Déjà voodoo: An undead GOP economic theory is choking us
Published 12:46 pm Thursday, June 29, 2017
By BRIAN COONEY
“It just isn’t going to work. . . this type of what I call a voodoo economic policy”
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— George H.W. Bush, 1980
The Republican government in Washington is trying to inflict on the entire nation a disastrous agenda that has spectacularly failed in several one-party red states. Stripping funds from health care and the EPA; withdrawing from the Paris climate accord; sweeping de-regulation of production and finance; and large tax cuts for corporations and the wealthy are all symptoms of a fact-free dogma known as supply-side economics.
Supply-siders claim that the best way to achieve prosperity for all is to increase investment capital by (1) lowering taxes on corporations and the wealthy, and (2) making investment more profitable by minimizing regulations and keeping wages low (including suppression of unions). This will motivate investors to put more money into the production of goods and services, thereby increasing demand for employees and creating jobs. This harmony between surging investor wealth and job creation puts a happy face on the Invisible Hand.
Supply-side economics demands an act of faith on the part of American workers. For “now,” they must do without wage increases and social programs (such as subsidized health care) in order to give the investor class enough money to create prosperity. But a new day will come when workers will be able to buy health care and education in a thriving market free from government intervention.
The people of Kansas have lost their faith. When Republican Sam Brownback took office as governor in 2011, he initiated the largest income tax cut in Kansas’ history and cut back funding for education and social services. As he explained on Morning Joe in 2012, “On taxes, you need to get your overall rates down, and you need to get your social manipulation out of it, in my estimation, to create growth. We’ll see how it works. We’ll have a real live experiment.”
The experiment failed.
“Revenue plunged and the state resorted to pulling money out of its rainy-day fund to plug the holes. A number of critical services, including for road maintenance and schools, were cut. The business climate has been poor, and the economy has lagged behind neighboring states as well as the rest of the country.” (Bloomberg, Oct. 24, 2016)
Finally, this month a coalition of Democrats and moderate Republicans voted to raise state taxes, overriding Gov. Brownback’s veto.
The same supply-side disaster unfolded in two other single-party red states: Oklahoma and Louisiana.
Oklahoma had a $200 million surplus four years ago. Then, according to the Associated Press, “Republicans who control state government successfully pushed to permanently reduce the state’s top income tax rate, slash the oil and gas production tax rate from 7 percent to 2 percent and give more tax incentives to industry.”
This spring, legislators faced a $900 million budget gap. Budget cuts have swollen class sizes. Four-day school weeks were introduced in 96 school districts. Teachers haven’t received a salary increase since 2008 and many are fleeing the state, replaced by untrained “emergency-certified” teachers.
Bobby Jindal, a once rising star in the national GOP, was governor of Louisiana from 2008 to 2016. By lowering income taxes and expanding exemptions to oil and gas companies, Jindal managed to go from a $900 million surplus to a $1.6 billion deficit. As Nathaniel Rich reports in The New York Review of Books, he “fired 30,000 state employees, furloughed many others, cut education funding by nearly half, and sold off as many state-owned parking lots, farms, and hospitals as he could” in an effort to offset lost tax revenue.
Last April 26, Treasury Secretary Steven Mnuchin and chief economic adviser Gary Cohn gave us a sparse but dramatic description of the Trump tax plan. It was pure supply-side (a.k.a. “trickle-down”) economics: It would “reduce the top rate on individual income tax — now 39.6 percent for income over around $470,000 for a married couple — to 35 percent. . . . It also would eliminate a 3.8-percent tax, used to help fund Obamacare, that applies to investment income over $250,000 for a couple” and end the estate tax on individuals with estates of $5.5 million (or $11 million for couples).” (NYT, April 26, 2017)
Ignoring the fiscal disasters in Kansas, Oklahoma and Louisiana, both Mnuchin and Cohn invoked the supply-side fantasy that their tax-cut plan “will pay for itself.” The idea here is that the cuts will create such an increase in business activity that total tax revenues will increase even though the tax rates are lower.
There is no evidence to support this claim. In 2012, the Congressional Research Service studied the 65-year period in which top marginal tax rates went down from 86.45 percent to 35 percent. The CRS found that these reductions “have had little association with saving, investment or productivity growth. However, the top tax rate reductions appear to be associated with the increasing concentration of income at the top of the income distribution.”
The investor class is already loaded with capital. But rich investors don’t want to start businesses when debt-ridden consumers can’t afford more purchases. Today we have what William Lazonick in the Harvard Business Review calls “profits without prosperity.” From 2003 to 2012, according to Lazonick, 449 companies in the S&P 500 index “used 54 percent of their earnings — a total of $2.4 trillion — to buy back their own stock.” Another 37 percent went to dividends, leaving only 9 percent for investment in production.
Supply-side economics is about increasing the power and wealth of the already wealthy. It’s about turning the entire country — and planet — into a sacrifice zone for the advance of capitalism. This is the core agenda of the GOP, and the Democratic Party offers only token opposition.