The Ascendency Of Magical Economic Thinking In The Democratic Contest

Although I am not a progressive, it is not difficult for me to articulate an honest argument for the progressive position. In brief summary, it goes something like this: The government is the right vehicle to provide enhanced social services to the less fortunate, and therefore the government must impose an appropriate amount of increased costs on the productive sector of society in order to fund a more generous level of government services than we currently have.

And then there is the dishonest argument, which can be summarized as: Costs? What costs? Vast new taxes and corresponding government spending will create a gusher of economic growth and new wealth out of thin air.

With all the leading Democratic candidates for President proposing greatly increased federal taxing and spending, it was only a question of time until this magical thinking came front and center into the political debate. And sure enough, it’s now here in full force.

Probably, your first reaction is, nobody could really buy into this. Greatly increasing taxes and government spending at a time of full or near-full employment means diverting resources from the voluntary (private) sector of the economy to the compulsory (government) sector. Inherently, many things that people (and not just rich people) would have wanted to do with their earnings cannot be done, in favor of things that the government will now be doing. So be honest, and acknowledge that there are costs, and undoubtedly big costs, depending on the amount of new spending that you are proposing; but argue that the costs are worth paying.

But that’s not how this works. Which brings me once again to Elizabeth Warren. She’s the one with the endless list of some 50+ “Plans,” each one of them promising some large new government spending and bureaucracy and/or taxation to grow the compulsory sector of the economy. There will be vast new spending on health care (“Medicare for All”), on education (“A Great Public School for Every Student”), on subsidized alternative energy (“Accelerating the Transition to Clean Energy”), on subsidized jobs (“Defend and Create American Jobs”), on government meddling in the agriculture sector (“A New Farm Economy”), on entitlements (“Expanding Social Security”), on child care (“Universal Child Care”), on student loan forgiveness, and on and on and on and on; and also massive new taxes (“Ultra-Millionaire Tax”). At some point it becomes obvious that the idea is to turn most of the economy into compulsory government-provided social services. Clearly, the costs will be large. How could they not be?

The answer is simple: You simply announce that each of your new programs will “grow the economy.” And of course you then find that there is an extensive network of left-side journalists, intellectuals and pundits who will buy into this idea and repeat it endlessly, no matter how ridiculous it may be.

The New York Times takes up this subject in a December 5 piece by Jim Tankersley headlined “Could Tax Increases Speed Up the Economy? Democrats Say Yes.” Excerpt:

Ms. Warren has proposed nearly $3 trillion a year in new taxes on businesses and high-earners. . . . The taxes would fund wide-reaching new government spending on health care, education, and family benefits like universal child care and paid parental leave. Last month, Ms. Warren wrote on Twitter that education, child care and student loan relief programs funded by her tax on wealthy Americans would “grow the economy.” In a separate post, she said student debt relief would “supercharge” growth.

Not only are all of these things free of cost, they will actually make us all wealthier. And not just by a little: Growth will be “supercharged”!

Tankersley finds no shortage of liberal economists prepared to support the idea that tax and spending increases will enhance economic growth. As just one example, here is Heather Boushey:

“The economy has changed, our understanding of it has changed, and we understand the constricting effects of inequality” on growth, said Heather Boushey, the president of the Washington Center for Equitable Growth, a think tank focused on inequality. . . . “We have an economy that isn’t delivering like it used to,” said Ms. Boushey, who advised Hillary Clinton’s 2016 Democratic presidential campaign. “That’s leading people to say let’s re-examine the evidence.”

Tankersley also cites a couple of regular economists for what he calls the “long-held economic view that large tax increases slow economic growth.” But somehow, in an article covering this issue as an economic debate, Tankersley never recognizes that both sides can’t be right. Somebody here has to be blowing smoke. Perhaps it’s the people who argue that a doubling or tripling the size of the public sector of the economy can be accomplished without large numbers of people feeling any cost?

I’ll close by reminding people of the origins of this idea that more government spending matched by more taxation — otherwise known as endless growth of the government sector — is a sure-fire economic positive. The source is none other than Paul Samuelson, the famous economist whose reputation is seemingly impervious to having been wrong about everything important for his whole career. For a lengthy discussion, see my 2017 review of the Backhouse biography of Samuelson here. Samuelson’s basic stance (usually couched in dense mathematical mumbo jumbo that nobody could understand) was that growing the government sector of the economy would inevitably be a positive for economic growth.

My review of Backhouse’s book focused particularly on a book chapter written by Samuelson in 1942 titled "Developing the New Economics, II: Policy, 1942-1943." In that chapter, Samuelson said he had made what Backhouse calls the “recent discovery . . . [that] came to be known as the balanced-budget multiplier, the idea that an increase in government spending matched by an equivalent rise in taxation is expansionary.” Backhouse commented, “The political significance of this is hard to exaggerate . . . .” No kidding.

A couple of examples of applying the “balanced-budget multiplier” to the real world come to mind. One was a prediction made by Samuelson himself in the very same 1942 book chapter:

"When this war [World War II] comes to an end, more than one out of every two workers will depend directly or indirectly upon military orders. We shall have some 10 million service men to throw on the labor market. We shall have to face a difficult reconversion period during which current goods cannot be produced and layoffs may be great. Nor will the technical necessity for reconversion necessarily generate much investment outlay in the critical period under discussion whatever its later potentialities. The final conclusion to be drawn from our experience at the end of the last war is inescapable--were the war to end suddenly within the next 6 months, were we again planning to wind up our war effort in the greatest haste, to demobilize our armed forces, to liquidate price controls, to shift from astronomical deficits to even the large deficits of the thirties--then there would be ushered in the greatest period of unemployment and industrial dislocation which any economy has ever faced.”

In fact, after the war, government spending fell 61%, and the result was an economic boom. Economist David Henderson calls Samuelson’s prediction of a post-war depression the single most disastrously wrong economic prediction ever.

And then there were Samuelson’s predictions as to economic growth in the Soviet Union. In the Soviet Union the government occupied essentially the whole economy, which should have led to economic nirvana under the balanced-budget multiplier theory. From Alex Tabarrok at Marginal Revolution (2010):

In the 1961 edition of his famous textbook of economic principles, Paul Samuelson wrote that GNP in the Soviet Union was about half that in the United States but the Soviet Union was growing faster. As a result, one could comfortably forecast that Soviet GNP would exceed that of the United States by as early as 1984 or perhaps by as late as 1997 and in any event Soviet GNP would greatly catch-up to U.S. GNP. A poor forecast–but it gets worse because in subsequent editions Samuelson presented the same analysis again and again except the overtaking time was always pushed further into the future so by 1980 the dates were 2002 to 2012. In subsequent editions, Samuelson provided no acknowledgment of his past failure to predict and little commentary beyond remarks about “bad weather” in the Soviet Union.

You would think it would be possible to learn from these things, but over in the progressive wing of the Democratic party, that’s just not possible.