In Washington, Republicans adamantly argue that we have to scale back spending, especially for social programs, and Democrats say no, we need to spend and the real problem is that we don’t have enough revenue coming in. Who is right? According to a small but growing number of economists, neither, and both.
According to Dr. Kelton, the Republicans are wrong to insist we must balance the budget by shutting off Government spending for the reasons outlined in Part I, and Democrats are wrong to insist that we need to raise taxes in a major way to pay for our spending. Both assume that deficits are the problem.
They are just coming at it from different directions. Where Republicans get it right (at least in theory) is that it is desirable to cut taxes, whether corporate or individual, and that jobs are the important thing we need to attend to. In 1981 Reagan cut taxes and actually raised revenue. However, another tax cut in 1986 as well as the George W. Bush tax cuts neither raised revenue nor helped the economy grow. Why didn’t their approach work? I’d note that in 1981 a good chunk of the tax cut went to the middle and lower income groups—in ’86 and the “W” tax cut, most of it went to the wealthy on the theory that the crumbs that fall from our masters’ table were sufficient to boost economic growth. They weren’t.
This tells us that it is important to cut taxes in such a way that it will put more money into the pockets of those who most need it and will spend it, putting it back into the economy. The wealthy, history has taught us, typically use their windfalls to accumulate more assets, which raises asset prices, not productivity. We get the same result when corporations use any windfall to buy back shares rather than invest in ways that create jobs. In neither case do such tax cuts help the country as a whole.
Democrats are therefore right in their insistence that the Government continue to spend on programs that create jobs and put more money into the pockets of ordinary citizens. When those in the middle and lower rungs of the economic ladder struggle, our consumer-led economy struggles.
Kelton suggests that we should enhance retirement schemes, beef up our crumbling infrastructure, relieve the student debt burden, put together a federally funded jobs program (we have, Kelton says, institutionalized unemployment), and make other investments to secure our future.
But in Kelton’s view, like the Republicans, the Democrats are working from a faulty premise when it comes to why and how this should be paid for. It is wrong, she says, to insist on major tax hikes to pay for it all, since the Fed can create money and, presumably, intelligent policies aimed at boosting productivity and economic growth will also boost revenue. To me, however, the implication is also that, given our rampant economic inequality, we do need to ask those who own at least 90% of the nation’s wealth, to contribute something more than their “fair share”(see Adam Smith!).
So the devil, as always, is in the details; current tax proposals are destructive and will not “pay for themselves,” as Mnuchin likes to believe. (And the two trillion dollar math error in Trump’s budget underscores this.)
Dr. Kelton understands that this is not all cut and dried and recognizes that letting the deficit get too large, especially if we’re not spending to invest, can be counterproductive. Her fundamental point is that we need to seriously recalibrate what she would term our “Gold Standard thinking,” which sees the Government as constrained by finite monetary resources.
In short, we can disagree on the details, but in the end that disagreement “must go in the right direction,” not toward higher taxes and/or decreased spending, because, Dr. Kelton asserts, taken together this is a recipe for economic stagnation and recession.
I’ve tried to present Dr. Kelton’s ideas fairly and, I hope, accurately, but I’m not an economist, and I would be interested in getting comments.
Dr. Stephanie Kelton née Bell is an American economist and a professor of Economics at the University of Missouri–Kansas City. She is a leading proponent of Modern Monetary Theory.