The financial crisis has become surreal. We have Republican Senators and Alan Greenspan arguing for nationalization of failed banks, Democratic leaders arguing against it, and under the surface, the dominant economic theory of the last 30 years (monetarism) is failing spectacularly. But, my friends, I have run across something that is making me doubt my sanity.
In today’s Forbes there is some historical perspective that calls into question the orthodoxy that tax cuts lead to more growth/investment and tax increases lead to less. Here are some choice excerpts:
- Ronald Reagan proposed the largest peacetime tax increase [TEFRA] in American history as part of a budget deal to get the federal deficit under control. During debate on TEFRA, many conservatives [quotes WSJ, Gingrich, Chamber of Commerce] predicted economic disaster…Looking at the data, however, it is very hard to see any evidence that TEFRA had a negative effect on growth. Indeed, one could easily make a case that its enactment stimulated growth. As one can see, the economy’s growth rates after TEFRA took effect were among the fastest in history.
- In 1993, Bill Clinton proposed another major tax increase…John Goodman of the National Center for Policy Analysis predicted the following results from the higher taxes: Capital formation would be reduced by $1.76 trillion through 1998, 1.34 million fewer jobs would be created and the real GDP growth rate would be 0.4% lower than it otherwise would have been. An examination of the data, however, shows that this forecast was totally wrong in every respect.
- But even if conservatives were willing to concede that Obama’s proposed tax increases won’t deepen or lengthen the recession, they would still oppose higher taxes because they cling blindly to the starve-the-beast theory…The problem with this theory is that there is not one iota of evidence that starving the beast works. Under George W. Bush, federal revenues fell from 20.9% of GDP in 2000 to 17.7% in 2008, but spending rose from 18.4% of GDP to 20.9% over the same period. Bill Niskanen of the libertarian Cato Institute thinks the starve-the-beast theory has actually had a perverse effect on spending.
- And it should also be noted that when confronted with a crisis in Social Security in 1983, Reagan endorsed a rescue plan drafted by Alan Greenspan that consisted almost entirely of higher taxes. [Double !!! about that one]
- Many of the same Republicans who today complain about Obama’s spending voted for every pork-barrel project proposed by any Republican during the years they controlled Congress, as well as voting for a vast expansion of Medicare spending in 2003 when the program was already bankrupt. Among those voting to further bankrupt Medicare were such self-proclaimed protectors of the public purse as House Republican Leader John Boehner, House Republican Whip Eric Cantor and House Budget Committee Ranking Republican Paul Ryan. When they complain about Obama’s spending, they should be reminded that their vote to expand Medicare added $17.2 trillion to the nation’s long-term indebtedness, according to the latest report by Medicare’s trustees
OK, so we have Forbes (traditionally the most prominent major anti-tax outlet) running a piece pointing out that Ronald Reagan was a tax increase lover (after his first tax cut and exploding deficit) that signed off on Alan Greenspan’s Social Security tax increase; the economy grew robustly after his and Clinton’s tax cuts; that Bush’s tax cuts failed to do much of anything; that the Republican leadership added (in what I’ve dubbed The Worst Bill ever even as it was signed) amounts to the long term debt that make Obama’s plans look tiny…causing a Cato representative to question whether the starve the beast theory works.
Got that? OK, here’s the kicker: the author is Bruce Bartlett. Yes, that Bruce Bartlett. A Champion of Supply Side Economics. That Bruce Bartlett. Wow.