[Welcome Bruce Bartlett, and Host James K. Galbraith - bev]
The New American Economy: The Failure of Reaganomics and a New Way Forward
In January 1981, Bruce Bartlett and I took over direction of the staff of the Joint Economic Committee – he on the Republican and I on the Democratic side. Our situation was unique: a bicameral committee, evenly divided between Democrats and Republicans, no majority either way. This, at the start of the Reagan revolution, which he favored and I opposed.
Bruce was a resolute supply-sider, having drafted the Kemp-Roth tax cuts. I was a resolute Keynesian, who had helped draft the Humphrey-Hawkins Full Employment Act. His specialty was taxation, mine was monetary policy. We were both twenty-nine years old.
Stalemate would have been possible but we took a different path, creating flexible subcommittees and turning the JEC into an open forum on every economic issue. The result was an exceptionally productive two years, and an enduring friendship – though we agreed on nothing then and not all that much even now.
Bruce’s views are, in my view, romantic: he is (or was, until this book) a small-government conservative and a fiscal hawk. But he thinks deeply and writes honestly – something that is not easy to do without tenure. For his apostasy in the matter of George W. Bush, some years back, Bruce paid with his job.
It would appear however that apostasy is an acquired taste. In The New American Economy Bruce ladles it out with gusto, and with a message that should cause an entire generation of the American Right true heartburn. The message? That John Maynard Keynes was really one of their own.
John Maynard Keynes? The John Maynard Keynes? How can this possibly be?
Bruce’s dark secret, here exposed, is that he is primarily a historian. He has a keen interest in the musty words of thinkers from a past day, and he actually goes off to read them. A good part of The New American Economy concerns itself with the old American economy–the economy that collapsed in the Depression and that was revived-or, more accurately, rebuilt-in the New Deal.
Though English, Keynes was central to the ferment of New Deal ideas. Bruce here admirably introduces him as, among other things, the greatest enemy communism had in those years. Why? Because Keynes understood that if capitalism were not saved, revolution would result — and because he felt that revolution would be worse. Drastic measures were therefore justified, whatever the business leaders of the day thought. As Bruce notes, this assessment agrees with one made decades back by my father, who characterized FDR’s motives in similar terms.
Bruce takes up JKG on another point, his 1965 testimony to the Joint Economic Committee on the tax cut bill of the previous year, which my father had opposed. “There was a danger,” he said, “that conservatives, once introduced to the delights of tax reduction, would like it too much. Tax reduction would then become a substitute for increased outlays on urgent social needs. We would then have a new and reactionary form of Keynesianism with which to contend.”
And so it happened. The Reagan period takes up much of this book. It is interesting in large part because of the wars that broke out between conservatives once the postwar American Keynesian liberals had been swept out of the way. Much of this is highly arcane, and to understand it, it helps to have been there, as monetarists, supply-siders, fiscal conservatives, free-marketeers and pro-business corporatists battled it out.
Bruce is a first-hand witness, and quite a good one – though not disinterested. In particular he makes a persuasive case (to me) that the leading supply-siders were not charlatans. They were, rather, for the most part idealists, who took their cues from what was then reputable thought in mainstream economics. (This, of course, raises a question as to whether the mainstream economists were charlatans, but let’s leave that one alone here.)
Still, there was an interesting practical convergence between supply-side and Keynesian perspectives. In public the supply-siders reviled the “discredited Keynesians,” and insisted that their tax cuts were all about “incentives to work save and invest.” But in private even Reagan’s own top economic adviser, Murray Weidenbaum, admitted in 1981 that the tax cuts would provide a powerful economic stimulus, Keynes-style, once the recession was past and the president was gearing up for re-election.
Given that the (Galbraithian) alternative of public investment and a stronger welfare state was not a political possibility, the choice then was between a tax cut-fueled boom and prolonged stagnation. One can argue — I do argue — that by reconciling Keynes with the interests of the rich, the supply-siders made the country more prosperous than it would otherwise have been. They also kept the Republican Party in business. It is true therefore that Reagan’s tax cuts replicated Kennedy’s success in 1964.
When Bruce turns his eye to the present crisis, he confronts a Republican Party in a near-vegetative state, able at best to blink and mutter “tax cut” in the face of any and all problems. He suggests, sensibly, that the lesson of the debacle of Bush’s Social Security privatization scheme be accepted: the welfare state is here to stay. He argues (again as my father once did) in favor of a Value-Added Tax to provide a stable, admittedly regressive, pro-saving funding source. Thus Bruce Bartlett becomes an advocate of the European-style tax-and-welfare state!
Here, we again part company on the merits. For Bruce, our key economic problem going forward is an insufficiency of saving and the supposed burden of public debt. For me, it’s a lack of investment, and of jobs, brought on by the debacle of private debt and a disastrously deregulated and corrupted financial sector. I’m not a fan of the European solution — among other things it leaves savings idle, unemployment high and education (in particular) underfunded. I like the progressive income tax and even more the estate tax, which spur philanthropy and fuel our vast non-profit sector. I think Social Security is the best part of the American welfare state – and one of the most successful public pension programs in the world.
Back to the trenches, Bruce?
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I’m here.
Bruce, Welcome back to the Lake.
James, Thank you for Hosting today’s Book Salon.
My pleasure! Welcome, Bruce. Care to lead off?
Let me just start by saying that I appreciate Jamie’s thoughtful commentary. He, better than almost anyone, I think knows that what I believe today isn’t really all that different from what it was in the days when he and I were sparring partners. What’s changed are circumstances, What was right for an inflatuionary recession is not right for a deflationary recession. The first required suuply side policies, the latter requires Keynes. None of my conservative friends understand this.
Care to describe for us your conversion to fan of Keynes? What brought it about? Has it cost you any friendships yet?
Bruce and James, thank you for joining us.
DW
I lost a lot of friends when my Impostor book came out. Those that have stuck with me feel that I have some compulsion to leave the reservation.
yes, but Keynes? That symbol of arch-liberalism? That anti-business gadfly?
Could you speculate as to why your conservative friends do not understand the need of the “flexibility” which you obviously embrace?
I think I’ve tiold this to Jamies before, but as I’ve gotten older I’ve come to appreciate his father. I still don’t agree with his economics, but as a political and social commentator he was very, very good. It’s sad that no conservative appreciates this fact.
I honestly don’t understand why those on both sides feel compelled to advocate one-side-fits-all economic policies. As Keynes reputedly once said, When facts change I change my views. What do you do, sir?
Again, Bruce, why do you imagine that you find yourself alone among your conservative friends in your appreciation of John Kenneth?
He was extrememly insightful. He really understood politics and knew everyone. I have a similar appreciation for Herb Stein, whom I disagreed with almost as much as I did JKG. For the record I would like to say that in every case where Herb and I disagreed, he was right and I was wrong.
A useful precept, but as you say, your actual economic views haven’t changed that much. What’s changed is your appreciation of Keynes, both in his time and ours. Here you seem to be in line with Skidelsky, whose new book is subtitled “Why, Sixty Years After His Death, John Maynard Keynes is the Most Important Economic Thinker for America.”
If that’s a fair summary of your view, what brought you to it?
Same with Keynes, of course, whom I believe to be a conservative in the classical sense. Everything he wrote and did was for the purpose of saving liberal capitalism, which some on the web site may disagree with. But it’s true. Why conservatives hate him as much as they hate Marx is a mystery to me. It;s just dogma.
I haven’t seen Skidelsky’s new book, but I read his three-volume biography and his views and mine on Keynes are very much the same.
Those who cannot adjust their “views” as the facts change will find themselves ever less relevant (if they are honest with themselves).Perhaps economists are at somewhat greater risk than most people, simply because they are more deeply “invested” in their “philosophy” than most of the rest of us who are not economists?
DW
Well, this is very interesting. So glad you both decided to get the band back together, even if only for these two hours!
What is the way out of the tax-cut cul-de-sac for the GOP? Here in California, we have GOPs who’ve taken a pledge never to raise taxes or vote for a tax increase. They will be challenged, probably successfully, from the right within their safely defined conservative districts should they break their pledge.
How can we ever hope to govern this huge complicated economy without the chance to adjust — okay, raise — revenues from new sources never contemplated when they took their pledge? What way out of this maze and into responsible governance does the modern GOP have, if they will never, ever raise taxes?
Thanks for chatting today.
My views of Keynes and KKG are very similar. They were extremely insightful social commentators. The difference is that Keynes was well to the right of JKG on economics!
On strictly economic questions though, you and Keynes are still pretty far apart. You write that “In the future, Americans must save more and consume less.” Keynes was emphatically opposed to policies that tried to raise saving. In one essay, he worked out that if you saved (say) 4 shillings a day, you’d put a man out of work for a week.
As a technical note, there is a “Reply” button located in the lower right hand of each comment. If you click on the “Reply” it pre-fills the commenter name and the number (it makes it a lot easier to follow the conversation)
I don’t know that economists are any more prone to a foolish consistency, as Samuel Johnson put it. But I certainly see a lot of economists advocating the same policies no matter the circumstances. I thinks it’s partly because they misunderstand the difference between policies that affect long-term trend growth and those that designed for countercyclical purposes.
(Worth noting, Skidelsky sits with the Tories in the House of Lords, or did for a time. He may be a cross-bencher now.)
Bruce, if you wish to reply to a specific comment, clicking on the little blue “Reply” at the bottom right of the comment will get you “there”.
:~DW
I think Keynes was speaking in cyclical terms when he said that. I’m not really sure what Keynes’ model of long-term growth was. As he famously said, in the long run we are all dead.
This is true. In 1940, Keynes wanted to preserve the free market’s ability to set prices during the war, and just to regulate demand. JKG felt this was entirely impractical, and ended up running price control for the first year or so of the war.
I think Skidelsky has sat in every section of Parliament at one time or another.
That’s tue. Even in 1940 Keynes was well to the right of JKG. Keynes was very opposed to price controls.
Keynes’ basic view of the long run was governed by compound interest: a powerful force for raising living standards. The problem would be to keep up investment as profitability gradually declined. He talks about this toward the end of the General Theory – it raises a problem of how to sustain investment and total demand. But personal saving is never something Keynes thought much of.
Keynes also thought deficits were terrible. He called for deficit reduction in England when unemployment was over 12 percent.
Keynes thought forced saving was the best way to deal with inflation.
Not so sure about this. The entire Liberal Party program of 1929, which Keynes wrote, was based on “loan-expenditure” — deficit spending.
In my book, I try to thread the needle by saying that supply-side policies were appropriate for for the late 1970s/early 1980s, but that we need Keynesian policies for deflationary conditions such as well have now.
Let me toss out another question.
As I read your last chapters, I’m not quite sure exactly where you stand on Social Security. Is it your view that SS benefits should be cut, but can’t be politically?
If so, I’d like to ask *why* you think SS benefits are larger than they ought to be?
I think Keynes was more concerned about spending than he was about deficits. He thought the budget should be balanced over the business cycle, with surpluses in good years offsetting deficits in bad years.
Bruce, I have not had an opportunity to read your book but do have a semi-economics based question for you and apologize if you cover this.
How do you (and other economists) reconcile the loss of US jobs attributable to “free trade/free markets” with the global benefits we are supposed to see? Does the economy reach a point where there are no longer enough consumers to support things? Would this lead to a semi permanent state of stimulus just trying to keep folks alive?
I’m not really concerned about SS. It’s fiscal problems are trivial compared to Medicare. I think we should change the indexing of initial benefits from wages to prices so that we don’t continuously raise real benefits. But my main concern is how do we control health care spending. That’s what is bankrupting us.
When life goes out of a body, there is no way to put it back in.
Is that true for economic systems?
Wasn’t the U.S. economy a pyramid scheme, which continued growing only so long as there were abundant and cheap resources and lots of buyers of American-made goods?
Seems to me Keynes is like trying to breathe life into a dead body.
I still believe in free trade. But I do think there is a big problem with China because they refuse to allow their currency to raise. This gives Chinese goods a price advantage. But on the other hand, it forces China to buy vast amounts of Treasury securities. It’s a bit of a two-edged sword.
I hope that’s not right.
Going forward, I think our biggest economic problem is the aging of society. We have not prepared at all for retirement of the giant baby boom generation.
Do you think a public option is a good way to control health care spending?
No? Wasn’t that precisely what the 1983 Greenspan commission did – by overfunding SS for a generation?
I’m curious what people think about the value-added tax, which I have advocated to partly close the fiscal hole we are in. My conservative friends are very stronmgly opposed to this idea. But I think it’s a fantasy to think we will ever cut spending enough to prevent national bankruptcy. I think conservatives should accept that we have a welfare state and learn to live with it and finance it properly.
Let’s talk about the Great Crisis. What do you think caused it? Is a Keynesian solution appropriate? If so, what along those lines would you do now?
Welcome to Profs. Galbraith and Bartlett. Wonderful exchange. Bring us to the present, please. We have denials the stimulus is working, so let’s bag it; arguments the stimulus was/is insufficient and the unemployment/jobless recovery are the proof; arguments for/against another stimulus but maybe we have to call it something different.
What have we learned from all this, and what should we do?
(Sorry — didn’t mean to step on your previous comment.)
Maybe, maybe not. Health is not my area of expertise. My concern with health care reform is that it is not properly financed. I think if we are going to create a new, broad-based benefit program it should be financed largely by the beneficiaries, as is the case with Social Security.
My $.02. I am not an economist but the regressive nature of a VAT is really troubling, unless basics are exempted from the mix. I know a number of states exempt food purchases from their sales tax collections and some exempt clothing below a certain threshold (e.g., MA at least used to exempt any individual clothing item less than $150).
If a VAT is an across the board sales tax, then no thank you. But as a tax on consumer products, then we can talk.
Let me put the question to Bruce this way: Unemployment is at 9.8 percent now. The stimulus package should be going full bore by now, so we’re clearly not going to get much more out of it than we’re getting now. 9.8 percent unemployment, though, is a disaster. What would you do?
I think Ronald Reagan missed an opportunity to at least propose some fundamental SS reforms. I think the retirement age should have been increased much more than it was. But that wasn’t even a Reagan initiative. It came from a guy named Jake Pickle in Congress. I think we should have a retirement age for SS and Medicare of 70 today and raise it more in the future.
How much confidence do you have in getting Medicare spending/costs under control. The bills include a MedPAC to get around Congress, but then special deals exempt PhRMA, hospitals, and now it seems doctors. It’s as though we can only have a stimulus by ensuring $200 billion pay raises for doctors. How do we break out of this political compromising?
The stimulus was grossly oversold and poorly designed. We needed policies to increase spending and the stimulus package didn’t really do that. It was mostly transfers that didn’t raise spending at all.
Raising the retirement age penalizes people who need to quit work at younger ages, by cutting their benefits. It’s fine for professors — not so good for anyone who actually works for a living.
But there’s another problem: keeping people working blocks up job openings that would otherwise go to the young. At a time of high unemployment, it misallocates the available slots in the workforce.
I’d cut the age of eligibility for Medicare to 55, and let a lot of people who would like to retire, but are holding on their jobs for the health benefits, get out from under.
Rome built great public works projects roads aqueducts things that benefited society but they built this slaves. Today we our neglecting our infrastructure and at the same time creating a mixed immigrant poor wage slave caste.
I assume as the Empire fell infrastructure was neglected and that further hurt the economy of Rome. At what point does failed infrastructure start being noticed and at what point will be to late.
Also how long can the wage slave immigrant underclass be kept where they are before we like Rome start having to take drastic measures?
It is my thought that the typical work week should be reduced from 40 hours.
To what extent (if at all) do you believe ever-widening economic disparity to be a threat to the system at large?
In your view what was the role (if any) of supply-side economics in creating a current level of disparity not seen since the early 20th century?
How does a system sustain if the gulf between haves and have-nots expands to the point where most of the population falls into the void? When a system ceases to serve the common interests of the majority of its members, where does the support for it’s future continuation derive from?
I have little confidence in any cost control measure for Medicare. As I said earlier, I think it would be better to pay for expanded health coverage by havinmg some sort of broad-based tax such as raising the payroll tax.
Prof Bartlett,
I’m really delighted that you are here. I read your blog regularly.
What should the Fed be doing now?
We have to do something to control costs. What do you suggest?
It doesn’t bother me if Warren Buffett makes another billion dollars as long as no one else is worse off.
Sacre bleu! The French tried this.
I haven’t seen a comprehensive assessment, but I don’t think that it worked very well as employment policy. It does change patterns of social life … but it’s not very clear that Americans want to spend more time at home.
Maybe financing the Viet Nam on credit was bad for our economy and high oil prices I’m sure also played a part.
Avoiding long wars and making cars more fuel efficient might give society better returns on its investment.
Then what measures do you propose for “raising spending”? Would you have supported or opposed, e.g., more stimulus to avoid state budget cuts to avoid teacher/health layoffs? Infrastructure? Subsidies for weatherization? Direct incentives like the cash for clunkers program? What works, in your view?
I think the Fed should have been more aggressive about what economists call quantitative easing–getting money into the economy where it will circulate. The problem is that money is piling up in bank accounts and is not being lent or spent. Partly that is because an active fiscal policy is necessary to augment monetary policy.
Bruce, if you are prepared to raise the age for participation in SS, what are your thoughts on raising the “cap” on income that should be subject to SS taxes?
And, as I’m on the topic of taxes, should the upper rates be raised, given that we are in an “endless war on terror” and that the “top” percentiles of the population have seen their “worth” increase significantly while most of the rest of us count ourselves lucky to have not lost more than we already have?
DW
Good question. It’s one that Keynes never really answered in the 1930s. In the end it took WWII to get enough spending to end the depression. But I’m pretty sure that tax cuts wouldn’t do any good at all under current circumstances. All of my conservative friends disagree with me about this.
How do the Western European countries & Canada control medical costs? U.S. is 1-1/2 times as much per capita as the next nearest country.
BTW, the U.S. medical system is just what you’d expect from a capitalist system: only the rich need apply.
Any signs the GOP is listening? Any sign of new thought besides tax cuts in GOP economic policy? What about Ron Paul he would get rid of the Fed and do a bunch of stuff neither the Dems or the GOP would like but he is getting a Popular following.
Is he the new voice of GOP economic policy?
the problem of health care costs is not a problem of Medicare – it’s a problem of the whole health care system. Four elements come to mind:
– the cost of the private health insurance system, which could be dispensed with completely. Someone pointed out to me the other day that illness isn’t a risk – it’s a certainty. The economic rationale for insuring against it privately isn’t that some people get sick and others don’t. It’s that some people get sick before age 65 — when Medicare kicks in — and others don’t. Extending Medicare would eliminate a lot of real economic costs associated with health care.
– managing the distribution of expensive machinery and procedures – a competitive element between doctors and medical centers – would make the system more efficient.
– single-buyer pressure on Big Pharma and drug prices would be useful.
– getting medical care and other help to people at younger ages, reducing the incidence of diabetes (notably), would over time reduce the cost of caring for the complications of that disease in older people.
Are there any signs from any in the current Republican leadship that they grasp/accept the message you’re giving them about Reaganomics. We seem to be missing an intelligence exchange between the parties — the Republicans aren’t making coherent arguments and the Democrats don’t have to tighten/refresh theirs. And we have the debate now framed by Krugman et al as Saltwater vs Freshwater economists. It’s truly bewildering. Any reactions?
I think it’s a bad idea to raise marginal tax rates. Also, raising the cap means that those with upper incomes will get back nothing on their SS contributions. Historically, the strength of SS, politically, is that it was a true pension with a close connection between taxes paid and benefits received. If that link is broken by raising the cap then SS beciomes just another welfare program and we know what happens to those.
Cut which taxes? Only 40% in the U.S. pay income taxes. So more income tax cuts for the rich?
They have single payer systems. I think Obama erred by not putting forward such a plan. I say that not because that’s what I favor, but because it would have changed the political dynamics. Unlike most conservatives I don’t shrink in horror at the idea of single payer. My main concern is that we pay vastly more than every other country for health care without getting better health care in return.
Bruce, those enjoying “upper incomes” have already received, and I hope you would agree, considerable benefits from the larger society. I think that requires a willingness to “give back” something to that society.
What do you think?
Actually, 47% of tax filers pay no income tax. I think that’s bad. Everyone should pay something to support the general operations of government. That’s why I favor a VAT.
Warren Buffet is making a mint at Goldman.
Do you think Goldman should be nationalized, quartered, or made to create value?
The Republican Party is brain dead. That’s why I am no longer a republican.
I have no idea what to do about Goldman.
The fundamental economics problem with the medical industry is the knowledge gap between buyer and seller, giving the seller economic power. In addition, the customer is vulnerable, augmenting the power of the seller. I call this the mafia of the intelligentsia: intelligentsia reflecting the knowledge gap, and mafia, stronger than cartel, because of the customers’ vulnerability. No “market” mechanism can fix that market imperfection. The system has to be managed by an outside force to minimized the MOI’s destructive economics.
Of course, it would me nice if something were done to reduce the knowledge gap. Like publish records of which hospitals and docs kill and which cure. Better online medical sites. Etc.
The idea of abolishing the Fed is nuts.
Are you saying you believe that the only observed consequence (of enacted policy) is that Buffett is better off – and there are not, in fact, millions of people who are substantially worse off? If that were the case maybe I could agree with you, but given that it’s clearly not… my question still stands.
Do you not see disparity as a (long-term) systemic threat? Or put differently: are we anywhere near the point – at current levels – where disparity potentially destabilizes the whole system?
Either I’m misunderstanding you, or it seems a rather glib answer.
See my 80. In the single-payer system, the govt manages the imperfections of the market. They may not do it perfectly, but they get an outcome on both quality and price that far exceeds that of the U.S.
Of course, after the W administration, I doubt that the U.S. govt could do anything close to as well of that done by other developed countries.
Bruce, to put things in “perspective”, have you any idea what percentage of US corporations pay no effective taxes?
We are told that “they” are “persons” too, even if they suffer no pangs of conscience, do not have to die, and cannot be imprisoned if they do terrible wrong.
Monetary “punishment” of Global corporations, unless such “punishment” is large enough to actually change behavior or destroy the corporation, is a ludicrous farce.
DW
I think it’s possible for one person to be better off without anyone else being worse off. The pie can get bigger. Economists call this Pareto optimality. If that leads to greater inequality that doesn’t bother me. If it were a zero-sum game that would be different.
Agreed but Ron Paul does seem to be the Populist voice and he is getting support among voters as long as the economy sucks he will keep gaining support.
The United States of Goldman Sachs. GS designed and managed it’s takeover of the U.S. financial system, including the govt portion, perfectly.
Perhaps not. But I think it’s important to know that for what the federal government spends on health now through Medicare and medicaid we could have a national health insurance system no worse than the one in England and save 7% or 8% of GDP in process. That would be like giving everyone a massive tax cut.
I’m arriving late, but would like to know what Bruce thinks about Rep. Frank’s bill that creates a Consumer Financial Protection Agency and particularly about reports that characterize Rep. Melissa Bean’s proposed amendment to Frank’s bill as an effort to minimize consumer protection in the financial services industry.
Her position on regulatory preemption seems a step backward, no?
In a world in which capital moves so easily I think it is a losing proposition to tax corporations at all. We should operate on the assumption that only people pay taxes and design a system that raises adequate revenue as fairly as possible.
zero-sum, – you cannot be serious!
approx 18% of americans are un, or under employed. That’s about zero-sum as it gets.
Dear me, NO idea what to do about GS? And you’re an economist? There must surely be some arrows in your quived that could address the problem. Like vigorous enforement of financial regulation, more financial regulation, including prohibitions on financial “innovations” that do nothing to help the real economy, but engorge the fat cats, who then get bailed out when the financial system they created collapses.
What would you do to close tax havens, used by individuals?
It’s outside my area of expertise. Of course, I believe that the existing regulatory system failed us badly in recent years. But what should take its place, I don’t know. I think it would be good to get away from the sterile argument about more versus less regulation and concentrate on good versus bad regulation. Sometimes more is better. I have no problem with that.
It’s a negative sum game for the poor and middle class, and a positive sum game for the rich. That’s why the U.S. has the system it has. It’s intentional.
Then corporations cannot be fictitious “persons”, but, legally and politically, will have to become some other kind of “animal”.
I would favor a territorial tax system. I don’t see why income earned by Americans in foreign countries should be subject to US taxation.
If only people pay taxes, where does some type of transactions/trading tax fit. We’ve protected Wall Street with trillions in guarantees and they’re riding high again, while the commercial banking sector still isn’t lending (or perhaps not enough people are borrowing?). Shouldn’t we have a mechanism to capture some of this upside on Wall Street? And if so, what would it look like?
Wouldn’t that open us up to all kinds of tax-shifting? Income could be booked practically anywhere taxes are low.
Would that not, in fact, just legitimize the Caymans, Jersey, Lichtenstein and the rest?
Thanks for the explanation.
But when the pie gets bigger (with power players disproportionally benefitting) primarily through asset-inflation bubbles, which when popped stick the taxpayer with the bill while the authors retain their ill-gotten gains…
Seems to me at some point people begin to realize that not only does the structure of the system not benefit them – it actively works to harm them. At that point what sustains their belief and effort in the system? If a system is manifestly unfair in the way the larger pie is divided, won’t that eventually affect the productivity off those (i.e the majority) who are not favored by economic policy and practice?
I don’t think a securities transactions tax is a good idea because trading will just shift to London, Hong Kong or somewhere else. The problems of Wall Street I think are regulatory in nature and should be dealt with that way by reforming the SEC et al.
No more than now. But then I agree with Irving Fisher that consumption is in principle the proper base for taxation.
Damned fine question, db11!
Bruce,
Do you believe in some system, some formula?
Is there some sort of mathematical equation for the U.S. economy?
How about taxing certain financial securities transactions with a ’sin’ tax?
From Jamie’s intro:
Prof. Galbraith wrote an excellent piece cited often here at FDL called No Return to Normal a few months back, and it seems to have been prophetic. Do the two of you now agree on the importance of a massive jobs program, both to deal with joblessness per se and to redirect investment? Is there any further clarity on where that redirection should be?
I agree that the legitimacy of capitalism rests on the assumption that everyone ultimately benefits. If people come to believe that the system is rigged then people will naturally demand policies that may throw the baby out with the bathwater. That’s why conservatives are foolish to oppose all government regulation and all redistribution. Some of that is a price that has to be paid to maintain political support for the goose that lays the golden eggs.
A manifestly unequal distribution of wealth in favor of those who are already wealthy forces the rest to work even harder to make ends meet, a pro-productivity policy.
These are by far the best proposals I have seen put forward for real healthcare reform with real tangible results.
Is there a chance in hell it could ever fly given that Congress and Emanuel are so beholden to medical campaign contributions?
So then “consumption” is the only “benefit” that should be taxed?
Logically then, Bruce, more and more will accrue to fewer and fewer.
At some point “they” will figure out how to “take it with them” and those of us “remaining” will have a great, shrinking pie.
;~D
I have thought that if we could increase aggregate spending that this would raise growth and that this would increase employment. Now I’m not so sure. We may need some targeted jobs programs going foward because I don’t see unemployment coming down very much even if GDP growth returns to normal.
Bruce, in your book you basically endorse the European system, a welfare
state funded by a broad-based tax structure. And here you say (as you have for years) that the proper base is consumption, not saving.
Let me raise a Keynesian question about all that.
Doesn’t the European model also generate high unemployment, fundamentally because it fails to mobilize and disperse savings effectively? You have massive wealth built up among (especially) the elderly of (especially) Germany — and no place for it to be spent.
(For example, European higher education is free, but it’s also cheap: the states that dole out the money do so very stingily.)
One thing about the American system: we recycle our fortunes, with the result that people are employed — or at least were, before the crisis took the system down.
Thoughts?
Thanks, Bruce. Simply stated, Rep. Bean (Illinois) wants to protect major banks and mortgage lenders from state regulations, which are often stricter than federal regulations.
So the House Finance Committee would create a Consumer Financial Protection Agency, and then simultaneously take away from the states the authority to protect their citizens.
I don’t see how that could possibly be good, though I do see the possibilities for all kinds of abuse.
I think we should be more concerned aboute absolute levels of well-being and less concerned about relative levels.
“Some of that is a price that has to be paid to maintain political support for the goose that lays the golden eggs.”
Would you please paint us a picture of this ‘golden egg’ ?
Alas….
I think high unemployment in Europe is mainly a function of labor market policies–high minimum wages, extreme difficulty in firing workers once hired, over-generous unemployment and welfare benefits etc. On the other hand, such policies make it much easier to weather storms such as we ghave seen lately.
My view on thw welfare state is that it is inevitable, whatever one thinks of its merits. The problem is financing it properly, as far as I am concerned. Neither liberals nor conservatives seem to be concerned about that.
Capitalism is clearly the best system ever devised for increasing aggregate wealth.
Which would require some “baseline” that would allow an individual person
to actually survive.
And would suggest that ALL individual human beings have an essential, and real, worth.
I don’t think your Republican friends would go along with THAT at all, Bruce.
Would you?
this is a TERRIFIC discussion and I’m gonna relish the dialogue
couple of things;
first, we all know reagan’s tax increases out wieghed his tax cuts, and the democrats miss that beat every single time
reagan did happen to lower taxes for the wealthiest among us however everyone else paid that bill and then some and that’s the subject for later however I need to point something out concerning “supply side” economics
you can’t get something from nothing, labor has to create product od some kind, either goods or service and that product is where profit is derived
it starts with labor and migrates up, it wealth doesn’t eminate from whole cloth and work it’s way down
the very concept is some kind of sick marketing concept specifically designed to redistribute middle class wealth
when you give some kind of “relief” to a person who has more assets then they can possibly spend you cannot possibly get more investment out of them, the notion is obsurd and I am amazed anyone ever fell for that in the first place
only now are we seeing the debt being called,
Given the national nature of finance, I am inclined to think national regulation would be better than state regulation. Otherwise there is a race to the bottom with banks locating where there is the least regulation. There’s a reason why most big companies incorporate in Delaware.
Excellent set of questions.
The problem for the people, once their belief in the system is nearly gone and productivity is down, what are they to do about it?
Bruce’s point @107, that conservatives [euphemism for the wealthy?] are foolish to oppose all government regulation and all redistribution, presupposes that such “principled” purists give a damn.
So here’s a political Q. How much worse must the U.S. economy get before both political parties will finally try to do something productive? 15% on the measured unemployment rate? Another burst bubble? An income distribution that’s twice as skewed as during the Gilded Age?
That’s not the answer a Keynesian would give! I think your conversion is not yet complete…
Actually, minimum wages in much of Europe are not high. In Portugal, Greece, Spain, Poland low-skilled wage rates are low but unemployment remains a big problem. Conversely, where minima are high (Denmark, for instance) the unemployment rate tends to be much lower.
As for job protections — I think they arise as an excuse for paying low wages — they are more prevalent in the low-wage countries. But it’s a very bad tradeoff – you can’t fire people and you can’t motivate them either. The solution is that job protections should be gotten rid of *as* wages are raised.
Do you mean Egg-regate wealth? In the Golden sense?
That is an assertion Bruce, regarding capitalism, a belief,if you will; our times seem to be suggesting the need of recognizing another, further truth.
You left out “regulation”.
wow, – with Gates in the room we’re all billionaires.
At the end of the eday Reagan cut taxes more than he raised them. His tax increases from 19982 to 1988 took back about half the 1981 tax cut. This is something no conservative will even acknowledge. They also forget that the top tax rate was still 50% even after the 1981 tax cut. Yet almost all conservatives today think it would be disastrous to raise the top rate to anything close to 50%. I think that’s nonsensical.
true enough for issues related to corporate charters. not so true for issues related to consumer protection, where state AGs are a major force.
That explains why we need a national Consumer Financial Protection Agency.
Ok.
But why take away the authority to regulate from New York, or any other state?
It surprises me that unemployment isn’t a bigger problem than it is, politically. If you factor in people who have left the labor force, are forced to work part time, etc. the real unemployment rate is like twice the official rate.
Came late so forgive any repetition. Reaganomics was essential to the construction of the paper economy. It transferred great wealth away from workers and to investors. The investors did not have sufficient opportunities or interest in investing this wealth productively so the result was a series of larger and larger bubbles. It also favored the gaming of the system until there was really nothing left of the financial system except the gaming. A classic case of bad money crowding good money out.
In any case, any thoughts or perspectives from your involvement in all this?
Sufferin’ dog hairs!!!
Does it count if we are in the same country with Gates?
(I feel more flush, already)
;~D
works to counter the Republican idea to pass legislation allowing inter State shopping for Insurance.
I think 10 percent unemployment over the holidays will start a lot of fires burning — as it did in 1982. Bruce will remember, the JEC held the hearings on unemployment when the rate breached 10 percent in October 1982, and the Dems picked up 26 seats the next month.
But if the administration chooses to do nothing about it, then I think some of the people for whom Bruce has minimum regard right now — on the far right — will start gaining real traction politically.
here’s the main reason it’s nonsensical;
the wealthy spend a far smaller percentage of their wage then the middle and lower class
therefore teh middle and lower class are re-taxed locally on just about their entire income, the wealthy are retaxed on a small percentage
they pay less in overall taxes by percentage even if you eliminate deductions and even when you take into account the progressive tax
in fact, a “true” flat tax would charge the federal government local taxes and then the federal government would create the aggravate percentage of the entire wage.
however that would wind up costing the wealthy far more and they really don’t want a “true” flat tax what they want are real regressive taxes wherever they can get them
Just want to note that despite the differences between guest and host, what’s refreshing in the intellectual honesty of the exchange. Elsewhere, tt’s practically non-existent these days.
How do the two of you account for today’s condition, and what can we do to improve it — at least the economic dialogue part of it?
I think the answer to your question is easy. Our elites of both parties, universities, think tanks, Wall Street, Washington, have shown again and again that they are not up to the task of addressing let alone fixing the nation’s problems. How bad things get is irrelevant. Certainly they will do something if, as I think, we have fullblown depression in 2011. But those actions will be as ineffective and off the mark as everything that they have done before.
I have read otherwise, that at the end of the day he raised them far more then he cut them
when you give back 40 dollars but reduce state aid by 80 dollars the state has to raise the differance, that is NOT a “tax deduction” by any measure
the washington monthly;
etc, etc, etc
Agreed.
Maybe the primary disagreement is how far we are already down that path. (of broad perception of fundamental unfairness / systemic corruption of the current capitalistic system). Seems to me it’s the one thing that the far left and right agree on – while obviously not agreeing on causes or remedies.
I see the system as being in a very fragile state: one more big shock could tip everything. The disconnect between the elite discourse of the ‘recovering’ economy and the everyday reality for average people is too tough to bridge… or stomach.
Any remaining belief in a system of global free-market capitalism and it’s supposed innate ability to maximize common good –a la Adam Smith– hangs by a thread for a vast swath of the population.
There is no good case for stripping the states of their power to regulate consumers. I think the Consumer protection agency was a good idea, but I do smell rats in the business.
Another issue here is why the Federal Reserve supports this. One important reason is that the very-important-Governors don’t like being called before Congress on consumer issues. They’d much rather have them in someone else’s bailiwick.
If that someone else isn’t doing the job, then we’re in trouble.
YES!
By the way, Bruce, we are a difficult bunch, here, lacking in respect and manners. And not much swayed by celebrity.
But you are doing okay, and I hope you understand that our jabs and pointed questions are a measure of respect for those who can deal with them.
DW
The problem I experienced with “supply-side” as implemented under Reagan is it inserted the rich elite between the masses and stimulus (financed through taxes paid by the masses), and relied upon a “trickledown” effect that never materialized in real terms for most working folks and their families.
Tax revenues never achieved the “Laffer Effect” and therefore passed an ever increasing share of the financial burden of running the country onto the middle and lower class via tax increases. I think the statistics bear this out.
Far better and more sustainable, I think, is to stimulate the economy from the bottom up by cutting the retirement age and increasing benefits, direct payment of manageable health care expenses, and infrastructure/technology investments.
Business and the well off will manage just fine to make a more sustainable fair profit over the long term instead of the increasing economic disparity of the last thirty years.
I’ll buy the book, Mr. Bartlett, but just so you know, my coworkers and I in the foundry didn’t believe a word of what you and Jack Kemp were selling for a minute – unfortunately enough of our underclass brethren did to get Reagan reelected.
Great review Mr. Galbraith, and the discussion by you both.
I don’t think that’s right. Reaganomics was about increasing incentives to work, save and invest by increasing the after-tax reward to such activities by reducing marginal tax rates, and about stopping inflation through a tight monetary policy. Given where we were in 1980, I think this policy worked pretty well. The problem is that this isn’t 1980 and we have a different set of problems that require different solutions. That’s where I disagree with my conservative friends, who are still stuck in 1980.
I think Obama erred by taking his eye off the economy. He should have spent just about every minute of every day in office doing everything in his power to get the economy moving. Pushing forward on so many other issues was a political mistake in my opinion.
if you count the rise in payroll taxes — as you should — then i suspect it comes out close to a wash, with DEFRA and TEFRA reducing the cuts in income taxes by about half, and the rise in payroll taxes making up the difference.
Easy way to check: what was the tax share in GDP in 1988 vs. 1981.
Fixed.
I’ve done this before. About a year ago I was lead commentator on a book by Dean Baker.
Well said, Jim.
DW
I believe that taxes as a share of GDP were about the same when Reagan left office as they were when he took office. His accomplishment was not so much to cut taxes as change their structure. I don’t deny that.
I should add that taxes were rising rapidly when Reagan took office due to bracket-creep. That was unsustainable.
Ah, you’re an old hand then?
Good on ya.
And I hope you might visit more often.
Let it not be a year, before next we share some time with you.
;~DW
In response to Bruce Bartlett @ 118
I’m amazed that no one has responded to this comment!
Capitalism is inherently flawed because by design it does not encourage those who have all the capital to consider the common good. Particularly as it has been implimented in recent years, we have found that it is a system that most certainly does not increase aggregate wealth, not at all.
If Capitalism is to survive as a system – if it is to survive – then it must be modified, those with the capital must accept more government regulation, and much less of our overall societal structures can be privatized than currently exists.
The proof is all around us as we debate health care reform and so many other things.
The pumping up of the stock market via sloshing around bailouts masks the deterioration in the fundamentals, like unemployment, the housing situation, and debt. I have thought the market might tank before the end of the year but it is hard to judge. It is mature and ready to fall but it won’t until we run out of greater fools.
Parenthetically, I follow oil markets and the closing price yesterday was something over $78/bbl. This is another bubble because with glut and recession it should be trading in the $30-$35 range. Yet I have heard no mention or outrage anywhere about this even though this has been going on for months.
Here we agree.
Part of the problem is the culture of policy advisers. So many health care wonks, so little time! Folks desperately want to get going on the topics they spent the entire campaign talking about.
Climate change could (and should) have been incorporated into an economy package – it’s a leading strategic question going forward. And health care could have been subrogated by my simple Medicare-at-55 plan, as an emergency measure to help the working population.
A second big problem was the pro-bank orientation of the policy group, and their view that they could somehow “get credit flowing” by stuffing the banks with cash. But credit is not a flow, and banks don’t need money in order to lend. If only some of these banker types actually understood banking…
Ah, but one can as easily argue that the problem was that Obama wasn’t presented with just one crisis that merited most of his attention. He was handed multiple crises spinning out of control, with delays in any of them making each worse, and they all demanded his attention. I don’t see how he can be faulted to trying to do more than one thing; the problem seems to be an unwillingness to provide remedies as serious as the problems he inherited.
As we come to the end of this Book Salon,
Bruce, Thank you for stopping by the Lake and discussing your new book and economics.
James, Thank you very much for Hosting today’s Book Salon.
Everyone, if you haven’t read Bruce’s book yet, here is a link.
Thanks all.
yes, we’re not getting anything much in real activity from the “pumping up” you describe.
And the mechanism for that is very simple: banks can borrow from the Fed for free. Not hard to make money on that basis.
The one thought worse than the idea that the economic advisers don’t understand banking, is the possibility that they do.
Unlike most American conservatives I don’t think it’s possible to go back to some 19th century minimalist state. Partly that’s because of Wagner’s Law, which says that as people get wealthier they naturally want more government services. The problem is that they are not yet willing to pay for those services. The big problem going forward is paying for the welfare state , in my opinion.
Completely agree on both your assessment and remedy.
Wonderful discussion. Thanks so much to both of you.
Bruce, well done and it’s been great chatting about all this.
I notice that the “The New American Economy” is #1 on Amazon under “Social Policy” at the moment – congrats. The market is at work, on some things anyway…
Jamie
Right, this is a form of fascism by government neglect.
The U.S. is a far different country than it was in 1982. Things that are being done in D.C. today would have been unthinkable in 1982. Which is why I think it must get a LOT worse than it already is before something reasonable is done. Or maybe reasonable is no longer possible in the U.S., in which case the country is on its way to collapse.
It may well be that “the welfare state” is “payment” for earlier excess.
And, Bruce, “welfare state” is a “negative” term, akin to “welfare queen”.
Incentives to work? Come on. He put the nail in the coffin of the unions. He raised taxes through the FICA on the working class. He transferred wealth to the rich who invested it badly. What in the world do ordianry Americans have to do with “marginal tax rates”? We are talking the wealthy again. And we are not talking about productive use of money but the beginning of the paper schemes that we have seen so much of late. We had the savings and loan fiasco. How did that encourage “work”? And a prime reason that working wages have been flat for 30 years is because wage increases were defined as inflationary and therefore to be stamped out by tightening the money policy. Money that went into wealth destroying bubbles and unproductive investment was on the other hand treated as the wave of the future. You seem more than a trifle revisionist here.
The economic advisors are all from Wall St. As I typed earlier, the situation today is deliberate.
David Dayen is upstairs!
Harman Shift On Afghanistan Could Reflect Impact Of Progressive Primary Challenge
Thank you, Bruce and James.
It has been a pleasure to have both of you visit here.
DW
Too bad you weren’t here earlier. Would have called a lot of BS.
I think you basically said the same thing @146.
I just used more words! ;->
Seconded!!
Yes, I always seem to be doing something else around 5 on the weekends and have been missed many of these salons. But it looks like you were taking care of business. *g*
I don’t have your patience to explain, so I end up making snarky comments that are ignored.
Off to dinner.
That makes some sense, i.e. to shift the argument from whether welfare state, to how extensive, in what areas… and especially how to pay for it (to make it sustainable.)
Might be able to learn a thing or two from the Scandinavians on that front.
Thanks very much Bruce for a very interesting and lively exchange, and thanks to James for hosting and engaging as well (I’m a big fan!).
We certainly missed you, Hugh, and your well-considered and well-spoken commentary.
Yet conservatives have no qualms whatsoever about tax cuts for the top 1% and financing unnecessary war at the expense of the middle class.
do you consider the raised local taxes in gdp?
This is a good conversation, but we should definetely have a payroll tax cut long term or short term. Middle Class Americans will spend that money and stimulate the economy. I disagree with Bartlett’s Forbes article on this subject, but agree with him when he says that Reagan raised taxes, did not, contrary to popular belief, cut them.
Let’s agree that he raised them on the 90% of working stiffs.
My understanding is that when the rate of Social Security contributions was raised in about 1983, Alan Greenspan (with help, obviously) siphoned the Social Security trust fund off for immediate use by the general Treasury. In other words, this was not in fact an overfunding of Social Security.
Can someone please correct me if this is wrong?
What a voice of fresh air you are!
Where can I read more of your writings (sorry Bruce…)
Skipping ahead from 44 to reply, may have missed other good comments on VAT — VAT works very well in Europe, though it is — as an ‘invisible’ tax levied at wholesale levels — partially responsible for the ’sticker shock’ Americans perceive when they visit or hear of European price levels.
For America, the transition problem — given our scattered 50 state panoply of sales tax systems, the Republicans fixation on never increasing taxes, and our shallow media acting on poorly-educated citizens — makes it impossible to see, in the present politico-social environment, how it could ever come into law.
As a small-time manufacturer & businessperson I’d hate the extra paperwork, but as a citizen I would hope that VAT could bring a little rationality to public finance, assuming it ever somehow came to pass. VAT could make it administratively easier to get to the greenhouse-gas price penalties we’ll need to actually prevent us from killing all our grandchildren with our neglect of Global Warming issues.