You Can’t Talk Honest Budgets Without Acknowledging the Politics of Depressions

Reihan Salam dubs Ryan’s budget the “put up or shut up” budget, in that it forces confrontations with the unspoken unpleasantries that would accompany either the Democrats preferred spending or the Republicans preferred cuts:

[A] March 2012 report from the Tax Policy Center by Eric Toder, Jim Nunns, and Joseph Rosenberg examines the top marginal tax rates we’d need to bring debt to sustainable levels without significantly altering the federal government’s spending trajectory and they are strikingly high.  This is part of why a number of neoliberals, including Matt Yglesias and Josh Barro, have argued that we need significant tax increases on middle-income households: the spending cuts we’d otherwise need to achieve fiscal balance are in their view unacceptable…

Democrats declare Ryan’s proposed spending cuts unacceptable without acknowledging that broad-based tax increases are the most realistic way of avoiding them. Republicans, meanwhile, have not generally thought through the impact of (in particular) the Medicaid cuts envisioned in the Ryan budget.

The math of this is correct. I’m firmly in the Yglesias camp on this. You can’t make the kind of government I’d prefer fiscally sustainable without hiking taxes on the middle class.

However, you also can’t talk about this stuff without acknowledging the unique political environment of an economic depression. Americans are freaked out by the deficit in the abstract. But they don’t want their taxes hiked — reasonable, given that we’re in a depression — and they don’t want their government support cut — also reasonable, given that we’re in a depression. Politically, this should lead everyone to a pretty straightforward policy response: Don’t cut the deficit!

Happily, that response is fully consistent with Keynesianism and textbook macroeconomics. You don’t reduce deficits during economic depressions, through sending cuts or tax increases, because this sucks demand out of an already struggling economy. In fact, in the short run, you increase deficits through new spending to help drive the economy back to its prior level of output. Once the economy is back on its feet, then you reduce the deficit.

With robust economic growth, the tax hikes or spending cuts needed to reduce the deficit become much less politically fraught. People tend to feel more secure in their circumstances, which makes them more tolerant of higher tax rates or lessened government support. I think this point is woefully under-appreciated. Depressions don’t just make deficits harder to close on a policy level, they make them harder to close on a sociological level as well. Conversely, getting back to robust growth lessens the hurdles on both fronts.

This should reemphasize what a godawful tragedy not getting a sufficiently large fiscal stimulus actually was. (Or sufficiently large monetary stimulus, for that matter.) We pumped enough demand into the economy to prevent a full-scale meltdown, but not enough to boost us back out. That left us limping along in a prolonged period of high unemployment, thus low revenue, thus expanded deficits. It also left us limping along through a prolonged period in which most Americans are already on the ropes, and thus vociferously opposed to any of the steps necessary to close the deficit. So both good politics and good policy converge on just not cutting the deficit right now.

Unfortunately, the Republican Party has made such an agreement all but impossible. While no politician ever suffered at the polls for increasing the deficit, fears of runaway deficits operate as a stalking horse in the public’s mind for a bad economy. So in a depression, demagoguing the deficit becomes a very effective short-term political tactic. And now that the Republicans have demagogued the deficit, they can’t very well turn around and agree to a policy program that blows it up over the short term, and they’ve mad it much harder for the Democrats to do so as well.

One other point: Your average European country not only has a broader, more regressive tax system than American — it also has a much more generous and expansive social safety net as well. I take that as evidence of an implicit deal required to satisfy your average populace of western voters. Low and middle income voters only tolerate significant tax burdens if those burdens are in equilibrium with generous government support programs. The kind of tax system American conservatives prefer has to be balanced against the kind of social safety net American liberals prefer, for political sustainability as well as fiscal sustainability. Right now America has neither.

You could argue that this is good reason to reduce both the tax burden and the size of government concurrently. But I think it’s pretty clear that the free market, absent significant government intervention, creates circumstances and distributions most Americans find utterly unacceptable. And we’re already pushing that boundary of the voters’ tolerance on that front.

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