Saturday, May 1, 2021

Joe Did What? Not Deficit Hawkery.


Bathtub boats, via Walmart.

So, as promised earlier in the week, to the Biden program: one reassuring thing we've learned over the pandemic year is that the federal government has a lot of fiscal and financial tools for dealing with an out-of-the-blue emergency. We may not be totally able to rely on the people, in Congress, in the White House, at the Fed, but the tools are really there—we don't need to devise a whole new system, the way the Union did (and the Confederacy failed to do) at the outset of the Civil War. The Federal Reserve Bank can keep interest rates near zero for years at a time, it seems, and Treasury can borrow more or less unlimited funds to deal with it, if Congress allows them to. And indeed, they've borrowed $4.3 trillion for Covid relief since March 2020, the last $1.9-trillion tranche signed by President Joe Biden, in a bill passed without a single Republican vote.

Which is a sign that Democrats may not be simply reverting "back to the days of paygo politics," as David Dayen complains, when they propose they propose some $4 trillion in tax hikes, all of it on the top 0.3% earners and on corporations, to "pay for" the planned new spending of the American Jobs Plan and American Families Plan:

“So, how do we pay for my Jobs and Family Plan?  I made it clear, we can do it without increasing the deficits,” Biden said last night. “What I propose is fair, fiscally responsible, and it raises revenue to pay for the plans I have proposed.” This was in a section where Biden attacked trickle-down economics, but even there, he condemned Trump for adding “$2 trillion to the deficit” with his tax cuts.

This is not limited to Biden himself. Here’s White House adviser Karine Jean-Pierre saying we have to pay for the plan and “not put the burden on the American people.” Council of Economic Advisers member Jared Bernstein has consistently made appearances touting how the deficit will not increase. There’s just no question that this is a preoccupation of the White House. In fact, if you go back to the campaign, this was the plan: emergency funding to rescue the country, and then back to the days of paygo politics.

That's an extremely limited view of what the tax proposals are all about, for starters. Biden himself devoted a lot more words in the speech to the project of reforming the tax system so that those who profit the most from that spending pay their "fair share":

I will not impose any tax increases on people making less than $400,000 a year. It’s time for corporate America and the wealthiest 1% of Americans to pay their fair share. Just pay their fair share.

A recent study shows that 55 of the nation’s biggest corporations paid zero in federal income tax last year. No federal taxes on more than $40 billion in profits. A lot of companies evade taxes through tax havens from Switzerland to Bermuda to the Cayman Islands. And they benefit from tax loopholes and deductions that allow for offshoring jobs and shifting profits overseas. That’s not right.

We’re going to reform corporate taxes so they pay their fair share – and help pay for the public investments their businesses will benefit from. And, we’re going to reward work, not wealth.

And that too was part of the campaign, the Elizabeth Warren part. Tax fairness, and tax progressivity, reversing the 2017 giveaway to the superrich and ending the Warren Buffett paradox in which he gets an easier rate than his secretary, are an essential part of the Biden message, and a hugely popular one too. If nothing else, it's good politics, accomplishing things people really want, while shutting up the media and their litany of "how will you pay for it"?

So the question Dayen should be asking is whether it's legitimate to make this connection  between fixing the tax system and fixing the physical infrastructure and "human infrastructure" systems. He's not going to object to the tax reform, I don't think. He's just going to object to the rhetoric of putting it together with the spending, which reinforces a popular notion he doesn't like, that "deficits are bad".

Which I think, in the first place, is kind of dumb. If "deficits are bad" is a stupid, reductive slogan, and it is, then so is "deficits are good". Nobody in the Biden camp is complaining about the $4.3 trillion dollars we added to the 2020 and 2021 deficits so far, but they are suggesting it might be a good idea not to add another $4 trillion when they could raise the money by taxing the rich instead. Sometimes a deficit is what you want, sometimes it's not.

The simplest issue is the one of interest rates. The US government can borrow right now more or less for free, because interest rates have been kept so low that it just doesn't cost anything. When the rates are higher, the government pays a premium and bond buyers make a profit, and who are the buyers? Rich people, hedging investors, foreign governments. All the money in the American Rescue Plan is borrowed now; the American Jobs Act stretches out eight years into the future and the American Families Act ten years. If they're authorizing borrowing, it's borrowing that will take place not now but in 2022, 2025, 2029, 2030, and who knows what interest rates will be then? 

It's lovely for the government to be borrowing now; later, if they're adding interest payments of $500 billion, $800 billion, even more to the annual budget, that's a net transfer of money from taxpayers to the rich, and do we really need to do that? Do we really want them profiteering off the spending instead of contributing to it?

Moreover, interest rates really ought to be rising to some extent, and soon, pulling investors out of buying risky stocks and junk bonds. bitcoin, and private equity, and into the more productive, growth-favoring places that the new legislation will favor, in housing, healthcare, education, and all that infrastructure and renewable energy, and it's happening, whatever Chairman Powell may say.

But what I really want to stress is that it's in principle better to raise government spending by progressive taxation than by borrowing not because "deficits are bad", which is only partly true and only some of the time, but because one always reduces inequality and the other generally increases it. 

Which I think the public is really grasping very clearly when they respond to what Biden says, in the passage Dayen cites, with an economic analysis that's good enough for me, progressive tax in the first paragraph below and deficit financing in the second one:

It raises the revenue to pay for the plans I’ve proposed that will create millions of jobs and grow the economy. When you hear someone say that they don’t want to raise taxes on the wealthiest 1% and on corporate America – ask them: whose taxes are you going to raise instead, and whose are you going to cut?

Look at the big tax cut in 2017. It was supposed to pay for itself and generate vast economic growth. Instead it added $2 trillion to the deficit. It was a huge windfall for corporate America and those at the very top.

That was a bad deficit indeed, while some deficits, including the current one, are great, no doubt, but no deficit is as good as eating the rich is, when that's an option. Period.

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