Bill Maher highlighted the conventional political wisdom of many Americans during the August 5th episode of his show Real Time (segment starts at the 13 minute mark).
Maher began a panel segment by asking why President Obama was blamed for the poor economy. He said that Obama had followed Republican fiscal prescriptions and cut taxes. If Republican policy offered a real solution, Maher asserted, shouldn’t the economy be roaring?
His conservative guest, filmmaker Stephen K. Bannon, answered that Americans blame economy for Obama’s failed trillion dollar Keynesian stimulus. Maher disagreed with Bannon’s response, insisting that tax cuts had greatly reduced the size (and effectiveness) of the stimulus. The host said: “take away the tax cuts, that’s not Keynesian.”
Keynesians believe that government must intervene in the economy and stabilize the business cycle’s fluctuations. Here’s a brief primer on the theory.
Tax cuts have shaped conservatives’ fiscal policies since Ronald Reagan became president. The Gipper championed supply-side economics, which call for tax-rate cuts to boost the economy. Supply-siders have challenged Keynesian orthodoxy and questioned the way Washington responds to economic downturns, for the last thirty years.
Politicians have loved Keynesian economics since the famous British economist wrote his 1936 treatise General Theory of Employment, Interest and Money. If politicians intervene in the economy during a down cycle, it shows the public they are doing something about a bad economy. Traditionally government’s run deficits during a recession in order to put Americans back to work.
This theory also has a place for tax cuts, which empower consumers during difficult periods. But elected officials prefer to spend money and point to a road, bridge, or courthouse that’s built with public dollars.
Steven F. Hayward spends a few pages on this towards the end of his first volume of The Age of Reagan. He claims Keynesian tax cuts are a “pump-priming” measure that put money into people’s wallets and boosted short term consumption and demand.
Over the last generation, tax cuts have become synonymous with the Republican agenda. The media has reinforced this narrative, perhaps due to Nobel Prize winning economist Milton Friedman’s famous remark: “I am in favor of cutting taxes under any circumstances and for any excuse, for any reason, whenever it’s possible.”
President Obama thought a short-term tax rebate would help the economy recover from the 2008 financial meltdown. Doing so also fulfilled his campaign pledge to cut taxes for 95% of Americans. Mr. Obama wanted to offer “targeted relief” to average Americans, struggling to get by during tough times.
Tax cuts made up 1/3 of his 2009 stimulus. The provision of the Recovery Act, labeled Make Work Pay, gave individuals $400 of tax relief in 2009. Couples received $800 that year. Working Americans took home an additional $13 a week in their paychecks.
The stimulus helped the country avert a depression but failed to jump-start the economy.The Keynesian tax cut didn’t deliver, as two previous Republican presidents had learned.
President Gerald Ford passed a one-time tax rebate in 1974, thinking it would boost demand and result in increased private spending. Conservative economists thought Ford should lower tax rates to improve the economy over the long-haul, but the president feared lowering rates would produce higher inflation.
Milton Friedman’s research shaped this conservative critique. His 1957 theory of permanent income said that consumption was based on “normal” income and a temporary increase, coming from a tax rebate, would have little effect on consumer spending in the short-term because the rebate did not enhance one’s income in the long-run.
Rebate checks went out in 1975. President Ford didn’t get the result he hoped for. Paul O’Neill, a Ford staffer and a future Treasury Secretary under President George W. Bush, concluded: “it just didn’t work.”
Bruce Bartlett, a deputy assistant secretary of the Treasury for economic policy for President George H.W. Bush, claimed this wasn’t a rebuke of Keynesian economics, but an insult to it. Bartlett called it feel-good economics.
A quarter-century later, newly elected President George W. Bush offered some feel-good economics as well. The Republican ordered a $35 billion tax rebate for all Americans, regardless of income. Following the tragedy of 9/11, Bush offered the rationale for the tax rebate. He told Americans to “go shopping” and help fix a failing economy.
Bush tried a tax rebate again seven years later. This time he targeted it to the poor and middle class, hoping they would use it to make a purchase and put the money back into circulation. He did not extend it to upper income earners, fearing they’d hoard the cash or use it to pay down debt..
Stanford economics professor John Taylor assessed the tax rebate policy later that year in an op-ed in the Wall Street Journal.
His column critiqued Bush’s rebate, claiming that short term fiscal policies do not encourage long-term economic growth. The professor argued the best stimulus came from permanent tax cuts. He encouraged president-elect Obama to consider this alternative as he contemplated another round of stimulus.
President Obama didn’t take the advice. Instead he followed the same feel-good Keynesian approach his Republican predecessors, offering more than $200 billion in tax relief a few months into his administration.
Today, with many fearing a double-dip recession, he wants the Bush tax rates to expire and return to Clinton era levels. This will increase taxes on all Americans.
President Obama is a true Keynesian. He thinks Washington will create employment and wealth for all Americans.That may be enough to win Bill Maher’s vote, but I doubt it will improve the economy.