Tuesday, December 20, 2011

The Fallacy of Reaganomics 2/3

by Nomad
When I find a man who is not willing to pay his share of the burden of the government which protects him, I find a man who is unworthy to enjoy the blessings of a government like ours.
William Jennings Bryan
In Part One on the Fallacy of Reaganomics, we looked at David Stockman, Reagan's budget advisor and his candid assessment back of Reagan's application of supply-side economics, better known as the trickle-down theory. Now let's take a look at the intellectual origins of the idea.
Horse and Sparrow Theory
William Jennings Bryan
History is sometimes a fickle thing. Often it remembers those who should probably be forgotten while forgetting those who, for one reason or another, deserve our lasting appreciation. William Jennings Bryan is one of those people who was quite popular in his time but has now been largely consigned to unread records. However, not unlike his contemporary, Teddy Roosevelt, Bryan’s words and thoughts, once considered fixed to a particular time and particular circumstance of American history, seem to be suddenly just as apt in our own times.

For example, in warning the public about the dangers of American imperialism back in 1900, he said,
If we have an imperial policy, we must have a great standing army as its natural and necessary complement...A large standing army is not only a pecuniary burden to the people and, if accompanied by compulsory service, a constant source of irritation but it is even a menace to a republican form of government. The army is the personification of force, and militarism will inevitably change the ideals of the people and turn the thoughts of our young men from the arts of peace to the science of war. The government which relies for its defense upon its citizens is more likely to be just than one which has at call a large body of professional soldiers.
This unheeded warning, some might say, has led our nation to its present state in which justice itself seems under threat. It began with how we treat the nations we occupied and it has grown to include our own citizens.

Born in 1860 in Salem, Illinois, Bryan was a gifted orator of his day and as an American political figure,, ran three times for president in the liberal wing of the Democratic Party. Bryan never won the presidency but eventually became Woodrow Wilson’s Secretary of State in 1913. 
His name is familiar in some circles because of his role in the famous Scope’s “Monkey Trial” in which he argued against the teaching of evolution in public school. Although he was left humiliated after being called to the stand himself to defend religion against science, Bryan, in fact, he won the case; the teacher was found guilty of breaking the law but the verdict was later overturned on a technicality. For that to be his only claim to fame is a pity. He appears to have much to say to our present age.
Who knows, today Bryan’s brand of populism might well have been more successful than in his own time. Wikipedia has this to say of Bryan:
With over 500 speeches in 1896, Bryan invented the national stumping tour, in an era when other presidential candidates stayed home. In his three presidential bids, he promoted Free Silver in 1896, anti-imperialism in 1900, and trust-busting in 1908, calling on Democrats to fight the trusts (big corporations) and big banks, and embrace anti-elitist ideals of republicanism.
His earliest and most famous speech, The Cross of Gold Speech, was delivered by Nebraska Congressman William Jennings Bryan on July 9, 1896, at the Democratic National Convention in Chicago. It was a diatribe against the Republican plan to use a gold- as opposed to a silver monetary standard. 
It was this speech that economist John Kenneth Galbraith cited as the reference for the intellectual origins of the trickle-down effect, the supply side economics that David Stockman, Ronald Reagan’s budget director had developed as the centerpiece of the so-called Reaganomics. 
There are two ideas of government. There are those who believe that if you just legislate to make the well-to-do prosperous, that their prosperity will leak through on those below. The Democratic idea has been that if you legislate to make the masses prosperous, their prosperity will find its way up and through every class that rests upon it.
As Galbraith wrote in an article for the New York Review of Books:
"Mr. David Stockman has said that supply-side economics was merely a cover for the trickle-down approach to economic policy—what an older and less elegant generation called the horse-and-sparrow theory: 'If you feed the horse enough oats, some will pass through to the road for the sparrows.'"
It was pointed out that all this revolutionary talk of supply-side economics was really nothing new. That, in itself, is not a refutation of the theory. It was however, not revolutionary by any means. If one wishes, they could go back even further. 

To Purify Wealth
Ibn Khaldun
Perhaps surprisingly, one of the intellectual sources for supply-side economics came from a 14th century Muslim philosopher Ibn Khaldun’s work, The Muqaddimah. In the book, he remarks that one factor to the collapse of empires is often high taxes. 

Khaldun’s remarks were was first noted in an article by Jean Boulakia in the Journal of Political Economy back in 1971. Later, on September 29, 1978, the Wall Street Journal published a long passage from Khaldun’s observations about empire-building and its maintainance. It was probably this excerpt that caught Ronald Reagan's eye. He referred to Khaldun by name during an October 1, 1981 press conference, attempting to impress reporters. Responding to a question, the president stated that he really espoused a cut in tax rates, not in revenues. (Never mind that, as Stockman was well aware, a cut in tax rates always leads to a cut in revenues.) Quoting Khaldun, Reagan said,
It should be known that at the beginning of the dynasty, taxation yields a large revenue from small assessments. At the end of the dynasty, taxation yields a small revenue from large assessments (Khaldun 1958: 2: 89)
Of course, first off, there's a glaring problem with Reagan's confusion of "dynasty" of the ancient world to a modern republic. There are other problems, as well.
Had Reagan or any of the speech-writers bothered to attempt more than a superficial cherry-picking of the source, they might have learned that for Khaldun, the best State is the one that has the minimum bureaucracy, minimum mercenary army to keep law and order, and minimum taxation on its citizens to finance the activities of the State. So, despite this citation by Reagan, it was really all a sham. Khaldun’s restriction on military spending was something that Reagan was never prepared to do. Increasing military expenditures was also Stockman's objection to Reagan's phony supply-side, trickle-down economic plan. 

Additionally, in citing a Muslim scholar, it is also important to remember the context. Reagan failed to mention the passage that immediately follows:
The reason for this is that when the dynasty follows the ways of the religion, it imposes only such taxes as are stipulated by the religious law, such as charity taxes, the land tax, and the poll tax. They mean small assessments, because, as everyone knows, the charity tax on property is low. The same applies to the charity tax on grain and cattle, and also to the poll tax, the land tax, and all other taxes required by the religious law. They have fixed limits that cannot be overstepped.
This calls for a bit of explanation. One of the five pillars of Islam is Zakāt, roughly meaning the giving of a fixed portion of one's wealth to charity, generally to the poor and needy. It is considered to be a religious duty and is expected to be paid by all practicing Muslims who have the financial means. The type of alms is generally voluntary but in some Islamic countries, like Saudi Arabia, it is obligatory. 

Zakāt is basically a tax of no less than 2.5% but may be up to 20% depending on the type of wealth being assessed. (Imagine the howls from the 1%.) The principle of this tenet was to “purify” the wealth by sharing God's blessing with the less fortunate members of the society and the effect was to narrow the inequalities between the rich and the poor. Therefore, the wealth of the person who does not pay zakāt is impure and tainted with the share of the poor and the needy. (That’s probably not a concept that would have played too well with the Republican party.)

When Khaldun referred to activities of state, he had not included the zakāt which would have automatically been deducted from the income since this kind of help to the destitute was thought of as a duty of the devout and of Islam generally. This fine point was something Reagan failed to mention- that helping the poor, either voluntary or under a mandate, was equally as important as keeping taxes low. 

Ronald and the Magical Theory of Taxation
Ronald Reagan: Magician 
Back in 1985, Former Senator Daniel Patrick Moynihan (D-NY) argued that supply-siders never expected higher revenues and simply invented the idea of supply-side economics. Stockman- but not Reagan- might well have agreed with that. Of the 1981 Reagan tax cut, Moyihan bombastically deemed it ''an auction of the Treasury,'' ''a great barbecue'' predicated on ''a magic theory of taxation.'' To be fair, as Bruce Bartlett, a domestic policy adviser to President Ronald Reagan, notes:
Every official document and statement ever released by the Reagan Administration made clear that the 1981 tax cut would lose large revenues. Moreover, its estimates were comparable to those of independent analysts such as the Congressional Budget Office. In the words of Bill Niskanen, a member of the Council of Economic Advisers under President Reagan, "Supply-side economics.... does not conclude that a general reduction in tax rates would increase tax revenues, nor did any government economist or budget projection by the Reagan Administration ever make that claim."
And in this remark lies an important point. Tax cuts were intended to spur growth and thereby incidentally reduce unemployment but they also result in lost revenue. It is true that reduced unemployment means less government spending and also (indirectly and over time) increased tax revenue on taxable income. That much seems obvious without any complicated explanation. Any cuts in taxation had to be matched in reduced spending or another means to increase revenue. 

Apparently something did work, whether liberal Democrats want to concede that point or not. The economy did turn around in the Reagan years regardless of the merits of the trickle down theory, so, it is only fair to ask why?

There are a lot of possible reasons and none of them have anything to do with tax cuts for the wealthy. For one thing, Reagan’s patriotic message to “Keep American workers working-Buy American” coupled with easy personal credit changed the United States from a nation of producers to a nation of consumers. Credit card shopping suddenly gave the middle class an illusion of apparent wealth. 
Having more and basing it on deficient spending- cheap credit- is a heady combination. It certainly created an engine of growth while it lasted. The problem is that while Americans were rushing out to purchase the latest gadgets, they were buying material success (not unlike the government) on credit, banking on the fact tomorrow was a going to be as bright and “rainy-day” free as today. After all, the grandfatherly president told us so. Meanwhile, nobody was checking the labels to find out where all these cheap and living standard-enhancing items were actually coming from. Hint: It wasn’t the United States.

Another factor in the so called Regan’s economic success story includes the build-up in military spending. Increased military spending resulted in a cascading effect on other related businesses, giving the economy a sizable boost. And who benefited? Boeing, Lockheed, General Electric, Westinghouse, McDonnell Douglas, to name a few. Weren’t those the same corporations that had once objected to Stockman’s cutting of government subsidies? These corporations needn't have worried about that. The military buildup was to turn out to be a much more lucrative proposition.

Of course, that increase was, in no way, a part of the supply side theory, as Stockman repeatedly stated. Defying the principles of supply-side with seemingly limitless spending on the re-building the military, Reagan was able to parlay this into promoting his own image as a Cold Warrior. When the Soviet Union finally collapsed on Reagan’s watch, it seemed as though it was merely a sign that the US was blessed by God. And it was common knowledge in Reagan’s time, that when God approved, he rewarded his beloved with material success. Being rich and successful (even when it was just with the help of easy credit) was merely God’s gold star and being poor was a disease, a moral failing and a shame.

Finally another possible factor in the boom years that began under Reagan was the drive toward deregulation. Deregulation certainly loosened the brakes that had held industries in check and had perhaps stunted growth. The problem- which we later had to learn the hard way- was that some regulations actually served an important purpose. Some regulations, for instance, kept corruption in check and actually promoted fair competition. Some regulations actually promoted a fair and balanced democracy, like the Fairness Doctrine of the FCC. And meanwhile, some de-regulation came at the cost to the health and safety of the American worker and to the protection of the consumer.

The Two Ronnies
From a political marketing point of view, Reagan basically said what people wanted to hear. Carter’s call for sacrifice and warnings against excess and selfishness and greed didn’t play as well as Reagan’s feel-good platitudes. It felt good to be proud again and flag-waving became a full time hobby for many Americans during Reagan’s time. 
As Andrew Bacevich points out in his book “The Limits of Power”
No doubt Reagan spoke from the heart but his real gift was a canny knack for telling Americans what they wanted to hear. As a candidate for the White House, Reagan did not call on Americans to tighten their belts, make do and settle for less. He saw no need for sacrifice or self-denial. He rejected as false Carter’s dichotomy between quantity and quality. Above all, he assured his countrymen that they could have more.
An important point to keep in mind is there were at least two Reagan personas. The Reagan before the elections and the Reagan after the elections.That was true when he ran for governor as well. Before the presidential election, he was all about the greatness of the nation and its people and America being a land without limits. It played well against Carter’s down-beat (but essentially honest) message of seriousness and sacrifice, of living within our means and getting back to our roots. The Reagan after the election was a bit more like Jimmy Carter. Realistic limits and practical thinking were important, after all. This Reagan was a bit more pragmatic, but both Reagans were equally intellectually dishonest. 

For example, he told the American people:
For decades now we piled deficit upon deficit, mortgaging our future and children’s future for the temporary convenience of the present. To continue this trend is to guarantee tremendous social, cultural, political and economic upheavals.
You and I, as individuals can by borrowing live beyond our means, but only for a limited period of time. Why the should we think that collectively as a nation we’re not bound by that same limitation?
All very well and good but there was only one major problem. While incontestable as his words about the economy were, Reagan never matched his real policy accordingly. We have heard the same things from nearly every president but knowing what the problem is and being able to do something about it is vastly different. 

As Bacevich points out:
During the Carter years. the federal deficit had averaged $54.5 billion annually. During the Reagan era, deficits skyrocketed, averaging $210.6 billion over the course of Reagan’s two terms. Overall federal spending nearly doubled, from $590.9 billion in 1980 to $1.14 trillion in 1989. The federal government did not shrink. It grew, the bureaucracy swelling by nearly 5% while Reagan occupied the White House. Although his supporters had promised that he would shut down extraneous government programs and agencies, that turned out to be just so much hot air.
Despite what neo-conservative revisionists might want you to believe, Reagan’s record as a tax-cutting, program slasher is wholly imaginary. As CBS reporter Brian Montopoli explains
Then there's the fact that after first pushing to cut Social Security benefits - and being stymied by Congress - Reagan in 1983 agreed to a $165 billion bailout of the program. He also massively expanded the Pentagon budget.
Meanwhile, following that initial tax cut, Reagan actually ended up raising taxes - eleven times. That's according to former Republican Sen. Alan Simpson, a longtime Reagan friend..
"Ronald Reagan was never afraid to raise taxes," historian Douglas Brinkley, who edited Reagan's diaries, told NPR. "He knew that it was necessary at times. And so there's a false mythology out there about Reagan as this conservative president who came in and just cut taxes and trimmed federal spending in a dramatic way. It didn't happen that way. It's false."
And that’s not all.
Reagan also raised the gas tax and signed the largest corporate tax increase in history, an act Joshua Green writes would be "utterly unimaginable for any conservative to support today."
With Reagan, it went beyond merely a failure to change the decline. He must have known that that it was impossible and yet he proceeded to sell a false bill of goods to the public at the same time that his budget director was telling journalists that the plan was hopeless, that things were simply not working according to plan. 

From that typical run-of-the-mill political hypocrisy was born the myth of the Reagan miracle and the magical thinking the Republican party has lied and relied upon for the last thirty years. Reagan the great communicator. Reagan the Cold Warrior. Reagan the Savior of the American Economy. All of those myths, told by a growing number of voices with more and more of the embroidery of heart-felt conviction and patriotism with every telling, gradually became something very close to a historical fact. Simply by repeating the same lies over and over doesn’t make it any more true. And the consequences of believing a lie was to prove a disaster.

So, to answer the question, did the trickle down theory actually work?

The answer is there is no answer because supply side economics was never actually implemented by the Reagan administration at all. He talked about it a lot and seemed to having unshakable faith in the idea of it. He just never tried it. It wasn’t possible. There was no realistic way to put the theory to the test. The demands of the budget, the reality of running the nation, would never have allowed it to be tested. Supply-side economic couldn't work in half or partial measures. It required a complete re-fitting of government and a full commitment by everybody involved and that was an impossibility.

Apart from Reagan’s dishonesty about his actual policy, the sole reason why it’s even necessary to address this question is that, despite all of the abuses and misrepresentations by the Republican party and the regaling of the phony Reaganomics, the trickle-down idea somehow manages to materialize every election. This election is no different. The new bottles for the old wine of trickle-down effect is the objection of “taxing the job creators” and the ominous warning “class warfare.”

In the last part, we will take a close look at the people who have created the myth and have promoted the lie, along with others who have worked hard to correct the fake history.  There's also one more piece of the puzzle that explains exactly why Reaganomics was little more than an elaborate con. 

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