He had an obsession: the rich had to pay their fair share.
So when the big bargain talks ultimately collapsed, Obama turned to a simple message: rescind Bush’s tax cuts for the rich and use the savings to reduce the deficit. And after he won re-election, that largely happened. He secured a tax increase that, while slightly smaller than he had proposed, was still large and benefited only the wealthy. And it wasn’t used to pay for new programs, but to reduce the federal debt.
The strategy was a political and legislative winner. Unfortunately, under the conditions at that time, this did not make economic sense. Government borrowing costs have been extremely low throughout the Obama presidency. Federal Reserve short-term interest rates were at zero. And inflation was low while unemployment was high. New tax revenues could have been funneled into programs that get people building infrastructure. Or if congressional politics had made that impossible, fiscal conditions would have allowed Obama to trade an extension of the Bush tax cuts for Republicans who agreed to spend more. The economy needed stimulus, not austerity.
However, the Biden economy could use the old Obama formula.
Plagued by inflation, we face a fundamental problem: voters want to lower prices. This can be achieved by slowing aggregate demand, but in practice it means reducing Americans’ incomes. People want cheaper gas at the pump and beef at the grocery store, but lower paychecks would be a heavy price to pay for those things.
Hence the appeal of watering the rich. By taking money out of the pockets of millionaires, it’s possible to suck demand out of the economy and lower prices in ways that leave most people’s incomes untouched. The catch is that the money really has to be used to reduce the deficit. Taxing the wealthy to transfer to those with more modest means is inflationary, since less wealthy people have higher marginal propensities to consume. But when the rich are taxed to reduce the deficit, they have less money to spend raising the prices of houses, food, gas and cars for everyone else.
Of course, raising taxes would not end inflation on its own.
Interest rates will have to rise, as the Fed says and as all market participants expect. And within reason, there is nothing wrong with higher interest rates. They might even have some advantages compared to the extremely low interest rates that prevailed for most of the 21st century. Still, using higher interest rates to fight inflation is somewhat paradoxical; They act most directly to restrain investment, although greater investment to expand the productive capacity of the economy could in a sense itself provide a partial solution to inflation. Fiscal policy, while not as nimble as monetary policy, targets consumption more directly and can be structured to skimp on the wallets of those who can best afford it.
Biden already has a big tax plan for the wealthy in the form of roughly $1.7 trillion in tax increases, which his economics team negotiated with moderates in Congress when crafting the Build Back Better package. That fell apart as Democrats couldn’t agree on exactly how the $1.7 trillion should be spent. But about $350 billion of that should subsidize US production of zero-carbon energy — an idea that fits well with both long-term ideological aspirations of Democrats and short-term imperatives as well.
Spending the entire remainder (or almost all of it; Democrats should certainly fund every pet project Senator Joe Manchin wants to fund) on deficit reduction would be a bitter pill for progressives to swallow. At the same time, an ambitious clean-energy-plus-deficit-reduction push funded by taxing the wealthy would be a much more palatable outcome than what they’re currently headed for: doing nothing and losing control of Congress in the fall. Politicians must play the cards they are dealt. The country is struggling with an ongoing pandemic and a European security emergency. Neither are high on progressives’ to-do lists, but they are important governance challenges, and they are generating inflation that is drawing public attention. Taxing the rich to reduce the deficit is a traditional progressive concept, and also one that Manchin advocates.
This style of politics has fallen out of favor with the left, mainly for the very good reason that it was not appropriate to the macroeconomic circumstances of the mid-Obama years. But times have changed, and policymakers must change with them.
More from other authors 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 crack down: Clive Crook
This column does not necessarily represent the opinion of the editors or of Bloomberg LP and its owners.
Matthew Yglesias is a columnist for Bloomberg Opinion and writes the Slow Boring blog and newsletter. A co-founder and former columnist for Vox, he is also the youngest author of One Billion Americans.