25 Comments

This sentence is so true: "The truth about those European welfare states is they’re financed by broad-based, double-digit value-added taxes that fall broadly on the middle class, and Democrats dare not even propose that kind of tax policy." I for one would pay higher taxes if it meant significantly reducing or eliminating my health insurance premiums, significantly reducing out-of-pocket costs for healthcare, and not paying $2k+ per month for daycare (and we only have one child!). I'd almost certainly come out better budget-wise. Why we can't get this message across to voters -- "yes, you'd spend more on taxes, but you'd likely come out ahead in the end!!" -- is a mystery to me. It's not a scenario of paying more taxes on top of what we already spend, it's a trade, and it's so strange to me that this is seemingly so hard to convey to people.

Expand full comment
Apr 3·edited Apr 3

People don't trust the government to set up this sort of welfare state program in an efficient and cost-effective way, for understandable reasons.

If they are serious about trying to imitate Scandinavia, Democrats should prioritize doing big government well on the state and local level. Universal Pre-K in NYC is an example of this approach done right; Vermont's disastrous single-payer experiment or the California HSR are examples of why voters are leery of shouldering big tax increases in order to imitate institutions that work well in Europe.

Expand full comment

I agree with that. But that is a question of how the government spends money, rather than how much.

Expand full comment

If the government spends money in a way that delivers tangible benefits at a reasonable cost then people will put up with higher taxes or inflation to pay for it.

Expand full comment

Yes, agreed. Although in many instances the inflation is not going to happen if, for example, among the tangible benefits are an enhancement of the economy's productive potential.

The opposite also applies: voters have every right to find government spending objectionable if it is associated with crony capitalism that delivers no obvious benefit to the public as a whole (which is one of the reasons the bank bailouts were so unpopular - personally, I would have nationalised the banks and broken them up)

Expand full comment

What you say isn't wrong, but I also think you're missing a key factor: a decade of "very serious people" claiming there was a debt crisis when there wasn't, as a smokescreen for cutting popular programs, notably Social Security and Medicare. I believe that the situation is different now but I also think that people are more likely to put up with taxes with evident benefits, e.g., increasing the FICA cap to better fund that same SS and Medicare.

We could also ditch billions in military pork that the military doesn't want but that's a separate argument.

Expand full comment

Actually, not really. I cited Keynes and some Keynesian economists. "Crowding out" was disproven well before MMT became a thing. For the record, there are many aspects of MMT that I disagree with. Unlimited government spending in the wrong hands can be a major political, as well as economic problem. And for the record, I do think government spending should be wound back now, as I am concerned about potential inflationary pressures.

But your description of how government crowds out private spending is factually incorrect, that's all. We can have a sensible discussion about that without resorting to name-calling.

Expand full comment

Thanks, Josh. You've answered *how* to make voters care again, but I want to read a bit more about *why* they don't seem to care in the first place. Maybe people haven't felt it in their pocketbooks enough yet? To what extent don't people care because of a boy-cried-wolf situation where many politicians have wailed -- often very shrilly with attendant government shutdowns in the case of Republicans -- about the deficit for decades? Are there other compelling explanations?

Expand full comment
author

I do think it's a problem that there were a lot of deficit warnings that were both false (deficits over much of the last 25 years were *not* actually going to explode inflation or cause a sovereign debt crisis) and insincere (Republican politicians arguing about the importance of cutting deficits while out of power because they really just wanted to prevent Democrats from spending money). But I think a lot of it is just that the periods when crowd-out was important feel like ancient history; the recent environment of high interest rates and inflation feels bizarre and people haven't thought very much about exactly why it's happening and what could make it stop.

Expand full comment

I’ll by insincere but I can’t get onboard with the false part. The increased costs of social security, Medicare and Medicaid as the population aged were well understood. We didn’t just wake up with this new problem in February of 2021. While I’m sure you can find some people who made overwrought claims of imminent crisis, the deficit was a problem in 2006. It was a problem in 2010. It was a problem in 2018. Sovereign debt crises is like corporate bankruptcy, it happens slowly and then suddenly.

Expand full comment

Overwrought claims? You mean like shutting down the government multiple times over the last 25 years? I would consider that overwrought

Expand full comment

I do share your belief that it will take a lot more pain before political parties and voters start taking it as seriously as it needs to.

Expand full comment
Apr 3·edited Apr 3

Maybe there will be a turning point if, as feels very likely, inflation will rear its ugly head again. That recurrence, or the specter of it, would be as good an opportunity as any to change the narrative.

Expand full comment

"To what extent don't people care because of a boy-cried-wolf situation where many politicians have wailed -- often very shrilly with attendant government shutdowns in the case of Republicans -- about the deficit for decades?"

As a millennial Democrat, I have to say this is a big reason I personally haven't cared. I didn't experience the 80s/90s situation and I haven't felt the impacts of the currently cartoonishly-large deficit in any *obvious* way, nor have I seen it impact anyone else. However, I *have* seen the immediate negative impacts of budget cuts (hello, sequester!) and government shutdowns. It's hard to conceptualize why it matters when it's not obviously mattering right now in my life. And frankly, the same is true for everyone about things like climate change - if you don't see it happening, it's not real. Except that we are now seeing climate change happening...

Expand full comment

Hard agree. I'm also a millennial, and Republicans freaking out about the deficit while Democrats are in power, and then turning around and trying to cut taxes the moment they have control feels like one of the most enduring parts of politics in this country.

Expand full comment

The "crowding out" thesis (i.e. too much government borrowing crowds out private investment) was discredited by Keynes over 70 years ago! The basis of the "crowding out" claim is that such government spending causes interest rates to rise, and investment to fall. In other words, too much government borrowing "crowds out" private investment. Because investment is important for long-run economic growth, government budget deficits reduce the economy's growth rate.

This argument reflects a complete misunderstanding of government spending. Increases in the federal deficit tend to decrease, rather than increase, interest rates. In reality, fiscal policy actions are those which alter the non-government sector's holdings of net financial assets. This is because deficit spending leads to a net injection of reserves into the banking system. (And big deficits imply big injections of reserves.) When the banking system is flush with reserves, the price of those reserves -- in the U.S. the federal funds rate -- is driven to zero in the absence of countervailing measures (such as bond sales). Unless a zero-bid is consistent with Fed policy, the central bank will begin selling bonds in order to drain excess reserves. The bond sales continue until the fed funds rate falls within the Fed's target band.

That's not to suggest that I think deficits don't matter. They do. Given spare capacity, public expenditures are not only productive but also foster additional activity in the private sector. In a study of a century of UK macroeconomic statistics, Professor Vicky Chick and Ann Pettifor provide very compelling evidence illustrating that active fiscal policy promoted economic growth and helped to REDUCE the UK's public debt to GDP ratio. By contrast, periods during which the single-minded focus on debt and deficit reduction became the main focus on policy, economic growth slowed and the UK's debt to GDP ratio rose.

This study validates one of Keynes's central conclusions: "For the proposition that supply creates its own demand, I shall substitute the proposition that expenditure creates its own income" (Collected Writings, Volume XXIX, p. 81). That being said, excessive government spending when the economy is running hot is likely to create inflation and in that sense can be economically disruptive. I would agree that this is the case today, and Biden should wind down gov't spending. But again, context matters.

Expand full comment
author

Oh god, not this MMT shit again.

Expand full comment

Maybe this is just the other side of the same coin, but doesn't monetary policy control interest rates?

It seems to me that the high interest rates of the '80s were caused by Paul Volker, not by government borrowing.

Now, you can argue (and I think you basically *are* arguing) that stimulative fiscal policy (i.e. deficits) in an economy that is already at its productive capacity will lead to inflation, and then monetary authorities will raise interest rates to combat inflation, so deficits can induce higher interest rates through that channel.

But the "crowding out" shortcut never made sense to me.

Expand full comment
author
Apr 3·edited Apr 3Author

The way I think about it is that monetary policy determines whether crowd-out leads to high interest rates or high inflation, but it has to produce one or the other. If Volcker hadn't raised rates so much in the early '80s, there would have been lower rates (obviously) but inflation would have been higher. And voters will feel pain either way.

Expand full comment

I fear that there is an underlying shift in attitude that makes it near impossible for either party to really care as long as they feel that any benefits accrue to the other party.

Currently, I think both parties fear that any reduction in the deficit will just be used by the other party when they gain control.

Expand full comment

I agree with most of Josh's case here. What I would be interested in hearing is how Democrats can make this a favorable issue for them? The people in my personal life that complain about the debt are essentially all Republicans. They are like Republican politicians though in the sense that they complain about the debt but think that budgets should always be balanced on the back of spending - if anything, they think taxes should be lower. My larger point is I don't see how making the debt more salient isn't just going to advantage Republicans. Neither party has been particularly fiscally responsible in my lifetime (I turn 40 in August) but I would argue the Dems have been less crazy. That being said, the debt obsessed voters seem to be very right leaning. How do Dems begin to change that?

Expand full comment

In the last Australian election, policies like increased childcare spending were argued to free up more women to join the workforce, increasing productivity and offsetting the inflationary pressure.

I think it's also fairly intuitive that some government spending *could* be more efficient than private spending, making it worth competing for borrowing, but it's all very speculative.

Still, if a party can make that argument, even in a roundabout way, it goes a long way to reducing the pushback they get for debt.

There Is also a bit of MMT talk going around. The takes I've heard are that politicians won't mention it directly but there's an increasing view that, with some qualifiers about 'good' spending, debt doesn't matter.

That said, the government has been careful to deliver repeated surpluses, so after the election at least they've managed to avoid the debate.

Expand full comment
founding

I'm no economist, but I'm surprised at the notion that it's only deficit spending that would cause inflation. Like, if the government found $1 trillion worth of gold at the bottom of the Potomac and immediately spent it, surely that would be too many dollars chasing too few goods and services in the same way as if they had financed the spending by borrowing? But maybe that's too contrived an example and irl if they were able to spend more without borrowing that means they've raised taxes (in which case the public spending replaces what otherwise would have been private spending) or something?

Expand full comment

Not to go down too deep a rabbit hole, but the budget rules congress follows, specifically pay go, appear to incentivize leaving spending levels as-is and not cutting spending when you can, instead saving it to be a “pay for” for some other bill.

If Congress instead could effectively “bank” cuts or taxes early and then spend from them during the remainder of the Congress maybe there wouldn’t be so many zombie government programs out there needing to be axed.

Or maybe it’s all screwed up because Congress is itself dysfunctional and they need some statutory limit on spending.

Expand full comment

It’s like a spiral, “ Inflations eating away at wages so we must increase benefits that increase the deficit. And with margins so slim in Congress, nobody’s willing to propose any serious plans to address it. It feels like dark days are ahead…..

Expand full comment