Do Republicans Really Care About the Deficit?
By JARED BERNSTEIN
Though America really doesn’t need a tax cut — demographic pressures alone suggest the need for more, not less, future revenues — President Trump and the Republican majority want one. But they don’t want to pay for it, which means the budget deficit is going to rise. Based on what we’ve seen so far, the increase in the deficit could be at least $1.5 trillion over 10 years.
Perhaps this surprises you, as you’ve long heard Republicans cry about deficits and debt. But any such tears are of the crocodile variety. When it comes to increasing the budget deficit, the impact of this tax plan is no different from any of their others.
Back in 2015, I testified at a hearing on these issues before the House Budget Committee. One after another, Republican members on the committee denounced rising debt levels. Why then, I asked, do you want to cut taxes? Their answer: It’s spending, not tax cuts, that increases the deficit.
That, of course, is crazy. I don’t mean it’s bad economics, or lousy fiscal policy. I mean it’s disconnected from reality, or more precisely, from arithmetic. You can, and they do, make arguments about how growth effects will make up the difference, despite the complete lack of empirical evidence to support such claims. Indeed, rumor is that Mr. Trump has his economics team ginning up a “dynamic growth model” that will spit out phony growth effects offsetting much of the cost of their tax cut.
Don’t believe it. Our fiscal history on this point is clear: Cutting taxes loses revenues, which, unless offset by higher taxes elsewhere or spending cuts, increases the budget deficit, which in turn raises the debt. (The debt is the sum of all past deficits minus past surpluses.)
In fact, the Republican budget hawk is a rare bird. There are, instead, flocks of chicken hawks who use the deficit argument to block spending, promote fiscal austerity, and small government, conveniently tossing deficit concerns aside when it comes to tax cuts.
But deficits don’t seem to hurt the economy. So, what’s the problem?
Economists’ main argument against budget deficits has long been that when the government borrows, it crowds out private-sector borrowing, thus misallocating resources and increasing interest rates. Though this dynamic is certainly possible in full-employment economies, we’ve recently sustained both budget deficits and low interest rates for many years running, which is why debt service costs as a share of the economy remain historically low.
The pattern isn’t surprising when you consider how much the Federal Reserve has been in the mix, holding its benchmark interest rate near zero for most of the last 10 years (it now stands at 1.25 percent). In addition, global financial flows have accelerated in recent years, and the United States has been a prime destination for that money. That’s increased the supply of loanable funds and pushed down rates regardless of the magnitude of the federal budget deficit. Meanwhile, we’ve been experiencing “secular stagnation” — persistently weak demand, even in recoveries like the one we’ve seen over the last several years — which is associated with higher savings, less investment (think of firms sitting on their earnings or buying back shares versus reinvesting) and lower interest rates.
Do these forces mean deficits don’t matter? Not at all. The problem with structural deficits — ones that go up even in good times — is that they reveal that we’re unwilling to raise the necessary revenues to support the government we want and need. This enables those who whose goal is to shrink government to point to deficits and debt as their proof that we can’t afford it, whatever “it” is, except when “it” is tax cuts.
Such faux hawks don’t hate budget deficits at all. To the contrary, they quite like them, because they provide scary-sounding numbers they can point to as the reason government can’t afford to shore up Social Security and Medicare. “Invest in kids, infrastructure, human capital?” they say. “Believe me, I wish we could. But have you seen the deficit?”
This is a big part of their whole tax cut play. When the offsetting growth effects fail to appear, the tax cutters are not going to apologize for their shortsightedness and agree to raise taxes back to at least where they were. They’ll argue that in the face of these unforeseen deficits, our only course of action is to cut spending.
Mr. Trump’s benighted tax cuts are thus a double whammy to economically vulnerable families. They get little from the cuts themselves, because they’re so regressive. Then, these households get dinged again by subsequent spending cuts to programs on which they depend. According to one study, low-income families get a tiny boost — less than 1 percent — from Mr. Trump’s plan, but once you factor in spending cuts, their income falls by about 10 percent.
We don’t need a tax cut that will lead to higher deficits that will then be used as a rationale for ever more spending cuts. We need a functional government that raises ample revenues to meet the challenges we face, including an aging population, climate change (and the intense disasters it increasingly causes), inequality, poverty and the winds of geopolitical upheaval.