Tuesday, October 27, 2009

Bruce Bartlett Review

Bruce Bartlett is one of the original architects of Reagan's Supply-Side Revolution. Recently, he's come out with a new book defending that movement, while arguing for higher taxes today in the form of a VAT, or consumption tax.

I don't buy it. I don't think adding extra consumption taxes would further either conservative or liberal goals.

Start with the conservatives. Bruce makes all of the conventional arguments against the Bush tax cuts: they didn't magically boost the economy, etc. etc. From the point of view of a bipartisan, maximize GDP perspective, these are fair points. In many ways, he repeats claims made by Jonathan Chait a few years back, when he denounced the extreme views of supply-siders as crackpot economics. What both miss is that the tax-cutting agenda is not driven purely by a motivation to boost "the economy." Transferring income away from the government towards people doesn't show up in GDP, but has an enormous impact on family welfare and the role of government in a free society.

To a substantial extent, the supply-siders are driven by the genuine desire of ordinary Americans to keep more of their hard-earned money. The rationalizations supply-siders offer for that goal are often dubious. But refuting those claims doesn't answer the broader question of how much government do we want, and what level of taxation would we like. This is very much a political and ideological question; yet Bartlett largely sidesteps that issue in favor of a broadly technocratic lens.

His diagnosis is that government is set to rise due to an entitlement crisis; that current economic problems are now ones of deflation and deficient demand; and that the only contribution of supply-side analysis is to pave the transition towards a larger government as smoothly as possible. His champions the VAT as a relatively efficient way to raise revenue.

Look, it would be one thing if we needed more taxpayer dollars to pay for some sort of Whiggish program of internal improvements, and a VAT was the only way to pay for that. But that's not the case. The long-term drivers of government spending are the entitlement programs--health care and social security--along with defense. Who benefits from these programs?

Social Security is distributed to everyone over 65--a population that has spent a lifetime earning and accumulating assets, and is rather well-off in aggregate. Medicare similarly benefits all the elderly, regardless of wealth, while its reimbursement program is riddled with fraud, and is a major driver of overtreatment and rising medical costs (Contributing 40 percent of the recent rise in medical costs by one estimate). Defense spending post-War on Terror is also insane. The US spends somewhere around $700 billion a year on defense; not only is this substantially more than any other country, it's also about twice what was spent during the 90s. Once Afghanistan and Iraq wind down, military spending could easily be cut in half with no discernible loss in welfare to the ordinary household.

This is to say: The drivers of higher government spending are basically wasteful and unnecessary spending, much of it consisting of transfers to the wealthy. This doesn't strike me as a cause worth funding through burdening the poor and working classes--who would be disproportionately hit by a tax on consumption.

There's an alternative here: slashing payroll taxes for poor workers and instituting flexible wages. Two of the biggest economic problems today are that wages are stagnant for many low-skill workers and unemployment looks to be persistently high. Both of these can be controlled by policy. By cutting regressive taxes on the poor, we can make wages rise as fast as we like--while attacking the real and growing disincentives for work. Bartlett is right to suggest that this may not have much of an impact as a "stimulus" or on economic aggregates. But this is to mistake GDP for human welfare. Families struggling to pay bills benefit tremendously with more after-tax income. It's precisely for this reason that many liberals worry so much about wages, even though the share of labor compensation doesn't have an impact on GDP.

We can cure unemployment as well. Singapore and France, along with other European countries, have implemented Edmund Phelps' policy of flexible wages. The idea is to allow employers to cut back on compensation during downturns, and have the government make up the difference. This allows labor markets to clear while keeping unemployment low. It's hard to think of any government spending that would further family welfare as much as keeping wage growth as high as we like, and unemployment as low as we want. Indeed, it's hard to think of many proposals that do so much to advance liberal goals. But fundamentally, this agenda relies on lowering the tax base and making it more progressive. Bartlett's VAT would move America in the opposite direction on both counts, while doing little to help struggling households.

I'll agree with Bartlett that Republican orthodoxy is sniffling the debate on many of these issues. Treating any defense cuts as tantamount to treason, and any cuts in Medicare as out of bounds entirely, doesn't do much to advance the debate on how to deal with a looming entitlement crisis. Republicans have done little during their time in office to tackle the long-term fiscal situation, and have placed too much emphasis on income tax cuts rather than dealing with chronic economic insecurity. But higher taxes on the poor won't help either.

That's the tradeoff we face. We can continue spending on wasteful and unnecessary transfers and spending, much of it going towards the rich, and balancing the cost on the already-burdened working and middle classes. Or we can solve the central economic problems of the day by addressing ballooning spending front-on. But that will require both more committed conservatives than Bartlett, and more devoted liberals than those in office.

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