Tuesday, July 19, 2011

Rethinking Reagan

I've been posting a lot lately about tax rates and wealth inequality, in part because the debt ceiling issue has dominated the news, but also because I view these issues as critically important.

My thinking is largely Keynesian, which explains my frequent reliance on Paul Krugman as a source. Briefly, Keynesian economics refutes the laissez-faire concept, arguing that public involvement -- particularly from the government in the form of fiscal policy -- is critical to economic growth as it can help correct irregularities in the private sector business cycle.

Keynes fell out of favor during the 1970s when the economy came to a standstill and inflation rates soared, largely due to the energy crisis at that time.

Enter Reagan and supply-side (or trickle-down) economics, which aimed to reduce inflation, cut taxes, decrease government spending and limit regulation.

Reagan unquestionably presided over a period of intense economic growth and he, along with his policies, has been deified to some degree by the modern Republican Party.

So now, when I question Reagan Almighty, several figures get thrown back at me to which I would like to add a bit of needed context.

Here are some commonly highlighted statistics from the Reagan years that I've seen praised by conservatives:
  1. The top marginal individual income tax rate dropped from 70% to 28%
  2. Unemployment fell from 7.1% to 5.5%
  3. The growth rate in America's GDP rose from -0.3% to 4.1%
  4. The federal deficit decreased from around 6% of GDP to 2.9% of GDP
These numbers are all true, and to some extent remarkable, but they don't tell the whole story.

Since America was founded by wealthy aristocrats who didn't want to pay taxes, we'll start there first -- out of respect. First, it's questionable how much tax cuts led to economic growth considering the effects of other policies.

That point aside, however, it's also important to remember that the 42% decrease in the highest tax rate didn't happen overnight. In 1981, Reagan cut the rate from 70% to 50%. The cut to 28% didn't happen until 1986, meaning that for the bulk of his administration -- including the worst Reagan recession years of 1982 and 1983 -- the highest marginal tax rate was 50%.

That 50% is well above the current rate of 35%, an increase to which is apparently off the table and unconscionable because we're currently in a recession. Go figure.

On to unemployment and the GDP. While Reagan did cut unemployment 1.6% during his two terms, it's important to remember that unemployment initially increased to around 9.5% in 1982 and 1983. Most economists credit this spike in unemployment to increased interest rates imposed to control inflation.

I actually have no problem with this policy since controlling for inflation was critically important. Once that problem was under control, interest rates were lowered which in turn led to an economic upturn, job growth, and the subsequent swelling of GDP.

I would, however, like to point out two things. First, statistical regression to the mean is pretty common. In other words, things can only get so bad until, eventually, the only way to go is up. Still, point Regan.

Second, and perhaps more importantly, increasing interest rates to control inflation in order to provide an environment for job growth is a Keynesian approach. It's a good idea, but not Reagan's. Point Keynes.

Finally, there's the deficit. First, it's worth noting that a deficit can be relatively meaningless. It's simply the annual difference between what the government takes in and what the government spends -- and notably negative. Deficits only really become problems when they are consistent as they add to the national debt.

All debt come with interest, and it's a bitch. It really eats at your income, and in the case of America, our annual interest payments on our debt total 6% of the budget. As a reference, consider that education spending accounts for only 3%. That's half for those of you who went to public schools.

I guess what I'm saying is that debt is the bigger issue, and Reagan created a lot of that. During his two terms the national debt rose from $712 billion to $2.05 trillion. Again, for the public school grads, he tripled it.

And how do you accrue so much debt? By spending a hell of a lot of money, particularly in the Department of Defense. Again during Reagan's two terms, government spending averaged 22.4% of GDP compared to the 20.6% average from 1971 to 2009 -- and remember that last number takes the Reagan years into account.

So looking back on what supply-side economics is supposed to achieve, it looks like Reagan got 3 out of 4. He lowered taxes, controlled inflation, and decreased regulation. Government spending, on the other hand, went through the damn roof.

I, however, am not against government spending -- particularly during recessions. Recessions typically occur when private sector funds dry up, causing economic stagnation that can in turn be offset by increased public spending for a limited period. This is the Keynesian approach.

Reagan followed this approach to a degree, but the greatest problem with Reaganomics is that our national love affair with it never really ended. The dual cycle of ever-decreasing taxes and ever-increasing expenditures creates a crippling debt. Raising taxes and limiting certain expenditures during times of prosperity creates a surplus that can be used to pay down debt accrued during recessions. Point Clinton.

I guess what I'm saying is that I prefer a "tax and spend" approach to the Reagan "don't tax and spend like a drunk teenager" approach as a sustainable economic model. Also, I'm wondering how drunk we must be as a nation to consider such a model fiscally responsible.

Monday, July 11, 2011

Trickle-dumb economics

The debt is dominating economic news lately, and despite accusations of rampant spending, it seems as though the Democrats are the only ones taking debt reduction seriously.

This weekend Republicans scaled back their debt reduction efforts, pulling out of the bipartisan talks. House Speaker John Boehner listed Republican reasoning as follows:
Despite good-faith efforts to find common ground, the White House will not pursue a bigger debt reduction agreement without tax hikes. I believe the best approach may be to focus on producing a smaller measure, based on the cuts identified in the Biden-led negotiations, that still meets our call for spending reforms and cuts greater than the amount of any debt limit increase.
The most interesting part of Republican reasoning is its complete lack of reason.

Taking tax increases off the table only leaves spending cuts as a means of deficit reduction. And although the Republican Party has done an excellent job of selling "tax and spend" as a Democratic plan of unjust wealth redistribution, they forgot a critical point: you can't redistribute wealth where it does not exist.

Fighting against the so-called tax hikes does not provide security for the middle class; rather, it represent a crusade against it. Nobody would feel the effects of most Democrat-proposed/Republican-opposed tax increases. Notice I said feel. Those with modest incomes would not see tax increases. Wealthy individuals would see tax increases, but I doubt it would meaningfully affect them.

Let's consider a few examples. First, we could eliminate the carried interest loophole. As of late, the stock market has become as much a place to make short-term profits as it is to make long-term investments. In the spirit of encouraging investing, capital gains are taxed at 15% as opposed to the rate in one's typical tax bracket -- 35% for the wealthiest among us. Translation: hedge fund managers like John Paulson, who made nearly $5 billion last year (not to mention his massive profits from betting against the market during the crash) has much of his income taxed at 15% rather than 35%. Nice to see the government looking out for the little guy.

Republicans oppose closing this loophole because...not sure. But my guess is they default to the idea that taxing the wealthy inevitably stunts job growth. Corporations and wealthy Americans must be protected from tax increases so they are free to invest in job creation, so sayeth the mighty theory of trickle-down economics.

My good friend, Stephen Colbert, once said that if the "trickle-down" were a cocktail, the recipe would go like this:

The bartender keeps giving your drink to the rich guy next to you until he vomits in your glass.

Trickle-down economics is certainly excrement of some kind. Republicans are fighting for corporate tax breaks and tax holidays, the argument being that businesses are strapped for cash and freeing up revenue will create jobs.


First, the premise of this argument is false. Businesses don't exist to create jobs, they exist to turn a profit. If creating jobs leads to profit, they do it. If it doesn't they don't. Tax breaks typically don't lead to job creation, or at least they haven't in the past.

Second, most large corporations are sitting on large cash reserves. Without government or consumer support in economic growth, they likely won't spend it. So giving them more money to do nothing is moronic.

Finally, why do we have such a hard-on for the middleman -- or more precisely the corporate middleman? American workers need our help, so let's give money to big business and let them help America workers.

Why? Couldn't we help both? Why not invest in strengthening national infrastructure via works projects. Programs to better national communication and transportation efforts would provide jobs in the short term while laying a foundation for long-term economic growth, helping both American workers and corporations.

I could throw out ideas all day and someone would probably have a valid counterpoint, but one thing is indisputable: unwavering dedication to a single class of people is detrimental to the whole. The middle and lower classes will likely take a hit in the "spirit of solidarity" and the hope for recovering, while the privileged among us will remain undeservedly privileged. Putting arguments of fairness aside, this approach is just plain dangerous.

Tuesday, July 5, 2011

U.S.A. number 1?

If Mario Kart has taught me anything, being number one is a mixed bag. You get first dibs on the latest swag and you can drop trash in the path of other contenders, but everyone is always gunning for you. And then there's the damn blue shell, seeking out first place like a socialist wrecking ball.

I guess I've never really cared if America was, in the words of Sean Hannity, "the greatest, best country God has ever given man on the face of the earth." Since I never cared, I don't suppose I ever asked myself if I believed it. PEW recently asked that question of Americans, and it seems most of us don't.

Just under 38% of Americans believe the United States stands alone at number one. Most respondents (53%) believe America stands among the greatest countries in the world. Then there's the pessimistic 8% who believe other countries are flat out better. Also, as you might expect, conservatives tend to hold the "U.S.A. number 1" view while liberals tend to be more pluralistic with their praise.

Now that I ask myself where I stand, I suppose I don't really know. When you talk about wealth and military might, we're certainly near or at the top. Consider things like education, health care or even happiness indexes, not so much. But does that mean other countries are better than us?

I think the best answer is, "Yes, at some things." Maybe such a statement is blasphemous so near Independence Day, but I don't see it as unpatriotic. Patriotism is simply the love and support of one's country.

I love and support a great many people and things in my life, and with love comes honesty. Looking at the world as it is rather than as you hope it would be allows you to transform those hopes into reality. If we got past the platitudes we could do it.

Thankfully, according to the same PEW study, well over half of Americans believe we can solve the problems we face. I am among those individuals, but recognizing the shortcomings comes first.

Anxious as I am sitting in first place, it's a good place to be because it means your getting something right. In the end, I guess a part of me misses looking over my shoulder for the blue shell.