“In my opinion, we are past the point where tax cuts can fix what ails us. Large tax increases will be necessary to pay for all the promises that have been made. Instead of opposing them entirely, conservatives should use their insights to design a new tax system better able to raise higher revenues at the least possible cost in terms of economic growth and freedom.” That is Bruce Bartlett in his book The New American Economy. It’s a surprising message coming from a leading supply-side advocate of the 1980s, though it won’t shock anyone who has followed Bartlett’s print and online writings over the past few years.
Bartlett argues that successful economic policies tend to be effective only in a specific set of circumstances. Their success, however, encourages supporters to believe their applicability is universal. Eventually they get overused, prove counterproductive, fall out of favor, and get replaced by new ideas.
This, according to Bartlett, is the story of both Keynesianism and supply-side economics. Keynes was a pragmatist. His recommendation to use fiscal policy to stimulate the economy was formulated in response to the conditions of the Great Depression. It worked. But then, in Bartlett’s telling, it came to be viewed as an appropriate remedy for all economic downturns. By the 1970s overuse of fiscal stimulus contributed to inflation without reducing unemployment. This led to its abandonment by many economists and policy makers.
Bartlett tells a parallel tale about supply-side economics. Its core thesis is that if marginal tax rates are too high, they discourage innovation, investment, and work effort. Bartlett says this was the situation in the 1970s. The Reagan administration’s sharp reduction of marginal rates in its 1981 and 1986 tax reforms was therefore effective medicine for the American economy. It “laid the foundation for higher real growth well into the 1990s.” But like the use of budget deficits to fight recession, the supply-side strategy of reducing tax rates came to be seen by its backers as an all-purpose cure — the appropriate tonic irrespective of the economy’s ailment.
The chief economic problem we now face, in Bartlett’s view, is not high marginal tax rates. It is the aging of baby boomers to whom we have made Medicare and Social Security commitments. Absent “massive and politically impossible cuts,” this will cause federal government expenditures to rise from 20% of GDP to around 30% over the coming generation. Supply-side dogma leaves Republicans ill-prepared for this challenge. “When the crunch comes and the need for a major increase in revenue becomes overwhelming,” says Bartlett, “I expect that Republicans will refuse to participate in the process. If Democrats have to raise taxes with no bipartisan support, then they will have no choice but to cater to the demands of their party’s most liberal wing. This will mean higher rates on businesses and entrepreneurs, and soak-the-rich policies that would make Franklin D. Roosevelt blush.”
A better result, according to Bartlett, would be to bring government revenues into line with projected expenditures via a value-added tax (VAT), a type of consumption tax. Heavy use of VATs is a key reason, he says, why “many European countries have tax/GDP ratios far higher than here without suffering particularly ill effects. They may not be growing as fast as they would if taxes and spending were lower, but neither are their standards of living significantly below those of the United States. Even strenuous efforts to show that Europeans are poorer than Americans show that the differences are merely trivial.”
I agree with a good bit of what Bartlett says in the book, and I’m particularly sympathetic to this diagnosis and prescription (see here and here). It’s a long way from Barry Goldwater, Milton Friedman, and Ronald Reagan.
I wish Bartlett had gone further. If modern conservatism is by necessity “big-government” conservatism, what principles should guide it? If conservatives must give up the goal of rolling back the welfare state, if they must acquiesce to government provision of generous cushions and supports, what should they aim for in economic and social policy? David Brooks, Ross Douthat and Reihan Salam, Will Wilkinson, Ron Haskins and Isabell Sawhill, and others have weighed in on this question. I’d be interested to know Bartlett’s take.
Some likely candidates:
A tax system conducive to entrepreneurship, investment, and work (Bartlett’s emphasis)
Employment incentives for able working-age adults
Enhancement of individual opportunity: early intervention, improvements to K-12 schools
Limited regulation of product and labor markets
Competition and choice in public services: charter schools, vouchers for schools and child care, maybe even a public option in health insurance
Decentralized administration of public services to ensure attentiveness to local conditions
Privatization of services where possible
Benefits and services targeted at the most needy rather than the middle class
Data. Many conservatives believe the poor are better off — more affluent and upwardly mobile — than government statistics and social scientists’ analyses tend to suggest. Why not allocate money for a large high-quality panel survey (something like a PSID on steroids) that will allow us to better assess this claim?
As it happens, we have a real-world illustration, albeit on a small scale, of what much of this — all of it except heavy privatization and targeting — looks like. It looks like this.