The Two Santa Claus Theory

Riffing off of Brian's post referencing the horror show of a Field Poll, where Californians polled apparently think we can balance the budget through spending cuts but don't want to cut anything (a sort-of companion PPIC poll basically shows the same thing, with respect to nobody wanting education cuts but nobody wanting to pay for increases), this should be a very familiar outlook to people. It's at the heart of the two Santa Claus theory, proposed by Jude Wanniski, a Republican economist, during the time of Ronald Reagan.

By 1974, Jude Wanniski had had enough. The Democrats got to play Santa Claus when they passed out Social Security and Unemployment checks – both programs of the New Deal – as well as when their "big government" projects like roads, bridges, and highways were built giving a healthy union paycheck to construction workers. They kept raising taxes on businesses and rich people to pay for things, which didn't seem to have much effect at all on working people (wages were steadily going up, in fact), and that made them seem like a party of Robin Hoods, taking from the rich to fund programs for the poor and the working class. Americans loved it. And every time Republicans railed against these programs, they lost elections [...]

Wanniski decided to turn the classical world of economics – which had operated on this simple demand-driven equation for seven thousand years – on its head. In 1974 he invented a new phrase – "supply side economics" – and suggested that the reason economies grew wasn't because people had money and wanted to buy things with it but, instead, because things were available for sale, thus tantalizing people to part with their money. The more things there were, the faster the economy would grow.

At the same time, Arthur Laffer was taking that equation a step further. Not only was supply-side a rational concept, Laffer suggested, but as taxes went down, revenue to the government would go up!

Neither concept made any sense – and time has proven both to be colossal idiocies – but together they offered the Republican Party a way out of the wilderness [...]

Democrats, (Wanniski) said, had been able to be "Santa Clauses" by giving people things from the largesse of the federal government. Republicans could do that, too – spending could actually increase. Plus, Republicans could be double Santa Clauses by cutting people's taxes! For working people it would only be a small token – a few hundred dollars a year on average – but would be heavily marketed. And for the rich it would amount to hundreds of billions of dollars in tax cuts. The rich, in turn, would use that money to import or build more stuff to market, thus increasing supply and stimulating the economy. And that growth in the economy would mean that the people still paying taxes would pay more because they were earning more.

There was no way, Wanniski said, that the Democrats could ever win again. They'd have to be anti-Santas by raising taxes, or anti-Santas by cutting spending. Either one would lose them elections.

In the intervening 35 years, we have had no progressive leader in California, no Democratic leader, challenge that ridiculous theory in any meaningful way. Instead, over and over again, Democrats must lead the charge killing off the two Santa Clauses, filling budget deficits by raising taxes or cutting spending, frequently the latter. And while other factors have contributed to Democratic dominance in recent years, the ideological theories of Santa Claus conservatism remain. And Democrats and Republicans alike have ingrained them into their lizard brains, either by believing in them, or believing that everyone else believes in them and there's no way to change that.

In truth, public opinion, particularly in such a low-information state like California, is quite malleable. But nobody has bothered to discredit the Two Santa Claus theory, the idea that we can have all the services we need and the lowest taxes possible. Of course, the insidious dynamic of the two-thirds rule, putting Democrats both nominally in power but subject to a conservative veto, has made a Democratic message impossible, so constrained it is by the straitjacket of an ungovernable system.

Now, the out for the believers in two Santa Clauses is that government can just do more with the money they have, through better efficiency. Nobody would argue that government is perfectly efficient - I don't see anyone leaping to defend spending $580,000 on unused office space - but the savings from that efficiency exist on the margins, and would do little to really impact our woefully low per capita state spending on areas like K-12 education. So we get bullshitty ideas like cutting lawmaker pay (the Governor jumped all over that one), or trashing the state's Waste Management Board, which has become a waystation for termed-out legislators to pull in a nice salary. These "efficiency" maneuvers would do absolutely nothing relative to the budget deficit. And the areas that would make a dent, like a broader-based sales tax that catches everything we consume, if off-limits because of special interest lobbying:

The declining “yield” of the state’s sales tax is one cause of California’s ongoing budget deficits. Since 1960, the revenue raised by each one percent state sales tax rate has fallen by about one-third. The reasons for the decline are two-fold. First, consumers now spend a larger share of their incomes on services, which are largely untaxed, rather than goods, which are subject to the state’s sales tax. The second reason is the rise of internet sales, including purchases from out-of-state retailers, that don’t collect the tax on sales made to California consumers. Estimates suggest that California loses $2 billion to $5 billion per year from untaxed internet sales - enough to make a significant and lasting dent in the state’s chronic budget woes.

In light of this fact, one might think that a bill that attempts to narrow a loophole that provides preferential treatment for businesses located entirely outside of California would be a “no brainer.” Unfortunately, this appears not to be the case. Assemblymember Nancy Skinner’s AB 178 is similar to a recently enacted New York law, would require businesses such as Amazon.com that enter into “affiliate” relationships with California-based entities to collect California sales tax.

At a time when California faces significant budget shortfalls and California retailers face declining sales, you’d think a bill that makes it possible for the state to actually collect taxes that are legally owed and that limits an incentive for Californians to buy from businesses that don’t employ a single Californian would be greeted with open arms. Unfortunately, opposition from tech industry lobbyists has left the measure’s future in question.

Ultimately, we have a serious problem. Our citizens get almost no public policy information from media, our state capitol is too often run by corporate interests, our Democratic leadership cowers from advocacy to disabuse citizens of false notions, and our Yacht Party is completely crazy. This is not insurmountable but requires leadership. We elected a President by 61% of the vote in California who was derided as a socialist. Attitudes can be changed. But someone has to stand up and speak.