The Democrats: The austerity party?

With continual concessions to House Republicans, Democrats are now the austerians of reactionary Keynesianism.

    The Democrats: The austerity party?
    When Barack Obama assumed office in 2008, he faced a similar conundrum as Bill Clinton - the Bush Republicans had run up massive deficits and debt [Reuters]

    Growing up in the 1970s, I had an almost primal association to the GOP as the party of the thrifty and the flinty. Republicans were the grown-ups at the table, forever cautioning the children against taking that extra piece of cake. Averse to spending money the country didn't have, they were as leery of deficits as they were of rhetoric. Plainspoken, economising men of austerity: that was the GOP.

    There was some truth to this picture, extending back several decades. Herbert Hoover helped send the Republican Party into 20 years of exile via his ill-timed effort to balance the budget with a hefty tax increase in 1932. One of the first things Eisenhower did upon coming into office was to insist on balancing the budget. Thanks to the Korean War, tax rates were high, and many Republicans wanted Eisenhower to reduce them.

    He refused, saying: "We cannot afford to reduce taxes, reduce income, until we have in sight a program of expenditures that shows that the factors of income and of outgo will be balanced. Now that is just to my mind sheer necessity." Upon taking office, both Nixon and Ford pursued similar paths, and resisted similar tax-cutting calls from their party.

    But by the time I was in middle school, that picture of the Republican Party had become a faded sepia print. During the 1970s, a new breed of conservatives had emerged, calling into question the wisdom of balanced budgets. Men like Jude Wanniski, Milton Friedman and Alan Greenspan took the lead in challenging the frugal dispensation on the right, claiming that Republicans had become what Newt Gingrich would later call "tax collectors for the welfare state".

    'Starve the beast' theory

    Interestingly, the most salient arguments of these new conservatives were less economic than political, focusing on the enabling dynamic of shitfaced Democrats being shepherded to safety by their designated drivers in the Republican Party, only to resume their drunken revels the following evening. 

    Here's Friedman writing in Policy Review in 1978:

    By concentrating on the wrong thing, the deficit, instead of the right thing, total government spending, fiscal conservatives have been the unwitting handmaidens of the big spenders. The typical historical process is that the spenders put through laws which increase government spending. A deficit emerges. The fiscal conservatives scratch their heads and say, "My God, that's terrible; we have got to do something about that deficit." So they cooperate with the big spenders in getting taxes imposed. As soon as the new taxes are imposed and passed, the big spenders are off again, and there is another burst in government spending and another deficit.

    What was the takeaway for Friedman? In Newsweek, he wrote:

    "I have concluded that the only effective way to restrain government spending is by limiting government's explicit tax revenue - just as a limited income is the only effective restraint on any individual's or family's spending."

    Greenspan made a similar claim before the Senate Finance Committee in 1978:

    "Let us remember that the basic purpose of any tax cut programme in today's environment is to reduce the momentum of expenditure growth by restraining the amount of revenue available and trust that there is a political limit to deficit spending."

    But it was probably Wanniski, more than anyone, who best understood the political ramifications of a shift away from deficits and balanced budgets. With an almost Schmittian attention to what he called "the political tension in the marketplace of ideas", Wanniski insisted that conservatives frame the Glaubenskrieg of the two parties as a struggle "between tax reduction and spending increases".

    Without that stark choice, he wrote, the Republicans would forever play the part of the disappointed, disapproving, and ultimately powerless parent: "As long as Republicans have insisted upon balanced budgets, their influence as a party has shrivelled, and budgets have been unbalanced."

    This argument - the so-called "starve the beast" theory - got support from a surprisingly diverse array of voices on the right: James Buchanan's public choice theory, the Proposition 13 movement, and the Kemp-Roth tax proposals. Politically, it came to a head under Ronald Reagan. Unlike his Republican predecessors, Reagan did not resist the calls for tax cuts first, balanced budgets later. Having internalised the new thinking of the 1970s, he declared in a February 1981 television address:

    Over the past decades, we've talked of curtailing government spending so that we can then lower the tax burden. Sometimes we've even taken a run at doing this. But there were always those who told us that taxes couldn't be cut until spending was reduced. Well, you know, we can lecture our children about extravagance until we run out of voice and breath. Or we can cure their extravagance by simply reducing their allowance.

    In his 1982 State of the Union Address, Reagan doubled down on that claim:

    Higher taxes would not mean lower deficits…. Raising taxes won't balance the budget. It will encourage more Government spending and less private investment… So I will not ask you to try to balance the budget on the backs of the American taxpayers.

    Nest of anti-tax ideologues

    Defenders of the Reagan-the-pragmatist thesis (with its corollary complaint that post-Gipper, the GOP has become a nest of anti-tax ideologues, fanatics and zealots) like to point out that despite his philosophical opposition to taxes, Reagan repeatedly raised taxes throughout his administration - 11 times no less.

    But what's often forgotten in these laments is that Reagan came to regret his tax increases, declaring them a colossal mistake. After he left office, he wrote in the Wall Street Journal:

    Despite the "assurances", "promises", "pledges" and "commitments" you are given, the spending cuts have a way of being forgotten or quietly lobbied out of future budgets. But the tax increases are as certain to come as, well, death and taxes.

    In 1982, Congress wanted to raise taxes. It promised it would cut federal spending by $3 for every $1 in new taxes. Being a new kid in town, I agreed to this. Unfortunately, although the new taxes went into effect, Congress never cut spending by even a penny.

    James Baker came to a similar conclusion as Reagan. And taking to the Senate floor in 1993, Republican Bob Packwood - another moderate GOP declinist to hold up against the anti-tax fundamentalists of today - spoke out against Bill Clinton's proposed tax hikes on the same grounds.

    The history of the US government is that when we increased taxes, we spent them; we did not apply it to the deficit. It does not matter that the President has stated, "Let us have a deficit reduction trust fund". We have never followed that; we instead spent it. I predict that if we raise these new taxes, we will spend them, also. We will not cut spending. We will spend it on new programs or expansion of existing programmes.

    Of course, Packwood was proven wrong. By the end of the Clinton presidency, there was a surplus, and Gore ran on a platform in 2000 of using that surplus to - among other things - help pay down the debt. 


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    Despite the record of austerity the Democrats had accumulated during the 1990s, George W Bush refused to hold onto the surplus. Having come to maturity - to the extent one can say Bush ever matured - in the party of Reagan, Friedman and Wanniski, he thought it imperative that any money the government had be returned to the tax payers. Neither debt nor deficits mattered.

    Tussling with Alan Greenspan over whether the surplus should be saved or spent, Bush insisted that "Mr Greenspan believes that money around Washington, DC, will be spent on a single item - debt reduction. I think it will be spent on greater government. He has got greater faith in the appropriators than I do." 

    So we got tax cuts. Big time. If Lyndon Johnson's Great Society was an extension of the New Deal, George W Bush's tax cut was the fulfillment of Reaganism.

    Massive deficits and debts

    Almost all of the above - the quotations, chronology and narrative - comes from Bruce Bartlett's excellent article "'Starve the Beast': Origins and Development of a Budgetary Metaphor". But here are my three takeaways from his piece.

    First, as I already suggested, we need to rid ourselves of the notion that the anti-tax fundamentalists of today's GOP are somehow new arrivals, alien imports from the land of Grover Norquist. The anti-tax position in the GOP has been gestating on the right for decades.

    Whatever temporary concessions Reagan might have made, the forward thrust of the party has been in the opposite direction for nearly a half-century. The assault on George HW Bush for renouncing his no tax pledge was not a dramatic turning point; it was the consummation of a tendency decades in the making.

    Second, the "starve the beast" argument sits uneasily with the basic claim of supply-side economics: that tax reductions will spur growth and generate revenues, which will pay not only for the tax cuts but also for other expenditures, ultimately leading to a balanced budget.

    The two arguments don't contradict each other - indeed, both are designed to lend support for tax cuts - but they press in different directions: towards a balanced budget in the case of supply side, toward shrinking government in the case of starve the beast. The Republicans, of course, haven't been terribly good at the former, but they haven't been terribly bad at the latter.

    Today, the ratio of public-sector employees to the overall population is the lowest it's been since 1968. That, of course, isn't the only measure of the size of government, but it's a pretty damn good one.

    Third, though Bartlett's piece is about the GOP, it's hard not to see how the Democrats have come to play the same role in the contemporary political order that Republicans once played under the New Deal.

    Starting with Walter Mondale's famous pledge in 1984 to raise taxes in order to bring down the deficit - one of Barlett's footnotes reveals this delicious and disturbing anecdote: just after announcing his tax pledge at the DNC convention to wild applause, Mondale turned to Dan Rostenkowski and said: "Look at 'em. We're going to tax their ass off." - Democrats have become the party of austerity. (Doug Henwood, Josh Freeman and David Harvey have shown that that process actually began in 1975, during the New York City Fiscal Crisis, when Wall Street Democrats successfully pushed for drastic cuts in government spending. But it was the Mondale campaign that crystallised the shift at the national level.)

    Like Republicans of yore, the Democrats have repeatedly sought to reduce the debt and deficits, only to find themselves held hostage to the other side's designs of depriving the welfare state of much needed cash. 


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    Consider the two major presidential cycles of the last three decades: Reagan/Bush-Clinton and Bush-Obama.

    During the 1980s, the Republicans cut taxes and ran up huge deficits. Then Bill Clinton came into office and announced his intention to reduce deficits. Anxious to appease Robert Rubin and the bond market, he abandoned whatever pretence of a progressive economic agenda he had set out during the campaign. He and the Democrats raised taxes and allowed government spending to decline dramatically as a percentage of GDP

    By the end of his second term, Clinton had managed to generate a surplus - with the explicit purpose of not only reducing the debt but also shoring up Social Security - only to have the Bush White House squander that surplus through massive tax cuts and increased military spending.

    When Barack Obama assumed office in 2008, he faced a similar conundrum as Clinton. The Bush Republicans had run up massive deficits and debt. Though the financial crisis (and his overwhelming victory) seemed to give Obama the warrant to spend - remember when we were all Keynesians again? - he was constrained by congressional Republicans and conservative elements in his own party, including the Wall Streeters who had been among his earliest supporters and happened to have a disproportionate influence in the White House. All of these forces seemed to worry more about the deficit than they did about the recession. The result, of course, was a much smaller stimulus package than many progressives had hoped for.

    Then came the healthcare bill, which also has to be understood in the context of - indeed cannot be separated from - the politics of deficits and debt reduction. Throughout the healthcare negotiations, Obama took great pains to stress that his bill would not increase the deficit (CBO scores became as important to the national conversation as healthcare itself).

    Negotiations on the healthcare bill

    Incredibly, this was an entirely Democratic and self-imposed, constraint, which made the passage of healthcare reform more difficult than it might have been. As Jonathan Chait pointed out in 2010:

    "Paygo" was a reform imposed by the 1990 budget agreement that required Congress to offset the cost of any new entitlement programme or tax cuts with entitlement cuts or tax hikes. It was a significant factor in the decline of the deficit through the 1990s. Republicans hated it because it required them to offset the cost of tax cuts with either spending cuts or increases in other taxes, thereby making the trade-offs of tax cuts explicit. When they took control of Congress in 2001, Republicans ended the Paygo rule, which allowed them to pass a series of tax cuts along with a Medicare prescription drug benefit without any offsetting measures. The structural deficit exploded.

    When Democrats recaptured Congress, they re-imposed pay-go rules, leaving an exception for extension of the Bush tax cuts for income under $250,000. That's one reason why the Affordable Care Act had to be offset with hundreds of billions of dollars in politically-painful Medicare cuts, rather than financed solely through borrowing like the Medicare prescription drug law. Naturally, this made the Affordable Care Act much harder to pass through Congress as well as less popular - bills that hide their cost pass more quickly and with less complaint than bills that make explicit who is going to pay for their costs.

    Just as the White House and Congress were wrapping up their negotiations on the healthcare bill in the early months of 2010, Obama announced that the great challenge of the age was debt reduction. Though it's often argued that Obama was pushed into that position by the Republican takeover of the House in November 2010, the fact is that he created the Bowles-Simpson Commission in February 2010, with the declared purpose of balancing the budget by 2015 and reducing the debt. The committee's membership, chosen by Obama, included on the Democratic side deficit hawks like Max Baucus and on the Republican side… Paul Ryan. 


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    At every step, then, of the two major initiatives of his administration - the stimulus and healthcare bills - Obama shouldered the load of debt and deficits. Whether that was by default or design remains the subject of much debate. But what's not in dispute is that the debt has become the Democrats' burden and/or vocation, which the Republicans are free to flout at will.

    This became especially clear during the debt-ceiling crisis of 2011 and since. Once the Republicans began to threaten a default in the spring of 2011, Obama made one concession after another in a desperate attempt to make a deal. He offered to cut Social Security benefits, raise the Medicare eligibility age to 67, increase premiums, and more. Thankfully, GOP intransigence saved those proposals from becoming part of the deal. 

    The final deal, announced at the end of July 2011, included $1 trillion in cuts, divided evenly between defence and non-defence spending. There would be no tax increase. Instead, the White House emphasised that the cuts would "reduce non-defence discretionary spending to its lowest level since Dwight Eisenhower was President".

    The deal also created a bipartisan congressional super committee tasked with coming up with an additional $1.5 trillion in savings. If the committee failed, an automatic process of savings measures would be triggered, which would include tax increases and spending cuts, with Social Security, Medicaid and a few other programmes exempted from the cuts.

    Cuttting defence budget 

    Since the announcement of that deal, we've seen two developments. First, the congressional super committee tried - and failed - to come to an agreement. At each phase in the negotiations, which ended in November, the Democrats played the responsible adult, the Republicans the wild child. The Democrats came in with a proposal to raise taxes by $1.3 trillion and cut spending by $1.7 trillion (including cuts to Medicare and Medicaid). The Republican response: $2.2 trillion in cuts (not much more than the Democrats) and no tax increases.

    By the end of the negotiations, the Democrats had reduced their tax increase proposal to $400bn and were offering nearly a $1 trillion in spending cuts; the Republicans tendered $640bn in spending cuts and $3bn in tax increases. In other words, not only were the Democrats promising to cut far more than were the Republicans, but they also promised to reduce the debt overwhelmingly through spending cuts rather than tax increases.

    Second, now that that the super committee has failed, the GOP has predictably begun to balk at the defence cuts mandated by the deal. (I say predictably because just after the deal was announced, I got into a heated argument with a political scientist over that very issue. Where he was elated by the defence cuts, I warned that the Republicans would almost certainly renege on them.) Throughout this past summer, the GOP promised to make the so-called sequester a major issue in the election, and the 2012 Republican Party platform(see page 40) enshrines their opposition to it:

    "Once the Republicans began to threaten a default in the spring of 2011, Obama made one concession after another in a desperate attempt to make a deal."

    Sequestration - which is severe, automatic, across-the-board cuts in defence spending over the next decade - of the nation's military budget would be a disaster for national security, imperiling the safety of our servicemen and women, accelerating the decline of our nation's defence industrial base, and resulting in the layoff of more than 1 million skilled workers.

    Opposition to sequester is bipartisan; even the current Secretary of Defence has said the cuts will be "devastating" to America's military. Yet the current President supported sequestration, signed it into law, and has threatened to veto Republican efforts to prevent it.

    If he allows an additional half trillion dollars to be cut from the defence budget, America will be left with the smallest ground force since 1940, the smallest number of ships since 1915, and the smallest Air Force in its history - at a time when our Nation faces a growing range of threats to our national security and a struggling economy that can ill afford to lose 1.5 million defence-related jobs.

    So here we are, concluding a presidential campaign with Obama begging the media to recognise him and the Democrats as the party of austerity - for being willing to make difficult and deep cuts to Medicare and Social Security - and Republicans happily calling for a constitutional amendment requiring congressional super majorities for tax increases (see page 4).

    Ceiling on social spending

    Ironically, it was during the heyday of the New Deal that we first got a glimpse of the way we live now - from none other than John Kenneth Galbraith. As Bartlett shows, when Galbraith learned of Kennedy's plans for a large tax cut in 1962, he shrewdly observed in his diary that "lower tax revenues will become a ceiling on spending".

    Though the economics of the tax cut were impeccably Keynesian, Galbraith was far more concerned about the politics, which he thought were dangerous. As he explained in his testimony to Congress in 1965:

    I was never as enthusiastic as many of my fellow economists over the tax reductions of last year. The case for it as an isolated action was undoubtedly good. But there was danger that conservatives, once introduced to the delights of tax reduction, would like it too much. Tax reduction would then become a substitute for increased outlays on urgent social needs. We would have a new and reactionary form of Keynesianism with which to contend.

    What Galbraith could not have foreseen - ensconced in the New Deal consensus as he was - was that that the real ceiling on social spending would be set not merely by the Republicans but also, and perhaps more fatally, by the Democrats.

    Once upon a time, Republicans were tax collectors for the welfare state. Now, Democrats are the austerians of reactionary Keynesianism.

    Corey Robin teaches political science at Brooklyn College and the CUNY Graduate Centre.

    SOURCE: Al Jazeera



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