It’s been nearly 35 years since we’ve had a “tax and spend” political party. During the 1970s, the Democrats gave up fighting the Republicans about the “tax and spend” label, and the Carter Administration tried to escape from that charge by making very serious attempts to balance the budget. During the 1980s, more and more Democrats emphasized their concern for reducing deficits and balancing budgets as a way of distinguishing themselves from the Reagan Administration’s unprecedented peacetime deficits. This didn’t work for them during Reagan’s time, but they finally were able to use the balanced budget old-time religion game to get George Bush to violate his no new taxes pledge, which both contributed to the Bush recession and, as a further consequence, was a big reason why Bill Clinton was elected.
Clinton, of course, embraced the philosophy of deficit neutrality. He relied primarily on credit expansions in the private sector to drive the economy, raised taxes on higher income people, and basked in the glory of unexpected budget surpluses in the last four years of his tenure. Clinton’s surpluses withdrew demand from the private economy, and were the proximate cause, along with the collapse of “the dot com boom,” in creating the recession at the very end of Clinton’s term. During the Bush Administration, the Democrats continued to attack the Republicans for the Bush tax cuts from a deficit neutrality perspective, while preparing to run against them in 2004, 2006, and 2008.
And Barack Obama, even after the crash of 2008, ran on a promise of fiscal responsibility in the White House, while also promising to end “The Great Recession.” Since taking office, he’s shown a reluctance to spend more in a way that isn’t deficit neutral. Yes, the stimulus package was pure deficit spending. But it was about half the size needed to end the recession decisively. And, in addition, the President’s health care reform was limited to $800 Billion over ten years, and the Democrats in Congress worked hard to see that it was scored by CBO as likely to have a surplus over a 10 year period. In addition, the President is trying to end the Bush tax cuts for higher income people; everything else he’s proposing that will cost money is apparently shaped with deficit neutrality in mind, while, finally, his “Catfood Commission” is apparently going to recommend deep cuts in entitlements, along with some tax increases, after the election.
In short, the Democrats haven’t been the “tax and spend” Party for close to 35 years now. And the Republicans have mostly been a “spend and spend” Party, though not, of course, on the social safety net, education, infrastructure, or in areas of other public need, but rather on various wars and the military-industrial complex. So, what’s happened to America without a “tax and spend Party” that will do a lot of Federal deficit spending on domestic needs, while complementing that spending with a progressive taxation system with high marginal tax rates? . . .
Before I answer that question, let’s consider what progressive taxation and Federal Spending do when applied on a sustained basis. Put simply, progressive taxation, supplemented by high inheritance taxes tends to level the paying field of economic life so that the advantages of inherited wealth are reduced, including the greater political influence of wealthy people on the political process. As for Federal spending, its role can be better understood by looking at the Sectoral Balance Model accounting identity I’ve referred to before. It is:
Private Sector Surplus – the Current Account Balance – the Government Deficit = Zero.
In a country like the US, with a fiat currency system, floating exchange rates, no debts in any other currency, and a negative current account balance, the identity tells us that the only way we can have a private sector surplus (private sector savings) is for the Government sector to run a deficit. That deficit must be great enough to balance the sum of the balance of payments deficit, and the total amount of private savings. So, in general, the more deficit spending by the Government, the more savings by the private sector, other things being equal. For private savings in the aggregate to increase over time in a situation like this, Government deficit spending also must continue.
In addition to supporting and increasing private savings, Government deficit spending, when directed toward domestic needs like infrastructure, education, innovation, and other human needs, creates a structure of public goods that supports economic activity and growth, without at the same time reducing demand through taxation. The consequence of constraining Government deficit spending over a long period is declining shared “commons” capital that all of us can use to facilitate our economic activity.
On the other hand, if Government spending is undertaken without deficits, then the accounting identity tells us that the tax revenue raised, reduces aggregate demand in the private sector by reducing the stock of private savings and investment. To insist on fully financing Government spending with taxation, is to insist on placing private and public spending into an unnecessary competition, and an almost inevitable starving of the public sector. So, if you want a vibrant public sector accumulating the public goods needed by the private sector, in a country like the United States today, then you have to have that happen through deficit spending because it almost certainly won’t happen in a nation importing goods, saving money, and insisting on a balanced, or near balanced budget.
Since the 1970s, with the disappearance of the “tax and spend” Democrats of the 1933 – 1975 period, and their transformation to the deficit neutrality-yearning Democrats of today, we have seen an over-riding long-term trend toward increasing wealth and income inequality, accompanied by another long-term trend of declining savings. In addition, we have also seen a slowing of economic growth, and a deteriorating situation in public infrastructure, education, and America’s wealth in public goods more generally. In fact, these trends are so pronounced that the idea of an increasingly third world America has become commonplace, and the possibility that America is evolving into a hereditary plutocracy of political, entertainment, business, educational, and media elites, destroying our political democracy in the process, is becoming increasingly probable.
These trends have occurred for many reasons and I won’t review all of them here. But one important reason for them is that the Democrats ceased to believe in progressive “taxing and spending,” and ran away from that characterization of their Party in the 1970s rather than defending it. During FDR’s second Administration Harry Hopkins may have said:
”We will spend and spend, and tax and tax, and elect and elect.”
I don’t know whether the Democratic Party will ever be able to bring itself to go back to that, penetrated as it now is by “blue dogs,” by DLC Democrats, and by other throwbacks who seem to think their patron saint is Herbert Hoover, rather than Franklin Roosevelt, and who hold the entirely mistaken view that a Government sovereign in its own currency can have solvency problems. But what I do know is that America badly needs a “tax and spend” Party once again.
It needs a Party and a Government that will run large enough deficits to add enough to private savings to overcome the”overhang” of debt left by the crash of 2008 and “the Great Recession.” It needs a Party and a Government that will spend enough to ensure demand for the private sector, so that businesses will invest knowing that demand is there. It needs a Party and a Government that will restore the growth rates of the post-war period through the end of the 1970s. It needs a Party and a Government that will renew our stock of public goods, and the educational and skill levels of our work force. It needs a Party and a Government that will aim for and accomplish full employment, where that means no under-employment and unemployment of 2%. Finally, it needs a Party that will level the playing field in American society to an appreciable extent, by taxing away excessive income and accumulations of wealth, because it recognizes that such accumulations lead to the inordinate influence of wealthy individuals in every area of society including the political, and results ultimately in lack of social mobility, the rise of plutocracy and the death of democracy.
In short, America badly needs a “tax and spend” Party again. That can be the Democrats, or it can be some third Party not yet formed and the Democrats can then go the way of the Whigs, because no one needs them to be a second corporate party. It doesn’t matter which way it happens; but one way or the other it had better happen, because only a “tax and spend” Party can lead America back to the promise of freedom, equality of opportunity, and real political democracy.