Supply-Side Foolishness

Ever since the ascension of Ronald Reagan the Republican Party has ridden an anti-tax platform to electoral success. They have won five of the past seven presidential elections and held congress for most of the years since 1994. Reagan wanted to cut taxes in that recession year of 1981 to shrink the size of government. He especially wanted to cut taxes on business and the wealthiest Americans, believing it would free up lots of money for investment that would make the economy grow. He wanted to spend less on social programs but more on defense. It got complicated, because he also wanted to reduce the deficit, which was $59 billion for Jimmy Carter's last year. How could he cut taxes and keep spending the same amount (just spending it on different priorities) without going deeper into debt?

Aha! Professor Arthur Laffer to the rescue. According to the "Laffer Curve" economic model he developed, the tax cuts would spark such tremendous growth that revenues would actually increase. The rates would be lower, but the economy would grow so much that even more money would come gushing into the federal treasury than before. This was just what Reagan wanted to hear, not to mention the voters. It was a "have your cake and eat it too" extravaganza. Pay less tax, get greater prosperity and pay down the national debt all at the same time. Sure the rich would get most of the tax cut money, but they would reinvest it in the good old U.S.A., making for more jobs and higher pay for average folks. Reagan called it "supply-side economics." The press started calling it "Reaganomics." Reagan's main Republican primary opponent, George H. W. Bush, called it "Voodoo economics." The Democrats called it "trickle down."

So how did that all work out? Well, for starters, the debt immediately tripled to $180 billion a year. The economy did grow, but the gains all went to the top-and stayed there. The poverty rate rose by 20%. He figured maybe the problem was he hadn't cut taxes enough. So in his second term he cut them again, especially on corporations and capital gains. The debt went up to $195 billion. Wages for the bottom four-fifths of the labor force stagnated.

The elder George Bush succeeded Reagan in 1989. He knew better, but pledged to continue Reagan's tax cutting ways. Sold by Reagan's sunny optimism, people by now believed in it, or wanted to, and would vote accordingly. "Read my lips: no new taxes!" he said. During his term the deficits went up as high as $230 billion. The demographic pattern remained the same. The rich got richer, the poor got poorer and the middle class held even by sending more and more women into the work force. Alarmed by the mushrooming red ink, Bush finally agreed to some tax increases. He was defeated for re-election.

During the 1990s Bill Clinton and the Republican congress were often at bitter odds with each other. But they did agree to restore some revenues and saved considerable money by paring down expenses, including military cuts made possible by the disintegration of the Soviet Union. The economy boomed for groups up and down the economic ladder and the federal government actually began running a fiscal surplus.

Then came George W. Bush, a supply-side true believer. With a friendly congress and another recession gathering, he slashed taxes again, by the largest amount ever. Capital gains, once 40%, were now down to 15%. The wealthy again got most of the cash. Would the economy grow fast enough to pay for the cuts? Would the benefits trickle down through the economy? Would the third time be a charm?

Instead, it looks more like three strikes and you're out. In just seven years Bush has run up another $3.335 trillion in debt. The national debt now stands at $9.44 trillion. 35.3% of the total debt accumulated since the founding of the republic in 1776 has been amassed in Bush's time in office, which is just 3% of America's history. Two-thirds of that 9-plus trillion has come in the 19 years of Reagan and the two Bushes-just 8% of the country's existence. It now costs over $430 billion a year just to pay the interest on all that borrowing. That's a lot of money. To compare, the NASA budget is $15 billion, Education $61 billion and Transportation $56 billion.

Where has this theory gotten us? Over the past twenty-eight years the real after-tax income for the top one percent has risen 167%. Janet L. Yellen, President and CEO, Federal Reserve Bank of San Francisco, stated on 6 November, 2006, "In contrast, at the 50th percentile and below real wages rose by only 5 to 10 percent." And that came from the gains of the 90s, when the Reagan ideology was not followed.

There is an old proverb attributed to the Englishman John Heywood in 1546 and used by Jonathan Swift in 1738 and the American Thomas Chalkey in 1713 which says, "There are none so blind as those who will not see. The most deluded people are those who choose to ignore what they already know." John McCain knows. He opposed the Bush tax cuts in 2001 and 2003, and for good reason. But he also knows where the Republican votes are and needed to embrace this philosophy of smoke and mirrors to gain the nomination. Now he is wedded to it. This pernicious doctrine that sends hundreds of billions annually to Japan, China and Saudi Arabia in interest payments, that has led to stagnation in the standard of living of most of the American people, contributed to the free fall of the dollar and threatens impending fiscal catastrophe will continue to wreak at least another four years of damage if he is elected. Barack Obama and Hillary Clinton, on the other hand, see it for the foolishness it is. If for no other reason than this, it is imperative that he not be elected our 44th president and that one of them must be.