Bad Policy, Bad Politics
Word comes that Barack Obama's budget will, not surprisingly, call for ending the sequester spending limits now in effect.
That's not surprising. White House aides proposed the sequester, but Obama thought it wouldn't go into effect because Republicans couldn't accept its sharp limits on defense spending. But with voters recoiling against foreign military involvement, they could and did.
At the time, Keynesian economists predicted that the sequester -- "austerity" -- would squelch economic growth. And they predicted that Republicans' failure to continue extending unemployment benefits beyond 26 weeks would result in mass misery.
The Keynesian predictions have proven unfounded. The 2009 stimulus, much of it devoted to preserving public employee union jobs, didn't seem to stimulate much. Growth after the tough early 2014 winter, though still not dazzling, has been stronger than in pre-sequester years. Unemployment fell sharply as an end of benefits prompted workers to find jobs and employers to hire them.
Obama will argue for more spending on the grounds that the federal budget deficit is now sharply down. It is: The Congressional Budget Office says it declined from 10 percent of gross domestic product in his first year in office -- blame George W. Bush and the financial crisis if you like -- to around the 50-year average of 2.7 percent.
The sequester contributed to that by holding down spending. But credit also goes to the fact that our tax system is much more progressive than you'd gather from Obama's rhetoric. CBO reports that the top 20 percent of earners pay 70 percent of all federal taxes, and the top 1 percent pay 24 percent.
The U.S. tax system is actually more progressive than the systems of Western European welfare states that rely heavily on value-added (i.e., sales) taxes. Those can be raised stealthily, without even showing up on credit card receipts. U.S. income tax increases show up on every worker's pay stub and W-2 form.
Progressive taxes produce volatile revenue streams, plunging when profits and capital gains are low, zooming upward when they're high. That's because high incomes and capital gains are volatile, and high earners can, legally and morally, structure their affairs to minimize taxation. So even in a period of tepid economic growth, federal revenues rose from 15 percent of GDP in 2009 to 17 percent in 2014 -- not as much as in the early 1980s recovery or the late 1990s bubble, but still significant.
Yet there are limits. In the 2008 campaign, ABC's Charlie Gibson asked Obama if he would raise capital gains taxes even if, as has often been the case, that would mean lower tax revenues. Obama said yes. For him "fairness" meant taking more of people's money even if the government ends up with less. That reduces after-tax economic inequality. But it doesn't help reduce federal budget deficits.
To do that, you have to do more than raise tax rates on high earners. As Bloomberg's Megan McArdle writes, "We are simply running out of room to pay for generous new programs with higher taxes on the small handful of people who make many hundreds of thousands of dollars a year."
Income taxes as a percentage of GDP, the CBO reports, are already approaching the highest level in the last 50 years. To exceed that level, you have to go where the money is -- you have to raise taxes on the middle class.
Obama claims he's advocating "middle class economics." But a Brookings-Urban Institute study showed his tax and economic policies would produce no significant gains for those on the middle 60 percent of the income ladder.
And Obama had to ditch his proposal to tax withdrawals from 529 college savings accounts after protests not just from Republicans but from Democratic leaders Nancy Pelosi and Chris Van Hollen, who represent affluent gentry liberal districts.
In any case, as CBO reports, the budget deficit is on track to rise as a percentage of GDP far in future years. Entitlements -- Social Security, disability insurance, Medicare -- will eat up a growing slice of the economy.
Obama's Democrats have rejected all attempts at entitlement reform. At every opportunity they opt to run one more campaign assailing Republicans for cutting Social Security or Medicare, even though the over-65 crowd has become a solidly Republican voting bloc.
So entitlement spending will increasingly squeeze out spending on Democrats' domestic wish lists. That puts pressure on Democrats to raise taxes that will inevitably fall on the middle class, and more so as Keynesian policies sputter. Bad policy is, sooner or later, bad politics.
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