Part of the problem is the Democrats are a victim of their own success. Because the deficit was tamed and we had a surplus in the 90s the Democrats now feel they have won the fiscal responsibility debate. After years of the Republicans attacking them as spendthrift and irresponsible they now had proof positive that they are the responsible party, the true deficit hawks, while the Republicans have shown themselves to be chicken hawks-all talk, no action. After all we had a huge deficit under Reagan, Clinton balanced the budget and got us into surplus, then George W. Bush came in and we had an even bigger deficit than under Reagan. Case closed, especially in light of Cheney's watershed moment of declaring "Reagan proved deficits don't matter."
But this must make the Republicans smile. Sure they'll take the hit and let the Democrats have the vanity of being the party that gave us surpluses. What the Democrats never ask themselves is exactly how did they become the party of fiscal restraint? This used to be the Republican position.
They used to be the victim of their own fiscal discipline. So what did they do? They gave it up or rather they outsourced it-to the Democrats. If one man is responsible for this Republican coup it's Jude Wanniski. Here Bruce Bartlett makes available an article he wrote that was really the programmatic manifesto of this Republican coup that was not widely available. We owe a debt of thanks to Bruce Bartlett.
"Because of the historical importance of Wanniski's article--echoes of which can still be heard in Republican tax cut rhetoric--I am making it available to a wider audience. I retyped it myself from a rather grainy copy. I've done my best to reproduce it exactly as it was printed. Bruce Bartlett"
The name of Wanniski's project is the Two-Santa Theory. The crux of the matter comes down to this. Now deficits only matter when Democrats are president but prior to Wanniski's Two-Santa Theory they only mattered under Republican presidents. This was largely because the Democrats then hadn't drunk the koolaid of making a fetish out of a balanced budget. This was a Republican obsession. I will quote the main points of the article though the whole thing is worth reading as this premise of Wanniski's has proven to be a home run.
At the time he wrote this 1976 he complained that the Republicans didn't understand what the Democrats did: that you never shoot Santa Claus. The trouble is the the Republicans wanted to cut taxes but only when the budget was balanced for otherwise they feared this would increase inflation and hike up borrowing costs. Doe this fear sound familiar? It should it is how the Democrats have sounded since Reagan, playing the role of fiscal scrooge. They want more spending-maybe-but only after the budget is in order and we have made sure our borrowing costs don't go up-a wholly illusionary worry. When have U.S. borrowing costs gone up in the last 30 years due to a budget deficit?
Wanniski on his Two Santa Claus Theory
"Simply stated, the Two Santa Claus Theory is this: For the U.S. economy to be healthy and growing, there must be a division of labor between Democrats and Republicans; each must be a different kind of Santa Claus."
"The Democrats, the party of income redistribution, are best suited for the role of Spending Santa Claus. The Republicans, traditionally the party of income growth, should be the Santa Claus of Tax Reduction. It has been the failure of the GOP to stick to this traditional role that has caused much of the nation’s economic misery. Only the shrewdness of the Democrats, who have kindly agreed to play both Santa Clauses during critical periods, has saved the nation from even greater misery"
The reason he says the Democrats saved the nation from even greater misery is because he believes that income taxes that are too high can lead to recessions and even depressions-the Democrats had cut taxes under Kennedy and LBJ and also the Democrat Congress had over Repubican opposition in 1971. The old structural argument: he even claims that Hoover's-who as we saw above he claims is the wrong type of Republican-raising the top income and luxury tax rates after the start of the Depression in some meaningful way intensified it
"Hoover decided that the $2 billion in revenues lost during the recession had to be recovered so the budget could be balanced. He boosted taxes on “luxuries and nonessentials,” raised the inheritance tax to 45 per cent from 23 per cent, raised the income tax to 45 per cent from 23 per cent, and imposed a 15 per cent corporate tax rate. The Republican Congress enacted these measures in the summer of 1932 going into the teeth of the Presidential elections, banks failing left and right, and the stock market reeling"
Note the implicit suggestion that there was a relation between the tax hikes and the stock market reeling and banks "falling left and right."
" It isn’t that Republicans don’t enjoy cutting taxes. They love it. But there is something in the Republican chemistry that causes the GOP to become hypnotized by the prospect of an imbalanced budget. Static analysis tells them taxes can’t be cut or inflation will result. They either argue for a tax hike to dampen inflation when the economy is in a boom or demand spending cuts to balance the budget when the economy is in recession."
Interestingly he also criticizes the monetarists along with Keynesianism for failing to mention high taxes in connection with the Depression.
"To this day, the two main economic theories that attempt to explain the Great Depression ignore or underestimate the impact of the steady increase in tax rates. The Keynesians either argue that Roosevelt did not tax or spend enough or simply that he did not spend enough. The monetarists, led by Milton Friedman, believe everything would have been wonderful if the Federal Reserve in 1930 and 1931 had printed a lot of money."
As our friend Scott Sumner tells us, correlation doesn't prove causation. Clearly he is attempting to argue this was in some way a cause of the Depression which shows that the casuistry of the structural recession theorists are nothing new.
In a nut shell, there has been a subtle role reversal. The Democrats are now the party that believes in balanced budgets first, then spending cuts later if we can. It used to be that the Republicans felt the same way about tax cuts. Well played, Jude Wanniski!
This is why Greenspan seemed to change from the wise counselling of a balanced budget under Clinton to supporting Bush's budget busting tax cuts in 2001 and why Greenspan offered not a peep when Cheney declared that deficits don't matter. They don't when a Republican is President.