Almost 30 years ago, Reagan took the Presidential oath. I remember the day after his election like it was yesterday.
Mr. Lauritzen, the "cool" U.S. history teacher, came to class with a new, much shorter hair-cut. He had gotten his hair cut to fit in with the new mindset in the country. The recognition by academia of the sea-change sat well with my upper middle class classmates; not so much with me.
My father, a Republican-turned-liberal, reacted to Reagan's election differently. Always politically savvy, he'd predicted Reagan's landslide, and the subsequent course of Reagan's Presidency. He said Reagan's inaugural claim, to be able to balance the budget while spending vastly more on defense, was simply impossible; the debt would explode. The national debt quadrupled during Reagan's eight years.
My father predicted Reagan's squabbles with Paul Volker, the Federal Reserve Chairman who killed inflation, caused a recession, but rescued the country from "malaise." He predicted the destruction of not only EPA's ability to regulate because of the cozy, symbiotic private-public-private revolving door between private companies and regulatory agencies,but that such relationships would render oversight, including oversight of oil drilling, effectively nul.
My father understood supply-side economics was a farce, a useless, horribly ineffective economic model which was not designed to stimulate the economy, but rather to put the tax code back sixty years - back to the gilded age, back prior to the Great Depression. My father understood the reason for 70% or 90% tax rates on high income was NOT to confiscate wealth, but rather to prevent the accumulation of vast fortunes in the first place.
We had seen the impact of that kind of economy. We had seen 80% of people lived paycheck to paycheck, where the upper tier of the lower class (defined by means standards) were barely able to survive working 80 hours per week. Children worked beside parents, who were both employed full time. That U.S. was a mostly agrarian nation with inefficiencies of production. There were a wealthy few: Rockefellers, Morgans, Hearsts, Roosevelts, and Carnegies. People who lived in huge mansions, attended by staffs of servants. We were also a nation of smaller but still substantial Victorian homes, but only for a very small middle class.
After the Great Depression, this country recognized bankers had risked locally saved money on the stock market, in speculative, highly leveraged margin-based buys. Investors lost the fortunes of not just the middle-class and the poor, but also of the highly affluent, resulting in shuttering factories, destroying lives, towns, homes, and futures. The nation responded, "never again" after the revelations of reckless financial misadventure revealed in the 1932-34 Pecora Commission hearings.
In response to the lessons learned, barriers, like Glass-Steagal, and like 90% tax rates on incomes above $3M were put in place. Not because anyone hated the rich, not because they wanted to confiscate money or "redistribute the wealth." They understood what harm came from over-concentration of wealth in the hands of a few powerful men and a very few women. They understood making it harder for the owners of industry to personally accumulate wealth would result in owners instead investing their profits in production lines, in better pay for their workers, and NOT in worrying quite so much about stock price as the end-all, be-all measure of a robust working economy.
We enacted barriers between investment and banking to protect banks from profit competition with Wall Street, and Wall Street from having to provide security like a bank, but also to offer local investment money locally. We started Fannie Mae to ensure a secondary sales market would exist for home loans, and started FHA and VA after WWII to ensure funds would exist to offer those loans.
We enacted income taxes on corporations at rates unheard of, undreamed of, during the "Roaring 20's." Tax rates which would bring about claims of "Communism" if they were tried today, or worse yet, cries of "Job Killers!" After all of these sweeping, broad and mostly egalitarian changes, the nation lived at it's highest level of productivity and prosperity. We had high employment, high home ownership, and a high standard of living. Companies stayed in business, people enjoyed more free time and job security. There was a shorter distance between the lower class and the middle class, and a MUCH shorter distance between the middle class and the upper class.
That was not against paying the bright and gifted well, they WERE paid well. There WERE millionaires, there just weren't many BILLIONAIRES. Companies put money into pension funds. Not everything was idyllic, but we were more thoughtful, better educated, and more forward-looking, living better, enjoying life more, than at any other time in our history.
We were in part the recipients of good fortune that our economy hadn't been wrecked by WWII. We had gone into WWII with 50% of the world's productive capacity, and ended with 75%, as much of the European and Japanese production capability was destroyed. This lead to the easy life of the 1950's and 1960's, but by 1965, W.E. Demming had been to Japan. The Japanese had begun to compete with us.. but we still had jobs, productivity here in the US was very strong, and we were generally doing well. The lack of U.S. mega-rich billionaires was not the catalyst for Japanese competitive success. Our tax rates didn't disable us and enable the Japanese, our barriers between banks and the stock market didn't make it so that WE couldn't invest while our competitors, like Taiwan, or Japan, or France could.
The primary complaint of conservatives was our 'socialist' tendencies would lead us into a Communist style take-over, not into financial ruin, not a failure to compete. They didn't complain about a lack of good jobs, nor did they complain about "job-killing" proposals. Reagan, in "The Speech" in his 1964 run for the California Governor's seat, evoked images of rampant socialism. Reagan in the cold war era stoked and painted fears of Communism taking over the country. Reagan minimally objected to unfairness in social programs like Medicare or Social Security, for good reason. The mood of the country wasn't it was "unfair" to keep the elderly from starving or the poor from being homeless so that the rich could instead be super rich.
Fast forward, 1964 to 1981. In 1981 and 1982 Reagan and a conservative majority in congress enacted steep tax cuts for the rich. Marginal tax rate for the highest incomes dropped from 70% to 36%, then 33%, then rose again in the face of alarmingly rising deficits.
The Republican majority enacted cuts and loop-holes for industry. Taxes on the middle-class were cut initially, but then increased in 1987 to pay for a significant increase for Social Security. The increase was forced on Reagan by Claude R. Pepper, powerful southern Senator from Florida, the leading voice for the elderly in Congress. Reagan was advised by idealistic wunderkind David Stockman "supply-side" or "trickle-down" economics they had relied on for success had NOT been effective.
The nation engaged in VAST spending, gorging itself on debt and real-estate speculation. When the credit-driven element of the economy was factored out, what was seen was that factories were closing instead of being built by "supply-side" money. The money being amassed by the wealthy were instead invested in real-estate speculation. In the late 80's, the real-estate market crashed. The Savings and Loans after lobbying a friendly Congress to remove S&L limits on types of loans they could offer, followed real-estate down the rat-hole of economic collapse. The same collapse in S&L's occurred in the 1980's that we are seeing today in banks, for much the same reasons.
Real-estate was artificially inflated by too much money chasing too few good property. This included investment from newly affluent Japan. The collapse of the S&L's (iirc) resulted in the shut down of almost 80% of the S&L's amid scandal. It resulted in a "bail-out" by Reagan and then GWHBush, through a 1930's era solution, an RTC (Resolution Trust Corporation). They relied on the "big gov'mint" fix to purchase "toxic assets", then liquidating them once they stabilized and a real value was established.
Thank you Pen!!!!!
ReplyDeleteThe original name for Trickle Down Economics, aka Supply Side Economics, was Horse and Sparrow Economics.
Why Horse and Sparrow, our readers may ask? Remember how the french king, Lois XVI's queen, Marie Antoinette is credited with the line "Let them eat cake" when told there was no bread for the popultion that was staging hunger riots?
The horse and sparrow analogy for trickle down economics was to provide all of the oats - wealth - to the production class owners, the horse in this analogy. The sparrows, everyone else for the purpose of this model, could find plenty of undigested oats on which to survive.....after the oats went through the horse, from the manure.
Now, this was not actually meant to be an insulting let-them-eat-cake analogy. The thought, as with trickle down, or the other names for this regressive, backwards, out of date, and discredited notion of economics (there IS no evidence that it works) was to portray industrialists as the noble workhorse.........and everyone else is the sparrow from the new testament biblical quotation that not even a sparrow falls to the ground without God's permission.
Unfortunately, with trickle down economics, we get a lot of 'meadow muffins' and 'horse apples but very few apples or horses either.
If you believe that it is stimulating to growth to put more money into the hands of the wealthy to invest, it makes as much sense to first keep - not give - that money in the hands of the largest number of consumers, the middle class, to spend on the products produced by those wealthy individuals. It grows the econocmy more quickly, more directly, and it grows it HERE, not somewhere else. The rising tide which in fact raises all boats works by not re-distributing wealth upwards into the hands of a very few -- and make no mistake, the pattern of boom and bust in our economic history and the history of others is that the few with wealth will find ways to game the system to benefit themselves at the expense of others.
The notion that giving tax advantages to the middle class or more progressive and less regressive systems of taxation are based in the understanding that we are a consumer driven society.
My father was present when 'the speech' was given, he liked Reagan very much. But as an investment banker, a man who spent a lot of time paying attention to economists, and a very very conservative man, both politically and socially, he admitted that supply side economics didn't work, and that Keynsian economics did.
As Pen has so ably pointed out, if trickle down economics, supply side, horse-and-sparrow economics worked, there would be better evidence to support it.
The only cachet it seems to have with modern supporters is that it was an idea that appealed to Reagan... as if that makes it politicl gospel exempt from rational proof.
It is not gospel, economic OR political, it is......what comes out of the horse.
I read an excellent book called The Education of David Stockman. It opened my eyes to two things: what it meant to be an honest and principled conservative (something I had always been curious about) and the reality of Reagan's economy. I highly recommend it.
ReplyDeleteThere is an interesting wikipedia bio on Stockman, that references the Atlantic Monthly article, the Education of David Stockman. I'm going to try to find a copy.
ReplyDeleteI think of an honest, principled conservative - and I've known more than a few - as individuals who favor things like a balanced budget ALL the time, not just when there is a Democratic administration. That for me rules out Geo.W.Bush, and his supporters like Bachmann who couldn't get enough touchy feely with 'W', or Palin, or all of those other Republicans / conservatives who were either supportive or at the very least failed to be prominently critical of the 2001 - 2008 policies, or those of the Newt Gingrich and successor congressional sessions.
Thanks AB!
Aha! I found it, first try, for anyone else who might enjoy it as well:
ReplyDeletewww.theatlantic.com/magazine/archive/1981/12/the_education_of_david_stockman/5760
"None of us really understands what's going on with all of these numbers." - David Stockman
The theory of supply side economics is that if a company pays fair wages and hires more people that puts more money into the community and people with more money or more people with money means you sell more goods and you make more money also. If you look at a small growing community like most rural areas in the 50s this works and it usually also works with privately held companies. When you get to large public corporations you end up with the largest stockholders forming the board of directors. They never see the employees doing the work and usually could care less about them. They lobby congress to pass laws that benefit them and hurt their competition, the people they do hire are overseas if possible, and everything is geared toward maximizing dividends, stock price, and profits. Back before about 1970 you had new startup companies that kept this in check somewhat, the startup would hire their skilled workers away and make a better product and hurt their profits, there was an incentive to not treat your employees badly. Now it costs millions to start a company that can make even a shoddy copy of a product from say IBM, GM, or Ford so the incentive is gone. With 15% unemployment it is even further gone. I asked at a company meeting one time if it really made sense to move jobs overseas when we wanted the housing market to improve. The division president heading the meeting asked what I meant and I said well the 1200 jobs you put in India are 1200 people over here who cannot buy a house. He agreed but said unless all our competitors moved their jobs back to the US at the same time we would go out of business. We somehow need to get some of the competition back. There should never be companies too big to fail, banks, car companies or anyone. We need congress to look at regulations carefully. Take a look at who spends money supporting new regulations, most times it is someone in the business being regulated and the regulation does far more to put down their competition than it does to save the environment or whatever they say it is needed for. If a company is a defacto monopoly then they should be regulated and audited on a regular basis. I really don't think higher taxes will help this situation. A well targetted tax that encourages companies to keep jobs here and pay decent wages might help a little but just a blanket income tax increase on the wealthy will probably do little or nothing.
ReplyDeleteOh one other thing for Dog. Most of the conservatives I know said their biggest problem with Bush was that he spent money like a Democrat.:)
ReplyDeleteSupply side or trickle down, the economic theory which is unsupported by documentation relies on giving a lot of money to a very few people on the premise that of course those few people must be better suited to have that money than the majority of people; it asserts unsupported by evidence that those rich people will use it to create jobs -here.
ReplyDeleteWhat it does not do is to explain why people would create jobs unless there was someone ready and able to buy the goods or services provided by those jobs.
A premise that not only suggests those larger masses of people should eat poop - in the horse-and-sparrow analogy - but a notion which puts the cart before the horse - goods/services without consumers to purchase them.d
With progressive rather than regressive taxation you have consumers driving the market growth, the market driving investment which creates economic growth and general profitability for both the consumers who are employed and able to purchase, and for the investors as well.
Take another look Tuck at who sits on boards of directors these days and how they get there. Most corporations no longer have boards elected by their share holders - and haven't for some time.
And then take a long look at what Obama's policies have done - the biggest growth in manufacturing in five years.
As to Democratic spending? Bush spent like Reagan, not like a Democrat. Bill Clinton's administration was the most recent democratic one - and he left after two years with not only a balanced budget but a surplus. You might want to acquaint those conservatives with some factual statistics about our federal debt the next time they make that statement.
One thing that can and should be done is to tax companies that export their labor to other countries. The tax should be set so that it makes no economic sense for them to use offshore labor..i.e. tax them the difference between what they would pay US workers and what they pay workers in (insert country here).
ReplyDelete