Bruce Bartlett is the author of The New American Economy, which his publisher was kind enough to send to me to review. Bartlett himself submitted to an interview about his book, the transcript of which follows below.
Bartlett’s basic argument is that we are in a Keynesian moment, that Keynes–contra conventional wisdom–was actually quite conservative, and put forth his theories and beliefs because he wanted to preserve social norms against fascism and socialism, which he believed could emerge out of a world plagued by the Great Depression, that supply-side economics was very useful when rolled out as an alternative to Keynesianism, but has been been bastardized and now needs to withdraw from the scene, and that at best, supply-siders should help with the creation and implementation of a value-added tax (VAT) to help the United States emerge from the fiscal mess it is in, and the fiscal mess that is oncoming.
While I find certain elements of Bartlett’s analysis compelling and fruitful, other portions leave me unconvinced. Still others need to be fleshed out more.
Even if Bartlett thinks that we are in a Keynesian moment, his call for supply-siders to basically disband is ill-advised. Bartlett underestimates, in my view, the effect of allowing Keynesians to run wild when it comes to crafting and implementing economic policy; having the supply-siders around to check the Keynesians and vice versa is preferable. Additionally, I believe that Bartlett understates the damage that could be done to economics if the supply-siders just pack up and go home. Bartlett believes that the good elements of supply-side economics have been adopted into the mainstream, and that only the bastardized version of supply-side economics remains. But he states his agreement with Krugman’s lament that the economics profession relegated Keynesianism to the dustbin while the supply-siders, the monetarists, and the Chicago School ran the show with power untrammeled. I would think that this would cause Bartlett to want to keep supply-side economics as a vibrant force, even if he does not believe that it is useful for the current times; again, having an opposing intellectual camp with which they would have to contend would keep the Keynesians sharp and honest. But Bartlett disagrees, as the below makes clear.
In terms of the VAT, politically, its advocates must come up with a deadline for its enactment and implementation. As Bartlett well knows, having served in Washington, the federal government generally does not operate well absent deadlines, and while some freedom of action is required, there must be some kind of reckoning as to when and how the VAT ought to be introduced. I hope to see more specificity from proponents of the VAT in this regard.
Bartlett does a considerable service–as do economists like Tyler Cowen and Greg Mankiw–in pointing out that the VAT has a rightist provenance of sorts. Combining the VAT with the tax cuts that both Cowen and Mankiw advocate could be a very useful proposition both politically, and policy-wise, as a distortionary income tax might give way to a significantly less distortionary VAT in order to increase federal revenues. But Bartlett seems fatalistic and cynical about getting center-right support for the VAT, despite all of this. His cynicism may be well-founded, but seeing as how his prediction concerning how the VAT will finally be accepted by Republicans would involve a great deal of economic distortion prior to any Republican acceptance, it is to be hoped that he and other VAT advocates will campaign amongst the center-right for increased acceptance of the VAT so as to try to avoid any distortion altogether.
This would require, of course, a strong understanding of what would be taxed under a VAT. To be fair to Bartlett, typing his responses to me in real time meant that it would have been difficult to give any kind of comprehensive list of what goods and services would fall under the rubric of a VAT. That having been conceded, more specifics are needed on this issue.
But that is enough from me. On to the interview. My thanks to Bruce Bartlett for his time, and for engaging in this discussion.
PY: Let’s start with a foundational/organizational issue. You worked very hard in the book to give your readers a view of Keynes that you feel differs from the conventional view. You pointed out that he was, at bottom, a conservative and that he wanted to maintain the existing class order. He proposed his policies to keep fascism and/or socialism from becoming the dominant political force in America. You also discussed supply-side economics, and debunked some conventional thinking regarding that doctrine, pointing out what classical supply-side doctrine says about the issues of the day. But unlike your discussion of Keynes, you then say that the supply-siders ought to “declare victory and go home,” or that at most, they ought to stick around to help out with the construction of a deficit-fighting tax. Why shouldn’t the Keynesians disband and go home as well?
BB: Different ideas work at different times. The 1980s were a time when SSE [supply-side economics] was right and worked. Now is a time when Keynesian economics is appropriate. There may come a time again when SSE is the right approach. In my view, Keynesian policies failed because they were inappropriately applied in the 1960s and 1970s. SSE would fail if its main idea–tax cuts–was applied today. There is simply no evidence that tax cuts would do the slightest good under current economic conditions. Those who propose them are simply repeating tired dogma.
PY: Okay, but the political reality is that even if supply-siders did what you asked, they would still be attacked for propagating “voodoo economics,” or “trickle-down economics,” and those doing the attacking wouldn’t make the distinctions you seek to make between classical supply-side economics, and what you believe to be the bastardized version. Shouldn’t the supply-side school still be a force, even if you think that this is a Keynesian moment? When the time comes again for supply-side economics to provide answers to pressing economic questions, do you really want to have to rebuild the school from scratch?
BB: The idea that SSE came into existence are now dead. For example, most economists once believed that inflation had nothing to do with the money supply. They also thought marginal tax rates were economically meaningless; that only effective rates mattered. I don’t know any economist who believes these things today.
PY: Yes, and supply-siders and monetarists helped change thinking regarding those issues. But Paul Krugman often complains that people just plum forgot about Keynesianism, or laughed it off the stage every time someone tried to discuss it at a time when the Chicago School was dominant, and he thinks that the study of economics, and the formulation of economic policy suffered as a consequence. I wonder why you don’t have the same worry concerning supply-side economics, and its applicability at a later time. Even good ideas can be forgotten.
BB: Krugman is right. I think we went too far in dismissing Keynesian ideas and the time may come when we go too far in dismissing SSE. The trick is to analyze economic conditions objectively and use whatever theory best fits those conditions, rather than using a one-size-fits-all approach.
PY: Okay. Let’s discuss your idea of a VAT. Outline why you think it is needed.
BB: My argument is simple. The trend of federal spending even before the recent crisis was unsustainable. It is politically impossible to cut spending enough to prevent a fiscal crisis. Therefore, higher taxes will be the default option for closing the deficit. I believe that if the magnitude of revenues that will be needed are raised through the income tax they will be economically debilitating. Raising the same revenue through a VAT would be far less damaging to the economy.
BB: I have no problem with doing so. But I don’t think it is enough to just reform the tax system. We also need to raise net additional revenue; that is, we need a higher tax/GDP ratio.
PY: Understood. I am just not clear on whether you would object to personal and corporate income taxes being cut to the 25% level that Mankiw calls for in conjunction with implementing a VAT. I want to make sure that I represent your views properly.
BB: I have no problem with that. I just don’t want the discussion to be solely on the issue of tax reform. If I thought it was possible to hold the tax/GDP ratio at its present level I probably wouldn’t favor a VAT. It is ONLY because I believe that the tax/GDP ratio must raise dramatically that leads me to support it.
PY: When would you want to implement the VAT? This year? Next?
BB: I don’t know. My view is that the debate of whether to have a VAT will take at least several years and then a couple more once it is enacted before it could be implemented.
PY: Are you concerned that if it gets implemented in the near term, it will choke off any economic recovery? Or would permanent corresponding cuts in marginal tax rates be sufficient to keep a recovery going strong?
BB: It’s not going to happen in the near term so any discussion of that is a waste of time. I don’t believe tax cuts of any kind would be useful in terms of stimulating growth at this time because the economy’s fundamental problem is a lack of spending.
PY: What would it take to get conservatives and right-of-center libertarians on board with a VAT. You quoted the semi-facetious line that the United States doesn’t have a VAT because conservatives view it as a money machine, and liberals view it as a tax on the poor, and that we will get a VAT when liberals realize that it is a money machine, and conservatives realize that it is a tax on the poor. The line is funny, but surely, more is required than that. How do you sell a VAT to the center-right?
BB: What I think will happen is that when the time comes that it’s absolutely essential to raise taxes, Republicans will simply refuse to participate in the discussion, thus forcing Democrats to raise taxes on their own. This will mean soak the rich policies that will sharply increase tax rates on the rich. Eventually, Republicans will support a VAT as a tax reform so as to finance tax cuts for the rich.
PY: Going back to your comment about how a lack of spending is holding the economy back–and by that, I presume that you mean consumer spending, since you have come out against another round of fiscal stimulus, what does it take to increase consumer spending? What isn’t being done that should be done on this issue?
BB: I opposed additional stimulus because I felt that there was plenty of stimulus in the pipeline, but I may revise my opinion if the data show weakness. I believe that when private spending grinds to a halt because of deflationary conditions then government spending has to pick up the slack.
PY: On the VAT, a number of people I have talked to regarding your book and arguments have expressed concerns with (a) what will be taxed, and (b) compliance costs. Could you address those? What general category of goods would not be taxed? Would services incur a VAT? And what do compliance costs do to small businesses?
BB: I really don’t know. We are so far away from a serious discussion of implementing a VAT that it’s not worth the trouble to worry about such things. I estimate that perhaps a third of GDP could be taxed.
PY: Do you think that we could phase out a VAT after our fiscal problems are addressed, or would you like for it to remain a part of a fundamental reshaping of tax policy? (I note that you did indicate in your book that if things worked out, a VAT could remain with a simple supplement of income taxes for the rich.)
BB: Once we have a VAT we will have it forever, just like the income tax.
PY: Do you continue to believe–as you indicated in the past–that if a VAT is implemented, the time between enactment and implementation would be marked by significant amounts of spending, as people tried to buy things before a VAT went into effect? Megan McArdle of the Atlantic noted your comments on this issue, and has her doubts. I should note as well that the Economist’s “Free Exchange” blog casts doubt on this argument as well.
BB: Of course. That’s happened every place that every implemented a VAT. But it’s a very short term phenomenon.
PY: The Economist also casts doubt on your contention that the way to restrain spending is to increase taxes whenever spending rises. What is your reply to this argument, and how does it affect the decision concerning the enactment and implementation of a VAT?
BB: My main argument is simply that entitlements already in law plus interest on the debt plus wars without end plus an aging society mean that spending is going to rise dramatically and that it must be financed.
PY: One thing that would serve policymaking better is if policymakers–and policy advocates–would confront the question “what if I am wrong,” and “what would change my mind concerning the issues of the day”? So . . . what if you are wrong, and what might cause you to change your mind concerning the arguments you make in your book?
BB: I can’t speculate about that. I would have to see data and analysis that was convincing or circumstances would have to change. [Here, Bartlett refers me to this document, which can be downloaded once one clicks on the link.]
PY: A political question: You have been pretty harsh on the Republican party recently. In your mind, are there any Republican leaders who you think have a good chance of taking the party out of the intellectual funk you perceive it to be in?
BB: No. The just say no strategy is working too well. And if Republicans do well in November they will be even more convinced that this is the right strategy. I don’t see anything changing until Republicans have lost enough elections that they are forced to adopt a new strategy. Perhaps if they lose the WH again in 2012 and 2016 they may begin to think that their strategy is wrong. In the meantime, the Democrats are going to have to do all the heavy lifting on public policy by themselves.
PY: This clearly calls for speculation, but how do you think your old bosses, Ronald Reagan and Jack Kemp, would respond to the arguments you make in The New American Economy, were they alive?
BB: I don’t know. I have yet to find anyone on the right who takes any of my arguments seriously.
PY: Finally, I just want you to have a chance to make any points you think are worth making, that we haven’t covered.