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Taxing our way to prosperity: The Democrats' strange version of fiscal responsibility

By W. James Antle III
web posted June 16, 2003

It has always been part of the contrast between the Mommy party and the Daddy party: The Republicans have long been identified as the party of sound money, fiscal discipline and responsible economic stewardship. The Democrats have been the party of big, compassionate spenders. During the New Deal era, when the GOP was a beleaguered minority party without much else to recommend it, the party's staid accountant image at least presented it as fiscally responsible. Even when the Great Depression did undermine Republican economic credibility in the eyes of many voters, the charge was not recklessness but excessive parsimony. The perception was that Herbert Hoover did too little to counteract that historic downturn, not too much or that he somehow precipitated it by his meddling.

Both the rhetoric of opponents and supporters alike has traditionally presented the Republican Party as the party of money: All the talk about Wall Street, K-Street and Ebenezer Scrooge from the left implied that Republicans were reluctant to spend taxpayer dollars and concerned about business. But the Democrats have been quietly recasting themselves as the party of fiscal responsibility over the past decade.

William Saletan at Slate and the Tapped bloggers over at The American Prospect have approvingly quoted from this Howard Dean stem-winder:

"When Ronald Reagan came into office, he cut taxes, we had big deficits, and we lost 2 million jobs. When Bill Clinton came into office, he raised taxes without a single Republican vote; we balanced the budget; we gained 6 and a half million jobs. George Bush has already lost 2 and a half million. I want a balanced budget because that's how you get jobs in this country is to balance the books. No Republican president has balanced the budget in 34 years . . . You had better elect a Democrat, because the Republicans cannot handle money . . . We're the party of responsibility, and they're not."

Dean's facts are wrong. The Reagan tax cuts were followed by America's longest peacetime economic expansion in history up to that point, which led to the creation of over 20 million jobs. The unemployment rate was virtually halved between the peak of the 1982 recession and when Reagan left office in 1989. The rate of economic growth actually slowed following Clinton's 1993 tax increase, picking up again after the Federal Reserve turned on the money spigots and the man from Hope assumed a less economically liberal posture during his second term. Dean's analysis also conspicuously ignores anything that contradicts his "Republican tax-cutters bad, Democratic tax-hikers good" mantra. In fact, the first President George Bush raised taxes when he signed a deficit-reduction package similar to Clinton's into law in 1990. This failed to bring us any closer to a balanced budget -- the deficit continued to grow -- and compounded the 1990-91 recession. In his 1997 balanced-budget agreement with congressional Republicans, Bill Clinton signed legislation that contained the first broad-based federal tax cuts since the Reagan years, accelerating growth without preventing the elimination of the deficit ahead of schedule. There was, of course, no balanced budget prior to the Republican takeover of Congress -- no Democratic Congress has balanced the budget in 34 years. Perhaps showing his lack of partisan bias, Dean even low-balled the number of jobs created during Clinton's presidency.

But the most remarkable thing is that he is appealing to the party's liberal base -- the Democratic wing of the Democratic Party, as he says -- with economic rhetoric that is almost exactly the opposite of orthodox Keynesianism, especially in the context of joblessness and anemic growth. Dean isn't a DLC-style New Democrat. If anything, he is running against such elements within the party, yet his insistence that the budget must be balanced at all costs in order for the economy to create jobs is closer to Hoover's economics than anything proposed by Reagan or George W. Bush.

Old-school Keynesian demand-side theory, to which virtually all liberal Democrats subscribed from Franklin D. Roosevelt's administration on, taught that deficits were expansionary. While that did not necessarily mean they should be run chronically, as they have been for most of the past four decades, they were regarded as conducive to full employment and beneficial during an economic contraction. In practice, Keynesian economics helped establish deficit spending at the federal level as the norm. By the time the liberals' nemesis Richard Nixon was president, he could proclaim that we were all Keynesians.

Yet the Keynesians were unable to resolve the slow economic growth and high inflation, commonly called stagflation, of the 1970s. Reagan swept into the White House in 1980 on a bold supply-side platform that was aimed at curing the Carter malaise (although in fairness to Jimmy Carter, his Republican predecessors for the most part followed similar policies and achieved similarly poor results). It was only after Reagan became president and the deficits persisted that liberal Democrats began to profess any concern about the federal budget deficit.

It is true that the deficits of the 1980s were abnormally large and seemingly permanent, without regard to national economic conditions (although between 1983, when the Reagan tax cuts were fully phased in, and 1989 economic growth did reduce the deficit as a percentage of GDP). But most Democrats and nearly all liberals were unwilling to contemplate serious spending cuts outside of the defense budget. In fact, most howled that Reagan was already cutting needed programs and did not spend generously enough outside of military expenditures. Their preferred solution to the deficit was to raise taxes. As Reagan's opponent for reelection in 1984, Walter Mondale famously promised that he would raise taxes in his Democratic National Convention acceptance speech. Four years later, Michael Dukakis refused to rule out higher taxes and was defeated by a Republican who told voters to "read [his] lips: no new taxes" -- that man, of course, was Reagan's vice president and Dubya's father.

Ironically, it was when the deficits coincided with an economic contraction -- precisely when liberal Keynesians had always argued they were needed to provide stimulus -- that liberals were able to launch their most effective offensive against Republican economic policy. Buoyed by deficit hawks on the right and center, Democrats deftly tied the deficit to the early '90s recession. They claimed the Reagan tax cuts were a drunken binge that created the illusion of prosperity; the 1990-91 recession was the hangover. (No mention was made of loose monetary policy or areas where the Republicans had failed to confront government spending, such as the S&L bailouts and federal health care expenditures; tax cuts were the culprit behind the boom and bust.)

The result of this campaign was a tax increase, including an increase in the top marginal income tax rate, which further damaged the elder Bush politically and the nation economically. But the failure of this gambit to raise taxes on "the rich" to reduce the deficit actually inoculated Clinton from the political fallout of proposing to repeat it -- coupled with a middle-class tax cut -- during the 1992 presidential campaign. Bush had already raised taxes, without any accompanying tax cut for the middle class, so he was limited in how effectively he could criticize Clinton's plan. Plus, both major parties and Ross Perot had implicitly discredited Reagan-era tax cuts as the source of the deficit, not runaway federal spending.

As noted earlier, it is a distortion of reality to claim that Clinton was able to balance the budget and stimulate economic growth by raising taxes. Even his tax hike kept the top marginal income tax rate below 40 percent and that was the worst economic policy he was able to pass. His energy tax, national health care plan and other major expansions of the federal government failed to make it through Congress; by contrast, welfare reform, free trade agreements and a Republican-sponsored capital gains tax cut all did. But the fact that the sky didn't fall after the 1993 tax increase -- as some of the more hysterical Republican critics claimed it would -- and that the economy grew for most of Clinton's presidency won the Democrats high marks on the economy for the first time since the Carter malaise and gave the idea that higher taxes could actually be good for the economy a superficial validity.

This departure from Keynesian theory came to be called Rubinomics, after Clinton Treasury Secretary Robert Rubin. The general idea is that balancing the federal budget promotes economic growth by lowering long-term interest rates. Thus, tax increases can actually be good for the economy if they wipe out deficits (or enlarge surpluses) and lower long-term interest rates; tax cuts can similarly have a negative economic effect by raising interest rates. Despite assertions that Rubinomics worked during the Clinton years, there are several problems with this theory in practice. First, given all the other factors that influence interest rates, how ironclad is the relationship between long-term interest rates and fluctuations in the annual surplus/deficit figures this theory presupposes? What if a properly constructed supply-side tax cut lowers the cost of capital more than enough to offset the contractionary impact of any increase in interest rates? Can't marginal tax rates ever get so high as to be economically self-defeating?

More troubling is that this theory is applied exclusively as a limitation on across-the-board tax cuts, particularly those that result in lower marginal tax rates. Seldom is Rubinomics used to justify major spending reductions. In fact, most of the so-called deficit hawks who argue against conservative tax cut proposals along these lines oppose any serious retrenchment of growing federal entitlement programs. Many are even in favor of creating new ones, such as adding a prescription drug benefit to Medicare. Howard Dean wants to create a new national health care program. Clinton offered Rubinomics as welfare statism with a fiscally conservative face. Now it has been adopted as the anti-tax-cut strategy of choice by Democrats to his left, who appear to believe that they can grow the economy by taxing us more.

Opposing tax cuts with fiscally conservative language about balanced budgets while favoring consistent and substantial increases in federal expenditures is simply a clever redefinition of the same old tax-and-spend policies. Real-income bracket creep and the alternative minimum tax are ticking time bombs that threaten to raise more Americans' taxes; these are trends that recent tax cuts have only begun to moderate. The pressure of automatically growing entitlement programs, which will only increase as the baby boomers retire, will further strain taxpayers. In the absence of tax and spending limitations, our dynamic free-market economy could in coming decades come to resemble the stagnant welfare states of Old Europe.

Republicans deserve some of the blame for not living up to their party's reputation for spending restraint. But this does not mean that the Democrats are correct to portray their calls for higher taxes as fiscal responsibility. It may sell better politically than open calls for income redistribution, but this approach is simply using new language to repeat old mistakes. The economy cannot be taxed into prosperity.

W. James Antle III is a senior editor for Enter Stage Right.

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