The Reagan Era is Finally Over

https://edsteinink.com/long-wait-2ffdd30f0c70

Biden’s speech and the response (or lack of response) from Republicans demonstrates that no one believes in the old nostrums any more.


The day Clinton surrendered. In the 1996 State of the Union, President Bill Clinton said, “The era of big government is over.” This has been widely marked as the moment when the Democratic Party surrendered to the Reagan revolution.

For the 12 years of the Reagan and Bush administrations, many Democrats in Congress had tried to hold the line. Then, after Clinton was elected in 1992, he set out to extend the legacy of FDR and LBJ by fulfilling the longstanding Democratic ambition to create some version of universal health care. After seeming popular at first, “HillaryCare” didn’t pass. Democrats were subsequently routed in the 1994 midterm elections, making Newt Gingrich the first Republican Speaker of the House since the legendary Sam Rayburn replaced the much-less-legendary Joseph W. Martin Jr. in 1955.

The lesson Clinton learned from that defeat was that Democrats needed to temper their ambitions. Subsequently, he worked with Gingrich to achieve goals that appealed to Republicans, like balancing the budget, ending “welfare as we know it”, passing NAFTA, and de-regulating the banking system (in ways that would blow up by 2008). There would be no more big-ticket proposals until ObamaCare in 2009. Democratic governance became little more than a kinder, more efficient version of Republican governance.

For most of the 20th century, Democrats had stood for an active government trying to solve people’s problems. FDR’s New Deal had given the country Social Security, unemployment insurance, and the minimum wage. LBJ’s Great Society had added Medicare, the War on Poverty, and the Voting Rights Act. But all that was over now. Clinton was not just refusing to advance, he was actively capitulating: “Big government” was itself a Reaganite phrase that would have been anathema to Democrats just a few years before. (To make a present-day comparison: Imagine what it would mean if major Republicans started denouncing “white privilege”.)

Meanwhile, Republicans continued to worship at the shrine of the Great Communicator. For three decades, the philosophy of the Republican Party didn’t waver: low taxes, less regulation, free trade, more spending for defense but less for social programs, and “traditional family values” — which mainly meant opposing abortion and homosexuality.

This constancy gave Republican candidates a significant branding advantage in campaigns. If you saw an R next to a politician’s name, you immediately knew what he stood for — even if you had never heard of him before. Democrats, conversely, had to put considerable effort and money into introducing themselves to voters, and explaining why they weren’t the “tax-and-spend liberals” Reagan had so successfully vilified.

That was the Reagan Era. Even if you hadn’t been born yet when he left office in 1989, you have been living in his era. Until Wednesday, when President Biden announced the end of it.

Two cycles. The Reagan Era did not end all at once. It took two complete election cycles to bring it down.

When Republicans started campaigning for the presidency in 2015, Reaganite orthodoxy still seemed solidly in control. Marco Rubio, for example, might talk about “new ideas”, but what he really meant was “new faces”. After listening to his stump speech, I wrote:

What in that plan does he think Jeb Bush will disagree with? Less regulation, lower taxes on corporations and the rich, less government spending, traditional family values, strong defense, aggressive American leadership in the world. How is that different from what every Republican has been saying since Ronald Reagan?

Rubio’s “new leadership” plea just meant that the old Reagan program needed a fresh young Hispanic spokesman, and that nobody really wanted another Bush vs. Clinton election.

But Trump upended all that. Occasionally he would wave in the direction of tax cuts and strong defense, but his real applause lines appealed to a rising white nationalist anger that Bush or Rubio could not speak for. (“Build a wall.” “Lock her up.”) Jeb Bush was “low energy” compared to the violence-promoting Trump. “Little Marco” was too mousy and too brown to stand up for the oppressed white working class.

An undercurrent of the Trump campaign was that Republicans had sold out white workers just as much as Democrats had. (In the other primary, Bernie Sanders was saying that Democrats had sold out workers just as much as Republicans had.) It was never clear just what time period the “again” in “Make America Great Again” pointed back to, but it wasn’t the Reagan administration. Maybe it was the 1950s, or the 1920s, or the Confederacy.

Trump’s speeches had a scatter-shot approach that sometimes could invoke big government positively. He told 60 Minutes that he would replace ObamaCare with a “terrific” healthcare plan that would cover all Americans “much better”. “I’m going to take care of everybody” he claimed, and “the government’s going to pay for it.”

Free trade was out and tariffs were in. And while he professed to be against regulation in general, he often threatened to interfere with American business in ways far beyond what Obama or Clinton had done. If Ford threatened to move a plant to Mexico, Trump said he would tell Ford’s CEO

Let me give you the bad news: every car, every truck and every part manufactured in this plant that comes across the border, we’re going to charge you a 35 percent tax — OK? — and that tax is going to be paid simultaneously with the transaction.

By 2020, the GOP was not even pretending to be more than a Trump personality cult. Their convention didn’t bother to write a new platform, because why weigh down the Great Leader with a specific policy agenda? Republicans would support Trump in 2020 — that’s all voters needed to know.

Supply-side economics. The beating heart of Reaganism was supply-side economics, as crystalized in the not-at-all-funny Laffer Curve, which started out as a drawing on a napkin and never got much more precise than that. The idea was that as taxes rose, economic activity shrank, with the result that sometimes a higher tax rate produced less revenue than a lower one. (At the extreme, it makes sense: If the tax rate were 100%, nobody would bother to make money.)

There was never a solid estimate of where the peak of the Laffer Curve was supposed to be, but Republicans uniformly believed that it was always at a lower rate than the current one. So tax cuts became the free lunch that economics wasn’t supposed to have: Cut taxes and the economy will grow so fast that the government will get more revenue. Everybody wins!

It didn’t work for Reagan or either of the times when Bush Jr. tried it. Lower taxes might goose the economy a little, but not enough to raise revenue beyond the previous projections. Invariably, tax cuts led to deficits.

So by the time Trump proposed a tax cut in 2017, supply-side economics had hit the same point Soviet Communism did during the Brezhnev Era: Everyone trotted out the old slogans, but no one really believed them. Trump cut rich people’s taxes because he was rich and wanted to pay less tax. McConnell and the other Republicans in Congress went along because their donors were rich and wanted to pay less tax. Mnunchin and various other hired experts might claim that it would be different this time, but soon Trump’s deficits began to approach $1 trillion a year, pre-Covid, at a time in the economic cycle when classic Keynesianism would call for a surplus. Obama had run trillion-dollar deficits to pull the economy out of the Great Recession. Trump was running them because … well, why not?

And the personality cultists in the GOP didn’t care.

When Covid hit, Trump realized that direct payments from the government were popular, and that no one cared about the deficit. So the deficit for fiscal 2020 (October, 2019 to October, 2020) clocked in at $3.1 trillion. During the fall campaign, Trump proposed another round of direct payments, plus infrastructure spending. The second round of payments passed after the election, at a lower level than either Trump or the Democrats wanted, but the infrastructure proposal never turned into a specific piece of legislation.

Biden. After Trump’s coup attempt failed and Biden took over, Republicans in Congress attempted to run the same play that had stymied Obama: Underfund and slow-roll everything, so that the economy will limp along and the new administration will be blamed.

On Covid relief, Biden decided not to play that game. He politely listened to a lowball Republican proposal that they probably would have backed away from anyway, and then pushed ahead with a reconciliation strategy (the same one Trump had used to pass his tax cut). The $2 trillion package passed quickly with only Democratic votes. It has been quite popular, and Republicans have at times tried to take credit for it, despite unanimously voting against it.

In his speech to a joint session of Congress Wednesday night, the President promoted two additional proposals — the American Jobs Plan and the American Families Plan, that together would spend over $4 trillion during the next ten years. The plans are funded by tax increases on corporations (rolling back part — but not all — of Trump cut in the corporate tax rate) and the rich (the top tax rate returns to its pre-Trump level, and capital gains are taxed as ordinary income for those making more than $1 million a year). Biden pledges not to raise taxes on those making less than $400,000 a year. The middle class, he said, “is already paying enough”.

This is all heresy against Reaganomics, which says that if taxes on the wealthy are kept low, they’ll invest their money more productively than government could, resulting in higher economic growth, more jobs, and increased wages. That was a formidable argument in the 1980s, and still had teeth even when it was used against Obama.

But no one believes it any more. Biden saw no need to give an elaborate justification for taxing the rich to build American infrastructure. Instead, he called supply-side economics by its liberal name, and brushed it off:

Trickle-down economics has never worked.

That simple statement is the bookend to Clinton’s “The era of big government is over.”

The true history of American infrastructure. It has now been more than two centuries since New York State began constructing the Erie Canal, which made Buffalo a boom town and promoted economic growth across the Great Lakes. Once cargoes from Lake Superior started floating down the Hudson, New York City soon replaced Philadelphia as the nation’s top port.

What the last two centuries have taught us is that the economy needs a mixture of public and private investment. The logic of that can get a little wonky, but the gist is that certain big investments, like the Erie Canal, the transcontinental railroad, the interstate highway system, or rural electrification, create what economists call “positive externalities”. In other words, they promote a general growth that no private-sector entity is broad enough to capture. (Even New York State failed to capture the growth its canal promoted in Chicago and Detroit.) So the private sector either will not build them at all, or will build them much too small and too late.

One result of Reaganism has been an under-investment in the public sector. That’s what Biden is trying to reverse. By taxing the rich, he is taking money from a bloated private sector to catch up on the public-sector investments that have gone begging for decades. Biden is betting that this shift will increase growth and create jobs — the exact reverse of what Reaganomics predicts.

In the official Republican response to Biden’s speech, Senator Tim Scott invoked trickle-down when he described Biden’s tax plan as “job-killing”, and predicted “it would lower Americans’ wages and shrink our economy”. If the Trump tax cuts — or the Bush tax cuts before them — had actually created jobs and promoted growth, as they were supposed to do, then it would make sense to predict that reversing them would kill jobs and stifle growth. But none of the promised benefits of Trump’s plan actually happened, so the jobs that it didn’t create won’t be lost when Biden goes back to pre-Trump tax rates.

Where is the Tea Party? Writing in Politico, conservative Rich Lowry waxes nostalgic about 2009, when “President Barack Obama created a spontaneous, hugely influential conservative grassroots movement on the basis of an $800 billion stimulus bill and a health care plan estimated to cost less than a trillion.”

Once upon a time, Joe Biden’s spending proposals would have launched mass demonstrations in opposition.

Little else would have been talked about in conservative media, and ambitious Republican politicians would have competed with one another to demonstrate the most intense, comprehensive resistance, up to and perhaps including chaining themselves to the U.S. Treasury building in protest.

But now, he laments, Republicans just want to talk about the border and cancel culture. No one is defending the Reagan orthodoxy, because no one believes in it any more.

Perestroika has come.

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