The consequences of the tax program will shelve support for the Republicans, but once in power the Democrats’ hands will be financially bound for years
I think many Democrats and independent political observers are puzzled by the intensity with which Republicans are pursuing their tax cut. It’s not politically popular and may well lead to the party’s defeat in next year’s congressional elections. So why do it?
The answer is that Republicans are pushing the tax cut at breakneck speed precisely because they know they are probably going to lose next year and in 2020 as well. The tax cut, once enacted, however, will bind the hands of Democrats for years to come, forcing them to essentially follow a Republican agenda of deficit reduction and prevent any action on a positive Democratic program. The result will be a steady erosion of support for Democrats that will put Republicans back in power within a few election cycles.
The theory was laid out almost 30 years ago by two Swedish economists, Torsten Persson and Lars EO Svensson. In a densely written article for the Quarterly Journal of Economics in 1989, they explained why a stubborn conservative legislator would intentionally run a big budget deficit.
It has to do with what economists call time inconsistency – the consequences of actions taken today may not appear until the future, when a different political party will be in power. Thus the credit or blame will accrue to that party rather than the one that implemented the policy, because voters tend to attribute whatever is happening today to the party in power today even if that party had nothing to do with it.
Thus Barack Obama got blamed for a recession and resulting budget deficits he had nothing to do with originating. No matter how many times the Congressional Budget Office showed that the vast bulk of the budget deficits in his administration were baked in the cake the day he took office, Republicans nevertheless blamed him and his policies exclusively for those deficits.
Of course, another reason for those deficits is that Republicans systematically decimated the federal government’s revenue-raising capacity during the George W Bush administration with one huge tax cut after another. All of these were sold as necessary to get the economy growing again. The failure of the economy to respond positively was never taken as evidence of the failure of those tax cuts, but rather as showing the need for even more and bigger tax cuts.
By 2022, Republicans will be back in control of Congress and in the White House by 2024
The payoff for this orgy of tax-cutting came when Obama took office. All of a sudden, Republicans noticed that there were large deficits and insisted that Obama do something about them right this minute! They even made the nonsensical argument that spending cuts would stimulate growth by reducing the burden of government.
Democrats did a poor job of explaining how Franklin Roosevelt tried exactly that in 1937, slashing government spending because his treasury secretary told him it would restore business confidence. The result was a sharp downturn that raised unemployment, which had been trending down.
Obama’s hands were tied by the deficit hawks in his own party as well and prevented from offering an economic stimulus adequate to offset the loss of aggregate demand resulting from the great recession that began in December 2007 on Bush’s watch. Obama even joined with Republicans to slash spending in the 2011 budget deal and put in place budget controls that made it virtually impossible to pursue any positive Democratic initiatives for the balance of his presidency. No wonder Trump won.
I think Republicans remember better than Democrats the lesson of 1993 as well. Bill Clinton was elected in 1992 on an activist agenda. But once in office, he was persuaded to reverse course and put all his efforts into deficit reduction. This transformation was spelled out in detail in Bob Woodward’s 1994 book, The Agenda. Its key element was a significant tax increase that every Republican in Congress voted against. They said it would crash the economy, but was instead followed by an economic boom. Unfortunately, the boom didn’t become apparent until after the 1994 election in which Democrats took heavy losses – in large part because of the tax increase. Republicans got control of both houses of Congress for the first time in 40 years.
Clinton remained beholden to the deficit hawks for his entire presidency, doing nothing with the vast budget surpluses that emerged and hoarding them like a modern day Midas, despite pressing economic needs and growing financial problems withsocial security and Medicare that those surpluses could have fixed. Clinton simply bequeathed them to Bush, who promptly dissipated them with tax cuts and a huge new spending program, Medicare Part D, not to mention wars in the Middle East that continue to this day.
I believe that the same cycle will rerun over the next few years. Should Democrats get control of the House and/or Senate next year, Trump and his party will insist that deficit reduction be the only order of business. Automatic spending cuts resulting directly from the tax cut will start to bite, hurting the poor and middle class primarily, according to the Congressional Budget Office, and making them forget that they resulted from a huge tax give-away to the wealthy that increased the deficit by $1.5tn. Democrats will get much of the blame due to time-inconsistency.
It’s possible that Trump’s appointees to the Federal Reserve may be so alarmed by the inflationary potential of the growing deficits that they will raise interest rates in response. This could trigger a recession that will be blamed on a Democratic president taking office in 2021, just as happened with Obama. But that president may not be able to enact any stimulus at all because deficits crowd out any fiscal space. By 2022, Republicans will be back in control of Congress and in the White House by 2024. In 2025, they will demand still more tax cuts.
Keep in mind that no matter how big the deficit gets from the tax cut Republicans are rushing to enact, none of them will ever vote to undo those cuts or raise taxes except, perhaps, in ways that further burden the poor, such as raising the gasoline tax. That is because they all signed a tax pledge promising never to raise taxes. Therefore, any deficit reduction will either consist solely of spending cuts or pass with only Democratic votes, as was the case in 1993.
The originator of the pledge, Grover Norquist, planned it this way. I doubt he has ever read Persson and Svensson, but understood intuitively that the tax pledge was guaranteed to ratchet down the size of government forever. It wouldn’t happen all at once, but over a period of decades. The history of fiscal policy since the pledge was originated in 1988 is, sadly, proof that it has worked exactly as he hoped.
The Democrats’ only hope is to defeat the tax cut in its entirety and not be seduced by Republican efforts to tilt it more in favor of the middle class. Once the deficit is programmed to increase by another $1.5tn the Republican trap will be set and Democrats will again be on the path to cleaning up their fiscal mess. Just say no to tax cuts is my advice.
- Bruce Bartlett worked as an adviser for Ronald Reagan and George HW Bush. His new book is The Truth Matters