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“What The Godfather Of Reaganomics Gets Wrong”: Wink, Wink, Nudge, Nudge; More Distorted Reagan Nostalgia

Chris Christie just announced a big tax-cut plan. Well, of course he did. Offering such proposals is de rigueur for Republican presidential candidates. And it pretty much has been since the Reagan presidency.

No surprise, then, that Arthur Laffer, intellectual godfather of the Reagan tax cuts, remains in high demand on the right. Many GOP 2016ers — including Jeb Bush, Scott Walker, and Ted Cruz — have been publicly consulting with the supply-side economist who continues to joyfully preach the wonder-working power of cutting top marginal tax rates.

But Laffer is, shall we say, less than enthusiastic about my recent column here at The Week, in which I argued that some presidential wannabes were misinterpreting and misapplying the lessons of Reaganomics. As I wrote a few weeks back:

Republicans sometimes misuse Reaganomics to justify fantastical tax plans that promise deep rate cuts for the rich — both Cruz and Paul favor low-rate flat taxes — that will pay for themselves and boost the middle class through explosive economic growth. … Republican policymakers and voters have little reason — either from historical experience or empirical studies — to assume tax reform will generate a prolonged period of 4-5 percent GDP growth such that concerns about budget deficits and income distribution are irrelevant. [The Week]

In other words, a flat tax won’t supercharge growth enough to prevent us from losing big bucks. This is a rather modest claim and critique, one perfectly compatible with the idea that the Reagan tax cuts were still good policy. Reaganomics was a home run — just not an impossible five-run dinger.

My comments are also compatible with the consensus among economists on the left and right. Yet Laffer felt compelled to respond to my article with a three-chart, five-page, 2,000-word rebuttal.

Laffer is one of the most important public policy entrepreneurs of the 20th century, right up there with John Maynard Keynes and Milton Friedman. His official bio asserts his work was responsible for “triggering a world-wide tax-cutting movement in the 1980s” — and that is no vain boast. His famous Laffer Curve — an illustration of the trade-off between tax rates and tax revenue derived from the ideas of philosopher Ibn Khaldun — is indeed one of “the main theoretical constructs of supply-side economics.”

So it is disappointing that Laffer, in responding to me, offers such an odd, airy, and ultimately unnecessary defense of his life’s work. For instance: While Laffer doesn’t explicitly say the Reagan tax cuts paid for themselves, he doesn’t say they lost revenue, either. Yet he spends hundreds of words countering my claim that they didn’t pay for themselves. What Laffer basically argues is that since (a) income tax revenue rose during the 1980s, (b) the rich paid a higher share of GDP in income taxes, and (c) there were more employed people as a share of the entire adult population, then that must mean the tax cuts paid for themselves. Except he doesn’t actually say that. “Well, I hope you get the idea” is how he puts it. Wink, wink, nudge, nudge.

Put aside for a moment that Laffer mostly avoids my evidence, such as a Treasury Department study concluding the Reagan tax cuts lost $200 billion a year and one by former Bush II economists that found income tax cuts only recoup a sixth of the revenue they lose through higher growth. A bigger flaw in Laffer’s argument is that he ignores everything else happening in the U.S. economy during the 1980s. Tax rates matter plenty — Laffer’s key insight — but they aren’t all that matters. Laffer ignores the big role of easier monetary policy in driving the recovery after the awful 1981-82 recession. And, yes, the employment-population ratio rose in the 1980s — as it did in the 1970s. Did the Reagan tax cuts cause the Baby Boom, too? Laffer also ignores the revenue impact of $115 billion a year in 1980s tax hikes and how the Tax Reform Act of 1986 nudged rich people to shift how they took their income to the personal income tax base from the corporate one. Laffer ignores a lot as he attempts to make a stronger-than-necessary case. The economist doth protest too much.

Laffer’s other big objection is that I downplay the growth effects of the Reagan tax cuts by cherry picking dates. Since the tax cuts did not go fully into effect until 1983, Laffer argues that’s the appropriate start date for the Reagan boom. Indeed, real GDP grew at a snappy 4.5 percent annually from 1983 through 1988. But Laffer’s timing is problematic. The recovery likely would not have been as strong if not for the 1981-82 recession itself. Sharp recoveries after downturns were the rule of the postwar era through the 1980s. And since the 1981 downturn was the deepest, a strong rebound would be expected. For example, the economy grew by 5 percent during the first two years after the awful 1973-75 recession.

Again, none of this means the Reagan tax cuts failed. It would be hard to find a reasonable economist who denied they boosted growth in the 1980s as the Fed battled inflation. The effects just were not ginormous enough to fully offset the direct revenue loss. More importantly, perhaps, Reaganomics — tax cuts, deregulation, entrepreneurial optimism — changed America’s longer-term economic direction. Economist Michael Mandel contends that “the impact of the policies Reagan set out in the 1980s, which slowly worked their way through the economy, helped lay the groundwork for the Information Revolution of the 1990s.” So, yeah, you can give Reagan a bit of thanks for your smartphone.

This is the data-driven, evidence-based analysis Laffer and other old-school Reaganauts should be making to today’s GOP and center-right movement. The real Reaganomics. With fantasy tax plans again abounding on the right, the presidential race could use a reality check more than more distorted Reagan nostalgia.

 

By: James Pethokoukis, The Week, May 13, 2015

May 14, 2015 Posted by | GOP Presidential Candidates, Reaganomics, Supply Side Economics | , , , , , , , | 1 Comment

“Reaganomics Killed America’s Middle Class”: The Time Is Long Past Due For Us To Roll Back The Reagan Tax Cuts

There’s nothing “normal” about having a middle class. Having a middle class is a choice that a society has to make, and it’s a choice we need to make again in this generation, if we want to stop the destruction of the remnants of the last generation’s middle class.

Despite what you might read in the Wall Street Journal or see on Fox News, capitalism is not an economic system that produces a middle class. In fact, if left to its own devices, capitalism tends towards vast levels of inequality and monopoly. The natural and most stable state of capitalism actually looks a lot like the Victorian England depicted in Charles Dickens’ novels.

At the top there is a very small class of superrich. Below them, there is a slightly larger, but still very small, “middle” class of professionals and mercantilists – doctor, lawyers, shop-owners – who help keep things running for the superrich and supply the working poor with their needs. And at the very bottom there is the great mass of people – typically over 90 percent of the population – who make up the working poor. They have no wealth – in fact they’re typically in debt most of their lives – and can barely survive on what little money they make.

So, for average working people, there is no such thing as a middle class in “normal” capitalism. Wealth accumulates at the very top among the elites, not among everyday working people. Inequality is the default option.

You can see this trend today in America. When we had heavily regulated and taxed capitalism in the post-war era, the largest employer in America was General Motors, and they paid working people what would be, in today’s dollars, about $50 an hour with benefits. Reagan began deregulating and cutting taxes on capitalism in 1981, and today, with more classical “raw capitalism,” what we call “Reaganomics,” or “supply side economics,” our nation’s largest employer is WalMart and they pay around $10 an hour.

This is how quickly capitalism reorients itself when the brakes of regulation and taxes are removed – this huge change was done in less than 35 years.

The only ways a working-class “middle class” can come about in a capitalist society are by massive social upheaval – a middle class emerged after the Black Plague in Europe in the 14th century – or by heavily taxing the rich.

French economist Thomas Piketty has talked about this at great length in his groundbreaking new book, Capital in the Twenty-First Century. He argues that the middle class that came about in Western Europe and the United States during the mid-twentieth was the direct result of a peculiar set of historical events.

According to Piketty, the post-World War II middle class was created by two major things: the destruction of European inherited wealth during the war and higher taxes on the rich, most of which were rationalized by the war. This brought wealth and income at the top down, and raised working people up into a middle class.

Piketty is right, especially about the importance of high marginal tax rates and inheritance taxes being necessary for the creation of a middle class that includes working-class people. Progressive taxation, when done correctly, pushes wages down to working people and reduces the incentives for the very rich to pillage their companies or rip off their workers. After all, why take another billion when 91 percent of it just going to be paid in taxes?

This is the main reason why, when GM was our largest employer and our working class were also in the middle class, CEOs only took home 30 times what working people did. The top tax rate for all the time America’s middle class was created was between 74 and 91 percent. Until, of course, Reagan dropped it to 28 percent and working people moved from the middle class to becoming the working poor.

Other policies, like protective tariffs and strong labor laws also help build a middle class, but progressive taxation is the most important because it is the most direct way to transfer money from the rich to the working poor, and to create a disincentive to theft or monopoly by those at the top.

History shows how important high taxes on the rich are for creating a strong middle class.

If you compare a chart showing the historical top income tax rate over the course of the twentieth century with a chart of income inequality in the United States over roughly the same time period, you’ll see that the period with the highest taxes on the rich – the period between the Roosevelt and Reagan administrations – was also the period with the lowest levels of economic inequality.

You’ll also notice that since marginal tax rates started to plummet during the Reagan years, income inequality has skyrocketed.

Even more striking, during those same 33 years since Reagan took office and started cutting taxes on the rich, income levels for the top 1 percent have ballooned while income levels for everyone else have stayed pretty much flat.

Coincidence? I think not.

Creating a middle class is always a choice, and by embracing Reaganomics and cutting taxes on the rich, we decided back in 1980 not to have a middle class within a generation or two. George H.W. Bush saw this, and correctly called it “Voodoo Economics.” And we’re still in the era of Reaganomics – as President Obama recently pointed out, Reagan was a successful revolutionary.

This, of course, is exactly what conservatives always push for. When wealth is spread more equally among all parts of society, people start to expect more from society and start demanding more rights. That leads to social instability, which is feared and hated by conservatives, even though revolutionaries and liberals like Thomas Jefferson welcome it.

And, as Kirk and Buckley predicted back in the 1950s, this is exactly what happened in the 1960s and ’70s when taxes on the rich were at their highest. The Civil Rights movement, the women’s movement, the consumer movement, the anti-war movement, and the environmental movement – social movements that grew out of the wealth and rising expectations of the post-World War II era’s middle class – these all terrified conservatives. Which is why ever since they took power in 1980, they’ve made gutting working people out of the middle class their number one goal.

We now have a choice in this country. We can either continue going down the road to oligarchy, the road we’ve been on since the Reagan years, or we can choose to go on the road to a more pluralistic society with working class people able to make it into the middle class. We can’t have both.

And if we want to go down the road to letting working people back into the middle class, it all starts with taxing the rich.

The time is long past due for us to roll back the Reagan tax cuts.

 

By: Thom Hartmann, AlterNet, April 19, 2014

April 20, 2014 Posted by | Economic Inequality, Middle Class, Reaganomics | , , , , , , , | 1 Comment

   

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