to reject any plan he brought forward. As a result, the bill passed the house with no Republicans votes, and only narrowly avoided the filibuster with the support of three Republicans. One could argue that the Republicans were mainly concerned with debt levels, but both House and Senate Republicans had stimulus plans around the same size as Obama's. During the 2008 election, Mitt Romney had the largest stimulus plan. This suggests that Republicans weren't primarily concerned with debt, and so in an alternate universe where the Bush tax cuts never happened, it is unlikely likely that they would have supported a bigger stimulus.
But could Obama's stimulus have been bigger without the Bush tax cuts? As Grunwald describes, the size of the stimulus was originally constructed based on assumptions that underestimated the size of the collapse. However, ultimately the bill was capped by four senators (Nelson (D), Snowe (R), Specter (R), Collins (R)) who negotiated together to keep the bill at $800 billion dollars. How did they decide on that number? It's hard to say, but based on Grunwald's reporting the number was just basically something they all agreed to. Nowhere in the reporting do I remember aggregate U.S. debt levels being their main consideration, rather they were focusing on the size of this particular bill. Furthermore, all four of these Senators voted in favor of the Bush Tax cuts (except one "no" vote by Snowe on the 2003 cuts), so its hard to credit their decision to cap the stimulus as being based on fiscal prudence.
Two years, and a few smaller stimulus bills, later, the Republicans retook the house. During the lame duck session, congress passed the cumbersomely named Tax Relief, Unemployment Insurance, and Job Creation Act of 2010, along bipartisan lines (with most of the "no" votes coming from Democrats). The bill basically traded a temporary extension of the Bush tax cuts, in exchange for extending unemployment insurance, adding a payroll tax cut, and extending a bunch of items from the stimulus package. This was the only major bipartisan stimulus effort that was successfully enacted during Obama's tenure. And its arguable that it was made possible by the Bush Tax cuts, whose expiration forced the Republicans to the table. It's possible that, absent the Bush tax cuts, Obama still could have come up with a deal, but it would have been much harder to thread the needle between Democrats, who opposed the higher end tax cuts, and Republicans, who weren't interested cooperating with Obama. At the very least, the expiring Bush tax cuts framed the deal-to-be nicely and brought everyone to the table.
A few weeks later, the Republicans took over the House and have largely refused to deal with Obama. Stimulus has been out of the question. Obama may have been less eager to turn toward deficit reduction if the aggregate debt level was lower, but I'm skeptical for a few reasons reasons. First, most of Obama's focus has been on reforming entitlement programs, whose long term actuarial balances aren't really affected by the Bush tax cuts. Second, even with lower aggregate debt, debt/GDP ratio would have still shot up in 2008-10 (though not as high) and deficits would still have been very large. It's likely that their still would have been public pressure to reduce deficits. The idea of austerity always seemed like more of an ideological bias than a practical response to economic conditions. Third, even without Obama's rhetorical support for balanced budgets, I doubt he could have made a stimulus deal with the House Republicans.
The Bush tax cuts were bad policy. They were regressive. They increased deficits exactly when they shouldn't have (during a period of strong economic growth). The Heritage Foundation and the Bush Administration claimed they would pay for themselves, and they didn't, revealing flaws in supply-side economic thinking. When the economy finally recovers, and interest rates return to normal levels, that borrowing will have to be paid for.
But they didn't create the financial collapse. And they didn't hamper our ability to use fiscal stimulus to promote recovery. The response to the financial collapse was the result the political conditions of 2009-2011.
Update: A response from 4:17am
Subscribe to:
Posts (Atom)