Beware the Guns of August—in Asia
How to Keep U.S-Chinese Tensions From Sparking a War
After years of preaching to the world about the dangers of government spending, the U.S. government has suddenly gone Keynesian. Checks to households, massive liquidity injections from the U.S. Federal Reserve, and bailouts for businesses are now the order of the day—all at hitherto impossible levels, all justified by the extraordinary threat of the pandemic crisis.
The U.S. government does not usually spend liberally. Rather, it tends to adjust to economic shocks through unemployment and austerity—especially at the state level, where governors are often required by law to maintain balanced budgets. As soon as the COVID-19 outbreak abates, the familiar calls to slash spending and balance budgets will return. Federal debt will have risen to levels not seen since the 1940s—and in response, the proponents of austerity will demand to get the “free market” back to work by cutting both taxes and spending.
Americans should be prepared to reject such entreaties. Even those concerned about debt need look no further for an alternative than to the course American leaders took during the two great crises of the mid-twentieth century: the Great Depression and World War II. In response to these shocks, the U.S. government rejected the politics of austerity and increased taxes to finance the GI Bill and the largest infrastructure program in American history. It should do so again today, this time using the money to rebuild the nation’s health-care system.
U.S. President Franklin Roosevelt was elected in 1932, at the height of the Depression, in part because Americans sought a leader who would reject the politics of austerity and offer hope. Roosevelt did just that. “Our greatest primary task is to put people to work,” he declared in his first inaugural address. “This is no unsolvable problem if we face it wisely and courageously. It can be accomplished in part by direct recruiting by the government itself, treating the task as we would treat the emergency of a war, but at the same time, through this employment, accomplishing greatly needed projects to stimulate and reorganize the use of our natural resources.”
In his first 100 days in office, Roosevelt signed 15 bills that vastly expanded the scope of government in the lives of millions of Americans. The Works Progress Administration (WPA), perhaps the most iconic program of Roosevelt’s first term, put nearly eight million people to work building bridges, roads, schools, post offices, museums, swimming pools, parks, community centers, zoos, botanical gardens, gyms, universities, and much more. There was hardly a community in the country that did not witness the immediate, visible benefits of public action. By 1938, the United States had spent more on social welfare than any country in the world, including the United Kingdom and even Sweden. How did the government pay for these programs? By increasing taxes and borrowing money. Back in 1931, the top tax rate (on incomes of more than $100,000) was not far from what it is today, 25 percent. Immediately upon entering office, Roosevelt raised the rate on incomes of more than $1 million to 63 percent. In 1932, he raised that rate to 79 percent.
By the time the United States entered World War II, few were willing to argue for cutting taxes or rolling back government. On the contrary, deficit spending skyrocketed, peaking at more than 26 percent of GDP in 1943, and public debt rose to more than 100 percent of GDP. To finance all this spending, taxes were pushed up once again. The country embarked on its famous “Taxes to Beat the Axis” campaign and introduced a pay-as-you-go tax system. To win the war, everyone would have to pay in.
By 1944, even the lowest-income earners in the United States paid taxes at a rate of 23 percent, and those at the top paid an astounding 94 percent. Charles Wilson, then head of the largest corporation in the world, General Motors, famously said, “For years, I thought that what was good for our country was good for General Motors and vice versa.” Less famously, Wilson also felt that it was his duty to pay taxes. In 1949, Wilson earned $586,100 in salary, bonus, and stock. Of that amount, he paid $430,350 in taxes.
The economic thinking of the day was that the United States would sink into a deep depression at the war’s end. The economist Paul Samuelson predicted that millions of people would be thrown into the labor market. Without continued government planning and economic management, Samuelson warned, would come “the greatest period of unemployment and industrial dislocation which any economy has ever faced.”
Instead, over the next 20 years, the U.S. economy witnessed a miracle. Consumption rose by 22 percent between 1944 and 1947, while gross private investment rose by 223 percent over the same period. As families settled down and the baby boom began, real housing expenditures increased sixfold. Despite some fear mongering over debts and deficits, Roosevelt’s successor, Harry Truman, won the 1948 election on promises to further increase taxes on the rich (which he did) and build a national health insurance system (which he could not get through Congress).
Four years later, the country elected its first Republican president since Herbert Hoover, Dwight Eisenhower. Many Americans believed that the expansive government programs of the Roosevelt and Truman eras would finally be killed. But Eisenhower would have none of it. “Should any political party attempt to abolish social security, unemployment insurance, and eliminate labor laws and farm programs, you would not hear of that party again in our political history. There is a tiny splinter group, of course, that believes you can do these things. . . . Their number is negligible, and they are stupid,” he wrote. So rather than roll back government, Eisenhower expanded Social Security, embarked on the largest peacetime public spending program in U.S. history—the Interstate Highway Program—and refused to cut taxes on the rich. The top rate stood at 91 percent throughout his eight years in office, and the U.S. economy continued to boom.
Social distancing is, ironically, helping people realize how much they need each other. Around the world, people are making sacrifices for the good of others. Even in the United States, a country more dedicated to individualism and free markets than any other, most people are coming to understand that they are all in this together. How can the country make an opportunity out of this crisis?
First, raise taxes. The United States needn’t go back to the tax rates of the Eisenhower years. But even a return to the levels of 1980 would mean enormous progress. The undertaxed will argue that with yawning public debts, the country cannot afford to raise taxes and should instead cut them again. But the United States has enacted ten income tax cuts since 1981, and what did all those tax cuts bring? They are the root cause of the huge increases in public debt that deficit mongers rave about. In 1980, public debt stood at $930 billion, or 23 percent of GDP. After ten rounds of tax cuts that were supposed to finance themselves, public debt has increased to $22.3 trillion, or 106 percent of GDP—simply because, for the past 40 years, the United States has collected less in taxes than it has spent in every year except for a brief period from 1998 to 2000.
Everyone should be paying more, but especially the rich. At their highest point, tax rates on the richest millionaires reached 94 percent. By 1980, they had been cut to 70 percent. Today, the effective tax rate paid by the richest 400 Americans is just 23 percent, while middle-income earners pay over 25 percent. Increasing the average tax rate on the former by just five percent would generate over $140 billion per year. Doing the same with the average tax paid by middle-income earners ($55,000 to $88,000) would generate over $115 billion. Increasing taxes on all income classes by just five percent would yield at least $820 billion.
There is a great deal the government could do with that cash. The current crisis makes abundantly clear that the U.S. health-care system is a disaster. For a 93-year-old diabetic to get a hip replacement is seemingly easier than for a 23-year-old grocery store clerk to get a test for the novel coronavirus. Yet providing everyone with decent health care is not beyond the reach or means of one of the richest countries on earth.
The left-leaning Urban Institute has calculated that a single payer health-care system would cost $34 trillion over ten years. But these projections assume that introducing such a system would generate no new revenue. On the contrary, getting rid of the employer-paid health insurance deduction alone would generate $2.786 trillion over ten years, and employers would get the equivalent of a massive tax break by not having to add nearly a third to all their wage bills for benefits, as they currently do. Because of the United States’ exceedingly complex multipayer system, 30 percent of its health-care spending goes to administrative costs. As a result, the average American family currently spends over $5,700 a year just for administrative health-care costs, without the added expense of actual health services. These costs add up. Today, the United States spends more than twice as much per person for health care than the average member of the Organization for Economic Cooperation and Development, or OECD—yet by almost every measure, Americans have worse health-care outcomes.
A system that provides everyone with health care is more feasible than it may seem today. The current administration has already increased the national debt by $1.5 trillion through a tax cut in 2017, and if President Donald Trump wins reelection in November, he will need to give back to his supporters, who may prove to be among those more affected by the virus and the recession it causes. Just as only President Richard Nixon could go to China, perhaps Trump is the only one who can cross the Republican Rubicon on taxes. He is keen to find a replacement for Obamacare, and given the damage wrought by COVID-19 in the current health-care system, a general rebuild is in order whether he likes it or not. Meanwhile, the presumptive Democratic nominee, Joe Biden, can win only if he manages to mobilize the base of his former fellow candidate Senator Bernie Sanders—and committing to a national health-care system would be just the way to do so. Biden would also have the public on his side: the majority of Americans have favored some kind of national health insurance system ever since Truman introduced the idea in 1947. And today, 75 percent of Americans also support raising taxes on the rich.
Either way, the United States has a choice. When this pandemic is over, it can return to the politics of division and austerity and claim that it cannot afford anything else, despite clearly proving otherwise through its response to the coronavirus crisis. It can get into the usual fights over who should pay, disguised as concern over deficits, and weaken its social fabric and economic institutions to the point of breaking. Or it can raise taxes and fund the health care for all that the country so desperately needs. Every other developed economy has made the latter choice. It is the United States’ turn to do the same.
Why America’s Growth Model Suggests It Has Few Good Options