By Bill Black, the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. Originally published at New Economic Perspectives
Representative Nancy Pelosi has just written the latest effort by a prominent Democrat to bash Republicans for the high crime of not being financially illiterate. The Republicans are frequently financially illiterate on budget issues and they bash Democrats for the high crime of not being financially illiterate. The leaders of both parties share the hypocrisy of bashing the rival party for supporting budgetary stimulus in circumstances in which stimulus is vital. Particular forms of budgetary stimulus can be simultaneously desirable (relative to austerity) and inferior relative to alternative forms of budgetary stimulus. The Republican‘s favored form of budgetary stimulus – large tax cuts for the wealthy – is a remarkably inefficient means of providing stimulus that makes income inequality worse. Those two points are the correct bases for criticizing their proposed tax cuts. Far too many Democrats, however, cannot pass up the political opportunity to bash the Republicans for supporting stimulus when further stimulus is vital. When Democrats like Pelosi launch these myth-based political attacks on Republican stimulus programs they help to enshrine economically illiterate austerity policies that make it even harder for Democrats to make the case for stimulus even when it is essential.
THE long-endangered Republican Deficit Hawk is now extinct.
In December, the Republican Congress passed into law a huge permanent package of tax measures as part of the tax and spending deal. However, Republicans refused to pay for the legislation, thereby adding a thunderous $2 trillion to the deficit over the next two decades, according to an estimate from the nonpartisan Committee for a Responsible Federal Budget [CRFB].
The title of her article is “Shouldn’t Congress Tell Us How We’ll Pay for Tax Cuts?” The Republican (and Democratic “blue dog”) “deficit hawks” inflicted great harm on our Nation by preventing the larger stimulus program that would have led to a far quicker and stronger economic recovery. They used the same rhetoric that Pelosi now uses. Indeed, Pelosi’s misleading rhetoric about “adding a thunderous $2 trillion to the deficit” (over 20 years) sounds exactly like Donald Trump’s misleading rhetoric in his campaign speeches.
The CRFB is a group composed of extreme deficit hawks extolling “mindful austerity.” It spawned the notorious Simpson-Bowles group and the even more odious Campaign to Fix the Debt. Both of these groups were exposed long ago as fronts for Pete Peterson, the Wall Street billionaire who has dedicated his life to destroying the safety net and privatizing Social Security. The CRFB is “nonpartisan” solely in the sense that it represents the interests of Wall Street CEOs – whose great dream is the hundreds of billions of dollars of additional fees their firms would receive were Social Security to be privatized. There are, of course, “New Democrats” like the Clintons who have devoted their careers to serving Wall Street. But Peterson’s front groups need to be described accurately as pro-Wall Street rather than “nonpartisan.” They exist to spread myths about the supposed virtues of austerity and the supposed depravity of budgetary stimulus – hyper-inflation is always just about to break out (as interest rates and inflation fall).
Pelosi then goes full-Pete Peterson in the remainder of her myth-filled article.
[T]he cost of this tax package is casting a long shadow over America’s future, threatening to crowd out essential investments for hard-working American families.
Why isn’t there a rule requiring lawmakers to account for new expenditures by finding offsetting budget cuts or revenue increases when Congress enacts them? In fact, there is.
In 1982, George Miller, a progressive Democratic Congressman from California, had a simple but transformative idea to cut the deficit and restore fiscal responsibility to Washington, which he called pay as you go, or paygo. Under this rule, when Congress wanted to pass a new law that would increase the deficit, legislators would have to pay for the cost with matching revenue increases or spending cuts.
Paygo still allows for flexibility in overall discretionary budget increases and in times of emergency, but it forces lawmakers to account for the impact of laws that have consequences for federal revenues or mandatory spending.
It’s so common-sense that most people would be surprised it hasn’t always been the rule. After all, even the priorities we want and need must still be paid for.
No, “paygo” is not “common-sense” – it is based on an economic myth that our nation has to “pay for” budget increases or tax reductions just like a private household. A nation like the U.S. with a sovereign currency that borrows in that currency and allows that currency to “float” is nothing like a household when it comes to budget. No, paygo does not provide proper “flexibility in overall discretionary budget increases and in times of emergency.” Its constraints prevent adequate stimulus and would produce recurrent recessions and long-term reductions in economic growth. Paygo is a disaster that prevents adequate funding of social programs. No, paygo does not create “fiscal responsibility” – it typically does the opposite. The failure to adopt a much larger federal budgetary stimulus plan was fiscally irresponsible and inhumane.
No, the Republican’s proposed tax cuts are not “casting a long shadow over America’s future.” Pelosi is spreading the same myths that Republican deficit hawks spread about hyper-inflation being just about to break out (while interest rates are actually only barely above zero). No, the tax cuts will not “crowd out” “essential investments.” The correct argument, and the far better stimulus, would be to increase government spending now on “essential investments” that are not and will not be made by the private sector. But that correct argument is impossible to make under Pelosi’s myths.
Pelosi gets the economics all wrong in the effort to score political points against the Republicans.
President Clinton handed his successor, President George W. Bush, a projected $5.6 trillion 10-year budget surplus and eight years of economic expansion. But Republicans quickly abandoned any measure of fiscal responsibility and began a catastrophic spending spree. The completely unpaid-for tax cuts, including huge tax cuts for the wealthy in 2001, and two completely unpaid-for wars shattered our multitrillion-dollar surplus and created a vast new deficit.
After President Bush left the White House, President Obama was faced with a staggering $1.2 trillion projected budget deficit in his first year alone, according to estimates from the Congressional Budget Office, and an economy in free fall. Under President Obama, the paygo law was reinstated, and we’ve brought the annual deficit from $1.2 trillion when President Obama took office to $544 billion today.
Clinton’s budget surpluses did not constitute “fiscal responsibility.” They were wildly imprudent for a Nation with a huge trade deficit. For a government with a sovereign currency, the budget surplus or deficit is not a matter of morality. A surplus is not “virtuous” and a deficit is not irresponsible. Depending on the circumstances, a deficit or a surplus may be desirable. Large surpluses are, throughout U.S. history, very likely to be the preludes to severe recessions or Depressions. Clinton’s budget surpluses were generated in substantial part by twin bubbles in the stock and real estate markets.
Bush’s deficits, which were small in historical and international terms prior to the Great Recession, did not create the Great Recession. The Great Recession caused what Pelosi falsely labels the “staggering $1.2 projected budget deficit” for 2009. That projected deficit was far too small rather than “staggering[ly]” too large given the depth of the Great Recession. A much larger deficit in 2009 (via a much larger fiscal stimulus) would have produced a far quicker and stronger economic recovery. President Obama’s action in reinstating paygo was one of the harmful actions he took that prematurely reduced fiscal stimulus. Obama’s endorsement of paygo weakened the recovery and made it far harder to increase vital spending on infrastructure and training. We have reduced the federal debt too rapidly and by too much. This slowed the pace and the breadth of the economic recovery.
Pelosi admits in her op ed that paygo made it exceptionally difficult – even seven years too late – to provide support for the 9/11 first responders. That is a national disgrace, as is her call: “To contain and reduce the national debt, we must return to a simple rule called pay as you go.” No, we need to return to non-simplistic, real economics, and stop spreading simplistic myths about money and federal deficits spread by Wall Street vultures eager to profit from the destruction of the safety net.