The Eclectic One

…Because labels are a poor substitute for thinking

Are we ever going to get over Ronald Reagan’s Voodoo economics?

Posted by Bill Nance on September 17, 2008

Many Americans are either too young or were too detached in 1980 to remember Ronald Reagan’s Primary race. But it’s worth remembering today as Wall Street reels under increasing  pressure from the sub-prime mortgage crisis and the related fall in liquidity among the nation’s largest investment banks and their related industries.

In 1980 the economy was in the tank. In case you don’t remember what it was like for people back then, prices on just about everything were sky-rocketing, fuel prices had gone up drastically, interest rates were at all-time highs and jobs were rapidly going away as foreign competition was increasingly able to offer better, cheaper products to America than their domestic counterparts. Chrysler Corporation had just been bailed out by the federal government because of the potential disaster its failure could have caused to the economy.

Is this sounding familiar? It should.

That year a two-term Governor from California ran against the hapless, inept incumbent President, Jimmy Carter, with, among other things, a promise to get the economy rolling again.

One of his signature policies was supply-side economics, or the “trickle-down” theory. Reagan promised that if we would just give the wealthiest Americans tax relief, they would generate so much new wealth that the effect would “trickle down” to the rest of the country.

His opponent in that primary race, a man you may have heard of, was George Herbert Walker Bush. Bush called Reagan’s idea “voodoo economics.” Bush thought the entire idea of wealth “trickling down” was ludicrous on it’s face. And he was largely correct. In fact, real wages for the vast majority of Americans have been on a downward slide since 1981, the year Reagan was inaugurated, when adjusted for inflation.

One thing Reagan did get right was his policy on taxes. In 1980 the top marginal tax rate was around 70%. In this regard, tax policy was down right confiscatory. And the Reagan Administration quickly set about lowering this rate, which had only had the effect of discouraging investment. It’s common sense. Why invest in potentially risky ventures when even if you do make a lot of money, 70% of it goes to the government?

But that’s where the success stopped. As a result of the tax cuts, more jobs were created, unemployment went down, and wages stabilized. Combined with a massive spending program, the economy got substantially better for everyone, though then, as we see now, the primary beneficiaries were the already very well-to-do, in fact, in all fairness, lower taxes really did help everyone. Confiscatory tax rates discourage investment, which has it’s own “trickle-down” effect because no new jobs are created. But that’s in relation to excessive tax rates, nothing else.

Confiscatory tax rates on capital discourage investment. Taxes, by themselves, DO NOT.

But lower taxes and higher government spending also has other effects. During the Reagan years, the national debt tripled in size. This caused additional inflationary pressures, higher interest rates and massive debt to foreign countries. By the time George Herbert Walker Bush came to office the price was already starting to be paid, and a crash on Wall Street in 1989 was just one of those effects, and the S&L crisis was another. By 1992 the economy was again in a shambles, only this time with crushing debt.

Is this sounding familiar again?

While the reduction in top marginal rates spurred a lot of growth because rates had been so high, they were not coupled with a corresponding reduction in spending. Hello? Last 8 years? Anyone listening out there?

Enter George “Shrub” Bush. When Bush entered office the economy was in good shape. The tech bubble had burst causing some temporary pain in the economy, but this was fairly short-term pain. Unlike today, the fundamentals of the American economy really were sound. Interest rates were low, the size of the government had been trimmed by Al Gore’s eight-year-long project of efficiency in government, and the national debt was at zero for the first time in 50 years thanks to both the tech boom and the policies of Bill Clinton.

But that wasn’t good enough. Bush’s idea of economics was even lower taxes on the wealthy. Tax cuts which resulted in a situation where as a proportion of income, the world’s richest man, Warren Buffet, was paying less in taxes than his secretary! If that doesn’t deeply disturb you, I question your sanity.

Here’s the problem. Taxes hadn’t discouraged people from investing for years. the bush tax cuts for the wealthy didn’t benefit the economy at large, they just made the already rich even more so.

Combined with this give-away to the rich, the Bush administration and his Republican congress have de-regulated markets, installed cronies and incompetents in positions of oversight authority and spent money like a drunken sailor on liberty call. This has brought on another tide of massive national debt in just a short eight years.

This is what’s brought us to the current economic crisis. “Trickle-down” doesn’t work. It was voodoo economics in 1980 and it’s STILL voodoo economics.

There is a thing called balance. The tax rates on capital in 1980 were one extreme, the current one is the other side of that coin.

The top marginal rates plus the “millionaire tax” passed by the Clinton administration didn’t discourage anyone from investing. You could make a huge pile of cash and the government wanted a relatively small slice of it. By cutting taxes even more, Bush has succeeded only in adding more debt which increases pressure on companies to down-size and slash costs in order to remain competetive with foreign companies and either higher interest rates or inflation (how are your food budgets holding up again?)

As it stands now, the rich aren’t reluctant to invest in new technologies and business ventures because of tax rates. Fears are based on a sour economy brought about by crushing debt and a housing crisis caused by too little regulation. The richest people have gotten a free ride while everyone else has footed the bill.

Now John McCain wants to do more of the same.

Folks, this is voodoo economics. It’s not much-needed tax reform, it’s just plain pandering to the wealthiest people and the most powerful interests in the country. McCain can talk about reform all he wants to, his record makes those claims a lie. He sat as Chairman of the Senate Commerce Committee for 12 of the last 14 years. Years when he passed on every opportunity to properly regulate capital. Years in which he voted for nearly every spending increase.

If you liked George Bush’s economic policies, you are going to LOVE John McCain’s.

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One Response to “Are we ever going to get over Ronald Reagan’s Voodoo economics?”

  1. […] by Bill Nance on October 1, 2008 I’ve written before that Reaganomics didn’t work in the 1980s, as demonstrated by the tripling of the national […]

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