Pretty much every morning, I spend a couple of hours quickly reviewing 10-12 news sources: Vox, Salon, Slate, Politico, The National Review, Mother Jones, a few others. In the age of Trump, most stories, on most sites, are pretty scary. The presence of Donald Trump in the White House constitutes a continuing national emergency; we do all know that, right? But this morning, Vox had the scariest story of them all. I mean, it wasn’t Trump-with-the-nuclear-codes scary. But it was still pretty darn terrifying.
The Donald wants a Big Achievement before his first hundred days are up. And on his wish list: a big tax cut. Here’s the link; here’s the quotation:
On Wednesday, President Trump will unveil a new set of principles for what he calls “massive” tax cuts for businesses and individuals — a plan bigger “than any tax cut ever.” Those massive cuts will come with a massive problem for Trump’s economic team: how to pay for them. The White House doesn’t appear to have settled on a means of making up the trillions of dollars in lost federal revenue that economists predict will accompany Trump-size cuts. But administration officials are signaling they may be leaning away from hard choices to finance the cuts, and toward highly optimistic assumptions about economic growth.
I shouldn’t have to say this, but okay, getting back to basics. If the federal government wants to spend money for something, it has to calculate where that money’s going to come from. Tax cuts equal spending. This proposal means that, in the mind of the President, the highest possible priority for our government is to give a lot of money to really rich people. How much money? Oh, about a gazillion dollars. Okay, how much really? We don’t know yet; no specifics have been announced. In his last public budget proposal, Trump wanted to cut somewhere around five trillion dollars over the next ten years. Give or take half a trillion or so. And, yes, that would be the biggest tax cut in history.
How are we going to pay for it? See, that’s the nice thing about tax cuts. You don’t have to worry about how to pay for them. They pay for themselves! Yay! Tax cuts for businesses and rich folks stimulate the economy into the wildest kind of frenzied growth. We won’t know what to do with all the money. Unicorns will prance into our homes, dispensing diamonds and emeralds. Money will literally grow on trees. We’ll have so much winning, we’ll get tired of it. Hoo-fricking-ray.
“Highly optimistic assumptions about economic growth.” Magic, in other words. Miracles, bestowed on America, because we deserve it.
This is an example of what Paul Krugman calls ‘zombie ideas.’ Terrible ideas that somehow never die. Tax cuts for rich people do sometimes stimulate growth, a little, when the biggest problem in the economy is a lack of investment capital. (As in the Kennedy tax cuts of 1963). That is absolutely not the case today. We have lots of investment capital waiting on the sidelines. What’s hurting our economy is a lack of demand. Ordinary people are hurting for cash, in other words.
Coming out of a demand-side recession, tax cuts have essentially no stimulative effect. They make rich people richer. Those riches do not trickle down. We’ve seen it again and again, most recently with the Bush tax cuts of 2001 and 2003. To be specific, we’re talking about the EGTRRA and the JGTRRA, the Economic Growth and Tax Relief Reconciliation Act (2001) and the Job Growth and Tax Relief Reconciliation Act (2003).
They did not pay for themselves. The CBO calculates that those two bills added 1.5 trillion dollars to the national debt, not counting interest. They greatly increased income inequality, which remains one of our most troubling economic indicators. Middle-class and lower-middle-class folks have lost ground over the last fifteen years. That trend accelerated due to EGTRRA and JGTRRA. President Bush, Vice-President Cheney, all made public statements about how great the tax cuts had been, how stimulative, how fair. They’re contradicted by, you know, the facts. All that pesky evidence, found in reports by the CBO, the Center on Budget and Policy Priorities, the Tax Policy Center, and basically every professional economist who has studied the issue.
And now, President Trump wants to do it again, only four times bigger.
Okay, but all right, then, pal. Smarty-pants know-it-all. You say tax cuts don’t do much. Well, then, what about Reagan? Ronald Reagan took office when the economy was really struggling. He shoved a big tax cut through Congress. The 80s economy boomed. So, see? Tax cuts work! Post hoc ergo propter hoc.
Sorry, but no.
Reagan inherited an economy in the doldrums, due to rampant inflation. Remember President Ford, and those goofy Whip Inflation Now buttons we were all supposed to wear? Turns out that wearing buttons with a slogan doesn’t do much to slow inflation. Raising interest rates does. That’s the job of the Federal Reserve, and under Paul Volcker, that’s exactly what the Fed accomplished. Also, in ’82, Reagan, terrified by the budget numbers he was seeing, called for, and got, the biggest tax increase in history (at the time). Then, Volcker having squeezed the inflation out of the economy, cut interest rates, from 20% in ’81, to 9.6% in ’83, leading to an economic boom. And, so, yes, in the mid-80s, the economy grew. Didn’t do much to raise poor people out of poverty, though.
What most people remember is this: the economy stunk under Ford and Carter, and it boomed under Reagan. There’s not much use disputing that narrative. But it’s insane to give all the credit for that to Reagan. It had much more to do with Volcker than Ronnie. Hey, the economy nearly collapsed under Bush, and revived under Obama; Obama would be the first to admit that he didn’t do it all alone. His stimulus did help though; there’s no real disputing that.
Anyway. I think a strong case can be made for the Bush tax cuts being the worst public policy of the last forty years. Most policies have positives and negatives. Bush’s tax cuts accomplished nothing positive at all. Their impact was wholly negative. And now Trump wants to do it again. Only much much bigger.
And Congress is likely to go along with it. They want a win too. This is familiar Republican ground; belief in the efficacy of tax cuts is perhaps the single most foundational dogma in the entire Church of High Conservatism. The world rests on the back of a giant turtle, and this is what that turtle looks like.
A few Tea Party cranks, bless ’em, have expressed ‘concern’ for the impact of these cuts on the debt and deficit. (We’d been making such good progress on the deficit, even with the Great Recession dragging the numbers down!). They might join a unified Democratic Party and keep this from passing. That’s it, though. That’s our only hope. That’s who we’re counting on. The Tea Party.
So what will the negative consequences be, of this massive increase in our debt? If we’re lucky, if everything goes well, we’ll see a decrease in public investment. Infrastructure needs won’t be addressed, at a time when we desperately need repairs and upgrades in roads, bridges, the electrical grid, schools; we have all kinds of needs. Government debt will crowd out private investment. It’s likely to be inflationary.
What we’re absolutely not going to see is economic growth so robust that the tax cuts will pay for themselves. That’s a fantasy. Which is why this is so dangerous. This President loves to indulge in fantasy. Policy: not so much. And that’s a really bad combination.