I don’t know what Glenn Hubbard told Timothy Geithner in 2012 at the Economic Club of New York. In his new book, Stress Test, Geithner claims that Hubbard told him then that tax increases were unavoidable. “Well, of course we have to raise taxes,” Geithner writes that Hubbard told him. “We just can’t say that now.”
Hubbard vociferously denies having said that. “He’s going to go out and say what he wants,” Hubbard told Politico. “It just happens to be a lie.” Added Hubbard: “It’s pretty simple. It’s not true.” The story has been reported on Bloomberg TV and elsewhere.
This is unseemly sniping between two prominent men: Geithner was president of the Federal Reserve Bank of New York during the financial crisis and then became President Obama’s first Treasury secretary. Hubbard was the first chairman of President George W. Bush’s Council of Economic Advisers and later was an economic adviser to Mitt Romney during his 2012 Republican presidential campaign.
What I do know is what Hubbard told me in 2010 when I wrote a cover story for Bloomberg Businessweek about the George W. Bush tax cuts. Hubbard made clear that he was a big believer in the tax cuts. What he didn’t like was the lack of corresponding spending cuts, which resulted in big budget deficits. He said, as I reported then, that until the trajectory of spending changes, “deficits are just future taxes. You’re just talking about taxes today vs. taxes tomorrow.”
This isn’t politics. It’s mathematics. Simply put, all spending has to be paid for, now or later. If the government cuts taxes below what’s required to cover current spending, it will accumulate debt that will have to be paid off with future tax revenue. Not complicated.
In that light, the gulf between Hubbard and Geithner isn’t as big as the spat suggests. Both men believe that taxes have to be high enough to cover spending; their disagreement is over whether the gap should be closed by spending going down or taxes going up. Even that overstates their difference because Hubbard supports the Simpson-Bowles tax-and-spending plan. That plan would raise revenue–although by broadening the base of what’s taxed, not by raising rates.
When Hubbard says he opposes raising taxes, he mainly means that he opposes raising marginal rates—i.e., the rate on the last dollar earned, which most affects people’s incentives to work and save. “Bowles-Simpson actually raises revenue,” Hubbard told Politico. “But I wasn’t suggesting that we’re trying to raise taxes.”
Geithner has clearly gotten his nose in another hornet’s nest. That shouldn’t come as a surprise. On page 481 of Stress Test, he reveals that he was called the “Honey badger of the Obama administration.”