To help fight inflation, Joe Biden ought to take a page out of his former boss’ book: He should make a strong pitch for taxing the rich to reduce the federal budget deficit.
From the day his party suffered a massive midterm “shellacking” straight through his successful re-election campaign, Barack Obama branded the Democrats as the party of deficit reduction. He talked about the alleged need for the federal government to tighten its belt in a State of the Union address and dived deep into the multifaceted search for a “grand bargain” on budgetary issues — the Simpson-Bowles Commission, the supercommittee, the whole deal.
Throughout it all he had a fixed idea: The rich had to pay their fair share.
Thus, when the grand bargain talks ultimately failed, Obama pivoted to a simple message: Repeal the Bush tax cuts for the rich and use the savings to shrink the deficit. And after he won re-election that largely happened. He secured a tax increase that, while somewhat smaller than what he’d proposed, was still large and fell exclusively on the rich. And it was used not to pay for new programs but to reduce federal borrowing.
The strategy was a political and legislative winner. Unfortunately, given the conditions at the time, it made no economic sense. The government’s borrowing costs were extremely low throughout Obama’s presidency. The Federal Reserve’s short-term interest rates were at zero. And inflation was low while unemployment was high. New tax revenue could have been plowed into programs that put people to work building infrastructure. Or if congressional politics made that infeasible, fiscal conditions would have let Obama trade an extension of the Bush tax cuts for Republicans agreeing to spend more money. The economy needed stimulus, not austerity.
The Biden economy, however, could make good use of the old Obama formula.
Wracked with inflation, we face a basic problem: Voters want to bring prices down. This can be done by slowing aggregate demand, but in practice that means lowering Americans’ incomes. People want cheaper gas at the pump and beef at the supermarket, but lower paychecks would be a steep price to pay for these things.
Hence the appeal of soaking the rich. By taking money from the pockets of millionaires, it’s possible to suck demand out of the economy and lower prices in a way that leaves most people’s incomes untouched. The catch is that the money really does need to be used for deficit reduction. Taxing the rich in order to transfer it to people with more modest means is inflationary, since less-rich people have a higher marginal propensity to consume. But taxing the rich to reduce the deficit leaves them with less money to spend bidding up the price of houses, food, gasoline and cars for everyone else.
Of course, a tax hike wouldn’t single-handedly end inflation.
Interest rates are going to have to rise, as the Fed says they will and as all market participants expect. And within reason, there’s nothing wrong with higher interest rates. They might even have some benefits compared with the ultra-low rates that have prevailed for most of the 21st century. Yet there is something a bit paradoxical about using higher interest rates to cure inflation; they work most directly to constrain investment, when in some sense greater levels of investment to expand the economy’s productive capacity could themselves be a partial solution to inflation. Fiscal policy, while not as nimble as monetary policy, targets consumption more directly and can be structured to pinch the wallets of those most able to afford it.
Biden already has a big tax-the-rich plan teed up in the form of roughly $1.7 trillion in tax hikes that his economic team negotiated with moderates in Congress when crafting the Build Back Better package. That fell apart as Democrats couldn’t agree how exactly to spend the $1.7 trillion. But roughly $350 billion of it was supposed to subsidize the production of zero-carbon energy in the U.S. — an idea that’s well-suited to Democrats’ long-term ideological aspirations and also to short-term imperatives.
Spending all of the balance (or nearly all of it; Democrats should definitely fund any pet project Senator Joe Manchin wants funded) on deficit reduction would be a bitter pill for progressives to swallow. At the same time, an ambitious clean energy push plus deficit reduction financed by taxing the rich would be a much more congenial outcome than the one they’re currently headed for: passing nothing and losing control of Congress in the fall. Politicians need to play the cards they’ve been dealt. The country is grappling with a still-ongoing pandemic and a European security emergency. Neither of these is a top item on the progressives’ to-do list, but they are important governance challenges, and they are generating inflation that is consuming public attention. Taxing the rich to reduce the deficit is a traditional progressive concept and also
This style of politics has fallen out of favor on the left, mostly for the very good reason that it was inappropriate to the macroeconomic circumstances of the mid-Obama years. But times have changed, and policy makers need to change with them.
More from other writers at Bloomberg Opinion:
- Inflation Is
Bringing Back the K-Shaped Economy: Conor Sen
- It’s Not the Fed’s Job to
Stop Supply-Side Inflation: Ramesh Ponnuru
- Fighting Inflation May
Require the Fed to Be Brutal: Clive Crook
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