Monday, April 20, 2009

Trickle Down?

During the 1980's the economic conservatives were routinely disparaged for advocating trickle down economics - a term incorrectly commingled with supply-side economics.

Supply-side is a term used to describe how changes in marginal tax rates influence economic activity. Supply-side economists believe that high marginal tax rates strongly discourage income, output, and the efficiency of resource use.
(James D. Gwartney)

The principle of supply-side economics in the 80's was simple enough. It involved cutting taxes across the board with deepest cuts for those in the top tax brackets. The belief was that those who paid the most taxes would reinvest their tax savings creating new economic activity in which everyone would benefit. Trickle down became a derogatory term applied to all of "Reaganomics". In truth there has never been any discipline within economic studies that advocated trickle down theory. No such theory can be found in any book on the history of economics.

The 1980's were not the first time hefty tax cuts had been tried. Treasury Secretary Andrew Mellon in 1921 successfully pushed for tax cuts that then ushered in the roaring 20's. John Kennedy also dramatically lowered the upper tax rates which saw strong economic growth in the 60's. Modern supply-siders to this day counter the derogatory term trickle down economics with the famous Kennedy quote "a rising tide lifts all boats." Honest contemporary historians can't argue that Reagan's initial economic policies brought the country out of a deep recession and ushered in nearly 30 years of steady economic growth.

In reading history one could come to the conclusion that such tax cuts do initially spur economic activity aiding job creation, raising the GDP and general prosperity. Yet economic collapse always seems to follow. In the 1930's we had undoubtedly the worst economic crisis in history. The Great Depression was a disaster for America and the world. In the 1970's we endured two deep recessions. Since Reagan's time we have had two shallow and short recessions - until now.

If it were so simple...

Many factors contributed to the Great Depression and if we are to believe that tax cuts were main culprit we would be deceiving ourselves. Like wise for the 1970's. The original oil shocks, Federal Reserve policies and the beginning of what came to be known as globalization - not to mention a protracted, poorly managed war all contributed to the economic mess. The recessions of 1991 and 2001 were blips on the radar and could be tied to in part to the S&L debacle and the Dot Com bubble respectively.

So here we are today facing a very steep and very deep economic down turn. Again honest economic reflection is not citing the modest Bush tax cuts of 2001 and 2003 as the culprit. (keyword: honest) We should recognize the Federal Reserve's cheap money policies and Congressional meddling in the credit markets to advance a social agenda of home loans for their low income constituents. The result was runaway valuation for the housing markets and massive defaults that tore apart greedy investment houses and the corrupt GSE's known as Fannie and Freddie.

Clearly it wasn't the tax cuts... Still Democrats will argue with reality.

There's a difference between tax rates and tax revenues. Tax revenues went up while tax rates went down in the 1980s under Reagan. The same thing happened in the 1960s as well as the 1920s - and yes, even the 2000's under Bush. But still the cries can be heard that we have to pay for these tax cuts by raising deficits. Friends, it's government spending that creates deficits.

Where is all of this history going you might ask?

Today we have the major critics of Reagan's economic policies in power. Their answer to the economic woes is massive government spending through so-called stimulus that will hopefully result in what??? You guessed it: a perverted kind of trickle down economics. The big difference is that instead of the risk being taken by private corporations and entrpenuers - entities that carefully weigh every dime they spend - this massive stimulus is loading us, our children and our children's children with unfathomable debt. No economic recovery will ever expand tax revenues to cover this kind of spending.

If this administration wants an economic turn around they would best either do nothing (ha ha) or cut taxes on businesses that create jobs. They won't do that because it wouldn't achieve their true goals. Face the facts - their goal is government power above all else.