Posted on 04/26/2010 6:33:34 AM PDT by SeekAndFind
There are two schools of thought about the Reagan tax cuts. The conventional conservative view: They spurred investment, entrepreneurship, and real economic growth, helping to resuscitate the post-Carter economy, and, by doing so, they paid for themselves. The conventional liberal view: They were an ill-considered product of starve-the-beast ideology and produced crippling deficits, inaugurating a new era of fiscal irresponsibility only briefly transcended during the golden years of the Clinton presidency.
Here’s a different take: They never happened.
Properly understood, there were no Reagan tax cuts. In 1980 federal spending was $590 billion and in 1989 it was $1.14 trillion; you don’t get Reagan tax cuts without Tip O’Neill spending cuts. Looked at from the proper perspective, we haven’t really had any tax cuts to speak of — we’ve had tax deferrals. Reagan and his congressional allies had an excuse in the considerable person of Speaker O’Neill. But George W. Bush and the concurrent Republican majorities in both houses of Congress didn’t manage to cut spending, either. Part of that was circumstances — 9/11, Afghanistan, Iraq, the subprime meltdown — but part of it was the fact that a poorly applied supply-side analysis has infantilized Republicans when it comes to the budget. They love to cut taxes but cannot bring themselves to cut spending: It’s eat dessert first and leave the spinach on the table.
There is some evidence that this is both bad politics and bad policy. Many conservatives were disheartened by the Republican spending excesses of 2001–06, and abandoned the GOP in the elections of 2006 and 2008. And you may have noticed that our parks and public spaces are from time to time filled with rowdy tea-party demonstrators hollering for Washington to drop anchor post-haste on the USS Appropriations, which is nonetheless steaming on at a nauseating clip. Spending cuts are always popular in theory and detested in practice, but the deficit is now truly terrifying, and, fortunately for Republicans, it is owned by Barack Obama and Nancy Pelosi. Our gross national debt is about 80 percent of GDP today and will be nearly 100 percent by 2012. If the government applied any sort of reasonable accounting standard to its future liabilities — if it were taking the same write-downs on Social Security and Medicare that the Fortune 500 are taking on Obamacare — then our real liabilities would far exceed GDP. It’s ugly, and the numbers suggest that we aren’t going to grow our way out of it: Despite all those pro-growth tax cuts, our deficits continue to grow faster than our economy. That’s been especially true during the Great Recession, but even during periods of strong economic growth, there has been nothing to indicate that our economy is going to grow so fast that it will surmount our deficits and debt without serious spending restraint. This should be a shrieking klaxon of alarm for conservatives still falling for happy talk about pro-growth tax cuts and strategic Laffer Curve optimizing.
Some people are more sensible about that Laffer Curve talk. Laffer, for instance. Arthur Laffer, whose famous (and possibly apocryphal) back-of-the-napkin diagram launched supply-side tax policy, readily concedes that the growth effects of tax cuts are oversold in the political debate. “Does every tax cut pay for itself? No. I think Irving Kristol wrote that, once — and then did a pretty good job of arguing for it. But if some guy running for Congress in Clayton County, Texas, says all tax cuts pay for themselves, what do we want to do? Go after him with a shotgun? Sure, they’re going to cite me, and there’s very little I can do about it. But there’s the same amount of ignorance on the other side, ignoring the economic feedback effects of tax cuts.”
Laffer’s rustic hypothetical is apt: There is no Clayton County in Texas, but there is a little Texas town called Clayton, population 79, represented in the House by Republican Louie Gohmert. What does Representative Gohmert think about taxes? After 9/11, he argues, the United States was headed for a serious recession, even a depression, but tax cuts saved the day — and increased government revenues in the process. “With a tax cut, then another tax cut, we stimulated the economy, and record revenue like never before in American history flowed into the United States Treasury,” he said in a speech before the House. “As it turned out, the tax cuts helped create more revenue for the Treasury, not destroy revenue for the Treasury.” That last bit is fantasy. There is no evidence that the tax cuts on net produced more revenue than the Treasury would have realized without them. That claim could be true — if we were to credit most or all of the economic growth during the period in question to tax cuts, but that is an awfully big claim, one that no serious economist would be likely to entertain. It’s a just-so story, a bedtime fairy tale Republicans tell themselves to shake off fear of the deficit bogeyman. It’s whistling past the fiscal graveyard. But this kind of talk is distressingly unremarkable in Republican political circles.
And such magical thinking is not the exclusive domain of back-benchers from the hinterlands. The exaggeration of supply-side effects — the belief that tax-rate cuts pay for themselves or more than pay for themselves over some measurable period — is more an article of faith than an economic fact. But it’s a widespread faith: George W. Bush argued that tax cuts would serve to increase tax revenues. So did John McCain. Rush Limbaugh talks this way. Even Steve Forbes has stepped into this rhetorical stinker from time to time. Reagan knew better — his Treasury Department predicted significant revenue losses from his tax-rate cuts — but his epigones preach a different gospel. Writing in the Wall Street Journal, former Reagan speechwriter Clark S. Judge made a more specific claim: “The surpluses of the late ’90s were to a significant extent a product of the growth in revenues that came after the capital-gains tax was cut.” Here he’s really making two claims: 1) that capital-gains-tax revenue growth was a significant factor in balancing the budget, and 2) that the revenue grew because of the cuts. The first claim is demonstrably untrue: The total growth in capital-gains tax revenues amounts to about 10 percent of the overall deficit reduction that led to the surpluses of the late Clinton years. On the other hand, spending cuts accounted for about half of the deficit reduction. (“Spending cuts” is a famously slippery phrase; here we’re talking about some actual cuts, but mostly about scheduled spending forgone.)
As for Judge’s second claim, it is possible, even likely, that the cuts in the capital-gains-tax rates led to greater investment activity during the years in question, 1996–2000. But if we want to credit tax cuts for even the 10 percent of deficit reduction that came from increased capital-gains tax revenues, then we have to assume that the cuts were responsible for 100 percent of the growth in those revenues. And that’s a stretch. You may remember that the late 1990s were an unusual time in the American economy, to say the least. Recall, for instance, the two big news stories of Aug. 9, 1995: Jerry Garcia shuffled off his hippie coil and Netscape had its initial public offering of stock, an event that kicked off a very long and raucous money orgy we now know as the dot-com bubble, the Age of Irrational Exuberance. From 1994 to 2000, the NASDAQ rose 500 percent in value, doubling between 1999 and 2000 alone. It was not a modest reduction in the tax rates that inspired investors to bid stocks up to five times their earlier prices and to keep bidding them up even when price-earnings ratios had far exceeded historical norms. Compared with the dot-com bubble, the effects of the tax-rate cuts probably were of not much greater magnitude than the passing of Mr. Garcia. Overselling the effects of supply-side tax cuts gives Republicans an alternative narrative for the millennial economy — which is tempting, since nobody is going to run for office promising another disruptive bubble in modish technology shares.
But, in truth, nobody really should run for office on the supply-side revenue effects of tax cuts, either. As it turns out, they present a dry and technical question of limited interest to the general electorate. It is true that tax cuts can promote growth, and that the growth they promote can help generate tax revenue that offsets some of the losses from the cuts. When the Reagan tax cuts were being designed, the original supply-side crew thought that subsequent growth might offset 30 percent of the revenue losses. That’s on the high side of the current consensus, but it’s not preposterous. There is, however, a world of difference between tax cuts that only lose only 70 cents on the dollar and tax cuts that pay back 100 cents on the dollar and then some.
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Give me the red pen.
The department of education, HUD, and EPA are at the top of my list.
Nails it. GOP is full of ....
Ummmm... when was the last time they ever cut spending?
(crickets chirping)
In MA, during the primary for the US Senate seat formerly occupied by Ted Kennedy, there were 5 Democrats seeking the nomination. A number of them had good qualifications and it was a tough primary. The Democrat who won was Martha Coakley. Everyone said that she had run a smart campaign and beaten some worthy foes. Now, the seat was hers -- all she had to do was defeat some upstart Republican named Scott Brown.
Well, the people in MA were tired of the Kennedy mystique, they were afraid of Obamacare, and they wanted some change. Scott Brown came on strong and Coakley lost the race.
The takeaway -- trumpeted by all of the leftist media outlets in MA -- was that Martha Coakley was a bad candidate. She ran a boring campaign. She wasn't popular, and she never really had a chance against a charismatic guy like Scott Brown.
So where are we today? Martha Coakley is seeking re-election at Attorney General for MA. Who is her Republican opponent??
Oh. Right. The GOP seems to be letting her run unopposed.
The GOP is very much the problem today.
Count on it.
And how many people run on the campaign platform of not spending? "Vote for me, I went to DC last time and didn't approve of any spending above the bare minimum necessary to keep the country going. I didn't approve of any pork for our state/district."
I know WE would vote for such a candidate, but we're rare.
Everybody wants to get rid of spending, except for their own pet projects. Everybody wants to get rid of pork, except the pork that goes to their district.
All good ideas, but cutting those departments while leaving Soc Sec, Medicare and Medicaid intact is at best a thin moral victory.
Everyone wants to get reelected more than anything else.
WE NEED TERM LIMITS !
RE: Social Security
I heard that Chile had a social security problem similar to the USA, but they fixed it in the 1990’s by privatizing it. I believe the Chicago School of economics ( under Milton Friedman’s tutelage had a hand in helping them ).
I wonder how their system is doing now.
If it’s working and their system is solvent inspite of the market ups and downs, why can’t we implement it here ?
spending cuts are good in theory-—but proposed spending cuts are even attacked here. People were complaining when Obama cut the NASA budget-—and manned space flights and moon landings are a luxury of a prosperous government.
I don’t even want to see this place if defense spending is ever cut
well they had better figure it out pretty damn fast, because the Tea Party is about to ask for their FINAL ANSWER.
If they take over the Congress and cannot bring spending under control we are looking at an historic realignment, emergence of a new party (or parties) and likely death of the GOP
Government has legitimate functions, national defense is one of them.
It's not that there shouldn't be government spending, but never in my life has there been any cutting proposed that would leave people dying in the street.
Just for starters:
Dept. of Agriculture
Amtrack
Earned Income Credit
School lunch program
School breakfast program
Bureau of International Labor Affairs
Bureau of Land Mgmt.
Bureau of Census (let the locals handle it)
Dept. of Transportation
National Transportation and safety board
Civil Rights Commission
Americorps
Peace corps
National Endowment of the arts
National Highway traffic safety board
National Labor Relations Board
Radio Free Europe
VOA
National Mortgage Association
Dept. of Health and Human Services
Dept. of Labor
Federal Reserve System
AND LAST BUT NOT LEAST.........The UNITED NATIONS!
And remember, in DC talk, a “cut” is simply a reduction in the rate of increase.
GOP congresspeople are going to have a hard time cutting anything to do with medicare in the near future after they spent the last year saying that any medicare cuts, even to really unnessecary, expensive programs like medicare advantage, would kill old people.
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