WASHINGTON ― The late 1970s, the mid-1990s and the period from 2009 through last November have two things in common.
The first is that top Republicans spoke with grave concern about budget deficits and a growing national debt. They issued dire warnings that the red ink was mortgaging the nation’s future and inviting economic calamity.
The second thing those years all had in common: A Democrat happened to occupy the Oval Office. It was Jimmy Carter in the ’70s, Bill Clinton in the ’90s and Barack Obama most recently.
But what about the other years, when Republican presidents were in the White House?
Deficits and debt, for whatever reason, seemed far less threatening then.
When Vice President Dick Cheney and his boss George W. Bush decided in 2002 to pursue a second round of massive tax cuts, Cheney put it this way: “Deficits don’t matter.”
It was a repeat of the 1980s, when Ronald Reagan’s tax cuts sparked deficits that persisted nearly two decades. And it appears to be the template today, as Republicans prepare to add trillions of dollars to the national debt by slashing taxes again, this time under President Donald Trump.
“The opposition to deficits for Republicans is a tactic, not a deeply held value,” said Jared Bernstein, once the top economic adviser to former Vice President Joe Biden. “They toss those concerns aside in a D.C. minute when there’s an opportunity to cut taxes.”
Last week the House passed a budget framework already passed by the Senate that permits $1.5 trillion in new debt from the tax cuts. That figure could increase substantially if some Republicans get their wish to use alternative methods of “scoring” the legislation that would lower its price tag for the purpose of meeting that cap. The non-partisan Tax Policy Center said the proposal will cost $2.5 trillion over a decade, while the bi-partisan Committee for a Responsible Federal Budget estimates a $2.2 trillion cost, based on the details available thus far.
Republican leaders argue the tax cuts will really cost nothing, because the economy will grow so fast that more money will flow into the treasury despite the tax rate reductions. “Not only will this tax plan pay for itself, but it will pay down debt,” Treasury Secretary Steven Mnuchin said last month.
Those arguments do not impress Maya MacGuineas, the CRFB’s president, who calls them “bogus” and “free-lunch-enomics.”
“Clearly, this is a massive budget buster,” she said. “Tax cuts don’t pay for themselves.”
The gospel of tax cuts
The view that they do, though, has been part of Republican orthodoxy for decades.
At Reagan’s acceptance speech at the Republican National Convention in 1980, even as he slammed Jimmy Carter’s administration for having run up a $60 billion deficit that year, the then-candidate told his Detroit audience: “Every major tax cut in this century has strengthened the economy, generated renewed productivity and ended up yielding new revenues for the government by creating new investment, new jobs and more commerce among our people.”
Reagan won that November and quickly pushed through a massive, across-the-board tax cut in 1981. It represented nearly 3 percent of the size of the economy and remains the largest in U.S. history.
The premise was that tax rates were so high ― at the time, top individual rates were well above 50 percent ― that lower rates would actually generate additional tax revenue because businesses would be more inclined to invest and grow if they could keep more of the profits in their pockets. This theory was expressed in graphic form in economist Art Laffer’s now-famous curve, which showed government revenue peaking at a particular tax rate, with lower revenues coming in at tax rates both higher and lower.
The problem then, and now, was the inability to know precisely what that optimal rate was. Reagan and his top economic advisers, after realizing their initial cuts were too steep, approved tax hikes in every subsequent year of his first term. This included the Tax Equity and Fiscal Responsibility Act of 1982, which remains the largest tax increase in history.
Those Reagan tax increases are typically glossed over in Republican mythology about the party’s iconic leader, but his rationale ― that tax cuts lead to more tax revenue, not less ― has become gospel.
George W. Bush used that argument to justify his tax cuts of 2001 and 2003, which wound up adding several trillion dollars to the national debt in the subsequent decade and a half. Were it not for those tax cuts, in fact, the public debt (that portion not held by government agencies) today would only be half the size of the economy, rather than 77 percent, despite two wars and the financial crisis and recession.
Trump and Republican congressional leaders are making that same Reagan tax-cut argument now, even after spending eight years blasting Obama for the large run-up in the national debt during his two terms in office (caused in large part by the financial crisis that presented Obama a first-year deficit of $1.2 trillion as he took office).
“We’re going to give the president an opportunity to reduce our annual deficit, which is completely out of control,” Kentucky Sen. Mitch McConnell, now that chamber’s majority leader, said of Obama to NBC News in 2011.
“We have a debt crisis right in front of us, and what brings down great empires, past and future, is debt,” Wisconsin congressman Paul Ryan, now the House speaker, told CNN in 2012.
“It’s a disaster. Our national debt will be at 21 trillion soon,” Trump said to “Fox & Friends” in 2013. “It’s totally out of control.”
“There’s always been Republican hand-wringing about debt and deficits when Democrats were presidents,” said Stan Collender, a longtime congressional budget committee staffer. “Always.”
“It literally gets worse every day we wait”
While Republicans are arguing again that these latest tax cuts will bring in more tax revenues than they cost, the historical record says the exact opposite.
Rudolph Penner, who ran the Congressional Budget Office during much of Reagan’s tenure and is now a fellow at the Tax Policy Center, said even the theoretical rationale behind the Laffer Curve makes no sense after decades of successive tax cuts. “At current rates, it’s very hard to believe that we’re above a maximum revenue point,” Penner said.
Which means the new cuts will instead add to the debt ― in Penner’s view, irresponsibly ― beyond the amount it would have increased anyway. “I am a deficit hawk. And it’s getting scarier and scarier how few of us remain,” he said.
The danger, according to Penner and others, is that when interest rates start to rise ― which eventually they must ― the country’s annual cost just to service the debt will consume an ever-larger percentage of the available tax revenues.
The only ways to deal with that are by dramatically slashing spending, raising taxes or trying to restructure the debt. Any of those will have consequences that only get more severe the longer the nation lets it go.
“It literally gets worse every day we wait,” he said.
One wild card in the equation is that the United States, despite its increasing debt load, remains the world’s largest economy and the world’s “reserve currency” ― meaning that investors the world over still see this country as the safest bet. China, for instance, is the second-biggest economy, but because of its massive infrastructure campaign in recent decades it has government-controlled debt significantly larger than its gross domestic product.
While that may give leaders in Washington more breathing room, it is not a license to ignore the problem, said MacGuineas, from the Committee for a Responsible Federal Budget.
“The worry is that we’ll borrow ourselves into not being the world biggest economic power,” she said.