Déjà Voodoo All Over Again?
by Mike Hersh
Tuesday, Oct. 17, 2000 (AmpolNS) -- In this campaign, George W. Bush promises to slash taxes and regulation to promote economic growth. These claims rest on a fundamentally wrong understanding of recent history concerning "Supply Side" economics and their assumptions about the way the world works. Some still credit Reagan's policies for the current economic boom. In fact, his policies failed badly twenty years ago. If George W. Bush were to implement them in 2001, they would almost certainly cause serious harm to the economy.
There is no question Ronald Reagan led a political revolution in the early 1980s. His administration gave flesh to his rhetoric about confiscatory taxes, strangling regulations, and a weakened military. The Reagan era policies dramatically slashed taxes, especially on the wealthiest and big corporations. They refused to extend and in some cases refused to enforce regulations designed to protect the environment, workers, and consumers. They also dramatically increased spending on the military, but cut discretionary spending on everything else.
This was a series of major political victories for those who supported these polices, but were they successful?
Examining the performance of Reaganomics by any honest, meaningful measure the answer has to be no.
Despite widespread claims that Reaganomics unleashed the great American economy, there is absolutely no evidence to support such views. The record shakes the very foundation of Reaganomics because it shows there was no promised increase in investment which "Supply Siders" claimed would foster economic growth. In fact, the economy was healthier by all these measures before the Reagan tax cutting, borrowing and spending policies than afterward.
No one can deny that Reagan's policies failed to deliver on the promises of a balanced budget by 1984. They also failed just as dismally across the board. They failed to expand revenues in real terms. Adjusted for inflation, revenues remained below Carter-era levels until after a series of tax increases, and not until Reagan was almost out of office. As demonstrated by two-years of 9.5% unemployment, they failed to promote job creation. The annual job growth rate was lower during the Reagan years than any post W.W.II presidency before him, including Jimmy Carter's, and significantly lower than during the Clinton years. Some apologists claim that these early figures were before Reagan's program took effect, but that's sophistry at best. The economy emerged from the Reagan recession, the worst since the Great Depression, only after Reagan signed legislation pulling the plug on the supply-side experiment.
Economists widely predicted all of these results even before the Congress passed Reagan's policies. So how did the Reagan Administration win passage of these policies? Reagan overstated the economic problems we faced in 1980. Growth was weak, but positive. Unemployment was high, but coming down. Inflation, caused by oil shocks and other factors was high, but already falling. This in large part because of the artificially, historically high interest rates the Federal Reserve Board prescribed to squeeze inflation out of the economy.
Reagan also overstated the power of government in the economy for good or ill. The US economy runs in cycles which determine its ups and downs. These intractable trends place limits on what even Presidents as powerful and popular as Reagan or Franklin D. Roosevelt can accomplish, even when they enjoy strong backing from Congress. For all the claims that Reaganomics led to the current expansion, there is no evidence that anything he did helped decrease inflation or interest rates, or promote real investments or innovations. Reagan's policies worked at cross purposes to these and the other factors which lead to strong economic performance.
John Maynard Keynes argued, and events have proven that public spending can jump-start an economy lacking in private demand for goods and services. The "Supply Siders'" claim Keynes was wrong, and demand doesn't matter if government allows or spurs production. They tout tax cuts and regulation slashing to unleash economic growth. There is no evidence that this theory has ever worked. Tax cuts do not reliably lead to more investment or growth. Jimmy Carter's capital gains tax cut policy didn't. Reagan's didn't either.
That is not to say government polices do not matter. Poor policies can hamstring growth and innovation. Wise policies can help spur demand, and ameliorate suffering during economic slowdowns. They can police the securities exchanges, and support the banking system to promote consumer and investor confidence without which a modern economy stalls. They can fund research and development for inventions such as life saving drugs and the microprocessor. Public / private partnerships like land grant colleges and the rail roads promoted academic and economic vitality. The US government constructed massive public works like the Erie Canal, the national highway system, the Hoover Dam and the TVA without which the US would not have grown into an economic superpower.
Dramatic increases in productivity launch major economic booms. Technological breakthroughs in transportation, communications, and manufacturing unleash leaps in productivity. Implementation of inventions such as steel, the railroads, computers and telecommunications are a few examples. National and the global economies are prone to speculation, slowdowns, and overheating. As Adam Smith, Karl Marx and many others explained, these factors cause periodic contractions in the demand for goods and services, leading to recessions and depressions. These advances--not Reagan-style massive deficit spending and tinkering with tax rates--promote real growth.
Reagan capitalized on economic discontent and overpromised to promote his radical "Supply Side" policies. Most educated observers knew Reaganomics was an unwise gamble beforehand. Even the US Senate and some of Reagan's top advisors recognized these policies would create huge deficits rather than the promised balanced budget. To emphasize: not only is Reaganomics not responsible for the current economic boom, it failed badly, and was repudiated nearly twenty years ago!
In short, the only success regarding Reaganomics was political, and very short-lived. It was an economic catastrophe which blew a huge hole in revenues, led to a tripling of the national debt, and continued to damage the economy even after the Congress reversed its policy underpinnings. We still must pay $200 BILLION per year in interest on the national debt, thanks in large part to Reagan's political victory which was an economic Waterloo, and that's not even counting the costs of paying back the debt itself! GW Bush's call for a return to Reaganomics would only cripple this expansion, prevent good government policies which promote prosperity, and bury us beneath more debt.
97th Congress, First Session, Vote No. 464
SENATE RECORD VOTE ANALYSIS
December 9, 1981, 3:34 p.m.
Page S-14845 Temp. Record
Vote No. 464
SECOND CONCURRENT BUDGET RESOLUTION/Congressional Budget Goals
Reaffirming the congressional budget for the U.S. Government for the fiscal
years 1982, 1983, and 1984 (S. Con. Res. 50). Modified Domenici et al.
unprinted amendment No. 772.
AMENDMENT AGREED TO, 50 - 47
Pertinent votes on this legislation include Nos. 463-465. (For related action and debate on this specific issue, see Vote No. 463.) The modified Domenici et al. unprinted amendment No. 772 would add language to the bill expressing the sense of the Senate that: (1) The Budget Committee shall report a combined Revised Second Concurrent Budget Resolution for fiscal year 1982 and a proposed First Resolution for fiscal year 1983, to contain a balanced budget for fiscal year 1984; (2) spending shall be reduced in all parts of the budget and revenue increases realized other than through changes in the across-the-board cut enacted in the Economic Recovery Tax Act; and (3) Federal outlays shall not exceed 20.5 percent of the gross national product (GNP) in fiscal year 1984. During floor debate, Senator Domenici modified the language, "the Senate directs the Budget Committee to report," in (1) above, to "it is the sense of the Senate that the Budget Committee report."
Those favoring the amendment contended: This amendment would add sense-of-the-Senate language to the resolution indicating our expectation of a response to present fiscal problems. It should be adopted based on its merits. First, this amendment does not bind the Congress. It merely indicates how the U.S. Senate sees the next 3 or 4 years and how to respond to those projections. Second, the amendment recognizes that the individual tax cuts and general depreciation allowances passed by this Congress represent the engine of economic recovery. Thus, we should not tamper with them. Third, the amendment says we must continue the process of ratcheting down with no sacred cows until the percentage of expenditures as a percent of GNP is reduced to no more than 20.5 percent. The way to get inflation and interest rates down, to have the kind of growth that will reduce unemployment, and to allow us to continue to strengthen our military capabilities is to move along the course we have already charted. Spending cuts are being made, and general tax relief has been granted to individuals as well as to American business large and small. Before adopting this procedural budget resolution, we should indicate our collective desire to guide the Budget Committee as it begins deliberations next year. In sum, adoption of this amendment would accomplish two worthwhile objectives: It would reaffirm our goal of a thriving economy with lower inflation, more jobs, and a budget in balance by 1984. It would also state our conviction that achieving those goals is a shared responsibility of Congress and the President. Those opposing the amendment contended: Extravagant and outrageous revenue hemorrhage of the individual across-the-board tax cut has caused the huge deficits we now face, and this sense-of-the-Senate resolution is simply a nice placebo which will do nothing to alter the picture. Unless the tax system is freed from the protection this administration and this Senate has granted it, our economy will continue to falter. It is this aspect of our fiscal policy which needs adjustment, not the important assistance programs like social security, to which this amendment would explicitly allow cuts. Indeed, this amendment is directed at further cuts in social security and defense spending. In addition, this resolution calls for a spending cap of 20.5 percent of GNP in 1984. At the same time, the administration calls for a GNP of $4,097 billion in that year. Twenty and one-half percent of that figure is $839.3 billion, or a $91 billion increase over the administration's projected spending for fiscal year 1984. Twenty and one-half percent of the first budget resolution projection for fiscal year 1984 is a full $100 billion more than the administration projection for spending. We must wonder whether the administration is actually seeking an increase in an already bloated Federal budget. A further complication arises from our understanding, only primitive at best, of the true size of both the GNP and the Federal budget. Sponsors of this amendment also appear to have lost faith in the administration's ability to balance the budget in fiscal year 1984. In short, we should reject this amendment and recognize the incompetence of the people in the administration managing an economic policy of smoke and voodoo. Cocktail napkin economics and free lunches will not cure our ills, and this reestablishment of the devastating, extravagant tax cuts that caused the revenue hemorrhage which aborted Reaganomics should be rejected.
(48 or 94%) Abdnor Andrews Armstrong Baker Boschwitz Chafee Cochran Cohen
D'Amato Danforth Denton Dole Domenici Durenberger East Garn Gorton Grassley
Hatch Hatfield Hawkins Hayakawa Helms Humphrey Jepsen Kassebaum Kasten Laxalt
Lugar Mathias Mattingly McClure Murkowski Nickles Percy Pressler Quayle
Rudman Schmitt Simpson Specter Stafford Stevens Symms Thurmond Tower Wallop
(2 or 4%) Byrd Harry F Jr Proxmire
(3 or 6%) Heinz Packwood Roth
(44 or 96%) Baucus Bentsen Biden Boren Bradley Bumpers Burdick Byrd Robert C
Cannon Chiles Cranston DeConcini Dixon Dodd Eagleton Exon Ford Glenn Hart
Heflin Hollings Inouye Jackson Johnston Kennedy Leahy Levin Long Matsunaga
Melcher Metzenbaum Mitchell Moynihan Nunn Pell Pryor Randolph Riegle Sarbanes
Sasser Stennis Tsongas Williams Zorinsky
(2) Goldwater-2 Weicker-2
ABSENCE CODE: 1-Official Business 2-Nec. absent 3-Illness 4-Other
Symbols: AY-Announced Yea AN-Announced Nay PY-Paired Yea PN-Paired Nay
Compiled and written by the staff of the Republican Policy Committee - John