A college buddy of mine used to work closely with Alan Greenspan, back when Greenspan was still serving as Fed chair. Sometimes, I’m told, they would tease Greenspan in private about his ability to talk without really saying anything, a trick he often employed when testifying before Congress. Sufficiently prodded, Greenspan would then launch into that schtick for a few minutes, using it as a parlor trick to amuse his listeners.
These days, a chastened Greenspan is much more to the point, as he was last weekend on “Meet The Press”:
“Look, I’m very much in favor of tax cuts, but not with borrowed money. And the problem that we’ve gotten into in recent years is spending programs with borrowed money, tax cuts with borrowed money, and at the end of the day, that proves disastrous.”
Tax cuts, he told David Gregory point blank, do not pay for themselves.
That’s a critically salient point. When we increase government spending, we finance it by borrowing more money. Everyone gets that part. But the second part of Greenspan’s observation shouldn’t be controversial either: Tax cuts are financed the exact same way, by borrowing more money and adding to the deficit.
Some people don’t want to hear that, of course. They prefer to believe that tax cuts “return the taxpayers’ money,” even though it does nothing of the kind. Every dime that taxpayers send Washington is spent, and once money is spent it cannot be “returned.” As a result, tax-cut money is borrowed money, money that puts the government deeper and deeper into debt.
For a generation, Republican economic theory has been built on denying that simple fact. They peddled the wishful thinking that tax cuts represent free money that falls down out of the sky, magically putting more cash in voters’ pockets AND putting more cash into government coffers.
But magic is an illusion. Greenspan now acknowledges that. The CBO has documented it, estimating that each dollar of a tax cut generates 10 to 40 cents in additional GDP, far less than is needed to pay for itself. Mark Zandi of Moody Economics, who served as John McCain’s top economic adviser, also estimates that tax cuts produce roughly 30 cents in growth for each dollar “returned” to taxpayers.
David Stockman, who served as Ronald Reagan’s budget director, now condemns what he calls “the insidious doctrine that deficits don’t matter if they result from tax cuts”:
“Republicans used to believe that prosperity depended upon the regular balancing of accounts — in government, in international trade, on the ledgers of central banks and in the financial affairs of private households and businesses, too. But the new catechism, as practiced by Republican policymakers for decades now, has amounted to little more than money printing and deficit finance — vulgar Keynesianism robed in the ideological vestments of the prosperous classes.
This approach has not simply made a mockery of traditional party ideals. It has also led to the serial financial bubbles and Wall Street depredations that have crippled our economy.”
“The day of national reckoning has arrived. We will not have a conventional business recovery now, but rather a long hangover of debt liquidation and downsizing — as suggested by last week’s news that the national economy grew at an anemic annual rate of 2.4 percent in the second quarter. Under these circumstances, it’s a pity that the modern Republican Party offers the American people an irrelevant platform of recycled Keynesianism when the old approach — balanced budgets, sound money and financial discipline — is needed more than ever.”
It’s a pity indeed. The Democratic Party alone cannot solve this nation’s fiscal problems, in part because it lacks the necessary votes and in part because it needs a viable partner on the other side that will insist in good faith that entitlements be addressed. It’s going to take the best of both parties to work this out. However, that adult conversation cannot take place as long as the GOP clings to a myth that never made sense in the first place and that has been thoroughly refuted by decade after decade of ever-growing debt.