Saturday, December 17, 2011

The Fallacy of Reaganomics 1/3

by Nomad
The conventional view serves to protect us from the painful job of thinking. - John Kenneth Galbraith

Ronald Reagan
Lately it seems like every GOP candidate wants to find some way, any way, to make a linkage to Ronald Reagan. It goes way beyond an illegitimate comparison into the offensive and idiotic. Recently in an interview with CNN, for example, Newt Gingrich had audacity to say,
"I think a big mistake on my part was to try to bring in conventional consultants. Because I am much like Reagan and Margaret Thatcher, I'm such an unconventional political figure that you really need to design a unique campaign that fits the way I operate and what I'm trying to do."
As if by invoking the name of the 40th president- like some enchanted spell- it will bring them political magic or a cloak of invisibility to hide their shameful ideological nakedness. 
Many have objected to Obama’s call for a fair tax system, in which the super wealthy will pay their rightful share. Taxing the “job creators” is, they bewail, out of the question. Where on earth do you expect jobs to come from if you punish success? they moan. Of course, anybody familiar with history will recognize that line of thinking as the Trickle-down theory, which was a key feature of Reagan’s economic plan. 

So much has been written on both sides about the supposed successes and supposed failures of Reagan’s economic policies. These policies go by many names, supply-side economics and the trickle-down theory and even as George Bush, Sr. once called them “voodoo economics.” Usually the opinions on his domestic programs fall along partisan lines. 
When one adds the limitless esoteric terms of economists and career politicians, all hope of learning the truth about Reaganomics becomes pretty much a lost cause. Statistics and graphs appear like flowers from a magician's sleeve but to no avail because as all of us have seen, that kind of evidence can be made to prove just about any claim. 
Some experts have made the claim that our present economic woes are a direct result of the reliance on the same policy, particularly tax cuts for the rich, deregulation and the free market philosophy. In order to give both sides a fair hearing, I thought I would investigate the background of Reaganomics. Like most subjects I write about, it is merely a record of my continuing education. 

When Whiz Kids Spill Beans
dave StockmanDuring the campaign of 1980, Reagan had protrayed himself as something of a crusader. He had promised to turn Washington on its head and implement a completely new way of doing things. He based his economic plans a revolutionary approach. It was called Supply-side economics. 
The concept of supply-side had found some adherents in academia. It proposed a strict tightening of government spending and low taxes, in order to kick start growth. 
President Reagan’s economic program was laid out in “A Program for Economic Recovery,” made available to the public and submitted to Congress in February 1981. 

Later that year, The Atlantic magazine wrote a famous article on David Stockman, Reagan’s budget director, his economic whiz-kid, the outsider in charge of putting those revolutionary ideas into practice. Stockman’s unguarded comments about how the budget was drafted, fought over and repeatedly revised made for great reading. It also caused some furor at the time it was published.
Where did things go wrong? Stockman kept asking and answering the right questions. The more he considered it, the more he moved away from the radical vision of reformer, away from the wishful thinking of supply-side economics, and toward the "old-time religion" of conservative economic thinking.
Stockman was clearly not happy with the results of his efforts to formulate a coherent economic policy.
"The whole thing is premised on faith," Stockman explained. "On a belief about how the world works."
And what if.. the world didn't really work like that? 
 The budget politics of 1981, which produced such clear and dramatic rhetoric from both sides, was, in fact, based upon a bewildering set of numbers that confused even those, like Stockman, who produced them.
While attempting to put together his radical economic policy, it wasn’t long before Stockman faced the real priorities of the Republican conservatives. Against a cabinet filled with heads who all refused to cut their own budgets (but seemed quite happy to reduce spending from any “other” place), Stockman realized that that old habits die hard and that cost-cutting was a great idea in theory. And applying free market principles was an excellent idea, in theory.

Stockman had jumped into the fray as soon as the Reagan administration set up shop in order to thwart the expected internal opposition. In meeting after meeting, he presented his outline for drastic cuts in spending to particular departments. 

The idea was to attack the respective budgets before the cabinet secretaries had any real chance to become settled in and protective. After all, nobody, and especially not a newly appointed head, likes to oversee the down-sizing of their own department. What’s the fun in that?

Ironically it was this very rush, this expediency, that Stockman would later cite as a cause of the problems.
"The reason we did it wrong—not wrong, but less than the optimum—was that we said, Hey, we have to get a program out fast. And when you decide to put a program of this breadth and depth out fast, you can only do so much. We were working in a twenty or twenty-five-day time frame, and we didn't think it all the way through. We didn't add up all the numbers. We didn't make all the thorough, comprehensive calculations about where we really needed to come out and how much to put on the plate the first time, and so forth.
Stockman: Not a happy camper
In the end, Stockman managed to outflank the mounting cabinet resistance with the help of Edwin Meese, so-called "Counselor to the President for Policy,” by arranging meetings with the individual cabinet members. They feared that otherwise there could very well be a mutiny.

What Stockman encountered had very little to do with balancing the budget and a lot more to do with representing the best interests of a few big corporations. 
When, for example, proposing cuts from the Export-Import Bank, which provides subsidized financing for international trade which including direct loans to companies like Boeing, Lockheed, General Electric, Westinghouse, McDonnell Douglas, Western Electric, Combustion Engineering, Stockman was only applying what Reagan considered a fundamental policy principle- the free market principles and reduced government interference.
Stockman thought the trade subsidies offended the free-market principles that all conservatives espouse—in particular, President Reagan's objective of withdrawing Washington from business decision-making. Supporters of the subsidies made a practical argument: the U.S. companies, big as they were, needed the financial subsidies to stay even against government-subsidized competition from Europe and Japan.
There clearly had been some miscommunication. The free market principles, everybody had assumed, meant that corporations would not be interfered with. The fact that it could also mean that taxpayers would not be subsiding corporations never seemed to occur to anyone in charge. Simply put, according to the cabinet secretaries, there were promises made and under no circumstances could they be broken, balanced budget or not.
The counter-offensive against the cut was led by Commerce Secretary Malcolm Baldrige and U.S. Trade Representative William Brock, who argued eloquently before the budget working group for a partial restoration of Ex-Im funds. By Stockman's account, the two "fought, argued, pounded the table," and the meeting seemed headed for deadlock. "I sort of innocently asked, well, isn't there a terrible political spin on this? It's my impression that most of the money goes to a handful of big corporations, and if we are ever caught not cutting this while we're biting deeply into the social programs, we're going to have big problems."
Stockman asked if anyone at the table had any relevant data. Deputy Secretary of the Treasury Tim McNamar thereupon produced a list of Ex-Im's major beneficiaries (a list that Stockman had given him before the meeting). "So then I went into this demagogic tirade about how in the world can I cut food stamps and social services and CETA jobs and EDA jobs and you're going to tell me you can't give up one penny for Boeing?"
Stockman eventually won the argument but not without struggle. Feeling a bit shell-shocked, he began to ask: Where was the commitment to free market principles? And that was only the beginning. Stockman was in for a shock. He was about to learn how the world actually worked.

Bottom Up, Government Down
There soon came a time when theory met reality and when that crash occurred, Stockman, the president’s chief budget director, was the first person to register surprise.
Beyond the brilliant tactical maneuvering, however, and concealed by the public victories, Stockman was privately staring at another reality—a gloomy portent that the economic theory behind the President's program wasn't working. While it was winning in the political arena, the plan was losing on Wall Street. The financial markets, which Stockman had thought would be reassured by the new President's bold actions, and which were supposed to launch a historic "bull market" in April, failed to respond in accordance with Stockman's script. The markets not only failed to rally, they went into a new decline. Interest rates started up again; the bond market slumped. The annual inflation rate, it was true, was declining, dropping below double digits, but even Stockman acknowledged that this was owing to "good luck" with grain harvests and world oil supplies, not to Reaganomics. Investment analysts, however, were looking closely at the Stockman budget figures, looking beyond the storm of political debate and the President's winning style, and what they saw were enormous deficits ahead—the same numbers that had shocked David Stockman when he came into office in January.
Despite all the in-fighting and the inconclusive results, it was Reagan himself who, on September 29, 1981, spoke up the idea of a free market with little government interference. Reagan told the American people.
“We who live in free market societies believe that growth, prosperity, and ultimately human fulfillment are created from the bottom up, not the government down...This is the one irrefutable lesson of the entire postwar period, contradicting the notion that rigid government controls are essential to economic development.” 

Some critics have pointed that this was, in fact, Reagan’s political blind spot, his failure to recognize that government regulation might well serve the interests of business by promoting fairness in competition. Additionally, regulation might serve to protect the consumer from wholesale greed and corrupt dealing. In short, deregulation meant a lack of oversight. (This fact seems to escaped him but it did not escape the neo-conservative administrations that followed him.)
Behind the Reagan speeches, the truth was generally much less certain. As Stockman suggests, Reagan was peddling a misrepresentation of the realities to the American public. For Stockman, doubts began to creep in.
But the real problem, as Stockman conceded, was still unsolved. Indeed, pondering the reactions of financial markets, the budget director made an extraordinary confession in private: the original agenda of budget reductions, which had seemed so radical in February, was exposed by May as inadequate. The "magic asterisk" might suffice for the political debate in Congress, but it would not answer the fundamental question asked by Wall Street: How, in fact, did Ronald Reagan expect to balance the federal budget? "
So what was the problem? Stockman was asked. 

Military spending for one thing. It was, and would be throughout the Reagan era, a budget untouchable. By the end of his second term, the president had expanded the U.S. military budget to a staggering 43% increase over the total expenditure during the height of the Vietnam war. That meant the increase of tens of thousands of troops, more weapons and equipment, not to mention a beefed-up intelligence program. 
And how was this to be paid for? The answer: Deficient spending which undermined the whole legitimacy of Stockman’s economic program. Stockman remained hopeful that $20 or $30 billion worth of waste in defense spending could be used to offset the deficient problem. It was really the only way to save the sinking ship. 

The other problem with his supply-side program? There was, he confessed, never any real organization to the cuts in spending.
"The defense numbers got out of control and we were doing that whole budget-cutting exercise so frenetically. In other words, you were juggling details, pushing people, and going from one session to another, trying to cut housing programs here and rural electric there, and we were doing it so fast, we didn't know where we were ending up for sure ... In other words, we should have designed those pieces to be more compatible. But the pieces were moving on independent tracks—the tax program, where we were going on spending, and the defense program, which was just a bunch of numbers written on a piece of paper. And it didn't quite mesh. That's what happened. But, you see, for about a month and a half we got away with that because of the novelty of all these budget reductions."
If nothing else, Stockman's confession reveals an administration without any coherent organization and one essentially "faking it." In any case, once the plan had been introduced there was nothing else to do but to trot it out and sell it as best as they could. That was something Reagan knew how to do. Selling an idea was his gift. Again, The Atlantic article notes:
Reagan's policy-makers knew that their plan was wrong, or at least inadequate to its promised effects, but the President went ahead and conveyed the opposite impression to the American public. With the cool sincerity of an experienced television actor, Reagan appeared on network TV to rally the nation in support of the Gramm-Latta resolution, promising a new era of fiscal control and balanced budgets, when Stockman knew they still had not found the solution. This practice of offering the public eloquent reassurances despite privately held doubts was not new, of course. Every contemporary President—starting with Lyndon Johnson, in his attempt to cover up the true cost of the war in Vietnam—had been caught, sooner or later, in contradictions between promises and economic realities. The legacy was a deep popular skepticism about anything a President promised about the economy. Barely four months in office, Ronald Reagan was already adding to the legacy.
In fact, Stockman himself began to question whether supply-side economics had any validity at all. It didn’t take long for Stockman to admit something that critics had been arguing from the beginning. This was something that Stockman himself noted in The Atlantic article:
...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."
Hard to sell? That’s certainly not the language of a convert. That’s the language of advertising and Madison Avenue. Of used car dealers. 

That usually pejorative term, “trickle-down effect” came from a theory of distribution which holds that the concentration of wealth in a few hands benefits the poor as the wealth necessarily “trickles down” to them, mainly through employment generated by the demand for personal services and as a result of investments made by the wealthy. 

It was easy to make fun of. Give a fat cat a million dollars and watch how many people he employs. People to make plump his pillows at the hotels and people to wash his car. Not a very positive image for a president to throw his support behind. For most Americans, (but not for all) it wasn’t a particularly popular idea. 

The fallout from The Atlantic article was predictable. By that time, patience with Reagan and his revolutionary economics had just about worn out. The article merely reinforced what the public was beginning to suspect. As one source tells us:
By November [of 1981], when the jobless rate had risen to 8.3 percent, from 7.5 percent in January, a plurality of the public believed that Reaganomics would hurt, not help, their family finances. So began Ronald Reagan’s approval ratings slide. By December, according to Gallup, 49 percent approved of his job performance while 41 percent disapproved. With the economy faltering, his approval rating fell to 42 percent by July 1982, with 46 percent disapproving. His rating hit a low of 35 percent early the next year.
Reagan’s reaction to Stockman's comments was grandfatherly yet deceptive. When asked to comment on the revelations in the article, he replied that if what he had heard was true then “Dave is a turncoat- but in reality, he was victimized by what he thought was a good friend.” Stockman, in other words, had mistakenly trusted in the crafty Liberal Media and he had been tricked. And that was that. No mention of the content of the article.
It was an easier choice to paint the picture this way because President could not afford to fire Stockman. The consequences of having a ex-budget director revealing the facts behind the failure of supply-side was unthinkable. In fact, as far as Reagan’s suggestion that Stockman has been too trusting, as William Greider, the writer of the article later explained, David Stockman had submitted to, not one but 18 interviews and had even had a chance to read the article prior to its publication. 
After Stockman had read the article, we had an amiable conversation in which he acknowledged that, while the political fallout would cause him considerable pain, my account of his performance as budget director was both accurate and "not unfair to me."
The thing that Stockman left unsaid in the article was why he was loath to use the term “trickle-down” and why it should be so hard to sell. 
But many economists, those that had done their homework, knew. That idea of enriching the wealthy with the hope that it would gradually filter down to the less fortunate, that idea had already been, if not discredited, then abandoned as public policy. 
And it had been discussed and withdrawn from further consideration nearly a hundred years before Reagan became president. 
In the part TWO of this series on Reaganomics we will discuss the origins of the trickle-down theory, from the observations of a wandering Arab writer to a largely forgotten populist who shamed the Republicans.

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