Tax
cuts initiate bubble economies, not true growth.
by
Thom Hartmann
The
Republican Party has been running a long con on the American people,
and Trump’s new tax cut proposals are just the latest iteration on
it. This con involves getting Democrats to shoot Santa Claus (Clinton
cutting welfare/Obama proposing the chained CPI cut to Social
Security) and using tax policy to put a jolly old Saint Nick outfit
on the Republicans.
As Bruce
Bartlett – one of the architects and major salespeople for Reagan’s
tax cuts in the ‘80s – wrote in USA Today this week: “Virtually
everything Republicans say about taxes today is a lie. Tax cuts and
tax rate reductions will not pay for themselves; they never have.
Republicans don’t even believe they will, they are just excuses to
slash spending for the poor when revenues collapse and deficits rise.
There is no evidence that tax reform raises growth, although it may
improve fairness and tax administration.”
So how do
Republicans get away with this lie, and why does the press let them
get away with it? It’s a fascinating story.
Odds are
you've never heard of Jude Wanniski, but without him Reagan never
would have become a "successful" president, Republicans
never would have taken control of the House or Senate, Bill Clinton
never would have been impeached, and George Bush never would have
become president. Ditto for Trump.
When Barry
Goldwater went down to ignominious defeat in 1964, most Republicans
felt doomed (among them the 28-year-old Wanniski). Goldwater himself,
although uncomfortable with the rising religious right within his own
party and the calls for more intrusion in people's bedrooms, was a
diehard fan of Herbert Hoover's economic worldview.
In Hoover's
world (and virtually all the Republicans since reconstruction with
the exception of Teddy Roosevelt), market fundamentalism was a
virtual religion. Economists from Ludwig von Mises to Friedrich Hayek
to Milton Friedman had preached that government could only make a
mess of things economic, and the world of finance should be left to
the Big Boys – the Masters of the Universe, as they sometimes
called themselves – who ruled Wall Street and international
finance.
Hoover
enthusiastically followed the advice of his Treasury Secretary,
multimillionaire Andrew Mellon, who said in 1931: "Liquidate
labor, liquidate stocks, liquidate the farmers, liquidate real
estate. Purge the rottenness out of the system. High costs of living
and high living will come down... enterprising people will pick up
the wrecks from less competent people."
Thus, the
Republican mantra was: "Lower taxes, reduce the size of
government, and balance the budget."
The only
problem with this ideology from the Hooverite perspective was that
the Democrats always seemed like the bestowers of gifts, while the
Republicans were seen by the American people as the stingy Scrooges,
bent on making the lives of working people harder all the while
making the very richest even richer. This, Republican strategists
since 1930 knew, was no way to win elections.
Which was
why the most successful Republican of the 20th century up to that
time, Dwight D. Eisenhower, had been quite happy with a top income
tax rate on multimillionaires of 91 percent. As he explained to his
right-wing brother Edgar Eisenhower in a personal letter on November
8, 1954:
[T]o
attain any success it is quite clear that the Federal government
cannot avoid or escape responsibilities which the mass of the people
firmly believe should be undertaken by it. The political processes of
our country are such that if a rule of reason is not applied in this
effort, we will lose everything--even to a possible and drastic
change in the Constitution. This is what I mean by my constant
insistence upon 'moderation' in government.
Should
any political party attempt to abolish social security, unemployment
insurance, and eliminate labor laws and farm programs, you would not
hear of that party again in our political history. There is a tiny
splinter group, of course, that believes you can do these things.
Among them are H. L. Hunt (you possibly know his background), a few
other Texas oil millionaires, and an occasional politician or
business man from other areas. Their number is negligible and they
are stupid.
Goldwater,
however, rejected the "liberalism" of Eisenhower,
Rockefeller, and other "moderates" within his own party.
Extremism in defense of liberty was no vice, he famously told the
1964 nominating convention, and moderation was no virtue. And it
doomed him and his party.
And so after
Goldwater's defeat, the Republicans were again lost in the wilderness
just as after Hoover's disastrous presidency. Even four years later
when Richard Nixon beat Hubert Humphrey in 1968, Nixon wasn't willing
to embrace the economic conservatism of Goldwater and the economic
true believers in the Republican Party. And Jerry Ford wasn't, in
their opinions, much better. If Nixon and Ford believed in economic
conservatism, they were afraid to practice it for fear of dooming
their party to another 40 years in the electoral wilderness.
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 schools, hospitals, roads, bridges,
and highways were built giving a healthy union paycheck to
construction workers and driving economic growth. Democrats kept high
taxes on businesses and rich people to pay for things, which worked
out just fine for working people (wages were steadily going up, in
fact), and made the Democrats 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.
Everybody
understood at the time that economies are driven by demand. People
with good jobs have money in their pockets, and want to use it to buy
things. The job of the business community is to either determine or
drive that demand to their particular goods, and when they're
successful at meeting the demand then factories get built, more
people become employed to make more products, and those
newly-employed people have a paycheck that further increases demand.
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.
Ronald
Reagan was the first national Republican politician to suggest that
he could cut taxes on rich people and businesses, that those tax cuts
would cause them to take their surplus money and build factories to
make more stuff, and that the more stuff there was supplying the
economy the faster it would grow.
In the 1980
GOP primary, George Herbert Walker Bush – like most Republicans of
the time – was horrified. Ronald Reagan was suggesting "Voodoo
Economics," said Bush in the primary campaign, and Wanniski's
supply-side and Laffer's tax-cut theories would throw the nation into
such deep debt that we'd ultimately crash into another Republican
Great Depression.
But Wanniski
had been doing his homework on how to sell supply-side economics. In
1976, he rolled out to the hard-right insiders in the Republican
Party his "Two Santa Clauses" theory, which would enable
the Republicans to take power in America for the next generation.
Democrats,
he 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, he said, 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.
When Reagan
rolled out supply-side economics in the early '80s, dramatically
cutting taxes while exploding (mostly military) spending, there was a
moment when it seemed to Wanniski and Laffer that all was lost. The
budget deficit exploded and the country fell into a deep recession –
the worst since the Great Depression – and Republicans nationwide
held their collective breath.
But David
Stockman came up with a great new theory about what was going on –
they were "starving the beast" of government by running up
such huge deficits that Democrats would never, ever in the future be
able to talk again about national health care or improving Social
Security – and this so pleased Paul Volker, the Fed chairman, that
he opened the spigots of the Fed, dropping interest rates from 19 to
9 percent (between 1981 and 1982) and buying government bonds,
producing a nice, healthy goose to the economy. Alan Greenspan
further counseled Reagan to dramatically increase taxes on people
earning under $37,800 a year by doubling the Social Security
(FICA/payroll) tax, and then let the government borrow those newfound
hundreds of billions of dollars off-the-books to make the deficit
look better than it was.
Reagan,
Greenspan, Winniski, and Laffer took the federal budget deficit from
under a trillion dollars in 1980 to almost $3 trillion by 1988, and
back then a dollar could buy far more than it buys today. They and
George HW Bush ran up more debt in eight years than every president
in history, from George Washington to Jimmy Carter, combined. Surely
this would both starve the beast and force the Democrats to make the
politically suicidal move of becoming deficit hawks and shoot Santa
Claus.
And that's
just how it turned out. Bill Clinton, who had run on an FDR-like
platform of a "new covenant" with the American people that
would strengthen the institutions of the New Deal, strengthen labor,
and institute a national health care system, found himself in a box.
A few weeks before his inauguration, Alan Greenspan and Robert Rubin
sat him down and told him the facts of life: he was going to have to
raise taxes and cut the size of government.
Clinton took
their advice to heart, raised taxes, balanced the budget, and cut
numerous programs, declaring an "end to welfare as we know it"
and, in his second inaugural address, an "end to the era of big
government." He was the anti-Santa Claus, and the result was an
explosion of Republican wins across the country as Republican
politicians campaigned on a platform of supply-side tax cuts and
pork-rich spending increases.
Looking at
the wreckage of the Democratic Party all around Clinton by 1999,
Winniski wrote a gloating memo that said, in part: "We of
course should be indebted to Art Laffer for all time for his Curve...
But as the primary political theoretician of the supply-side camp, I
began arguing for the 'Two Santa Claus Theory' in 1974. If the
Democrats are going to play Santa Claus by promoting more spending,
the Republicans can never beat them by promoting less spending. They
have to promise tax cuts..."
Ed Crane,
then president of the Libertarian CATO Institute, noted in a memo
that year: "When Jack Kemp, Newt Gingich, Vin Weber, Connie
Mack and the rest discovered Jude Wanniski and Art Laffer, they
thought they'd died and gone to heaven. In supply-side economics they
found a philosophy that gave them a free pass out of the debate over
the proper role of government. Just cut taxes and grow the economy:
government will shrink as a percentage of GDP, even if you don't cut
spending. That's why you rarely, if ever, heard Kemp or Gingrich call
for spending cuts, much less the elimination of programs and
departments."
George W.
Bush embraced the Two Santa Claus Theory with gusto, ramming through
huge tax cuts – particularly a cut to a maximum 15 percent income
tax rate on people like himself who made their principle income from
sitting around the pool waiting for their dividend or capital gains
checks to arrive in the mail – and blowing out federal spending.
Bush even out-spent Reagan, which nobody had ever thought would again
be possible.
And it all
seemed to be going so well, just as it did in the early 1920s when
three consecutive Republican presidents cut income taxes on the
uber-rich from over 70 percent to under 30 percent. In 1929, pretty
much everybody realized that instead of building factories with all
that extra money, the rich had been pouring it into the stock market,
inflating a bubble that – like an inexorable law of nature –
would have to burst. But the people who remembered that lesson were
mostly all dead by 2005, when Jude Wanniski died and George Gilder
celebrated the Reagan/Bush supply-side-created bubble economies in a
Wall Street Journal eulogy:
...Jude's
charismatic focus on the tax on capital gains redeemed the fiscal
policies of four administrations. ... Unbound by zero-sum economics,
Jude forged the golden gift of a profound and passionate argument
that the establishments of the mold must finally give way to the
powers of the mind. He audaciously defied all the Buffetteers of the
trade gap, the moldy figs of the Phillips Curve, the chic traders in
money and principle, even the stultifying pillows of the Nobel Prize.
In reality,
his tax cuts did what they have always done over the past 100 years –
they initiated a bubble economy that would let the very rich skim the
cream off the top just before the ceiling crashed in on working
people.
The
Republicans got what they wanted from Wanniski's work. They held
power for over 30 years, made themselves trillions of dollars, cut
organized labor's representation in the workplace from around 25
percent when Reagan came into office to around 6 percent of the
non-governmental workforce today, and left such a massive deficit
that some misguided "centrist" Democrats are again
clamoring to shoot Santa with working-class tax hikes and entitlement
program cuts.
And now
Trump and the whole crowd are again clamoring to be recognized as the
ones who will out-Santa Claus the Democrats. You'd think after all
the damage they've done that the infotainment stars on TV would at
least acknowledge this history. But that’s not convenient when you
need GOP “stars” to come on your show or you lose your
million-dollar job.
Wanniski is
gone, but his memo still lives on, particularly where he admonished
Ed Crane at CATO to stop talking about cutting the federal deficit
and instead promise people the Santa Claus of economic growth. He
ended his infamous memo with:
If the
Democrats are going to play Santa Claus by promoting more spending,
the Republicans can never beat them by promoting less spending. They
have to promise tax cuts in order to grow the economy -- not to
‘starve the government of revenue,’ which is Milton Friedman's
rationale. Let's shoot Santa Claus? Let's not.” Instead, let’s
force the Democrats to shoot Santa!
The Two
Santa Claus theory isn't dead, as we can see from today's Republican
rhetoric. Hopefully, though, reality will continue to sink in with
the American people and the massive fraud perpetrated by Wanniski,
Reagan, Graham, Bush(s), and all their "conservative"
enablers will be seen for what it was and is.
And the rest
of us can get about the business of repairing the damage and
recovering the stolen assets of our nation from these cheap hustlers
who dare call themselves politicians.
Source,
links:
Good economic doctors, like a good medical doctors must know their patient and balance their remedies to fit the conditions. Both "supply side" and "demand side" programs can beneficial if the "doctor" is knowledgeable and skillful. The big deficiency is in the knowledge and skill of the electorate. I believe parents should receive credit on their property taxes, if they chose private schools. Parents should be more active in choosing curriculums.
ReplyDeleteGary D. Jones, email: rsl.garyjones@comcast.net