Both parties have abandoned even the pretense of budgetary restraint
Nothing new on the budget front, or so it seems at ﬁrst glance. President Trump submitted to Congress a $4.7 trillion budget for the 2020 fiscal year, which begins on Oct. 1 of this year. That’s almost 8 percent more than he asked for in his last budget. Congress issued its traditional statement, pronouncing the budget DOA, dead on arrival. Both sides having laid out their stalls, negotiations – the third step in the budget process – follow between the president and his critics, with words such as “another government shutdown” and “bankruptcy” being bandied about.
Trump wants to spend more to defend the nation, and the Democrats want to spend more on domestic programs. Trump is talking of another tax cut, the Democrats of tax increases, but only on the rich, who couldn’t cover the cost of both parties’ wishes if they surrendered their entire incomes to the cause. Which they won’t, of course, instead preferring to ease their guilt by calling for some modest increases in their tax load while readying an army of consultants to keep their total burden at acceptable levels.
The president is projecting an annual deﬁcit of about $1 trillion until 2023, followed by a decline, but not large enough to slow the spending train by the terminal year of the budget projection, 2029.
On further examination, especially of the political setting in which this budget is being considered, there is more here than the same old, same old. There are two reasons for concern about the latest lurch into ﬁscal incontinence. First, there is no powerful constituency pressing to bring the deﬁcit under control, as was true in the good old days when red ink came in driblets rather than in a ﬂood. Republicans up for re-election are unwilling to question whether the Trump tax cuts will pay for themselves, even though the chairman of the president’s Council of Economic Advisers, the estimable Kevin Hassett, admitted in the council’s annual report that the economy will not grow rapidly enough in the long term to produce sufficient new revenues to make the recent tax cuts self-ﬁnancing. These Republicans fear antagonizing a president with a strong hold on the party’s base. And those conservatives who are naturally inclined to be deficit hawks are constrained by the need to undo the damage inﬂicted on the military by President Obama. They want to increase defense spending in real terms by 3-5 percent annually for 15 years, by one reliable estimate. To accomplish that, they know they will have to lure Democrats with equal increases in domestic spending. It is not unreasonable to be willing to live with red ink to ensure the security of the nation, but it is not good news for the national ﬁsc.
Second, do not underestimate the power of the siren call of the Left and of the lure of Modern Monetary Theory, or MMT. There was a time when reputable economists such as Larry Summers called for deﬁcit spending for one of two reasons. Following the great John Maynard Keynes, they believed that when there is insufficient demand for goods and services to keep the economy at full employment we suff er from “secular stagnation.” The corrective would be deﬁcit spending to create the demand private industry and consumers could not.
When it became apparent that the secular is not stagnating, that we have achieved what any reasonable person would call full employment, another reason for deﬁcits was conjured. With interest rates as low as they are, the thinking goes, the government can and should borrow cheaply to fund infrastructure and other programs that have high social returns. Whether the government is capable of delivering these theoretically high-return programs is a problem with which only pedants and anti-government ideologues concern themselves.
Those reasons for running deficits do not satisfy the spending lust of the left-wingers in apparent control of the Democratic Party. Their pet is MMT, which its advocates view as a ﬁnal coming to terms with Richard Nixon’s abandonment of the gold standard, leaving America with a ﬁ at currency backed by nothing more than trust in the government. MMT holds that a country with its own currency need not worry about accumulating too much debt because it can always print enough money to pay the interest due. At the direction of the president, the Federal Reserve can run the presses longer and faster or create banks to extend credit for such projects as the Green New Deal. This is a step too far for Larry Summers who, along with Jason Furman, Obama’s chief economist, took to the pages of Foreign Affairs to attack MMT, lest it be seen as the logical progeny of their secular stagnation and infrastructure investment proposals, which they deny.
Which brings us to the Green New Deal. That plan calls for replacing air travel with high-speed trains (see California for details); eliminating methane-producing cattle and, as a consequence, steaks and hamburgers; rebuilding all homes and buildings to fuel-saving standards; ending the use of fossil fuels for transport and electricity generation; and much more. All within 12 years lest the world end. And all while simultaneously providing economic security to those unable and, in a quickly withdrawn draft, “unwilling” to work. All funded with newly printed dollars. To critics, this multitrillion-dollar program seems self-evidently absurd, so absurd that voters will laugh all the way to the polls to re-elect Donald Trump. They should think again. In the great musical “Chicago,” the corrupt and corrupting lawyer played by Richard Gere describes how he bamboozles juries:
“Razzle dazzle ’em, …
Give ’em the old hocus-pocus,
Bead and feather ’em,
How can they see with sequins in their eyes?”
Sen. Bernie Sanders, I-Vt., for whom capitalism was anathema even before he spent his honeymoon in Moscow, media phenomenon Rep. Alexandria Ocasio-Cortez, the socialist Democrat from New York who regards capitalism as “immoral,” and others on the Left are sprinkling lots of sequins into voters’ eyes: $1,000 baby bonds at birth, free child care, free healthcare, free college, soak the rich. With the majority of millennials telling pollsters from the Victims of Communism Memorial Foundation that they would prefer to live in a socialist, 46 percent, or Communist, 6 percent, country – despite not being able to accurately deﬁne either – rather than in a capitalist one, we can’t count on a majority of voters to brush all those glittering sequins from their eyes so that they can see clearly the consequences of the Venezuelan model the Left so admires.
Nor can we count on the usual policy tools to help us chart a correction. In the past we knew, or thought we did, that what Milton Friedman called “too much money chasing too few goods” unleashed inflation. The old solution was for the central bank to raise interest rates and cool the economy. Or we could count on the “bond vigilantes” to accomplish the same thing by demanding higher interest rates to compensate for their increased fear of inﬂation. MMTers now argue that interest rates cannot control economic activity, since business investment is a function of anticipated growth rates rather than the cost of borrowing, and anyhow, inﬂation is not the result of loose ﬁscal policy but of monopoly pricing by big business.
Add to that the fact that with total debt at extraordinary levels, a rise in interest rates would so increase the interest payments on that debt pile as to put a squeeze on other spending, something politicians are unprepared to do. Instead, the easy way out of that dilemma would be to print still more money, creating an inﬂationary ﬁre that even a latter-day Paul Volcker could not extinguish.
Lenin, reports Keynes, once said, “The best way to destroy the capitalist system is to debauch the currency.” Sanders knows that. Most likely his younger acolytes do not, but would gladly accept that result as a byproduct of their spending and funding plans. Perhaps, now that Robert Mueller has echoed the president’s claim of “no collusion,” the White House campaign team will spend a bit more time attempting to remove those distracting sequins from voters’ eyes.