Book Review: Edward Kleinbard’s “We Are Better Than This.”

October 8th, 2014 at 4:23 pm

When it comes to fiscal policy—government taxes and spending—there’s a lot we Americans get wrong.

We think we’re taxed a lot more heavily than our counterparts in other countries.

If we’re conservative, we think any bump up in tax rates will have terrible unintended consequences.

If we’re liberal, we insist on progressivity—higher tax rates on higher incomes—on the tax side without much thought about the spending side.

We’re endlessly told that reducing the budget deficit is essential.

Then we’re told that we can have all the government we want while cutting taxes.

And don’t even think about trying to get to the bottom of these assertions from the media or many of today’s “think tanks.” Vested interests purchase not only the airspace to promulgate their biases; they buy the think tanks to give them the answers they want.

Forget truth. You’ll be lucky if you uncover some truthiness.

What’s that? You’re headed over the Congressional Budget Office website to get the nonpartisan story straight from the budget wonks? Well, I hope you’ve decided which “baseline” to use (current law vs. alternative), not to mention which economic and technical assumptions you accept. You’ll also need an intravenous caffeine feed.

Let’s face it, America. We really need someone to help us to get to bottom of these existential fiscal questions in a way that goes down pretty easy.

Turns out, we’re in luck. Ed Kleinbard is a tax expert who embodies one of my personal touchstones: if you really understand something, you can explain it to anyone. His new book, We Are Better Than This: How Government Should Spend Our Money, will not only help you separate the sense from the nonsense in America’s fiscal debate. Far more importantly, it will remind you why we need a functional federal government and the extremely high costs in terms of our economic well-being, today and tomorrow, of its absence.

Kleinbard describes himself as a “Dutch uncle” which the dictionary tells me is someone who admonishes sternly and bluntly…tells us the hard truths whether we want to hear them or not. But he’s actually considerably friendlier than that, and while the book is dense with subject matter that ranges from the national income accounting system to the precise definition of capital income in the tax code, he works hard to make it all reader friendly.

Moreover, though Kleinbard is a technical analyst with long experience in both the private and public sector, his heart is as big as his brain. The book has a strong moral compass and even amidst the underbrush of the national revenue and outlays tables, he consistently summons his compass to point the way back to his theme.

Which is this:

Yes, markets are often highly efficient and good at what they do. But they don’t do everything by a long shot. We need a highly functional and amply funded government sector to invest in public goods, offset market failures, and provide social insurance.

Each chapter explores some dimension of this theme. The early chapters take on the government-disparaging market triumphalists (his term), emphasizing their need to ingest a sizable chill pill. Markets fail all over the place, with the Great Recession as exhibit A (and don’t try to tell Kleinbard that it was government housing programs that inflated that bubble; he’s got the evidence to show otherwise). Moreover, their view that government is always and everywhere the enemy of markets is ahistorical extremism that has helped give birth to the dysfunctionality that now plagues us.

And Kleinbard puts not too fine a point on it:

“Market triumphalism confuses national income with national welfare; it ignores the positive returns to government insurance and government investment; it confuses life outcomes with the hand of Providence; and it justifies a distasteful narcissism and possessiveness toward all material goods. It enables the unreflective affluent to sleep at night, their consciousness assuaged by its message that their success is explained by their own admirable virtues alone.”

As my 14 year-old would say: “shots fired!”

One of the more important subthemes here is that taxes are not by definition job-killing or spirit-crushing. They are, in fact (and he’s got these facts in there too), on the low side compared to that of other advanced economies. Also, to get slightly technical, Kleinbard importantly stresses that far too much of the tax debate today assumes huge, negative “elasticities,” meaning undesirable responses to higher taxes.

This is the idea that if taxes on earnings or wealth go up at all, people will react by working less, saving less, investing less, and they’ll generally just mope around instead of being productive (the obverse of this—cutting taxes will increase growth—is the thoroughly debunked notion of trickle down economics).

Kleinbard points out that reality, unsurprisingly, is a lot more nuanced, and the historical record shows that the US economy has done well when tax rates were higher while other countries manage to flourish with a much larger public sector than our own. He reasonably calls for a return to the Clinton-era tax rates, a period when not only jobs, growth, and productivity performed significantly better than today, but prosperity was more broadly shared and the budget achieved surplus.

He also, however, has an important message for liberals: stop being so obsessed with progressivity in the tax code (a progressive tax code is one where rates rise with incomes). It’s not, as you can pretty easily glean from the above quote, that his heart bleeds for Romney’s “makers” versus the left’s “takers.” In fact, he shows how wrong that construct is, demonstrating that once you factor in the full spate of taxes, almost everyone contributes something.

But what matters to Kleinbard, and he’s surely got a point, is the progressivity of taxing and spending. He writes: “Our greatest public finance mistake over the last few decades has been to obsess over tax policy, while simultaneously failing to have serious and rational debates over spending policy.”

For the record, I’d argue that our greatest recent fiscal mistake, and Europe is getting this even more wrong than we did, was austerity in the face of recession. But broadly speaking, he’s right. By putting taxing so far in front of spending, we’re putting the cart before the horse and it has profoundly distorted our national debate. Instead of thinking clearly about where, in advanced economies, markets leave off and government must pick up, we fight tooth and nail over basis points (hundredths of a percentage point) on tax rates.

Of course, and Kleinbard gets this, the debate we’re having is much the one that those who benefit from the status quo would like us to have. If we were instead to recognize the essential role of government in fighting climate change, the deteriorating quality of our public goods, the need to invest in the education and mobility of the poor, the inherent efficiency of pooling risk through the large social insurance programs, including Social Security, Medicare, and now Obamacare, and critically, the positive interaction of these functions with the market economy, we’d have a much more meaningful national discussion.

Sure, that conversation would cause great discomfort to the market triumphalists, which Kleinbard would view as a feature, not a bug.

That’s the conversation Kleinbard’s trying to generate here, but while I found his book uplifting and optimistic in terms of its aspirations for us, I fear that he will not succeed in steering us there.

The reason is in the very first word of the title: “We Are Better than This.” Just who is this “We” he keeps talking about? More than any time in our recent history, we are balkanized by income, class, ideology, religion, politics, race, and pretty much every other dimension you can think of. And if there is no coherent “we” then there can be no clear path for “us” to take together that will make us “better than this.”

Popular graphics like this one show that we are a more partisan than ever, and this is a fundamental problem for anyone seeking a solution that makes sense to a majority willing to take action to get us on a better path.

Kleinbard’s book doesn’t deal with this. That’s not so much a critique—the book covers more than enough ground and does so in fact-based detail. Like Adam Smith, whom he cites throughout, Kleinbard is a moral philosopher. He sits astride society with tax tables and charts and thinks clearly, with great depth and insight, about what a better society would look like.

But not unlike the progressives whom he insists mustn’t obsess over taxes without considering spending, a vision of where we should be doesn’t get us there. Somehow, we need to get to a place where there is enough of a national “we” that wants to be better than we are today. At that point, this book will be invaluable.

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5 comments in reply to "Book Review: Edward Kleinbard’s “We Are Better Than This.”"

  1. Robert Salzberg says:

    All government programs should begin with the question: What do we want to do and how do we want to pay for it?

    Dedicated taxes for specific programs like Social Security answer that question the best. Because an overwhelming majority of Americans don’t want cuts to benefits, then we need to eventually raises taxes like eliminating the cap of income subject to the Social Security tax.

    Infrastructure spending could be fully funded by a combination of raising the gas tax and instituting a 0.1% FTT dedicated to infrastructure spending. Carbon taxes could be devoted to paying for programs that reduce our carbon footprint.

    Of course, some money will have to come from general taxation for things like military spending and education but Progressives shouldn’t shrink from raising taxes to pay for things We the People want.

  2. smith says:

    The important message for liberals should be: start being obsessed with progressivity in the tax code! I don’t understand who or which liberals are characterized as excessively obsessed with progessivity. Certainly not the Obama administration, the Democratic leadership (Reid, Schumer, Pelosi, et al) who engineered or mishandled the retention of 80% of the Bush tax cuts. Clinton era tax hikes are hardly progressive in historical terms, thanks to Reagan – Bradley 1980s era slashing, not to mention Kennedy cuts (JFK). The rise of the 1%, the creation of new American aristocracy, the return of the Gilded Age values, will never be halted, let alone reversed without restoring Eisenhower marginal rates. 90% over $2 million dollars, that’s what we had, and guess what, it worked.
    Contrary to conventional wisdom, we don’t care if capping someones salary to close to $2 million causes them to work less. If they are earning $500,000 and paying 70 cents on the dollar to Uncle Sam so they cut back, so what?
    Those not obsessed with tax progressivity don’t understand the economic history of the 20th Century, the zero sum plus small 1.5 – 3% productivity growth game we play. Without restoring New Deal rates there is no way to cut the power of the 1% and corporations, and free up money for a more equitable distribution of income. Raise marginal rates, corporate rates, capital income rates and close loopholes.

    Yes, it’s just as important to cut waste, inefficiency and avoid the bureaucratic nightmares of big government. Use the excess money to expand research, create free university education, free day care, pay down the public debt, lower the optional retirement age, or raise benefits.

    • smith says:

      Left the danger of progressive spending. Yes, end corporate welfare and tax break expenditures for the rich. But benefits should be universal, like Social Security, Medicare, student loan guarantees, free public education. Means test these and you destroy them. Even unemployment insurance (though capped at low rates) is available to the newly unemployed hedge fund manager (we don’t give them zero for making millions, just the opposite, they get the max).

  3. smith says:

    It is a very dangerous idea to not soak the rich.

    Pro for not soaking:
    Politically, soaking difficult due to Republican opposition
    Practically impossible due to lip service liberal Democrats just as beholden to the rich.
    A rising tide lifts all boats idea is offered as alternative, better economy lifts everyone out of poverty.
    The Kleinbard scenario of more government spending is also offered as the way forward.

    So you may ask what’s wrong with everyone pitching in and helping everyone.
    If low and middle income are aided by increased benefits while the rich get to keep most of their money what’s wrong with that? Everyone wins, right?

    If your vision of society is one where a super powerful and rich elite run things beneficently for everyone’s benefit, where even the lower and middle class lead the good life, and government has much more involvement in the economy, fine.

    The American way is limited government and a free enterprise system, where the power of money is curtailed by very progressive tax rates, like Eisenhower 90% on $2 million (close to what Piketty advocates too).

    Germany is hardly a great example, Klienbard admits inequality is just as high. Maybe that’s why Germany has cost Europe trillions of dollars by leading the austerity charge, causing a double dip recession, whole countries thrown into endless depression, a policy that now threatens anemic growth at home too. German workers councils? Great. Environmentalism? Wonderful. Free university? Liberating. Economic policy and inequality? Nien.

    More context from Krugman:

    The trouble is liberal policy makers won’t face the truth, no one is worth 200 times the income of the average worker. Allowing this leads to distorted politics and economy, and absolute power. We already live in royal times. The rulers of two of the three largest states succeeded their father, as did the previous ruler of the country, while the consort of ruler previous to him seeks to restore their reign. Locally the financial center of the U.S. was run by the 13th richest man in the world for 12 years. You either have a democratic republic or an aristocracy, not both. Don’t pretend otherwise.