The president is bent on raising taxes big time. The rationale? The deficit is getting out of control. Indeed it is. Since January 2009, when President Obama took office, the United States has run cumulative budget deficits of $5 trillion. Before that time, debt held by the public was $6.3 trillion. Now it’s $11.4 trillion, an increase of 80%.What did we get for it?
Growth of 1.5% per year. As it happens, the over the eight years of President George W. Bush, the economy averaged 1.6% economic growth, and the cumulative deficit was $2.4 trillion. President Obama has more than doubled the W. deficits, while coming up short a tenth of a point of growth. What a horrible record. The President’s current tax-increase push is, if nothing else, an admission that the stimulus efforts of his first term failed. The thinking now, apparently, is that given this fact, then “getting the federal financial house in order” just might work. We used to call this latter strategy “Rubinomics,” after the Bill Clinton tax-increase architect Robert Rubin of 1993 fame.
We could call it “Mills-onomics,” after Treasury Secretary Ogden Mills, who in 1932 acceded to a 38-point increase in the top rate of the income tax in the face of 10 million unemployed. 1932 was not quite the worst year in American economic history. It wasn’t the trough of the Great Depression—1933 was.
As President Obama and Congress lurch forward in their “fiscal cliff” negotiations, we do well to remember canonical thinking—Democratic thinking—on when taxes should be increased, given economic conditions.
In the old days, such as the heyday of the Council of Economic Advisors under Presidents Harry Truman in the 1940s and 1950s and John F. Kennedy in the 1960s, experts spoke of something called the “fiscal brake.”
The fiscal brake referred to the way the progressive federal income tax code pushed people into higher tax brackets, the more money they made. No new legislation (much less some “fiscal cliff” tax-cut expiration) was involved. There would automatically come a tax increase—indeed a tax-rate increase—given any kind of substantial economic growth. Growth would lead to higher incomes, and higher incomes to more people in higher brackets. It was a thing of beauty. The government got tax increases, given a recovery, and Congress didn’t even have to be called on to do the deed.
This reflected the Keynesian notion that during busts and recessions, the government should deficit-spend in order to get the recovery going, with the debt that accumulated then wiped out with the automatic tax increases that ensued with the recovery. Stimulus brought growth, and growth brought solvency.
You see how President Obama’s program is such a sorry testimony to the Democratic-Keynesian tradition. First he deficit spent, and big—and got no recovery. Now the poor man has to legislate tax increases, in that the lack of recovery means that no one is getting thrown into higher tax brackets on account of recovery-induced higher incomes. And given all the phase-outs for even modestly higher incomes, there’s plenty of progressivity in the tax code as it is.
President Obama has got to be the most hapless Keynesian ever.
In the Keynesian period, you never had to be so groveling as to ask for/demand tax increases to pay for your deficits. The recovery that came would bring tax increases and wipe out the debt. Oops, President Obama’s $5 trillion in deficits didn’t produce a recovery in the first place.
Keynesians used the term “fiscal brake” in explaining all this, in that increased taxes as the economy “got hot” worked to “cool” it. As for recessions, this is when taxes automatically got lowered, since people’s income fell relative to the progressive rate structure. Everything was to lead to shallower recessions and more contained booms—in another words, smooth, steady growth.
As it turned out, growth in the Keynesian era after 1945 was no greater than that of the quarter-century “Great Moderation” launched by Ronald Reagan in 1982. But the Great Moderation is called just that because of its singular smoothness, in particular the shallowness of its recessions.
First the supply-side economics of the Great Moderation proved superior to Keynesianism, producing good growth without the bouncing around that somehow did bedevil the Keynesian era. Now Mr. Barack Obama is hitting the old venerable tradition with friendly fire. The keepers of Keynesianism had better disown this epigone before the humiliations get even worse.
Books on the topic discussed in this essay may be found in The Imaginative Conservative Bookstore. Originally published at Forbes.com the essay is reprinted here with gracious permission of Brian Domitrovic.