Progressives Lose Touch With Economic Reality

By David Brooks

There is a statue outside the Federal Trade Commission of a powerful, rambunctious horse being reined in by an extremely muscular man. This used to be a metaphor for liberalism. The horse was capitalism. The man was government, which was needed sometimes to restrain capitalism’s excesses. 

Today, liberalism seems to have changed. Today, many progressives seem to believe that government is the horse, the source of growth, job creation and prosperity. Capitalism is just a feeding trough that government can use to fuel its expansion. 

For an example of this new worldview, look at the budget produced by the Congressional Progressive Caucus last week. These Democrats try to boost economic growth with a gigantic $2.1 trillion increase in government spending — including a $450 billion public works initiative, a similar-size infrastructure program and $179 billion so states, too, can hire more government workers.

Now, of course, liberals have always believed in Keynesian countercyclical deficit spending. But that was borrowing to brake against a downturn when certain conditions prevail: when the economy is shrinking; when debt levels are low; when there are plenty of shovel-ready projects waiting to be enacted; when there is a large and growing gap between the economy’s current output and what it is capable of producing.

Today, House progressives are calling for a huge increase in government taxing and spending when none of those conditions apply. Today, progressives are calling on government to be the growth engine in all circumstances. In this phase of the recovery, just as the economy is finally beginning to take off, these Democrats want to take an astounding $4.2 trillion out of the private sector and put it into government where they believe it can be used more efficiently.

How do the House Democrats want to get this money? The top tax rate would shoot up to 49 percent. There’d be new taxes on investment, inheritance, corporate income, financial transactions, banking activity and on and on.

Now, of course, there have been times, like, say, the Eisenhower administration, when top tax rates were very high. But the total tax burden was lower since so few people paid the top rate and there were so many ways to avoid it. Government was smaller.

Today, especially after the recent tax increases, the total tax burden is already at historic highs. If you combine federal, state, sales and other taxes, rich people in places like California and New York are seeing the government take 60 cents or more out of their last dollar earned.

Democrats would make that weighty tax burden much, much heavier. In fact, the entire Democratic governing vision, from President Obama on down, is based on the notion that we can have a growing welfare state and pay for it by taxing the top 2 percent.

The first problem, of course, is that there aren’t enough rich people to cover even the current spending plans. As an analysis by the group Third Way demonstrated, even if we threw every semiplausible tax increase at the rich, the national debt would still double over the next three decades.

The second problem is that if you set the tax burden at astronomical levels you really do begin to change behavior and wind up with a very different country. You don’t have to be a rabid supply-sider to believe that when you start taking away 80 percent or 90 percent of somebody’s top marginal earnings, you are going to get some pretty screwy effects.

Higher taxes will produce long-term changes in social norms, behavior and growth. Edward Prescott, a winner of the Nobel Memorial Prize in economics, found that, in the 1950s when their taxes were low, Europeans worked more hours per capita than Americans. Then their taxes went up, reducing the incentives to work and increasing the incentives to relax. Over the next decades, Europe saw a nearly 30 percent decline in work hours.

The rich tend to be more sensitive to tax-rate changes because they’ve got advisers who are paid to be. Martin Feldstein, an economics professor at Harvard, looked into tax changes in the 1980s and concluded that raising rates causes people to shift compensations to untaxed fringe benefits and otherwise suppresses their economic activity. A study last year by the economists Michael Keane and Richard Rogerson found that tax rates can have a surprisingly large influence on how much people invest in education, how likely they are to create businesses and which professions they go into.

The progressive budget in the House seems to have been written by people hermetically sealed in the house of government. They work in government. They represent public-sector workers. They seem to have had little contact with private-sector job creators and no idea about what factors might play in their thinking. It’s a reminder that while Republicans may embarrass on a daily basis, many progressives have lost touch with what actually produces growth and prosperity.