Barbarians at Washington’s gates

Alex Castellanos Co-founder, Purple Strategies

Republicans are uncivilized, hostage-taking barbarians. Worse, we are drama queens. That wisdom prevails in our nation’s capital, as we emerge from our no-holds-barred, debt-ceiling death match. The GOP inconvenienced Washington’s comfortable elite, the story goes, to deal with a petty accounting issue: raising the debt ceiling. Washington has routinely dispatched this annoyance 74 times since 1962, without difficulty or drama. Why should this time be different? The established news media, in chorus with the Democratic Party, instructed us of their conclusion: Boorish Republicans, led by an ignorant and fanatical Tea Party minority, manufactured this unnecessary drama and put the full faith and credit of the United States at risk.

What philistines we Republicans are. We should be humbled that we have learned to walk upright, command the written word and enjoy a nice Montrachet with our fish.

John Boehner’s intransigent Republicans are no better than terrorists, we’re advised, because they were willing to use their limited political power to stop adding to our $14.5 trillion national debt, which is growing by $3.81 billion a day.

The Balanced Budget Amendment? An irresponsible gimmick that would tie our thoughtful leaders’ hands, especially in a national emergency. Wait a moment: If someone protests the Ten Commandments, would we think it was to defend their right to lie, cheat and fool around in an emergency? That can’t be Democratic Party policy. It must be a joke on Comedy Central. Only in Washington are those supporting a balanced-budget mandate condemned as reckless, while those who haven’t balanced a budget since 1957 are lauded for their restraint.

Requiring government to live within its means, however, was not the most irrational Republican demand in the party’s assault on reason, democracy and civility. Listen to this: The GOP insisted only on spending cuts, with no tax increases, to fund deficit reduction.

Crazy talk.

How unenlightened can Republicans get?

On CNN’s Sunday night special, “Get It Done: Countdown to Debt Crisis,” my friend, the talented CNN money man Ali Velshi, not only echoed the prevailing Beltway wisdom that “balance” demands both spending cuts and tax increases, he argued that spending cuts do less to help our economy than tax increases:

Here’s the thing. If you spend too much, you either cut how much you spend or you increase taxes. It’s all money. It’s all the same thing. But when you cut spending, what you do is you cut money that generally goes to people who have less money, so when they have that money, they spend all of it and more in the economy.

When you — when you deal with taxes, when you cut taxes, you’re taking it away from a portion of the population. You’re taking money away from a portion of the population that doesn’t spend every last dollar they have, which is why the impact on the economy of spending, government spending, is greater than the impact of tax cuts.

Now, I put it out there on Twitter, Don [Lemon]. You saw it. I said, if somebody can provide me with evidence or a report that says cutting taxes is good for the economy or increasing taxes is bad for the economy, I’ll read it. There is no such report. People just say it, and they’ve gotten everybody to believe it.

“There is no such report?” Text message shorthand: TTIOT. There actually is.

Ali Velshi is right that whether we take a dollar out of our economy through the front door by cutting spending or through the back door by raising taxes, a dollar is still a dollar. Its value is the same and its absence will be sensed similarly. Taking money out of a deeply depressed economy inevitably leads to pain, a profound ache we could avoid eternally, if we could borrow and spend without limit.

But we can’t borrow forever. There is no perpetual motion, in physics, economics or governing. At some point, as our debt grows, China charges us higher interest rates. Those rates expand our debt and make it even more expensive to service. This vicious circle winds tighter and the long-term pain of continuing to live beyond our means becomes life threatening. Eventually, like Greece, we run out of borrowed money.

Deficit reduction now, despite the contraction it must compel, is a much smaller price to pay. As a friend once tried to persuade me late into the reaches of a gauzy night, “Drinking doesn’t cause hangovers. Stopping drinking causes hangovers.” But if we do have to stop boozing eventually, it is less painful to stop before we get kicked out of the bar, as my friend eventually learned.

Credit agencies have looked under our hood and agreed this is the moment. They have demanded deficit reduction. Lower tax rates and more substantial spending cuts? Or a balanced approach with higher taxes that cuts less spending? Which hangover will we pick?

Michael Boskin, the chairman of the Council of Economic Advisors under President George H.W. Bush, is the Friedman Professor of Economics at Stanford University’s Hoover Institution. He can be forgiven for his advanced degrees from Berkeley.

In a December 1, 2010 Wall Street Journal article entitled, “Why the Spending Stimulus Failed,” Boskin sheds light on new economic research demonstrating why lower tax rates are more powerful growth and revenue engines than government spending. Boskin notes macroeconomics has come a long way since John Maynard Keynes helped found the discipline in the 1930s:

Macroeconomics since Keynes has incorporated the effects of longer time horizons, expectations about future incomes and policies, and incentives … on economic decisions.

Boskin then explains why the Obama stimulus has produced an economic flat-line:

Government purchases have a GDP impact far smaller in New Keynesian than Old Keynesian models and quickly crowd out the private sector. They estimate the effect of the [Obama] February 2009 stimulus at a puny 0.2% of GDP by now.

By contrast, the last two major tax cuts — President Reagan’s in 1981-83 and President George W. Bush’s in 2003 — boosted growth … In a survey of fiscal policy changes in the OECD (34 of the world’s most advanced and emerging countries, comprising the Organization of Economic Co-operation and Development) over the past four decades, Harvard’s Albert Alesina and Silvia Ardagna conclude that tax cuts have been far more likely to increase growth than has more spending …

Former Obama adviser Christina Romer and David Romer of the University of California, Berkeley, estimate a tax-cut multiplier of 3.0, meaning $1 of lower taxes raises short-run output by $3. Messrs. Mountford and Uhlig show that substantial tax cuts had a far larger impact on output and employment than spending increases, with a multiplier up to 5.0.

Tax cuts producing growth? Multiplying every dollar 3 to 5 times? Maybe it is as simple as farming: The more seeds entrepreneurs, businesspeople and consumers have to plant, the larger their economic crop. And the seeds of growth sprout more productively in the fertile soil of the private sector than in the barren concrete of Washington, D.C. Leaving a dollar in someone’s pocket, it turns out, is more productive than taking it away, sending it to Washington, imposing the cost of bureaucratic friction and inefficiency, and then, re-directing that dollar back into a similar pocket with artificially developed political restrictions and instructions. Who knew? Apparently, a few Democratic and Republican presidents.

As Michael Griffith notes in his well-documented “Facts About Tax Cuts, Revenue, and Growth,” every major tax cut over the last 60 years has more than paid for itself. All have been followed by substantial economic growth and increases in revenue.

* John F. Kennedy’s tax cuts, proportionally larger than Reagan’s and slightly larger than George W. Bush’s combined tax cuts, were followed by a 30% increase in federal revenue, while they were in effect, and led to the rich paying a larger share of income taxes, up from 11.6% to 15.1%.

* President Reagan? Despite signing two tax increases, inheriting a stagnant economy and double-digit inflation, Reagan left taxes a lot lower than he found them. The result? Though he lowered the top tax rate from 70% to 28%, the share of taxes paid by the top 1% climbed from 17% to 27%. The Reagan cuts ignited a boom that defied recessions for 92 straight months, reduced double-digit inflation to 1%, and grew the economy 35%.

* Bill Clinton? He signed a tax cut for the rich in 1997, advanced free trade, and adopted a hands-off tax policy for the Internet. The tech industry boomed. The economy grew for 116 straight months and created 22.5 million jobs, both the most in our history. As the original Man from Hope might say: “Go, baby!”

* And the much-maligned Bush tax cuts? They were followed by 52 consecutive months of economic growth. From 2004 to 2007 federal tax revenue increased by $780 billion, our country’s largest four-year increase. Worker productivity grew faster under Bush than under Clinton and, even, Reagan. George Bush left President Obama an economy 19% larger than the one he inherited from President Clinton. And after the Bush tax cuts, the rich paid a higher percentage of the total tax burden than they had in 40 years.

In his Dec. 14, 1962 speech to the Economic Club of New York, President Kennedy spoke to our problem:

Our true choice is not between tax reduction, on the one hand, and the avoidance of large federal deficits on the other. It is increasingly clear that no matter what party is in power, so long as our national security needs keep rising, an economy hampered by restrictive tax rates will never produce enough revenues to balance our budget — just as it will never produce enough jobs or enough profits … and the soundest way to raise the revenues in the long run is to cut the rates now … The purpose of cutting taxes now is not to incur a budget deficit, but to achieve the more prosperous, expanding economy which can bring a budget surplus.

I repeat: our practical choice is not between a tax-cut deficit and a budgetary surplus. It is between two kinds of deficits: a chronic deficit of inertia, as the unwanted result of inadequate revenues and a restricted economy, or a temporary deficit of transition, resulting from a tax cut designed to boost the economy, increase tax revenues, and achieve, I believe — and I believe this can be done — a budget surplus. The first type of deficit is a sign of waste and weakness; the second reflects an investment in the future.”

This is the important question Velshi raises, to his great credit, with an open mind: If we have to suffer the pain of deficit reduction, what’s the most powerful way to inspire economic growth along the way? Do we take the path of higher taxes, more spending and a larger government? Or do we explore the opposite course: lower taxes, less spending and a smaller public sector?

Democrats, we Republicans would tell you, still believe in trickle-down growth directed politically and artificially from Washington. They would limit us to the paralyzingly slow, inflexible instruments of one-size-fits-all, public-sector solutions. But if this debt-ceiling crisis has proved anything, it is that Washington can’t manage its own economy, much less anyone else’s.

We Republicans, despite our barbarism, intolerance and occasional proclivity for hostage-taking, believe it is time for Washington to change. In this new world of communications, with an economy that connects us to each other in intricate and unlimited ways, we’d be smarter to bet on natural, organic, bottom-up economic growth like Google and Groupon than on top-down command-and-control economics from government central.

A dollar is a dollar, but each is more productive if directed by the hopes and dreams of a real American than the plans and schemes of the Washington establishment.

Grow, America, grow. We know which road to take.

Alex Castellanos is a Republican media consultant and co-founder of Purple Strategies.