Tuesday, April 17, 2007

Repeating Failed Strategies: the Triumph of Idiocy

It was not until January that George W. Bush bothered to acknowledge the growing gap between rich and poor in America. Like Ahmandinejad denying the Holocaust, America's GOP had always denied, ignored or excused the verifiable fact that the rich get richer and the poor get poorer. It is understandable that the GOP would do this. Inequalities are historically worse under GOP regimes going back, at least, to Herbert Hoover.

Bush policies, like those of Ronald Reagan before him, are largely to blame for this intolerable situation. The Bush administration seems to have deliberately tried to out-Reagan, Reagan, taking "trickle down economics" into uncharted waters not dared by Reagan or his budget guru, David Stockman, who later recanted.

To make matters worse, the GOP, under Bush, has consistently tried to reward the very rich and would exclude them entirely from some forms of taxation. For example, Senate Republicans have made ending the estate tax their number one priority. Supply-side economics has become the GOP's raison d'etre, a defining issue above even Iraq. Click the image for a larger, readable version.

One wonders why Bush, embattled on every other front, would bother to bring it up. The widening gap between rich and poor is hardly a GOP strong suit. Had Bush hoped to pre-empt Democrats and "liberal economists" on their home turf? Can Bush hope to outflank Democrats as long as he is owned by the privileged elite he calls his "base"? As long as "supply siders" continue to spout absurdities, there is little chance of that.
"The term 'income inequality' is a bit misleading because it suggests in a somewhat pejorative way that the rich are getting richer at the expense of the poor..."

-Edward Lazear, Stanford University labor economist, Bush Chairman of Council of Economic Advisers, as quoted by WSJ.

But that is precisely what has happened. With some help from the BEA and Brookings Institution, I can prove it.

The country experienced relatively broad-based wage growth during the latter part of the 1990's, but this growth ended with the 2001 economic downturn. Growth in real wages for low- and moderate-income families began to slow, and by 2003 wages began to decline and have not picked up in real terms. The economic recovery after the recession, one of the weakest recoveries on record, has not been diverse enough to generate the kind of income gains among low- and middle-income families seen over the last decade.

-Income Inequality Has Intensified Under Bush, OMB Watch

The term "trickle down theory" is most often used derisively by Democrats. Its biggest proponent during the Reagan years was David Stockman, who preferred and promoted the term "supply-side economics." Interestingly, Stockman was among the first defectors as economic inequalities increased throughout the Reagan administration.
But the Reagan Revolution’s abortive effort to rectify these inherited conditions cannot be simply exonerated as a good try that failed. The magnitude of the fiscal wreckage and the severity of the economic dangers that resulted are too great to permit such an easy verdict. In the larger scheme of democratic fact and economic reality there lies a harsher judgment. In fact, it was the basic assumptions and fiscal architecture of the Reagan Revolution itself which first introduced the folly that now envelops our economic governance.

David Stockman, The Triumph of Politics
What is behind the Bush administration's latest, sudden concern about wealth distribution when, earlier, he had referred fondly to the very rich as his "base"? Bush was caught, flat-footed, advised by many of the same people who had advised Ronald Reagan:
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.

Stockman himself had been a late convert to supply-side theology, and now he was beginning to leave the church. The theory of "expectations" wasn't working. He could see that. And Stockman's institutional role as budget director forced him to look constantly at aspects of the political economy that the other supply-siders tended to dismiss. Whatever the reason, Stockman was creating some distance between himself and the supply-side purists; eventually, he would become the target of their nasty barbs. For his part, Stockman began to disparage the grand theory as a kind of convenient illusion—new rhetoric to cover old Republican doctrine.

That regret was beyond remedy now; all Stockman could do was keep trying on different fronts, trying to catch up with the shortcomings of the original Reagan prospectus. But Stockman's new budget-cutting tactics were denounced as panic by his former allies in the supply-side camp. They now realized that Stockman regarded them as "overly optimistic" in predicting a painless boom through across-the-board tax reduction. "Some of the naive supply-siders just missed this whole dimension," he said. "You don't stop inflation without some kind of dislocation. You don't stop the growth of money supply in a three-trillion-dollar economy without some kind of dislocation ... Supply-side was the wrong atmospherics—not wrong theory or wrong economics, but wrong atmospherics... The supply-siders have gone too far. They created this nonpolitical view of the economy, where you are going to have big changes and abrupt turns, and their happy vision of this world of growth and no inflation with no pain."

The "dislocations" were multiplying across the nation, creating panic among the congressmen and senators who had just enacted this "fiscal revolution." But Stockman now understood that no amount of rhetoric from Washington, not the President's warmth on television nor his own nimble testimony before congressional hearings, would alter the economic forces at work. Tight monetary control should continue, he believed, until the inflationary fevers were sweated out of the economy. People would be hurt. Afterward, after the recession, perhaps the supply-side effects could begin—robust expansion, new investment, new jobs. The question was whether the country or its elected representatives would wait long enough.

--The Education of David Stockman, Atlantic Monthly
Bar charts from the Brookings Institution, clearly indicate that a pernicious, long term trend began with Ronald Reagan's infamous tax cut of 1982: the rich got much, much richer and the poor got much, much poorer. Interestingly, that trend began even as the nation slipped into a recession of at least 18 months, the longest and deepest recession since Herbert Hoover's Great Depression.
The depression began in late 1929 and lasted for about a decade. Many factors played a role in bringing about the depression; however, the main cause for the Great Depression was the combination of the greatly unequal distribution of wealth throughout the 1920's, and the extensive stock market speculation that took place during the latter part that same decade. The maldistribution of wealth in the 1920's existed on many levels. Money was distributed disparately between the rich and the middle-class, between industry and agriculture within the United States, and between the U.S. and Europe. This imbalance of wealth created an unstable economy.

Paul Alexander Gusmorino, Main Causes of the Great Depression

But the lesson of history is that no one learns the lesson of history. Despite Bush's recent concern and crocodile tears, policies known to aggravate income disparities continue under the present Bush administration. When the final chapter is written, the new trend will have begun with Bush's big tax cut.

Income inequality is real and getting worse. Though the gap between rich and poor has been growing wider since the 1970s, the wake up call was Ronald Reagan's tax cut of 1982. The upward trend of rising inequities did not abate until well into Bill Clinton's second term. According to the nonpartisan Congressional Budget Office, the wealthiest 20 percent of households accounted for 45.4 percent of total U.S. income in 1979, but claimed 53.5 percent in 2004. Households in the bottom fifth dropped from 5.8 to 4.1 percent over the same period.

Bush might not have used the term "supply-side economics", but he might have done. The strategy is the same. Only the very well off and millionaires have benefited from Bush's policies. Specifically, the very wealthy were already enjoying generous tax cuts. Then two additional "cuts" - enacted in 2001 - began to come into effect. Only 0.2 percent of households --millionaires with annual incomes of more than $1 million --benefit from fifty-four percent of these tax cuts. Ninety'-seven percent of Bush tax cuts go to only four percent of households, households boasting incomes of more than $200,000 a year. Bush has turned out to be the very best President money can buy.

"There is some good news", he said. "Most of the inequality reflects an increase in returns to 'investing in skills.'" This is the modern, moral equivalent of "let them eat cake." For the victims of supply side economics, "investing" is a luxury, something that is done with disposable income. Below a certain level, no income is disposable. The GOP, like flat taxers, have never understood this. Worse -they don't want to understand.

Some economists question Lazear's belief that raising taxes on higher-wage earners will provide an incentive to acquire the "investing" skills referred to by Lazear. The debate has a medieval ring to it like debating how many angels dance on the head of pin. People who have little money for food have even less for investing.

Here's the real news as Brookings put it:
The United States has recently enjoyed faster economic growth than any other large industrialized country. The US also has the highest level of inequality among the G7 countries and has seen inequality increase faster than most other industrialized nations. The combination of rapid American economic growth and high and rising US inequality raises a question: Has rising inequality contributed to rapid US economic growth?

-Gary Burtless, Senior Fellow, Economic Studies, Has Widening Inequality Promoted or Retarded U.S. Growth?

Simply put, as the US economy grew, the poor were left behind. Nothing new. The same thing happened during the back to back regimes of Ronald Reagan and George W. Bush Sr.

Supply-siders believe that government should reward corporations and the wealthy by re-structuring taxes. This move, it is believed, will provide the wealthy more capital to invest and, in turn, stimulate the economy. Ideally, the wealth should trickle down, producing more employment and higher wages for working people.

The following chart explains why the poor working stiff is less than enthusiastic about the GDP under Bush.

This is a snapshot of the very failure of "trickle down economics". Wages clearly have not kept pace with GDP, an index of the nation's wealth. If the working people are not benefiting, who is? The rich, of course. The chart is a picture of the rich, getting richer.

It is argued, who provides jobs if not the rich? That's the wrong question. The right question is: how do the rich get rich? The rich get rich by hiring labor and paying them less than the economic value of the labor. The difference is wealth. It is created in the act of work. Created, it trickles up. A ditch digger is paid because the ditch he creates has economic value to someone who wishes to divert water to crops, for example.

Trickle down theory might work if the US were a "closed economy", if the US did not import goods from abroad. If everyone in the US bought only US produced goods, an inequitable tax cut might, indeed, trickle down to those workers employed to make those goods. But that is not the world Ronald Reagan and George Bush created. Even as Ronald Reagan slashed taxes for millionaires, his administration is notable for having changed a long term trend. Under Reagan, the US began to import more automobiles, appliances, and electronic goods, items that had been the staple of the US economic engine. It was a one two punch from which we may never recover as long as the GOP continues to dominate economic policy.

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