Deficits, Surplus, Government Spending, Great Depression, Great Recession, Demand, Supply, Economics, Investment, Economic Theory, Budgets, Balanced, Tax Reform, Paul Ryan, Congress, Congressional Republicans, Trump, Donald Trump, Tax Cuts

The Real Battle Behind Tax Reform

The Brood: Congressional Republicans are mulling over radically conservative tax cuts that look poised to increase the deficit. A reader asks — How do we get back to compromising over, and balancing, the national budget?

I’m afraid that I don’t have a satisfying answer, because until some very fundamental aspects of American politics change, there is no compromise. Those aspects include, but aren’t limited to, money in politics, partisan gerrymandering aided by the precision of computing, and the radicalization of voters driven by both systematic disinformation, and social media algorithms that make money off of confirming our biases.

All great fodder for separate articles. In this article, it’s probably best to address what the ideologies are in Congress, and what constituents are driving those ideologies in there in the first place.

Liberals & Progressives

For Liberals and Progressives, budgets deficits are nothing to fear. Budget deficits are a normal part of the life of any government investing in its economy, so long as the debt they cause is financed and/or serviceable. In fact, budget deficits can be a good thing, as explained by everyone’s favorite early 20th century economist John Maynard Keynes in an open letter to FDR, explaining that debt-financed public expenditure could increase employment:

“…[Deficit spending in a crisis] is the only sure means of securing quickly a rising output at rising prices. That is why a war has always caused intense industrial activity. In the past orthodox finance has regarded war as the only legitimate excuse [for deficit spending]. You, Mr. President, having cast off such fetters, are free to engage in the interests of peace and prosperity the technique which hitherto has only been allowed to serve the purposes of war and destruction.”

John Maynard Keynes, Keynesian, Deficits, Surplus, Government Spending, FDR, Great Depression, Great Recession, Demand, Supply, Economics, Investment, Economic Theory, Budgets, Balanced
Keynes. Great Thinker. Terrible Mustache. (Image Source)

At the time, that was pretty radical. New Deal policies, and later WW2 spending, ballooned the National debt to a whopping 112% of GDP. But the investments paid off, leading to 30 years of prosperity.

Today, its still pretty radical. Just go back and read what Republicans said about the 2009 Stimulus Package, which tried to stave off Depression through spending, much like the New Deal. They wanted to cut taxes to stave off Depression.

Why cut taxes? Well, there’s two schools of conservative thought on this, one that is concerned with debt reduction, and one that is concerned with government spending.

Fiscal Conservatives

This point of view reflects an awful lot of folks who believe that there is a comparison to be made between a government’s checkbook and a household’s checkbook. We ought not live above our means, because as the deficit rises, so does our debt, and so does our interest payment. If we can’t service our debts, we go bankrupt or default. So naturally, our budgets should always be balanced. Pretty straightforward.

Deficits, Surplus, Government Spending, FDR, Great Depression, Great Recession, Demand, Supply, Economics, Investment, Economic Theory, Budgets, Balanced, Debt, Cieling, Congress, Cliff, Shutdown
How many fiscal conservatives view the climbing national debt. Much of the concern over the financing of the national debt is overblown, but may become legitimate if a unified plan to finance it is not passed for years on end. (Image Source)

There’s a couple of weaknesses in this argument, largely surrounding the fact that governments are almost nothing like households. The national government can service extremely high levels of debt because it can raise taxes, cut loopholes, adjust monetary policy, or simply print new money to pay debts. Going into deficit spending can also save the economy in trouble, as Keynes pointed out, making a mandatory balanced budget a liability.

The strength in this argument is that it suddenly becomes pertinent the moment the government stops being able to service its debts.

This could happen because of:

  • A recession, which eliminates tax revenues needed to service the debt.
  • High-level deficit spending in boom-time economies drive up interest rates and inflation which weaken both investment markets and wages, which eats at tax revenue. (This is not happening today, in what is, for most Americans, a very tepid recovery from 2008.)
  • The government goes out of its way to create budgets which don’t service its debts. (Which, I argue, is what is happening today.)

Radical Conservatives

Deficits, Surplus, Government Spending, FDR, Great Depression, Great Recession, Demand, Supply, Economics, Investment, Economic Theory, Budgets, Balanced, Milton Friedman, Austrian School, Chicago School, libertarian
Milton Friedman, mastermind behind anti-government economic theory. Economists sure are a handsome bunch, aren’t they? (Image Source)

The second school of thought, which the modern Republican Party follows, is the ideology of Milton Friedman, who popularized the idea the government spending is inherently less efficient, and thus bad, for the economy. If you are a believer of this philosophy, as Paul Ryan is, then the natural answer is to cut any and all government spending, or transfer other functions to the private sector.

If we focus solely on the budget, its feasible that if taxes and spending were cut commensurately, and in tandem, the deficit would disappear, and the budget would be balanced. It’s not entirely clear that that’s a good thing on its own. The effects on the economy of these policies would be a disaster, and, you guessed it, a great subject for a future article.

So why isn’t the budget balanced?

If you’re like me, you might read the previous summaries and find yourself confused. Don’t each and all of these ideologies seek to finance the debt? If that’s the case, how can we be running a deficit and increasing the debt?

The reason is because when you put these ideologies in a room, in real life, discrepancies between their ideas start to show. Especially when you take into account their constituencies. The Republican base loves the fiscally conservative line on balanced budgets and the radical conservative line on a smaller government. But they also identify with the military strongly, and want to increase spending as a way to support them. That is to say, they want to finance the military through debt. Sensing this friction, but unwilling to risk treating their constituents like adults, their leaders tell them they can have it both ways.

Deficits, Surplus, Government Spending, Bush, Iraq War, Afghanistan, War on Terror, Great Depression, Great Recession, Demand, Supply, Economics, Investment, Economic Theory, Budgets, Balanced, Bush Tax Cuts, Military Spending
“They definitely won’t notice the deficit if I hide it with tanks and explosions. Pew pew.” (Image Source)

Progressives, for their part, are unwilling to cut welfare spending, which is set to balloon in coming years as the Baby Boomers enter their twilight years, because they worry that cutting the social safety net will needlessly throw millions of people into harm’s way. Instead, they propose raising taxes and cutting loopholes in the tax code to pay for current and future expenditures.

Medicare, Medicaid, Baby Boomers, Entitlements, Demographics, Demographic shifts, 65 and over, Population, Deficits, Surplus, Government Spending, FDR, Great Depression, Great Recession, Demand, Supply, Economics, Investment, Economic Theory, Budgets, Balanced
As the Baby Boom gets old, it will increase spending on welfare and entitlements all over the world. In the United States, much of this will be borne through Medicaid, which, unless another plan is developed, would likely be paid through debt. (Image Source)

There would be a path towards reasonable budgeting if progressives and actual fiscal conservatives shared the government. But when government is shared between progressives, who believe the government is a force for good, and radical conservatives, who believe the government is an irredeemable force for waste that must be eliminated until it “can be drowned in a bathtub“, there is not much room for compromise.

Nor should there be, in my opinion. Not on this particular issue, on the very existence of government. We’re in the middle of a soul-searching national question. Do we believe self-government is a force for good? Or do we believe self-government itself “is the problem”? We won’t be balancing any budgets until we become all of one thing, or all of the other.

Do you see a middle path to compromise that I don’t? How do you think the election of Donald Trump has affected this debate on taxes? Do Americans really care about the deficit? Comment and share your thoughts!
Follow to get the next brooding question post right to your email, and comment below to suggest topics for future brooding.
Written and edited by Dylan Welch, co-host and creator of the Municipals podcast.

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