A New Alternative Explanation: The “Theory” of Voodoo Economics
The fundamental assumption of Voodoo (aka supply-side) economics, is that if you cut taxes for the rich, they will pay more taxes, or as they put it “tax revenues will increase.”
Here’s their proof: If the tax rate is 100% then you can’t keep any of the money you make, so why bother? So you make no money and pay no taxes. At a lower tax rate people do work and pay taxes. So cutting taxes below 100% increases tax revenue.
That only makes sense for tax rates near 100%
If that’s not clear, read this: Consider cutting the tax rate 80% to 40% (about like Reagan did). Say you’re making $100 million a year like the a typical billionaire. Then your taxes are cut from $80 to $40 million and your after-tax income goes from $20 to $60 million. That’s pretty sweet. Is that going to make you work so much harder that you more than double your income. If you could, you already would have. So no, you will just happily take home triple what you did before, and maybe even work less.
Even standard supply-side theory says this doesn’t work for lower-tax rates like the middle class pays. For them, supply-side says if you cut their tax rate, they will pay less tax.
This is why Wall Street invented and loves supply-side “theory.” It “proves” that to collect more taxes, cut the tax rate for the rich and raise it for the middle class. That’s why top Republican’s fell for this nonsense. It sounded soooooo good.
Why this matters
Supply-side economics is dishonest. The supply-siders didn’t even mind conning their own man Reagan. The tax-cut “theory” only actually applied to the rich. So the plan was to cut tax rates for the rich in half, which they did. To get this through they had to cut taxes for the middle class some too, but they counted on inflation pushing the middle class back into higher tax brackets. But cutting the top bracket had a permanent effect because there is no higher bracket to get pushed into.
So not only was cutting taxes to raise money crazy, it was just a deception to cut taxes for the richest and then use the deficits to force cuts in services for the middle class and the poor. The Republicans have almost all gone over to the supply side now, and many, like Reagan, have been brainwashed into believing it. G.W. Bush claimed he would “retire nearly $1 trillion in debt over the next four years. This will be the largest debt reduction ever achieved by any nation at any time.” I think he actually believed that.
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Class War: Voodoo Economics
Voodoo Economics, as George H.W. Bush named it in 1980, is what caused most of our national debt. It came from Wall Street and goes by the name “supply-side economics.” Here’s where you can find out about it. Since Ronald Reagan was a supply-sider, once Bush became his V.P. he had to change his tune. Watch this 22 second video:
How the Rich Steal from the Poor: How Reagan Sowed the Seeds of America's Demise
Throughout Reagan's life and political career he railed against government programs, economic regulations, and taxation. This began with his political speeches in the 1950s and continued throughout his career. Yet when Reagan became president in 1980 he talked about "restoring America", but restoring America to what? Restoring America to how it was prior to World War II? That isn't what he meant and it isn't what conservatives meant when they talked about restoring America. Reagan had railed against the policies of the 1940s and 1950s back in the 1950s, and he continued to do so in the 1960s, yet the "Golden Age" of the American economy was the 1940s-1960s, with the large middle-class that was built through the policies that Reagan railed against.
In the 1980s Reagan talked about restoring America, yet his policies were designed to do the exact opposite economically, they were designed to undo the America that middle-class Americans had come to think of as the "good ole days" to which America would be restored. The America of the 1940s and 50s was an America of a strong central government, with a highly regulated economy, built through the extensive use of federal programs and massive federal subsidization of the white middle-class. And that is what it was really all about. "Restoring America" always meant "restoring white dominance", yet it could never really be admitted that the white dominance of the 1940s-1960s was itself a product of government programs.
What happened in the 1960s and 1970s was that discriminatory practices by the federal government and state governments were challenged and the benefits of government programs began increasingly going to blacks and minorities in the way that they had only gone to whites previously. When this happened a new narrative emerged among conservatives, a narrative that was echoed by Reagan, and which became a fundamental national belief when Reagan came to power in 1980. This false narrative was that the white-middle class had established itself all on its own, not with the help of the federal government, but indeed despite the obstacles put in its way by the federal government.
You see, once minorities began receiving many of the same benefits from the government what whites had enjoyed for decades, one could not simply say that blacks shouldn't be able to get the same benefits as whites, and one couldn't acknowledge that whites had gotten where they were with the help of those same benefits. For those that opposed minority access to government benefits the convenient narrative was that whites had never needed such benefits in the first place and therefore no one should have them now.
This was a core aspect of how the American federal government became the enemy of post-World War II conservative America. The government was seen as good by the vast majority of whites in the 1940s and 1950s, when the government was almost exclusively helping middle-class whites. When government policies began adopting measures of fairness so as to give the same benefits to minorities that it gave to whites, then the white middle-class was easily turned against such policies.
But this merely opened the door for the adoption of broader "free-market" policies and ideology. Many of the so-called "free-market" policies of the Reagan era weren't readily supported by the white middle-class, but the fear stirred up by conservatives that government involvement in any shape or form might lead the incomes of whites being taxed away and given to undeserving minorities, or that government programs would in one way or another help blacks at the expense of whites, was enough to push many middle-class whites to support economic agendas that they otherwise would not have.
While Reagan and conservatives railed against government debt and federal spending, the policies of Reagan and the Republican party as a whole brought about unprecedented levels of deficit spending that had not been seen since World War II. Reagan came in to office lamenting what he called an unsustainable national debt, yet by the time he left office the debt had almost doubled as a percentage of GDP (and had far more than doubled in raw dollar terms). Not only had the debt of the federal government been pushed to its highest point in decades by Reagan's policies, but personal debt grew significantly as well.
Conservative defense of growing income inequality was simple, the basic claim was that voiced by Milton Friedman, which was that the standard of living was improving and that was all that was important.
In the particular problem of inequality, what is true, what is unquestionably true, is that there's been a widening difference in wages earned. You have had the skilled wages go up relative to the unskilled wages. However, there has been no comparable widening in the levels of consumption. If instead of looking at income, you look at levels of consumption, if anything that's become more equal. The fraction of families that have a dishwasher, that have a sewing machine, that have a television set. In respect to consumption, it's very hard to avoid the view that people have been getting more equal rather than more unequal.
Milton Friedman, 2000: http://www.pbs.org/fmc/interviews/friedman.htm
The fact that an economist like Friedman could acknowledge that there was a disparity between consumption levels and income levels and not acknowledge the obvious implications in terms of debt is astounding, and yet it was also quite typical. Free-market economists since the time of Reagan flat out failed to address the fact that economic stability and the ability of the middle-class to support the economy is inherently tied to income inequality. That as income inequality increases the stability of the economy decreases and the ability of the middle-class to support the economy decreases.
Friedman always failed to acknowledge the fact that the growth seen in the American economy from the 1980s through the end of the century was propped up by unsustainable levels of personal debt, deficit spending, an ever increasing number of workers per household, and one time gains from the exporting of American production to foreign countries.
And this is the issue that the majority of people continue to fail to understand today. The American economy of the past 30 years has always been unsustainable. Conservatives today talk about the "economic miracle" that occurred under Reagan, but the fact is that economic growth was modest under Reagan, and what economic growth did take place was largely a product of borrowing. The economy of the past 30 years has been built fundamentally on debt and other unsustainable trends, such as lack of investment in infrastructure and constant reductions of interest rates to fuel the debt dependent economy.
But at a certain point, when interest rates get too low, borrowing itself begins to greatly distort the economy, as we saw in spectacular fashion with the housing bubble of the 2003-2007. The ability to borrow cheaply leads economic actors into making decisions that they would not otherwise make. And this played a significant role in the ballooning of executive compensation as well, as the ability to borrow cheaply, combined with deregulation, brought about an environment of excessive corporate takeovers and mergers, leading to the rise of "defensive" compensation practices for corporate executives, who were given compensation packages completely out of line with their contributions in part as a defense against hostile takeovers.
And while the trend toward concentration of capital ownership and control was already underway prior to Reagan, the economic policies of Reaganomics opened the flood gates instead of strengthening the dam, leading to an even more dramatic rise in capital concentration over the past 30 years than would have otherwise been the case. The concentration of capital ownership by institutional investors added further fuel to the income disparity fire, with institutional investors acting in ways that individual middle-class investors previously had not. This helped pave the way for the massive off-shoring of American industry in the 1990s, during the time of cheap fuel, cheap borrowing, and institutional investors who were cozy and comfortable with executives but not workers, who pushed executives to take actions that would lead to greater market volatility and short-term gains, both of which were beneficial to "investment" institutions, while they are not particularly healthy for long-term economic stability and growth.
The result was that many people got rich quick during the 1980s and 1990s, while their very actions were leading to the overall demise of the American economy. Indeed the system of incentives that emerged from the Reaganomic agenda is one that has driven the country into a downward economic spiral as those driving the economy into the ground benefit from its destruction.
One of the biggest economic ironies of the past 30 years has been the belief among conservatives, famously voiced by Reagan, that "government is the problem", and the claim that government spending inhibits economic growth, when in fact two of the technologies that contributed the most to real economic growth in America over the past 30 years were developed by the government: the internet and satellite technologies.
The internet is the type of technology that is very unlikely for the private sector to ever develop, because when the internet was being developed there was no immediate commercial intention for it. Furthermore, it's something that took decades to develop and we know that during this time there was no similar private network being developed, and if some company had developed similar technology they would have made it proprietary and intentionally not open in the way that the internet is today. It is the openness of the internet that has made its economic impact so huge.
One of the other major technologies upon which real economic growth was produced over the past 30 years is satellite technology, primarily satellite communications. Telecommunications as we know it today would not exist without the major pioneering of satellite communications technologies by the federal government and the N.A.S.A. space program in general. Today everything from G.P.S. to telecommunications to weather forecasting to the entertainment industry owes a debt to decades of government research and funding for the development of the technologies that make modern information transmission possible. The internet and satellites are quite arguably the most important technologies of the past 30 years, upon which huge segments of our modern economy are based, and these are both technologies that were fundamentally developed by the American federal government, with the next closest rival being the government of the Soviet Union, not free enterprise.
It was only after these technologies were developed to a working and proven level by government programs they were then adopted, exploited and expanded upon by private industry.
While many economists and pundits talk about how long it will take to recover from the current recession and for the American economy to return to its "normal operation" of the past 30 years, they fail to recognize that the economy hasn't been operating "normally" for the past 30 years in the first place. The reality is that the demise of the America economy began some 30 years ago. The seeming decent functioning of the economy these past 30 years has been an illusion propped up by public and private debt, and basically by riding on the solid base that was built in this country during the 1940s-1960s. The solid economic base that was built during that time, both in terms of the middle-class itself and in terms of infrastructure and institutions was so strong and so well built that it was able to carry the country for several decades even as it was being weakened. The policies of the Reaganomic agenda reduced investment in the nation's infrastructure, reduced investment in education, reduced investment in long-term research and development, and instead squandered resources on grossly over-funded military spending and on privatization schemes that resulted not in the shrinking of the size of government nor in the improvement of government services, but rather in the development of a private sector with a profit motive to continuously get its hands on more and more tax payer money.
Turning the government into a contract broker that funnels taxpayer money to private for-profit companies is not a way to reduce government spending, indeed it inevitably insured increased government spending, as the privatization schemes of the past 30 years have proven. There is a reason that government spending never went down with the private outsourcing of government work, because by getting private companies so heavily involved in the running of the government it inevitably did not lead to more efficient and effective government, it led to a government controlled by the private sector, which the private sector has become able to use as a tool to increase profits. The private sector works well when it is truly fully private, and the public sector works best when it is truly fully public. It's when you give the private sector large scale access to public funds that corruption and complications inevitably take place, yielding results far worse than what either the private or public sectors would produce independently.
The fact of the matter is that the policies of Ronald Reagan and his ideological supporters in office have directly led to the ballooning of public and private debt in America, to increased income inequality, deterioration of the nation's infrastructure, and the weakening of the American middle-class. The economy of Reagan was always an illusion. The real economic growth that has taken place since 1980, and there definitely was some real economic growth, owed much of its success to the solid economic and technological base that had been built in this country in large part by the federal programs of the 1940s-1960s.
Not only has the economy of these past 30 years been largely propped up by debt and by a lack of engaging in the spending necessary to truly sustain and grow the country and the economy long-term, but the undoing of many of the tools for the promotion of economic fairness that had been in place from the 1940s through the 1970s also means that a minority of the population has benefited immensely at the expense of the working class. Not only has a small minority of super-wealthy Americans benefited disproportionately from the value produced by the American economy as a whole, but this disparity in income and wealth growth has itself undermined the economy and exacerbated American economic instability.
The incomes of the wealthiest Americans these past 30 years has been flat-out unearned and undeserved. It is the largest case of redistribution of wealth in this nation's history with the exception of the original redistribution of land from the Native Americans and the wealth gained through the use of slavery. It is a redistribution of wealth from the middle-class and working poor to the super-rich. Value created by working Americans, and indeed by workers around the world, has been taxed away from the working class, not by the government, but by capital owners.
This redistribution of wealth is at the heart of the economic problems in America today, it is the root cause of the housing crisis, it is the root cause of the rise in household debt over the past few decades, it is the root cause of funding problems for Social Security and Medicare, and it is most definitely the root cause of the corruption of the American political system. As the middle-class becomes relatively less wealthy the middle-class loses political power. Income and wealth inequality always coincide with political corruption and power inequality. Not only have the wealthy, empowered by the Reagan Revolution, stolen value produced by the working class over the past 30 years, but they have taken the political power away from the middle-class as well in the process, and this is Ronald Reagan's true legacy, and it remains to be seen if America can survive the harvest of what Reagan sowed.
Read entire article here- http://www.rationalrevolution.net/articles/recession_cause.htm
Voodoo: Not Traditional Republicanism:
The debt problem comes from Wall Street supply-siders taking over the Republicans. Ike, Nixon and Ford, all good Republicans, brought the debt down 11 out of 16 years. supply-siders brought it down 0 out of 20. That’s batting 688 versus batting 0. And G.H.W. Bush was no supply-sider — he called it voodoo economics. He just got trapped by Reagan’s supply-side policies. He passed a tax increase trying to partially undo Reagan’s damage, but the supply-side Republicans turned on him, and he was not re-elected.
So supply-sides are far from traditional Republican balanced-budget values. Cheney, a supply-sider, said “Reagan proved deficits don’t matter.” Unfortunately the supply-siders have now pretty much captured the Republican party.
Supply-Side “Economics” — It Came from Wall Street
Supply-side economics was started by the the Wall St. Journal opinion editor, Robert Bartley and his right-hand man Jude Wanniski. They worked with two economists, Arthur Laffer and Robert Mundell. But Bartley took the lead, and much of supply-side economics was developed by him and Laffer at a series of dinners at Michael 1, a posh restaurant a few steps from Wall Street.
They viewed it as an attack on Keynesian economics, which described how to get out of a depression by having the government increase demand for goods and services from the private sector. This is how we got out of the Great Depression during World War II (though Keynesian economics does not suggest war as even a possible policy measure). Since Keynes focused on the demand side, Bartley and Laffer focused on the supply side (remember “supply and demand”) and call their theory “supply-side economics.”
Standard Economics: Liberal and Conservative
In a nutshell, Keynesian (demand-side) economics, says that when a country is in a recession, it’s because businesses don’t have enough business. That is, people are not buying as much as usual, so they can’t sell enough, so they lay people off, and then the people who are laid off, or are afraid of being laid off, buy even less. To get things going, we need something to increase demand. Conservative economists tend to say — have the Fed reduce interest rates so people and businesses will borrow and spend more. Liberal economists tend to say have the government cut taxes for the poor, because they will spend, or have the government borrow and spend more to help business get started again.
The right answer, is that in a regular recession, monetary policy works and is much easier to use so that is best. But in a terrible recession or a depression, the interest rate goes down to about zero and can’t go any lower, so then monetary policy stops working. Then you need Keynesian economics — like the spending for World War II>
Both conservative (monetarist — like Milton Friedman) and liberal (Keynesian) economists say that the government needs to stimulate demand in a recession. But the two “supply-side” economist say both are wrong, that we need to give tax cuts to the rich and then the rich will be stimulated to work much harder and they are the ones who are most productive and that will make the economy hum again. Laffer drew his famous “Laffer curve” to try to prove this point (but it is just plain silly). It claims that if the government cuts their tax rate, the rich will make so much more money that they will pay more taxes not less. It also claims that if you cut the tax rate for the bottom 98% of the population this won’t happen.
So this was tried under Reagan. Big tax cuts for the rich. And G. W. H. Bush called this “voodoo economics,” because only two economists believed it (or at least they often said they did), and because the idea that cutting taxes for the rich would collect more money not less. Of course it never worked, and that’s one reason the supply-siders ran up the debt (even compared to GDP) for 20 out of 20 years, while other Presidents, both Republicans and Democrats did not have this problem. Stay Informed: Obama Signs Bill To Extend Bush Tax Cuts