The evolution of the Republican Party has been one of the great forces shaping American politics since the 1960’s — an amazing transformation from pro-civil rights, isolationism, and fiscal prudence to advocacy of racism, foreign wars, and massive deficits.
- Goldwater’s decision to vote against the 1964 Civil Rights Act inaugurated the first (a reversal of his long-standing support for civil rights), followed by Nixon’s southern strategy (crafted by Pat Buchanan and later Kevin Phillips). Note that Nixon, as the most-liberal President since FDR, probably did more for minorities than any President other than Lincoln and LBJ (America is a complex place).
- Foreign wars: adopting Vietnam from the liberals, the Gulf War and the Iraq War (establishing Iran as a potential hegemon in the Middle East), and the Af-Pak War.
- Massive deficits, the subject of this post.
Unlike the first two changes, the last has a definite origin, one of the most brilliant combinations of political insight and myth-making in our history. It’s worth reading, to understand why today America’s Federal and many State governments teeter on the brink of bankruptcy: “Taxes and a Two-Santa Theory“, Jude Wanniski, National Observer, 6 March 1976. Here is the opening; the remainder establishes the mythology of tax cuts.
The only thing wrong with the U.S. economy is the failure of the Republican Party to play Santa Claus. The only thing wrong with President Ford is that he is still too much a Hoover Republican when what the country needs is a Coolidge Republican.
These statements, seemingly absurd, follow naturally from the Two-Santa Claus Theory of the political economy. 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.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.
Trillions of dollars in debt later, now conservatives spin a different story. As we see in this excerpt from “Goodbye Supply Side:”, Kevin Williamson, National Review, 3 May 2010:
The exaggeration of supply-side effects — the belief that tax-rate cuts pay for themselves or more than pay for themselves over some measurable period — is more an article of faith than an economic fact. But it’s a widespread faith: George W. Bush argued that tax cuts would serve to increase tax revenues. So did John McCain. Rush Limbaugh talks this way. Even Steve Forbes has stepped into this rhetorical stinker from time to time. Reagan knew better — his Treasury Department predicted significant revenue losses from his tax-rate cuts — but his epigones preach a different gospel.
… But, in truth, nobody really should run for office on the supply-side revenue effects of tax cuts, either. As it turns out, they present a dry and technical question of limited interest to the general electorate. It is true that tax cuts can promote growth, and that the growth they promote can help generate tax revenue that offsets some of the losses from the cuts. When the Reagan tax cuts were being designed, the original supply-side crew thought that subsequent growth might offset 30% of the revenue losses. That’s on the high side of the current consensus, but it’s not preposterous. There is, however, a world of difference between tax cuts that only lose only 70 cents on the dollar and tax cuts that pay back 100 cents on the dollar and then some.
There is considerable debate among economists and federal legume-quantifiers about how large supply-side revenue effects are. The Congressional Budget Office did a study in 2005 of the effects of a theoretical 10% cut in income-tax rates. It ran a couple of different versions of the study, under different sets of economic assumptions. The conclusion the CBO came to was that the growth effects of such a tax cut could be expected to offset between 1% and 22% of the revenue loss in the first 5 years. In the second 5 years, the CBO calculated, feedback effects of tax-rate reductions might actually add 5 percent to the revenue loss — or offset as much as 32% of it. That’s a big deal, and something that conservative budget engineers should keep in mind. But the question of whether the CBO accounts for tax cuts at 100 cents on the dollar, 99 cents on the dollar, or 68 cents on the dollar is hardly the stuff that a broad-based political movement is going to put at the center of its campaigns. Federal spending, on the other hand, is a national crisis.
… The problem with magical supply-siderism is that it gives Republicans a rhetorical and intellectual framework in which to ignore spending — just keep cutting taxes, the argument goes, and somebody else will eventually have to cut spending. The results speak for themselves: Tom DeLay and Dennis Hastert and Trent Lott and Bill Frist all know how to count, but, under their leadership, Republicans spent all the money the country had and then some. Deficits boomed, and Republicans’ claim to being the responsible britches-wearing adults when it comes to spending got unpantsed. Cutting taxes is easy. Cutting spending is hard.
Professor Laffer appreciates this. “It’s hard to win on spending. If it’s a Louisiana Purchase or the Cornhusker Kickback or earmarks, you can win on some of those, but it’s real hard. If you’re on a college campus, you can whip the kids into a wild rage on defense spending, on Iraq and Afghanistan. People love getting government benefits and they hate paying for them.” Supply-side icon Jude Wanniski understood the politics of spending cuts and described his own approach as the “Two Santa Claus Theory.” Short version: Nobody votes for Scrooge. Tax cuts give Republicans an opportunity to distribute economic benefits through the tax code the way Democrats distribute them through appropriations, and the exaggeration of the supply-side effect gives them an opportunity to pretend like those benefits are cost-free.
For more about Jude Wanniski see this “high-level discussion between Jude Wanniski and Paul Krugman“, a reply to Krugman’s “A Spiral of Inequality“, Mother Jones, November/December 1996.
Afterword
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