For Democrats Adrift, Some Fiscal Therapy
By Robert B. Reich
Editorial
The Washington Post
Sunday, November 10, 2002
Maybe Democrats did everything they could. After all, George W. Bush is hugely popular, the nation is still traumatized by terrorism, most of the free TV air time leading up to Election Day was devoted to Iraq and then the sniper, and most of the paid air time went to Republicans, who outspent Democrats 3 to 1.
Maybe it wasn't such a huge defeat anyway. I mean, we're talking about the loss of no more than three Senate seats and no more than five in the House. It just feels huge because Republicans got control.
Besides, who am I to criticize? I couldn't even make it past a Democratic primary.
Yet the question has to be asked: Why didn't the Democrats break through on the economy? It was an easy target. The economy is still Number One in voters' minds, outpolling terrorism and Iraq. And it's still lousy. Unemployment is up, consumer confidence down, growth has slowed to a crawl. You don't have to be a high-rolling pollster to know Republicans are vulnerable on it.
The question is worth asking because Democrats have to get their economic act together if they want to take back control of even one chamber in 2004 or have half a chance of recapturing the White House. The economy could still be a big problem then. This isn't your typical business cycle, and it hasn't responded to the Fed's usual medicine. The recovery could remain anemic for another two years, fall into a "double dip" or, worse, into a vicious cycle of deflation. Japan has been flat on its back for a decade.
The Democrats' problem is that they don't have an economic message, only a gaggle of conflicting responses to Bush's big tax cut and his plan to make it permanent. "How can we have a consistent economic message?" one Democratic operative complained to me last week after the returns came in. "We're all over the map on the tax cut."
Six Democratic Senate incumbents up for re-election had voted in favor of it. Montana's Max Baucus turned his support for making the cut permanent into a centerpiece of his winning campaign. Most other Democrats voted against the cut and branded it "fiscally irresponsible." Yet few of these Democrats have called for repeal. One exception: Sen. Ted Kennedy (Mass.), who wants to rescind it for high-income taxpayers.
The Bush tax cut is the $1.35 trillion gorilla on the center of the table, but it's irrelevant to what's happening to the American economy. Conservatives may love it, but it's no solution to what ails the economy; liberals may think it grossly unfair, but it's not responsible for the economic doldrums. Responding to it without putting forth their own agenda puts Democrats in a trap.
The trap is set to spring again. The president will make permanent extension of his tax cuts the Republican economic centerpiece leading up to 2004. If the Democrats fail to come up with their own economic agenda they'll be right back on the defensive -- forced to take a position either for or against a tax cut. And, as before, they won't speak in one voice.
Democrats should just stop obsessing about the tax cut and start thinking about what the economy really needs. The economy is sputtering because there aren't nearly enough buyers to purchase all the goods and services we can now produce, at a price that covers the full cost of producing them. Blame the technology bubble and some irrationally exuberant overbuilding. Or blame China and other countries where capacity also mushroomed in recent years.
But a lot of productive capacity here in America isn't a bad thing. Quite the contrary. As long as we use it eventually, it gives us the means of achieving higher standards of living. In fact, over the long term we'll need much more productive capacity -- especially as millions of Boomers, their bodies beginning to corrode, start filing for Medicare and Social Security.
The challenge over the next two years is to boost demand for what we can produce now. Alan Greenspan can't do that alone. The Federal Reserve has been whacking interest rates for over a year in order to stimulate demand. Last week they cut the key rate by half a point, to 1.25 percent, its lowest level since John F. Kennedy was in the White House. That doesn't leave much room for further cuts. Yet the economy is stuck in neutral.
Where to turn? Fiscal policy -- taxing and spending. Here's where the Democrats' message should be crystal clear. If monetary policy isn't up to the task, the federal government has to do its part to stimulate use of America's productive capacity, even if that means running deficits.
Granted, a fiscal stimulus is tricky to pull off. One problem is timing. By the time Congress enacts a tax cut or new spending and it goes into effect, the economy may already be on the rebound. Mostly by luck, 2001 tax-rebate checks arrived at about the right time to enable families to keep spending, although not as much as they needed. But most of the Bush tax cuts take effect after 2004, so they offer no realistic help.
The other tricky thing about a fiscal stimulus is getting the money to people who will actually spend it. Most of the Bush tax cuts go to people who are already rich. They're far less likely to spend that extra money than poorer people. Most poor and middle-income people need to, or would like to, spend more.
That means Democrats ought to push for a fiscal stimulus that takes effect immediately and puts money directly into the pockets of lower-paid people. One idea: Exempt the first $15,000 to $20,000 of income from payroll taxes for two years. Everyone would get the same tax cut, but it's more helpful to lower-paid workers since payroll taxes are so regressive. Since employers would no longer have to pay their share of these taxes, they'd have a new incentive to keep people on the payroll.
The second purpose of fiscal policy is to help grow the economy by enlarging the nation's productive capacity over the long term. Many conservative economists think the best way to do this is to allow people to keep more of the money they earn rather than pay it in taxes. And because upper-income people pay most of the taxes, this logically means cutting taxes on the rich. Hence the Bush tax cut and the push to make it permanent.
This is "trickle-down" supply-side economics all over again. Democrats should remind Americans we tried trickle-down economics in the Reagan and first Bush administrations. The rich got richer and we ended up with $300 billion deficits as far as the eye could see. Trickle-down makes even less sense now that the rich are much richer than they were in the 1980s, and every rung on the economic ladder is wider apart.
Democrats should offer their own supply-side version -- "bubble-up" economics. The surest way to grow the economy is to make everyone in it more productive. This means better schools, affordable child care and early-childhood education, access to college, affordable health care, and cheap and efficient public transportation. Bubble-up economics has the added virtue of being equitable. It gives everyone a stake in the nation's future prosperity.
The cause is especially urgent now that states are cutting back. States are $58 billion in the hole this fiscal year. Most state constitutions don't allow deficit spending, so they're slashing education at all levels, as well as health care and infrastructure. Democrats should be pushing the federal government to step into the breach.
Democrats can make this argument only if they free themselves from the neo-Hooverian ideas that deficits are always bad and the national debt should be eliminated. For a decade Democrats have been banging Republicans over the head for being fiscally irresponsible. They were correct to do so in 1992 when deficits were out of control and inflation loomed. But now that the economy is sputtering and deficits are relatively small, Democrats should stop harping about fiscal responsibility.
You can understand how they got here. By the late 1990s, with growing budget surpluses, Democrats were worried that Republicans would turn the surpluses into tax cuts. Fearful of appearing to be "tax and spend" liberals, Democrats clutched the mantle of fiscal responsibility and told the nation to "Save Social Security First." When surpluses continued to mount, Democrats devised a fictional "Social Security surplus" to be deposited in a "lockbox."
Things got really weird. By the summer of 2001, House Majority Leader Richard Gephardt (D-Mo.) was proclaiming that Democrats would (willingly!) cut spending on education, health care and other programs for poor and working families in order to avoid dipping into the Social Security surplus. In the 2000 presidential campaign, Al Gore promised to use any additional surpluses to eliminate the debt by 2013. A Full Hoover.
Well, we're on the way to 2004 now, and the Democrats have lost control of the entire government. Meanwhile, the economy is going nowhere, most Americans are anxious about losing their jobs and making ends meet, and the gap between rich and poor is larger than it has been since the 1920s.
It is time for Democrats to adopt a positive economic agenda that is responsive to the real economy and consistent with goals they have championed for almost a century. That means a tax cut for working Americans coupled with an infusion of money to the states for education, health care and infrastructure. If they adopt this straightforward program, Democrats can be understood as clearly on the side of most Americans.
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Robert Reich is Hexter Professor of Social and Economic Policy at Brandeis University and former secretary of labor.
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