Applying Trickle Down Economics in America Today: The Only True Believers Are The Wealthy (They Know It Doesn’t Work)   Leave a comment

August 14, 2012

What Romney and Ryan Should Learn About Trickle-Down Economics From David Stockman and Arthur Laffer.

I guess the good news this week was that the 2012 Olympic Games in London came and went without a hitch. No terrorists, only minor problems with the weather, unprecedented support from the good citizens of the United Kingdom and the Commonwealth, enough international tourists to provide a small economic boost, and only a few minor athletic scandals. All of this—the good and the bad—appeared to be handled with the polish, poise, and aplomb that many of us expect from our good friends across the pond. Beyond the enjoyment of watching some of the games, there was the momentary suppression of the Obama/Romney campaign rhetoric for a few hours here and there. But as the games drew to a close the likely Republican Party nominee, Willard Romney, made public his selection of a running mate; and with the selection of Paul Ryan, I have only this to offer: can the rack, the stocks, scarlet letters, and debtor’s prisons be far behind?

What the über wealthy Romney and his young sidekick Ryan wish to revive is not the American economy. What the two of them wish to revive is the thirty-year old discredited theory of supply-side economics, often referred to as “trickle down economics”. This is an idea which reached its zenith during the Reagan years (1980-88) but has never gone completely away. In short, the theory proffers that by cutting taxes, wealthy people will invest in businesses, those businesses will grow, they’ll hire more workers, those workers will spend their income, and by virtue of this chain of events, the economy will grow. See? Sounds logical doesn’t it? But then—to some people—so does a séance. Here’s the problem. In spite of its application in the American economy three decades ago, trickle-down economics—like a séance, that other way to venture into the great unknown—there is no empirical evidence that proves convincingly that Supply-Side/Trickle Down  works at all. We can wish and hope all we want but I repeat, there is no empirical evidence that supply-side economics works; at least not in America during the past 30 years and certainly not today. Consider this little bit of history about Arthur Laffer and his theory (from About.com):

This last part is key:  “. . . this effect works best when taxes are in the ‘Prohibitive Range.’ If taxes are already low, then tax cuts will do nothing more than reduce government revenue — without stimulating additional economic growth.” Today’s reality is that taxes are not in a prohibitive range, and for all intents and purposes, have not been in a prohibitive range for more than a decade.

In 2001 and again in 2003 President George W. Bush advocated, helped pass, and signed two pieces of legislation lowering taxes, a particular benefit for the wealthy. The first cut, passed in 2001 during W’s first year as president, was left in place even after the 9/11 attacks in New York and Washington, D.C., and the subsequent October 2001 invasion of Afghanistan (ostensibly a war with the Taliban, and a hunt for Osama Bin Laden.) Regardless of Laffer’s theory and the wisdom of tax cuts in a time of peace, Bush and a Republican congress left them in place as the country went to war. In addition, Bush urged Americans to carry on as before, without asking for citizens to contribute to the war effort—except for those who sent their sons and daughters, brothers and sisters, mothers and fathers to the battlefields. No “war effort” was mobilized. Instead we were, as recounted in the Washington Post seven years later, given a different mission:
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  • It’s widely thought that the biggest gamble President Bush ever took was deciding to invade Iraq in 2003. It wasn’t. His riskiest move was actually one made right after the Sept. 11, 2001, terrorist attacks when he chose not to mobilize the country or summon his fellow citizens to any wartime economic sacrifice. Bush tried to remake the world on the cheap, and as the bill grew larger, he still refused to ask Americans to pay up. During this past week, that gamble collapsed, leaving the rest of us to sort through the wreckage.
  • To understand this link between today’s financial crisis and Bush’s wider national security decisions, we need to go back to 9/11 itself. From the very outset, the president described the “war on terror” as a vast undertaking of paramount importance. But he simultaneously urged Americans to carry on as if there were no war. “Get down to Disney World in Florida,” he urged just over two weeks after 9/11. “Take your families and enjoy life, the way we want it to be enjoyed.” Bush certainly wanted citizens to support his war — he just wasn’t going to require them actually to do anything. The support he sought was not active but passive. It entailed not popular engagement but popular deference. Bush simply wanted citizens (and Congress) to go along without asking too many questions.
  • So [the Bush] administration’s policies reflected an oddly business-as-usual approach. Senior officials routinely described the war as global in scope and likely to last decades, but the administration made no effort to expand the armed forces. It sought no additional revenue to cover the costs of waging a protracted conflict. It left the nation’s economic priorities unchanged. Instead of sacrifices, it offered tax cuts. So as the American soldier fought, the American consumer binged, encouraged by American banks offering easy credit.

Bush engaged in a ground war in Afghanistan with no mechanism to pay for it. He could have suggested that the 2001 tax cuts be rescinded to pay for the war but, no; in his world, and the world of the supply-siders, that wasn’t necessary. So, the poor and middle class sent their family members to Kabul, the wealthy sent their family members to Wall Street.

This was all repeated in 2003, when more tax cuts were the order of the day while the Bush administration created a rationale to invade Iraq. Once again, tens of thousands of troops headed to the Middle East. More poor and middle-class family members went to Baghdad, and more wealthy MBAs went to Wall Street. Taxes were cut for the second time in three years, we launched a war for the second time in three years, and again, Bush asked nothing of the American taxpayers other than to enjoy another round of tax cuts. This was perhaps, for Bush and the GOP, the greatest blunder of all. The 2003 tax cuts and the war in Iraq were both built on false pretenses. A pattern emerged: the Bush administration took war “off the books”; America fought two wars, In Iraq and Afghanistan, with no mechanism to pay for either, so in essence, both were fought on credit.

Coupled with other benefits for the wealthy, even Laffer (b. 1940) would concede that taxes are now too low for any tax-cut  to be able to stimulate the economy, and as reiterate his belief that “tax cuts will do nothing more than reduce government revenue — without stimulating additional economic growth.” Yet we find Mr. Romney and Mr. Ryan advancing the cause for still more tax cuts. Yet they make no mention of the accumulated war debt. We should not let anyone forget the Bush administration assured us because the wars would be short, the cost could be ignored. Here are six examples of pre-Iraq invasion rhetoric from an April 2003 article from USA Today:

  • “Kenneth Adelman, a Reagan administration official who serves on a Pentagon advisory board, said in a Washington Post column in February [2003] that the [Iraq] war would be “a cakewalk.”
  • “Richard Perle, who chaired [the Pentagon advisory] board until last week, predicted in July that support for Saddam, even within the Iraqi military, would “collapse after the first whiff of gunpowder.”
  • Feb. 7, Defense Secretary Donald Rumsfeld, [told] U.S. troops in Aviano, Italy: “It is unknowable how long that conflict will last. It could last six days, six weeks. I doubt six months.”
  • March 4, Air Force Gen. Richard Myers, chairman of the Joint Chiefs of Staff, at a breakfast with reporters: “What you’d like to do is have it be a short, short conflict. . . . Iraq is much weaker than they were back in the ’90s,” when its forces were routed from Kuwait.
  • March 11, Deputy Defense Secretary Paul Wolfowitz, in a speech to the Veterans of Foreign Wars: “The Iraqi people understand what this crisis is about. Like the people of France in the 1940s, they view us as their hoped-for liberator.”
  • March 16, Vice President Cheney, on NBC’s Meet the Press: “I think things have gotten so bad inside Iraq, from the standpoint of the Iraqi people, my belief is we will, in fact, be greeted as liberators. . . . I think it will go relatively quickly, . . . (in) weeks rather than months.” He predicted that regular Iraqi soldiers would not “put up such a struggle” and that even “significant elements of the Republican Guard . . . are likely to step aside.”

So here’s the deal: “W” fought the wars on the cheap, on credit, and now it’s time to acknowledge the debt and pay for them. If Romney and Ryan were true to their word about attacking the cause of the budget deficit, they’d start by going to the American people and say, “hey, you, me, we all cried ‘rah-rah’ when America launched an invasion of Afghanistan in 2001, and an invasion of Iraq two years later. We prepared you for a war (or wars) of short duration. That’s not what we got. So now I’m suggesting that the next president will need to enact a war tax to retroactively pay the $3 trillion for these two wars. A progressive tax. The wealthier you are the more you must contribute to the bill.” However, neither Romney nor Ryan will do that. They are still talking about tax cuts. Which brings me to David Stockman.

David Stockman was the Budget Director in the Reagan administration who reportedly ran through the streets crying “trickle down, trickle down; supply side economics will save us” or something to that effect. Instead, we had in Stockman a guru who in the end seemed to lose his orthodoxy, as described by William Greider for the Atlantic in 1981:

Stockman himself had been a late convert to supply-side theology, and now he was beginning to leave the church. The theory of “expectations” wasn’t working. He could see that. And Stockman’s institutional role as budget director forced him to look constantly at aspects of the political economy that the other supply-siders tended to dismiss. Whatever the reason, Stockman was creating some distance between himself and the supply-side purists; eventually, he would become the target of their nasty barbs. For his part, Stockman began to disparage the grand theory as a kind of convenient illusion—new rhetoric to cover old Republican doctrine.

“The hard part of the supply-side tax cut is dropping the top rate from 70 to 50 percent—the rest of it is a secondary matter,” Stockman explained. “The original argument was that the top bracket was too high, and that’s having the most devastating effect on the economy. Then, the general argument was that, in order to make this palatable as a political matter, you had to bring down all the brackets. But, I mean, Kemp-Roth was always a Trojan horse to bring down the top rate.”

A Trojan horse? This seemed a cynical concession for Stockman to make in private conversation while the Reagan Administration was still selling the supply-side doctrine to Congress. Yet he was conceding what the liberal Keynesian critics had argued from the outset—the supply-side theory was not a new economic theory at all but only new language and argument to conceal a hoary old Republican doctrine: give the tax cuts to the top brackets, the wealthiest individuals and largest enterprises, and let the good effects “trickle down” through the economy to reach everyone else. Yes, Stockman conceded, when one stripped away the new rhetoric emphasizing across-the-board cuts, the supply-side theory was really new clothes for the unpopular doctrine of the old Republican orthodoxy. “It’s kind of hard to sell ‘trickle down,'” he explained, “so the supply-side formula was the only way to get a tax policy that was really ‘trickle down.’ Supply-side is ‘trickle-down’ theory.”

Yet today, Stockman has revised his view. While he’s not an endorser of President Obama’s approach to taxes and revenue, he saves his best for Rep. Paul Ryan. Brad Knickerbocker included this in his April 24, 2011 piece in the Christian Science Monitor: “Representative Ryan fails to recognize that we are not in an era of old-time enterprise capitalism in which the gospel of low tax rates and incentives to create wealth might have had relevance.”

We can only hope that Ryan will take note of Stockman’s wisdom and redefine his own learning curve to stop supply-side/trickle-down approaches to the 2012 American economy.

David Steffen

© David Steffen 2012

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