Starve the Beast
It should be worth noting that the federal deficit under Trump is already at 5% of GDP even before the Coronavirus stimulus begins.
Figure 1
Interestingly, if you look at the long term record the only policy or strategy that fits the data is the Republican policy of starve the beast. That policy is to enlarge the federal deficit so much when they control the purse strings that democrats will be unable to enact policies increasing spending that benefits the lower and middle classes. That is why you repeatedly see a pattern of republicans presidents leaving office with a much larger deficit than they inherited while democratic presidents reduce the deficit.. With US savings rates so low this forces the US to borrow abroad to finance the savings-investment gap. We lucked out that in the 1980s OPEC and Japan had savings surpluses that they used to finance the US deficits. Under Bush it was the Chinese that had a savings surplus to invest in the US. But OPEC and Japan no longer have surpluses to finance the US deficit and the Chinese have started to draw down their savings as they shift to consumption led growth. Because the Japanese and Chinese had large surpluses to invest the long feared crowding out worked through the dollar and large trade deficit rather than higher interest rates and weakness in the credit sensitive economic sectors. The hollowing out of US manufacturing was a direct consequence of the republican tax cuts.
Interestingly, if you look at the long term record the only policy or strategy that fits the data is the Republican policy of starve the beast. That policy is to enlarge the federal deficit so much when they control the purse strings that democrats will be unable to enact policies increasing spending that benefits the lower and middle classes.
I don’t know, is that the only policy or strategy that fits the data?
So, it’s obviously the case that there are lots of times when Republican-controlled governments love to run up huge deficits. 2001-2007 is a clear example of this; so is the current administration, which drops billion- and trillion-dollar promises at the batting of a political eye. But is that the only thing that’s happening in this chart? It seems like there might be some counterexamples.
Who controlled federal appropriations from 1995-2001, during the longest sustained run-up and highest peak on your chart?
Who controlled federal appropriations from 2007-2011, during the sharpest drop-off and the absolute minimum on your chart?
Or, when you say that Republicans or Democrats “control the purse strings” during a given political cycle, do you mean something by that other than “control federal appropriations”? If so, what do you mean by it?
(You could of course point out that there are obvious macroeconomic factors that influence the deficit-to-GDP ratio in both those cases — because economic recoveries and collapses affect both the denominator — since they affect GDP measurements — and the numerator — since they increase or decrease government revenues. I would agree with you. But if so, that would seem to be evidence that explanations of the data which depend only on the single factor of a political strategy or public policy are probably bad explanations — there are a lot of other factors at work, many of which are not accounted for in political strategies and many of which are not under the deliberate control of political parties or policy-makers.)
Reagan juiced the economy with tax cuts, ran up a deficit, ran up debt. Call Bill Clinton. Bush II juiced the economy with tax cuts, spent a couple unfunded $trilllion on Wars, ran up a deficit, ran up debt. Call Barak Obama. Trump juiced the economy (when wasn’t needed), ran up a deficit, ran up debt. Who you going to call?
Venal Mitch is going to say we need to cut Social Security, Welfare, …
When will We the People wise up?
There is an argument to made that the president doesn’t control spending, but he does control a ratchet on tax rates. So yes Rad Geek has a point about control of congress. I am of the view that presidential systems always end up being disasters at some stage because they split power and responsibility. The voting public don’t know who to blame (especially the distracted voting public).
By the way you don’t have to go to trade effects to see tax rate cuts hollowing out industry – company tax cuts also directly reduce the incentive to invest by making investment more expensive.
If you look at detailed savings and investment around 1980 it is hard to avoid the point that the twin federal and current account deficit are tied closely together.
Before andafter1980 personal savings was about the same as housing investment. Roughly, personal savings has always financed housing.
Business savings was used largely to finance business fixed investment before and after 1980. Earlier business savings was modestly larger than business investment and this was used to finance the current account and federal deficit. Neither business savings or investment as a sshare of GDP changed significantly.
So what changed around 1980 — the current account deficit and the federal deficit. The current account deficit was driven by the influx of foreign capital and the resultant very strong dollar that made US manufacturing uncompetitive.The other change was the enlarged federal deficit that drove a wedge between domestic savings and investment.
While it is possible to imagine scenarios where different things changed, under both Reagan and Bush, the data clearly supports the conclusion that the republican tax cuts drove the dollar up and manufacturing down. What other line of thought does the data support?
Spenser no need to be defensive, I agree tax cuts had an effect on the dollar, in the special case of the US. I’m just saying there is also a very direct incentive effect and both effects probably worked together. So one on tge demand for financial assets the other eventually on the supply of domestic manufactures side.
Automation hollowed out manufacturing.
Lets also note that the US essentially balanced its budgets from 1946-57 after the War. We didn’t run any debt. After that US public debt began a long run acceleration. One that got bad in the 60’s and covered by LBJ’s printing which ended BW’s and began the great inflation.
A large part of that was the shift to consumption based economics. Its also when the 2nd wave(after the 1920’s) of plant closures began in 1959-67, which really, not post 1980 led to the “ghost towns of manufacturing plants”. Its also when the waves of automation met the first “offshoring” wave as companies tried to reduce costs to increase US consumption.
I can tell you stories about driving around Rockford in the late 70’s in a seas of long abandoned plants. No longer in service. Most had moved south, consolidated around Minnie or Chicago with less labor. The regional replaced by national.
Its the fundamental problem with modern democratic socialism and Austrian economics. People are sniffing out a turd and know their policies won’t work, so we are stuck in paralysis. Honestly starts at home. As the East Germans used to say about West German debt expansion: “The west has gone soft”. If you want a truly self-sufficient nation, you need to accept rationing, reduced consumption. Its why Conservatism and every elitist “con job” from the Alt(financed by Israelis)Right to the Tea Party will never work. Only the real Left Wing can provide that nation. Self-sufficient manufacturing, no immigration, is simply not possible under free markets. Immigration is the excrement of capitalism. But damn, you better learn how to conserve and save, because it will be expensive to act like a piglet. Most national resources will be thrown into health care, military and investment. Cell Phones better last for years and no issues unless there really is something “new” to release. Dishwashers better last 25 years. Its all about tribalism. Work within the tribe. Individualism based on tribe will be rewarded over crass consumption like we reward the individual today.
“…The hollowing out of US manufacturing was a direct consequence of the republican tax cuts.”
[They just played hand in hand with each other. The hollowing out of US manufacturing was a direct consequence of one specific Republican tax increase when they rescinded the dividends tax credit in 1954. The Democratic Party had flirted with that tax increase from 1936 through 1939, but then figured out why it was originally instituted which was to offset the capital gains tax preference.
When holding shares to collect dividends became less attractive then a vast new arena of capital market schemes emerged. The most immediately devastating for workers were the mergers and buyouts, including but not limited to private equity takeovers. Consolidation of nonfinancial firms beside the newly stimulated growth of investment banking killed pensions and jobs for about twenty years before container ships and Nixon’s end of Bretton Woods convertibility limits on trade deficits accelerated the demise of pensions and jobs to heretofore unimaginable proportions. Ronnie Reagan took over dispersal of the spoils of capital’s victory over labor by rewarding the guilty and punishing the innocent. That has largely remained the status quo ever since.]
Macroeconomics mostly ignores tax policy because hysteresis defeats their hunger for immediate gratification.