Discussion: (0 comments)
There are no comments available.
A public policy blog from AEI
More options: Share,
Democratic presidential candidate Pete Buttigieg, mayor of South Bend, Indiana, said some confusing things — or at least some things that confused me — in an interview with CNBC reporter John Harwood. Here is part of their exchange:
Buttigieg: … The economy is not some creature that just lumbers along on its own. It’s an interaction between private sector and public sector. And public sector policies, for basically as long as I’ve been alive, have been skewed in a direction that’s increasing inequality. And a lot of this is the consequence of what you might call the Reagan consensus. There was a period where even Democrats seemed to operate in this framework that assumes that the only thing you’d ever do with a tax is cut it. That those tax cuts were assumed to pay for themselves. The empirical collapse of that supply side consensus, I think, is one of the defining moments of this period that we’re living through.
Harwood: Why do you ascribe it to the Reagan consensus as opposed to technological change, globalization, movement of capital?
Buttigieg: Well, all of these forces interact. But none of these forces automatically have to make our society more unequal. If anything, globalization was supposed to create more equality among nations.
Harwood: Well actually it has created more equality in the world. It’s taken millions of people out of poverty.
Buttigieg: Sure, it’s lifted so many out of poverty. And by the way, there are ways that it can work for us at home, too. But again, we’re seeing a concentration of wealth and power that skews things in the opposite direction. The fundamental truth is, it turns out a rising tide does not lift all boats. Not on its own. Especially if some of the boats are sort of tethered to the ocean floor. And that’s the kind of pattern that we’ve been on.
A few thoughts: First, the idea that tax rates matter, that their levels or application may encourage or discourage economic activity, was indeed promoted by President Reagan and his self-described “supply-side” followers. But the idea is hardy an artifact of the 20th century or limited to supply-siders or somehow obsolete thinking.
Second, while there may have been a broad bipartisan consensus that a return to those high pre-Reagan tax rates was a bad idea, both Democratic presidents since 1980, Bill Clinton and Barack Obama, raised top tax rates. And neither accepted the idea that tax cuts pay for themselves, an idea frequently associated with supply-side economics. But Buttigieg is surely right that Democrats are now far more accepting of the idea that top tax rates could be much higher without any severe economic downside.
Third, it’s important not to conflate “supply-side’ economics with the post-1970s global shift toward market capitalism and economic freedom. While inspired by Reaganomics and the turnaround in the American economy, that shift was about trade, deregulation, privatization, and property rights as much as recognition that high marginal tax rates can dampen economic innovation, productivity, and growth.
Fourth, kudos to Harwood for correcting Buttigieg on the impact of globalization on inequality since Buttigieg is seemingly unaware that inequality between nations is experiencing an unprecedented decline. And as Harwood also correctly mentioned, market liberalization across the developing world — particularly China — has brought a billion humans out of extreme property.
Fifth, is the rise in income inequality really a story of tax policy and top tax rates (which have bounced around between 30% and 40% for for 30 years)? Could it be that technology and globalization have enabled highly talented and educated individuals to manage or perform on a larger scale, thus “applying their talent to greater pools of resources and reaching larger numbers of people, thus becoming more productive and higher paid,” as economist Steven Kaplan has argued? And to the extent that tax rates have played a role, maybe the cut in top rates made it far more attractive for people to get more education and start companies in pursuit of higher incomes. Those are good things!
Finally, assuming you’ve heard of Buttigieg, you’ve probably also heard that he is a Millennial. (Or is he really an Xennial?) Buttigieg was born in 1982. Not a good year, at least for the American economy. A deep recession was in full swing, with the unemployment rate hitting 10.8% in December. And it was only the latest in a string of bad years. The nasty 1981-82 recession was the fourth since 1969, a period economic volatility and high inflation. Such terrible performance was reflected in the stock market. The Dow industrials fell by nearly three quarters from 1966 through 1982, adjusted for inflation.
Then the Long Boom happened. Over the next quarter century, the U.S. economy combined strong and steady growth of 3.4% with low inflation, creating 50 million new jobs along the way. The surprising and spectacular performance of the American economy inspired a global awakening to the power of free market capitalism. And not just in Thatcherite Britain. The 1990s saw stagnant, socialist Sweden begin a program of tax cuts and deregulation, reversing years of decline. Then there’s the Asian economic miracle I cited earlier. While Buttigieg, thankfully, acknowledges that “American capitalism is one of the most productive forces ever known to man,” it’s still unclear to me what lessons Buttigieg draws from this bit of economic history and the rise of the “Reagan consensus.”
There are no comments available.
1789 Massachusetts Avenue, NW, Washington, DC 20036
© 2019 American Enterprise Institute