Normative Narratives


The Progressive Case For More Moderate Policies

If President Trump has had any positive effect on American politics, it’s that people are more engaged than ever. Think about it, when was the last time you heard that lazy complaint that “both parties are the same”?

Not only are the parties not the same, there are big differences within at least one of them. The GOP has become the party of Trump, but significant philosophical and policy differences exist within the Democratic Party. There are “progressives” like Warren and Sanders, “moderates” like Buttigeg, Biden and Klobuchar, and even an outsider-entrepreneur-populist in Andrew Yang.

When considering an ideal platform to run on, I am not talking about my personal preferences, or what may play well in politically uncompetitive parts of the country. Rather I am talking about two things:

  1. What best addresses the nation’s needs;
  2. What is most likely to appeal to independents and moderates, whose turnout and swing votes could be the determining factors in the 2020 election (electability).

Admittedly, “what best addresses the nation’s needs”, is opinion. In the next section I will defend my opinion that more moderate policies, and more of them, best addresses the nation’s needs. What is most likely to appeal to swing voters, however, is not opinion–it is moderate policies. This is common sense, strongly backed by a recent New York Times analysis of undecided voters:

“These potentially persuadable voters are divided on major issues like single-payer health care, immigration and taxes. But they are fairly clear about what they would like from a Democrat. They prefer, by 82 percent to 11 percent, one who promises to find common ground over one who promises to fight for a progressive agenda; and they prefer a moderate over a liberal, 75 percent to 19 percent.”

Making America Greater Than It’s Ever Been

After decades of inadequately investing in most Americans, many changes are needed to bring some semblance of equality of opportunity to this country.

Progressive Democrats focus on free college and healthcare, but economic opportunity goes beyond free or affordable versions of these things. It is not just healthcare and higher education reform that are needed, but also: early childhood development initiatives, investments in worker (re)training and apprenticeships, addressing student loan debt, a major infrastructure plan, an ambitious green economy plan, and perhaps the beginnings of a Federal work guarantee program (which is the real solution to automation). In other words, a realistic version of the Green New Deal.

By embracing more middle-of-the-road policies to address healthcare and college tuition costs, there is more fiscal space and political capital to spend on these other priorities. Lets consider the big ticket plans, as well as their more moderate alternatives:

“Medicare for All” vs. the “Public Option”

  • People will argue that Medicare for All is “socialism”, that it is “European”, not “American”. Yes, these are dumb arguments, unfortunately that does not matter when a large portion of the country believes them.
  • The public option–letting anyone who wants to buy into Medicare do so–on the other hand, embraces two core American values–choice and competition. It simply provides, as the name implies, an option.
    • As with the ACA, subsidies would be provided for people depending on their income.
  • One of the main reasons the ACA is less effective than it could be (aside from constantly being undermined by the GOP) is lack of providers in many areas.
  • There is more support for a public option than Medicare for all, and the gap is widening.
  • The public option is, of course, less expensive (by varying amounts, depending on the details of the plan).

Even Senator Warren’s path to “Medicare for All” is essentially just passing a public option at first, and then trying to pass a single payer health insurance law at a later date.

Free College Tuition vs. Free Community College

If someone knows they want to go to college, and is committed to seeing it through to degree completion, they should be encouraged and enabled to do so. The data shows that the higher your education level, the more you earn and the more likely you are to be employed. However, nothing good comes from a recent high school grad taking out a loan for a program they have no intention of completing, because they have been convinced that doing anything else would be a mistake.

  • Most student loan debt is driven by people attending for-profit colleges for a semester or two and then dropping out. Without the earnings bump one realizes from getting a degree, they find themselves stuck in debt.
  • We have all heard horror stories of people graduating with 6 figure debt, but these people are the loud minority of student loan debtors, and will likely be able to pay that debt off in the future.
    • For those who pursued or want to pursue expensive degrees in order to work for the social good, there are programs to help them pay down their debt (programs which can be expanded).
  • After years of conventional wisdom unwisely saying “everyone should get a degree”, the downsides of such thinking have become apparent; the decreased value of a bachelor’s degree (as they become much more common), and the increased cost (as more demand drives up prices).
  • Free Community College allows unsure young adults see if a bachelor’s degree is for them, or whether they want to go another route, without the burden of student loan debt.
    • State’s public higher education systems need to create as seamless a transition as possible from their associate’s to bachelor’s degree programs. By doing so, they would effectively be cutting the cost of a bachelor’s degree in half.
    • Some people do not want or need to pursue a bachelor’s degree, and that’s OK! This is not evidence of some moral or cognitive deficiency, nor is it a sentence to a life of poverty. We as a society need to better promote the alternatives, meaning;
    • High Schools, Community Colleges, and businesses need to provide more vocational training and apprenticeship opportunities, particularly since these jobs are projected to grow and more young Americans are beginning to show interest in them.
  • As with the public option, providing free community college would be significantly cheaper than making all public college tuition free.

Should any “moderate” plan be fully implemented, America would be immeasurably more progressive than it is today. All the progressives out there, if they truly care about social progress, should be out celebrating in the streets if a public option or free community college ever become the law of the land.

Progressive Taxation

Because bigger ticket plans are so expensive, progressive candidates have had to become innovative on taxation, most notably by proposing a wealth tax. There are also more familiar ideas to increase tax revenues, such as increasing higher end income and corporate tax rates, raising the capital gains tax, and introducing a value added tax. Then there is also adequately funding the IRS, so it can better enforce tax law.

Every other wealthy country in the world generates more tax revenue relative to its GDP than the U.S. Despite what Trump may say, I am not comparing the U.S. to socialist countries with failed states; these are the G7–literally the 6 wealthiest countries in the world after after the U.S.

Source: OECD

Note this chart ends at 2017; the U.S. figure is probably about 1% lower for 2018 after the GOP passed it’s new tax bill. That might not sound like much, but remember 1% of the $20 trillion dollar U.S. economy is about $200 billion dollars.

Doing a very rough back-of-the-napkin calculation, if the U.S. collected at the G7 average, it would easily bring in 1.5 trillion more tax dollars per year. I don’t care if your priority is reducing poverty, environmental protection, building up our military, providing better services to veterans, paying down the debt, or literally anything else, we should all be able to agree as a nation that we are leaving too much tax revenue on the table.

Moderate Democrats must also embrace more progressive taxation. For one, it hits on the widespread belief that the wealthy do not pay their fair share of taxes. Furthermore, if a candidate wants to propose a buffet of policies instead of a few main courses, it will still cost a lot of money. Being a moderate Democrat shouldn’t necessarily mean spending less, but rather spending differently. To do this responsibly still requires embracing much more progressive taxation. 

The Uneven Political Playing Field

Due to a number of factors (Gerrymandering in the House, less populous states being disproportionately represented in the Senate, the Electoral College), Trump’s GOP does not need to win national popular support to stay in power. Instead it will double down on lies, partisan attacks and other scare tactics to try to rile up its base.

The Democratic party cannot play this game. While Democrats have to be tough on Trump, they also have to try to appeal to some conservative voters. If the Democratic Party tries a mirror approach, appealing primarily to extreme progressives while ignoring moderate Democrats, conservatives and independents, all it will accomplish is breaking its own 2016 record of winning the popular vote by the largest margin in history while losing the Presidency.

Think about it, people who support the most progressive policies tend to be clustered in big cities–cities that already vote Democratic. Increasing turnout of this voting block would have less of an effect on the election than one may think.

Thanks to his words and actions, Trump has put previously uncompetitive areas in play–the so called “suburban slide” in the south. The Democratic party must seize on this opportunity and try to appeal to these voters. The party’s progressive wing should not punish it for playing smart politics; as the past three years have shown, the stakes are too high.

A New New Deal

Maybe I am wrong. Maybe absent grand policies like “Medicare for All”, “Free College”, or “$1,000 a month for everyone”, the excitement just isn’t there for any Democratic candidate and Trump wins again. Maybe most voters don’t have the capacity or desire to consider a platform that addresses the issues facing this nation with targeted policies.

Or maybe people do want that type of platform, but don’t think politicians can actually deliver it. This is a much more reasonable argument; the Federal government hasn’t been particularly effective in recent history, and it is easier to pass two bills than five.

To this I say that, in America, fatalism is self-fulfilling. If we say, “we can’t pass those bills”, and don’t even try, then we certainly we won’t pass them. If we say “we can’t tax the rich, they’ll just dodge it”, then that becomes the reality (as it has already begun to be).

Yes, there will be difficulties along the way–there always are when taking on wealthy interests. Globalization has made tax evasion more difficult to police. Today’s hyper-partisan political environment has made it harder to pass legislation that actually reflects the will of the vast majority of Americans across the political spectrum. BUT WE MUST TRY. To quote FDR:

“The country needs and, unless I mistake its temper, the country demands bold, persistent experimentation. It is common sense to take a method and try it; if it fails, admit it frankly and try another. But above all, try something. The millions who are in want will not stand by silently forever while the things to satisfy their needs are within easy reach.”

American democracy has driven some truly incredible advances in human progress and social fairness in the past, and there is nothing structurally stopping it from doing so again. The New Deal, which today’s Democratic party seems to want to emulate, was itself a large package of targeted policies addressing specific needs.

More moderate policies, and more of them, has been and continues to be the right approach to addressing the many challenges facing our nation. It also happens to be the more broadly popular–and therefore electable–platform. Whether a candidate with such a platform can make it through the 2020 Democratic presidential primaries, however, remains to be seen.


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Economic Outlook: Business Tax Reform is a Social Justice Issue

Since President Obama’s SOTU address, the term “middle class economics” has penetrated mainstream political discourse. These were not all new ideas, but rather a catchy phrase to sum up the priorities of the Obama administration and provide direction for the Democratic party going forward.

Of course, in a functioning democracy, broad based growth is not (or should not be) a partisan position. A recent NYT news analysis article highlighted how the G.O.P. has, in recent years, attempted to re-brand itself to be more appealing to low and middle class Americans (i.e. engage in “middle class economics”).

One potential avenue for such re-branding is compromising on a long overdue overhaul of the American tax system (the last major overhaul was in 1986). According to a recent Al Jazeera America poll, a majority of self-proclaimed Democrats (79%) and Republicans (68%) are “somewhat” or “very” willing to have their congressional leaders compromise on taxes.

Fortunately, bipartisan support for tax reform is not limited to the general public. Both the Democratic party and the G.O.P. have powerful voices in the Federal Executive and Legislative branches (respectively) advocating for compromise on tax reform:

G.O.P Stance:

“Though there are disagreements on the details, there is bipartisan support for tax reform in Congress,” said Orrin Hatch, Republican chairman of the Senate Finance Committee, at a conference for tax lawyers, analysts and economists.

“Members of both parties have expressed their support for a tax overhaul. And, I believe there is real momentum to get something done on tax reform this year, if we remain committed. And, believe me, I’m committed,” he said.

The U.S. tax code has not been overhauled thoroughly in 28 years. In that time it has become riddled with loopholes. As a result, tax avoidance is a growing problem.

At the same time, tax experts also generally agree that the system is so complex and often contradictory that compliance costs are excessive and economic productivity is harmed.

Hatch has laid out basic principles for reform. At the conference, he said he has the impression that Democratic President Barack Obama might be willing to do a deal on business tax reform alone, setting aside individual income tax issues.

“We need to lower corporate tax rates and transition toward a territorial tax system,” Hatch said. A territorial system is one that would exempt all or most of the foreign profits of U.S. corporations from the corporate income tax.

Democratic Party Stance:

Let me (Secretary of Treasury Jacob Lew) say at the outset that our entire federal tax code needs to be overhauled.  It has been almost 30 years since we last rewrote it, and since then, the tax system has become heavily burdened by loopholes and inefficiencies

I continue to believe that the best way to achieve reform today is to start with pro-growth business tax reform that protects and strengthens the middle class, lowers rates, simplifies the system, levels the playing field, and eliminates unfair and inefficient loopholes.

The fact is, there is a growing bipartisan consensus in Washington on how to achieve business tax reform, and we have a unique opportunity now to get this done.

On paper, we have one of the highest corporate income tax rates in the world, but in practice, there is a wide disparity in effective corporate tax rates.  Some corporations pay little or no income tax at all, while others pay the highest rate in the developed world.

Moreover, our business tax system is far too complicated — particularly for small businessesOne estimate suggests that a small business, on average, devotes hundreds of hours plus spends thousands of dollars, to comply with the tax code.  We can and must reduce this burden.

Our business tax system actually skews business decisions in ways that make it harder for the economy to grow.  Too many investment decisions are shaped by tax considerations when they should be driven by what will best enhance productivity and growth.  Our tax code should favor the best businesses that create the most economic value — not those that are best at taking advantage of tax deductions.

The international tax system is often looked at in terms of either what is known as a territorial system, in which a company located in a particular country only pays taxes on income earned in that country, or a system like that of the United States, in which that company must pay tax on worldwide income, regardless of the country where it is earned.  The President’s proposal strikes a sensible balance, and would move us towards a more hybrid system.  What that means is we would create a new minimum tax on foreign earnings and make it simpler for a business to bring income back to the United States.  It would also tighten the rules so that companies cannot use accounting techniques to avoid paying taxes, such as shifting profits to low-tax countries (inversions).

Of course, there are tax expenditures that make sense and that need to be protected — like the New Markets Tax Credit, expensing for small businesses, and the Research and Experimentation Tax Credit.  But these tax incentives cost money and need to be paid for to maintain adequate revenue levels.  And we cannot apply a double standard, as some have proposed, where we permanently extend business provisions without paying for them, without permanently extending critical improvements to the EITC, child tax credit, and college credits that help working families at the same time.

Secretary Lew laid out the five pillars of the administration’s proposal for a new business tax system:

1. Lower rates and close wasteful loopholes.
2. Build on the resurgence of manufacturing in the United States.
3. Reform the international tax rules that encourage companies to shift income and investment overseas.
4. Simplify and reduce taxes for small businesses.
5. Fix “our broken tax code and increase investment in a way that maintains current revenues.”

Sounds like both parties want many of the same things.

However, “revenue neutral” business tax reform does not go far enough. Looking at the Federal OMBs Historic Tables (p34-35) tells the story. Since 1934, individual income taxes have consistently made up 40+% of government receipts, while corporate income taxes have varied from as high as 30% to around 10% of receipts in recent years.

True this declining share is partially due to rising Social Security taxes, but since those are split evenly between employers and employees, it is clear that the burden of financing our government has shifted from corporations to people and small businesses. Looking at contributions as a % of GDP (p36-37) further supports this narrative.

These meager contributions by corporations are symptoms of an outdated and unfair tax code, and should not be enshrined in a new one.

Lower tax receipts skew the debate over how to invest in America and her people. Operating from a position of high debt and primary deficit, it is easy to drum up fears that accommodative economic policies will result in rising borrowing costs, ballooning deficits, and [hyper]inflation (despite the fact that America is facing the opposite–historically low borrowing costs, a shrinking deficit, and a very strong dollar).

Implementing business tax reforms would help push America into primary surplus, changing the context of this national debate.

I do not claim to know the exact amount or proper allocation of resources between public goods (education, infrastructure) and welfare programs needed to achieve greater “equality of opportunity” / social mobility. But I can say with confidence that more resources need to go to these causes, as the status-quo has long failed the vast majority of Americans.

The sooner we can have a clear-eyed debate on what policies are needed to promote broad based, sustainable American growth, the better. Holding back this debate, aside from uncompromising politicians, is a failure to overhaul our tax code.

In the interest of balance, work also needs to be done on individual tax reform, to fix high marginal tax rates affecting people who benefit from welfare programs. However, the importance of this issue has been, in my opinion, overblown by those on the political right.

Lastly, the Congressional Budget Office’s use of “dynamic scoring”, as it as been pushed through by the G.O.P. dominated congress (using it for tax proposals but not for spending bills) is another impediment to achieving social justice through tax reform and fiscal policy. 

Van Hollen (D-MD) added that while the bill requires the CBO to run dynamic analyses on major bills, it specifically excludes appropriations bills. He said that exemption shows that Republicans want to downplay how federal spending on education, infrastructure and other areas can also help the economy.

Ryan replied by saying that exemption is there because subjecting all spending bills to dynamic scoring would create significantly more work for the budget office. Rep. Gerry Connolly (D-Va.) proposed an amendment to include major spending bills, but the House rejected it 182-214.

Ryan’s argument is unfounded and offensive to the talented people employed by the CBO. It is a weak attempt to defend wealthy interests, while downplaying the awesome potential of the American people.

Ideally, this method would be implemented for both tax and spending proposals. If that is not possible, dynamic scoring should not be used at all.


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Transparency Report: Not All Regulations are Equal, Not All Compromise is Good

A recent New York Times poll on the achievability of “The American Dream” produced some concerning yet unsurprising results:

Notwithstanding the bleaker view of upward mobility, the majority of those polled said they were more concerned about the possibility that too much regulation in Washington could stymie the economy than they were about the prospect of inequality. Fifty-four percent of respondents said that “over-regulation that may interfere with economic growth” was a bigger problem than “too little regulation that may create an unequal distribution of wealth.” Only 38 percent said that too little regulation posed a bigger problem.

That answer was particularly noteworthy given the persistent concerns among economists and politicians from both parties about a growing gap between the wealthiest Americans and the middle class.

Still, almost six years after the height of the financial crisis, Americans’ wariness about the banking industry that was at its center remains. Only 4 percent of respondents said they had “a lot” of confidence “in Wall Street bankers and brokers,” though 31 percent said they had “some” confidence in Wall Street. Nonetheless, 44 percent said they trusted their own bank “a lot,” and 37 percent said they trusted their banks “some.”

My question is, if not the federal government, who can regulate Wall St?

Recently attention has focused on the Federal Reserve Bank of NY, which plays an outsized roll in financial regulation as NYC is the world’s largest financial hub. However, the NY Fed’s role in financial regulation is complementary to federal regulation–it is not a substitute. 

People may not be enamored with federal financial regulation, but the answer is more regulatory power, not rolling back key provisions of the already insufficient Dodd-Frank Act.

These reported beliefs on government regulation are not surprising (to me) because the rationale behind them is clearly explained by Matt Taibbi in his book “Griftopia” (which he discusses in an interview on Wall St. Cheat-sheet):

Basically, government regulation is the kind of stuff a lot of them see on a day-to-day basis, but in a different form. If they’re a hardware store owner, they see a local health inspector or an ADA inspector coming by to make sure they’re in compliance with something. These are all little annoyances and costs that they see when they interact with government. Unfortunately, that’s what they think financial regulation is. They don’t get that it’s a completely different ball game when you’re talking about JP Morgan Chase (JPM), Goldman Sachs (GS), and that level of power requiring oversight.

This is how the GOP sells its agenda to the average Americans (aside from exploiting social rifts, which can only go so far): anything provided by the public sector (regulation, welfare programs) is ineffective and holds back growth, therefore the path to prosperity lies in deregulation and slashing the social safety net.

Over-regulation may be a problem for regular Americans at the local level. But federal under-regulation of the financial sector, environmental concerns, and campaign finance, threaten our economic stability, future, and democratic processes respectively (these also happen to be the areas where Republicans are rolling back regulations in the current government spending bill).

But the way the GOP is pushing its deregulation agenda is almost as reprehensible as the socioeconomic consequences. The environmental issue is divisive, but there is a broad consensus among Americans in favor of tighter financial regulation and campaign finance reform.

No Congressman or woman campaigned on financial deregulation or easing campaign finance restrictions, as such an agenda would never be popular enough to get someone elected. But the GOP has essentially tied the ability to run the country to these very issues.

Compromise should be measured not only quantitatively (how often did congress compromise) but also qualitatively (what did congress compromises on). While there certainly needs to be more bipartisan cooperation in Washington, there also needs to be red-lines.


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Much Ado About a “Do Nothing Congress”

A recent NYT article cast a gloomy picture for those hoping for a Democratic super-majority after the 2014 Midterm Elections.

History says President Obama should brace for another round of midterm election losses next year — and be grateful for the opportunity.

Unlike presidents who never got the same chance, Mr. Obama is in line to become only the fifth president since Harry S. Truman to serve long enough for a second midterm election, and the possibility that his party might hold or gain ground in Congress in his sixth year in office. But the unhappy record of his two-term predecessors — none of whom gained control of either legislative chamber — offers scant comfort about his prospects.

However, there is reason to believe the Democrats may retake the House. Two forces in particular are working in their favor.

1) The Democratic Party is more popular than the G.O.P (Gallup Poll):

The two parties’ favorability ratings are at the lower end of the range Gallup has measured for each, although the GOP has the lower absolute rating. The Democratic Party’s current favorability rating of 42% is similar to what it was during most of 2010 — a year in which the Democrats lost 63 House seats and majority control in that chamber.

Moderates More Likely to Prefer Democratic Party Over Republican Party

While the two parties rely on their ideological soul mates for support — Republicans depend on conservatives, while Democrats lean on liberals — both parties also need at least some support from the political center to win elections. Self-described moderates are more likely to have a favorable image of the Democratic Party (47%) than of the Republican Party (27%), which may prove problematic for the GOP next year in the congressional elections. It is worth noting, however, that moderates typically lean more Democratic than Republican.

Parties' Favorability, by Self-Reported Ideology, December 2013

The Republican Party can hardly claim to have locked up its support among conservatives, who are as likely to have a favorable (47%) as an unfavorable (46%) image of the GOP. Liberals, by contrast, are more unified in their support for the Democratic Party, with 71% viewing the party favorably.

2) People don’t like a “Do-Nothing” Congress:

Trend: Do you approve or disapprove of the way Congress is handling its job?

And the 113th Congress is a “Do-Nothing” Congress.

This Friday, the 113th Congress will end its 2013 session with a less-than-distinguished title: one of the least productive ever.

Halfway through its term, Congress has passed 56 laws. By comparison, 10 years ago, the 108thCongress passed 504 laws between 2003 and 2004. A decade before, the 103rd passed 473 laws, according to GovTrack, a site that monitors legislation.

The current Congress’s predecessor, the 112th — thought to be the least productive ever — managed to pass 284. The 113th Congress is on track to underperform even that cohort.

The original “Do-Nothing” Congress, the 80th U.S. Congress, enjoyed a Republican super-majority. By the time the 81st Congress was sworn in, Democrats had taken over the majority in both the House and the Senate.

Now, the fact that Congress is currently split–Democrats have the majority in the Senate, while the G.O.P controls the house–paves the way for much more finger-pointing than in the 81st congressional election. The experts believe only 20 something seats are truly “up for grabs”, and the Democrats need to win almost all of them (17) to take a majority in the House. However, given the relative unpopularity of the G.O.P (both among conservatives and moderates), it would appear that Democrats primed to take many of the undecided seats.

Lots of time still remains before the 2014 midterm elections, and the political landscape can change drastically between now and then. If there is one things you can predict in democratic elections, it is unpredictability.

“I don’t think there are any formulas” for midterm election results, said Ken Khachigian, a former Reagan speechwriter. “We underplay the fact that elections are elections with individual candidates.”


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Economic Outlook: “Starve the Beast”, MMT, Debt Sustainability and the Debt Limit

I have, like many an economist, been preoccupied by the possibility of a U.S. debt default. How could our politicians willingly do something that is so obviously detrimental to American and global economic interests? Is there any precedent or historical clue which may shed some light on this phenomenon? It is possible, I would argue, that such a default is the current (and most heinous) manifestation of “starve the beast” political theory:

Starving the beast” is a political strategy employed by American conservatives in order to limit government spending[1][2][3] by cutting taxes in order to deprive the government of revenue in a deliberate effort to force the federal government to reduce spending. The short and medium term effect of the strategy has dramatically increased the United States public debt rather than reduce spending

On July 14, 1978, economist Alan Greenspan gave testimony to the U.S. Finance Committee: “Let us remember that the basic purpose of any tax cut program in today’s environment is to reduce the momentum of expenditure growth by restraining the amount of revenue available and trust that there is a political limit to deficit spending.”[5]

The earliest use of the actual term “starving the beast” to refer to the political-fiscal strategy (as opposed to its conceptual premise) was in a Wall Street Journal article in 1985 where the reporter quoted an unnamed Reagan staffer.[7]

Since 2000

The tax cuts and deficit spending of former US President George W. Bush‘s administration were attempts to “starve the beast.” Bush said in 2001 “so we have the tax relief plan […] that now provides a new kind—a fiscal straightjacket [sic] for Congress. And that’s good for the taxpayers, and it’s incredibly positive news if you’re worried about a federal government that has been growing at a dramatic pace over the past eight years and it has been.”[8]

Historian [Economist] Bruce Bartlett, former domestic policy adviser to President Ronald Reagan, has called Starve the Beast “the most pernicious fiscal doctrine in history”, and blames it for the increase in US government debt since the 1980s.[18]

For a historical look at government revenue and expenditure, please see here. The most useful number (IMO), is the % GDP comparisons.

But what is the connection between “starve the beast” and the “debt limit”? The answer lies in a simple analysis of Modern Monetary Theory:

A pivotal issue in our discussion turns out to be whether the central bank can or should hold the nominal rate of interest on government debt, R, below the rate of growth of nominal GDP, G. (We could frame the discussion in real terms instead by subtracting the rate of inflation, ΔP, from both sides; it makes no difference.) If R is held below G, then essentially any level of the government’s budget deficit is “mathematically sustainable,” a term we have been using to mean that the debt-to-GDP ratio does not grow without limit over time. On the other hand, if R exceeds G, the budget balance must show a primary surplus, on average over the business cycle, to achieve mathematical sustainability of the debt. (See the first of the posts referenced above for a detailed discussion of the conditions for mathematical sustainability.) 

The essential argument of MMT is that if growth rates are greater than interest rates, debt is sustainable and a government can run a budget deficit indefinitely (governments, unlike households, do not die). Japan, with its Debt/GDP ratio almost twice as high as the U.S., is a primary example the difference between debt sustainability versus total debt. Many of Europe’s “trouble countries” have trouble with much lower debt / GDP ratios (than Japan); without control of printing money, they are at the mercy of markets to borrow. These markets have been charging troubled countries a higher “risk premium”, pushing these countries into damaging austerity policies in the face of depressed demand. It is not the level of debt, but the interest that needs to be paid on it, that determines debt sustainability in a MMT model. 

In order to truly starve the beast, it is not enough to deny the U.S. government of tax revenue; the obstructionist must also increase the governments borrowing cost. This is exactly what a debt default would do, lead to higher borrowing costs. In fact, one of the main arguments by liberal economists for stimulus spending–other than the social and economic benefits of employing a substantial portion an idle workers and stimulating demand–is that the cost for doing so is for all intents and purposes the same as if we were running a government surplus! True the Fed can set the interest rate it pays by expanding it’s balance sheet, but this is an extraordinary role for the Fed to use only the most dire liquidity trap, not a viable long-term policy (due to inflationary effects of increasing the money supply when the economy is near or at full capacity).

There is certainly no proof that this is specifically anyone’s agenda. However, the same ideologies are behind “starve the beast” policies are behind holding the debt-limit hostage for fiscal concessions. We have to at least question the motives of these politicians; they are “rational” people, and until now I have heard no rational reason for such an unprecedented default. If the goal is to convince their opponents, who are likely to have Post-Keynesian if not MMT views of political economy, that certain policies are unsustainable, a default is–an irreversible way–to achieve such goals.

As the self-proclaimed party of fiscal responsibility, the GOP is leading America down the road of ballooning interest payments. Interest payments  already make up a substantial portion of total expenditure (8% and growing, twice as much as the federal government spends on education). A default would cause these payments to be substantially bigger, further constricting fiscal space for important social programs. We wouldn’t be getting more for less, or even the same for the same amount, we would receive less services for the same levels of expenditure. It is not fiscally responsible, but then again “starve the beast” and their contemporary “Tea Party” advocates were never really about fiscal responsibility.

Furthermore, follow a debt default the ensuing global recession would greatly raise the unemployment rate, driving up the spending on “automatic stabilizer” welfare programs that would otherwise be trending downwards in tandem with a growing economy.

You may say that no elected official would ever act so heinously and against the interests of the government and the American people; I would say read up on the history of the “starve the beast” political philosophy. It should also be noted that a default does not actually need to pass in order to result in higher borrowing costs / lower growth (making borrowing unsustainable based on a MMT framework); the specter of a default is enough to achieve these goals (the next debt-limit debate is set for February 2014). 


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Economic Outlook: The Do-Nothing-GOP Vows to Do-Nothing

I took particular interest in a recent Politifact article highlighting House Speaker John Boehner’s assessment that “There’s no plan from Senate Democrats or the White House to replace the sequester.” This statement should not seem right to anybody who follows politics, the news, or simply has not been living under a rock for the past few months (years?). Have the democrats really dropped the ball, or is this more political jockeying by the Do-Nothing GOP? Unsurprisingly, it is the latter. The President and Senate democrats have proposed plans, just not the plans their opponents agree on. Politifact gave Boehner’s comment its worst possible rating “Pants on Fire”.

Democrats, both in the White House and Capitol Hill, have proposed alternatives to the sequester that involve cutting bloated programs and closing tax loopholes to raise revenue. The “Sequester”, as most know by now, cuts programs indiscriminately of their importance to overall economic and social security and without taking into consideration whether the program runs efficiently or not. This undesirable result was meant to be undesirable in the hopes of forcing congress into passing a more acceptable deal. Unfortunately, Congress was unable to envision its own incompetence, and the sequester became fiscal policy starting last Friday.  

But how could Boehner openly deny Democrats having offered alternative plans, when they clearly have (you can go on the White House website and “click a prominent button that says “SEE THE PLAN.” It leads to a page titled “A Balanced Plan to Avert the Sequester and Reduce the Deficit.”?”)

The answer given by Boehner’s representative would be comical, if it did not represent such a high ranking U.S. government official:

“A plan must demonstrate it has the ability to pass a chamber of Congress to be worth anything. We’ve twice passed a plan. We’re still waiting for the Senate to pass something, anything,” Buck told PolitiFact in an email.”

So the Do-Nothing-GOP has decided the democrats have not offered an alternative plan because they have made it their party’s goal to strike down any plan the Democrats offer. This sounds more like self-fulfilling economic suicide than two sides working towards an agreement that will work for the American people.

So what does the GOP require in a plan? It requires that tax loopholes that are closed must be met with equal reductions in government spending. In an effort to be “fiscally responsible”, the GOP has taken any proposal that will raise government revenue off the table.

“’Republicans want tax reform. We want to bring rates down for all Americans so that we’ve got a fairer tax code,’ Mr. Boehner said. ‘But to arbitrarily pull out a couple of tax expenditures and to say, ‘Well, we ought to use that to get rid of the sequester.’ Listen, every American knows Washington has a spending problem.’”

Does the U.S. really have a spending problem, or do we have a revenue problem? Let’s take a look at the numbers:

http://research.stlouisfed.org/fred2/graph/fredgraph.png?&id=FYFRGDA188S,FYONGDA188S&scale=Left,Left&range=Max,Max&cosd=1929-01-01,1929-01-01&coed=2012-01-01,2012-01-01&line_color=%230000ff,%23ff0000&link_values=false,false&line_style=Solid,Solid&mark_type=NONE,NONE&mw=4,4&lw=1,1&ost=-99999,-99999&oet=99999,99999&mma=0,0&fml=a,a&fq=Annual,Annual&fam=avg,avg&fgst=lin,lin&transformation=lin,lin&vintage_date=2013-03-06,2013-03-06&revision_date=2013-03-06,2013-03-06

The blue line represents Federal government receipts (revenue), the red line represents Federal government outlays (spending). A number of interesting takeaways from this graph:

1)      The U.S. was running a budget surplus until Bush gave that surplus away in the form of tax breaks (notice the blue line sharply going down around 2000) and spending on the “war on terror” (notice how the red line goes up when around the same time period).

2)      Federal government receipts are at their lowest point since the 1960s. This is partially due to Bush Era tax cuts (which have expired for the wealthiest Americans thanks to “Fiscal Cliff” negotiations, which is probably what the current small uptick represents) and partially due to exploitation of tax loopholes (and other forms of tax evasion, such as moving profits abroad).

3)      Government spending peaked during the American Recovery and Reinvestment Act of 2009, and has since been on the decline since.

Government spending is supposed to rise during a recession, the only reason this is a problem is because the surplus secured under President Clinton was squandered during a period of economic prosperity by President Bush. Instead of pursuing counter-cyclical fiscal policy, (save up during the good times to spend during the bad times) Bush did the opposite. Therefore, we have had to rely on deficit spending instead of spending out of a “rainy day fund”. While not exact science, if government receipts had stayed at Clinton-era levels, it appears our deficit would be about half of what it currently is (around 40% of GDP instead of 80%).

In an ideal world, we would be able to pass another stimulus program to jump-start the economy and reduce unemployment. As interest rates remain low, the government could worry about paying back this deficit once the economy is producing at its full potential. The deficit is a manufactured problem, a legacy of “starve-the-beast” fiscal policy championed by the GOP. The problem is that starve-the-beast does not work, you can reduce the amount of resources the government has, but you cannot reduce the programs people rely on to survive (especially not during times of high unemployment). What you get instead is a large government deficit.

A balanced approach to deficit reduction would be reasonable during healthy economic times. In the current economic climate, however, the red line will continue to come down on its own as the economy recovers and less people rely on entitlement programs. The blue line is the one that requires government action.

But Obama, ever the centrist, has tried to find a mixed approach of revenue increases and spending cuts that have a chance of passing a House vote. But it seems that the more Obama offers, the more the GOP demands:

“He had written a piece suggesting that if only Republicans knew how much Obama has been willing to offer, they might be willing to make a deal. Jonathan Chait set him straight, informing him that no matter what Obama put on the table, Republicans would find a way to say that it’s not enough. And sure enough, a Twitter exchange lets Klein watch that process in real time, as a top Republican consultant, confronted with evidence that Obama has already conceded what he said was all that was needed, keeps adding more demands.

So Klein admits that Republicans just don’t want to make a deal. Their objections to the deals on the table aren’t sincere; if convinced that Obama has met their demands, they just make more demands.”

The GOP has no interest in getting a deal done if that deal involves raising revenues. This is an absurd position, as government revenue is at its lowest point in decades. A balanced approach to avoiding the “Sequester” is not what the doctor ordered; fiscal stimulus and greater government revenue is the optimal fiscal policy for the American public. But the idea that we have a spending problem, and not a revenue problem, is wrong. A balanced approach is still better than the alternative, but the GOP is refusing to consider even a balanced plan to end the Sequester.

By refusing to consider any deal increasing revenue, the GOP has doubled down on its “Do-Nothing” approach to governance, to the detriment of the American people and American economy. The GOP manufactured this deficit with “starve-the-beast” fiscal policy, now it is manufacturing a need to reform entitlement programs NOW (these are long term issues, while the Sequester and stubbornly high unemployment are immediate problems that are not being addressed). 

The GOP is the party of the 1%. and the 1% are not being hurt as badly as the rest of us by the Sequester, so why should the GOP budge if it’s constituents are happy? Hopefully in 2014 the GOP receives 1% of the seats in Congress; representation based on those it truly serves. It has become clear that the Democrats need a complete majority in the Federal government if there is any hope of reversing the high unemployment and inequality and low levels of social mobility that have come to define contemporary America.

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