Tuesday, May 23, 2017

Reaganomics Revisited

http://nymag.com/daily/intelligencer/2017/05/trump-budget-based-on-usd2-trillion-math-error.html

This is beginning to sound eerily familiar.

Back in 1980 -- you know, before the trumpster fire arrived to start blowing up the entire world -- Ronald Reagan made the same claim: that tax cuts would generate economic activity, with the end result that they would pay for themselves. His primary opponent, George H. W. Bush, famously called this approach "voodoo economics" (and in one of the greatest acts of political cowardice in my lifetime recanted this statement as soon as the vice-presidency was dangled in front of him).

Why do Republicans insist that cutting taxes will actually increase revenue?

A lot of this has to do with the basic economic philosophy behind supply-side economics, which Bush the Senior called "voodoo economics" and everyone else started calling "Reaganomics." Supply-side economics is a macroeconomic theory that holds that economic growth can be spurred by investing in capital and lowering barriers on the production of goods and services. In real-life terms, this means that strong supply-siders believe that lowering tax rates, as well as deregulation, will bring about economic growth due a resulting increase in supply.

In "The Concise Encyclopedia of Economics" (http://www.econlib.org/library/Enc/SupplySideEconomics.html), James D. Gwartney, a professor of economics and director of the Gus A. Stavros Center for the Advancement of Free Enterprise and Economic Education at Florida State University, writes:
"An increase in marginal tax rates adversely affects the output of an economy in two ways. First, the higher marginal rates reduce the payoff people derive from work and from other taxable productive activities. When people are prohibited from reaping much of what they sow, they will sow more sparingly. Thus, when marginal tax rates rise, some people—those with working spouses, for example—will opt out of the labor force. Others will decide to take more vacation time, retire earlier, or forgo overtime opportunities. Still others will decide to forgo promising but risky business opportunities. In some cases, high tax rates will even drive highly productive citizens to other countries where taxes are lower. These adjustments and others like them will shrink the effective supply of resources, and therefore will shrink output."
This completely ignores the fact that, for most people (aka "not part of the top 1%") "opting out of the labor force" isn't an option due to that pesky "earning a living and not going bankrupt" thing. Similarly, the average worker is not going to "sow more sparingly," because this person's economic needs haven't changed ... all that has changed is that he is now earning less, and has to work harder, longer hours, or a second job just to keep from losing ground.

Supply-side has another name that is probably very familiar to people: trickle-down economics. Co-opting President John F. Kennedy's phrase that "a rising tide lifts all boats," conservatives have used this concept as an argument in favor of supply side economics. The thinking here is that, by easing the burden at the top of the economic ladder, the resulting increase in economic activity will eventually work its way down the economic ladder until all benefit.

The problem with this? It doesn't work.

Even when I first heard about this during Ronald Reagan's 1980 campaign, when I was all of fifteen years old, I knew it was bunk. The problem stems from one glaring omission in supply-side theory, and that is the realization that people are greedy sumbitches. Cutting the marginal tax rate on production from 40% to 20%, say, doesn't actually increase production. It only increases profit. Profit which, in all likelihood, is stashed in offshore accounts or tax-sheltered investments, both of which are famous for not generating economic activity.

"But, but, but," conservatives will argue, "that increased profit is distributed throughout the company, and everybody benefits." Wrong again. Those increased profits are distributed to the CEO in the form of every higher compensation packages. After all, in 1965 the ratio between the average CEO's salary and that of the average worker stood at 20 to 1 ... not unreasonable. However, beginning in the mid 1970s (when supply side first showed up in the popular consciousness) and running through 2014, CEO pay increased at a rate of 997% (not counting stock options, bonuses, etc.) ... while the average worker saw a meager 10.9% increase during that same period.

And yes, those are inflation-adjusted amounts, which reflects purchasing power in the contemporary market, not absolute numbers -- which will puncture the conservative argument that "minimum wage has increased by more than six times since 1965." Yes, in terms of absolute numbers it has ... in 1965, minimum wage stood at $1.15, whereas it sits at $7.25 today. However, in 1965:
  • The Dow Jones closed the year at a high of 969.
  • The average new home cost $21,500.
  • A first-class stamp was five cents.
  • A gallon of gas was thirty one cents.
  • A dozen eggs was 53 cents.
  • A gallon of milk was 95 cents.
... the end result is that the average worker's salary went further in 1965 than it does today.

Now, in some cases (e. g. bread, eggs), this paycheck goes farther today than it did in 1965, in other cases (gas, for example) it does not. When everything is taken into account, though, the net result is a loss to the average worker.

All of which highlights the central failing of the trickle-down theory. Instead of benefits overflowing the cup at the top of the economic pyramid and filling those on the lower levels, all that happens is the people at the top get bigger cups. Very little, if any, then actually makes its way down the ladder to those on the lower rungs.

There is also significantly less discussion given to the effect this has on government revenue, and when it is discussed it relies on some economic chicanery. For example, Reagan held that cutting taxes would increase economic activity, which would increase the incoming revenue so that it matched the amount of the tax cuts. What was ignored here was that there was some double counting happening.

Let's look at a simple example of a government with no deficits. It spends, on average, $1 billion a year on all programs, with annual increases of about 3%. It receives $1 billion a year in tax revenue ... again, with an average 3% per year increase.

Now let's throw supply side economics into the mix. The top tax rates are cut, but the argument is that the increased economic activity will not only make up the difference so that we still get that $1 billion in revenue, but prevent deficits. The problem is that, while we may have generated $1 billion, we have spent $1.03 billion ... leaving us with a deficit of $30 million that has to come from somewhere.

Supply-siders address this problem by counting revenue twice: once by counting the actual revenue coming in, and again by claiming the increased activity equates to revenue.


In reality, things are far more complicated than this, which is why so many conservatives are talked into it ... it becomes so arcane, so quickly, that their eyes glaze over and they finally agree just to get whoever it is to shut the hell up, already. And who could blame them? Listening to someone explain supply-side economics in detail makes one yearn for the action-packed thrill ride of waiting at the DMV.

However, this does point to why deficits ballooned in the 1980s, and why Kansas (where trickle-down was fully enacted and allowed to run unimpeded for a number of years) is nearly bankrupt: schools were closed a month early due to budget cutbacks, and if ya gotta pee while you're driving across the state you better hope you can find a friendly bush, because all the rest stops have been closed due to budget cuts.

And now the Republicans are falling into this same trap. Cut taxes on the wealthy. Cut spending on the poor, because if there is any increase in economic activity it sure as hell won't cover the difference. And if the poor complain ... well, it's their fault for choosing to be poor in the first place.

This is why trump is only part of the problem. Yes, it's his name attached to "trumpanomics" (a term coined by Director of the White House Office of Management and Budget Mick Mulvaney), but if you think a man doesn't have the attention span to understand the causal relationship between turning the light off and the room getting dark is going to understand any of this ...

The heart of the problem is the new conservatism. Cruel, judgemental conservatism. A representative implies that someone with breast cancer may have deserved it because they did not sufficiently take care of themselves. Aid to the poor is slashed or eliminated altogether, because being poor is a character flaw, not a set of economic circumstances. Taxes are cut for the wealthy because, if they were bad people, they wouldn't have all that money and they deserve to be rewarded for this, right?

Here's the problem we face. We're going to get stuck with budgets that really suck for 2018 and 2019. This is unavoidable with Republican majorities in both houses and a Republican squatting in the White House. What we, as progressives, have to do is:
  • Urge our representatives to push back against these extreme measures.
  • Ensure that most of these chuckleheads are tossed out in 2018 and replaced with people who are thoughtful and understand that extreme income inequality is actually bad for everyone.
It's going to be an ugly eighteen months. There will undoubtedly huge piles of stupid coming from trump and his gang of idiots. There will be much hand-wringing over the perils of allowing liberals to do anything -- make economic policy, act in foreign affairs, brush their own teeth -- and even more threats of economic disaster if we allow even a scrap of humanity to enter into our economic policy. We will just have to weather the storm and do our best to come out the other side ready to fight.

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