Download Failed Republican Ideas Become a Cult

The New Cult: Failed Republican Ideas
Written in late 2012
This may be hard for anyone under age 40 to believe, but at one time in the recent past
the Republican Party was the party of ideas. While older generations of Democrats
simply repeated nostrums from the 1930s, and younger generations of Democrats chanted
slogans from the 1960s, Republicans were examining evidence of what did and did not
work, and proposing solutions. And many of those solutions were implemented during
the 30 years of Republican political dominance, often with the support or at least
acquiescence of Democrats who couldn’t come up with anything better.
Times sure have changed. Some of those Republican/Conservative/Free Market ideas
worked as promised. But many others have failed miserably, except as means to
redistribute income upward, and from worse off younger generations to older generations
that voted Republican, which is NOT what was promised. So, are Republicans
examining the evidence and proposing alternatives? Hardly. They are simply saying the
same things over and over, but shouting instead of speaking reasonably. I’m not just
talking about Tea Party fools, and spinning candidates for office. I’m talking about think
tanks and PhD’s, such as R Glenn Hubbard and Greg Mankiw. Those with conservative
leanings but open eyes, such as David Frum, are no longer welcome. This isn’t an
ideology anymore. It’s a cult. Since they won’t, let’s get in the wayback machine, look
at some of the promises, and some of the results.
Back in 1980 the economic system that had been put into place in response to the New
Deal, with some expansion during the 1960s, was falling apart. In major industries
unions had pushed up wages but also held down productivity, to the point where many
American made goods were both declining in quality and increasingly expensive to those
not in the deal. Expansionary monetary policy meant more and more money, promises
that you can buy something, was chasing not enough goods and services, the stuff
actually available to buy. Regulations and price controls discouraged production and
competition in industries such as natural gas and the airlines. The top federal income tax
rate was 70.0%, with state and local taxes on top of that. For those anywhere near the
top, there was little incentive to work more or invest – after taxes and inflation everyone
was coming out behind.
What you had, in other words, was a crisis of supply. Yes people held pieces of paper
that said they were entitled to things, and those pieces of paper were much more equally
distributed that they are today. But people were less and less motivated to work
diligently to produce the goods and services that the pieces of paper could then buy, and
produce them well. Japanese products were much less likely to break. And there was
much less interest in using some of those pieces of paper to invest in the plant,
equipment, infrastructure, and research and development that would allow even more
goods and services to be produced better in the future. The U.S. savings rate was a
miserable 8.0%, far less than our economic partners/competitors, and their plant,
equipment and infrastructure was far more up to date.
The Reagan Republican solution – tax cuts, to encourage work, savings and investment,
and deregulation to allow economic innovation to take place faster. Some may remember
that this was called “supply side economics.” It was claimed this would lead to more
production and productivity in the United States, and therefore higher wages, and
therefore greater tax revenues, despite the lower tax rates. The latter point, pushed by
Arthur Laffer, made it seem as if tax cuts for those at the top would either cost nothing, or
even benefit, everyone else. (Just as 20 years later the public employee unions claimed
that their retroactive pension enhancements would cost, or even save money.)
Another influential right winger of the 1970s was Edward C. Banfield, author of The
Unheavenly City. Banfield argued that older central cities were in decline due to the
presence of many poor people, and poor people were poor because of their moral failures.
They were “present-oriented,” and unwilling or unable to restrain their biological urges
for their own future benefit and the benefit of their children. If they felt like screwing
they screwed. If they felt like stealing they stole. If they didn’t feel like studying or
working, they didn’t. When they realized their mistake later, it was too late for
themselves and their offspring. This, he claimed, was the “culture of poverty.”
The middle class, according to Banfield, was more moral – able and willing to work for,
study for, save for their own future, and restrain their sexual desires and other appetites
for the benefit of their futures and their families. The real moral people, however, were
the rich, who were not only capable of considering their own futures in the present, but
also to make short term sacrifices for the long-term good of society as a whole. They
were the ones who would advocate fiscal responsibility, to leave a positive collective
legacy for future generations, and build vibrant new industries with high paying jobs, if
only they were allowed to control more of society’s resources.
Cough.
The first supply side policy, and perhaps Ronald Reagan’s biggest congressional victory,
was the Kemp-Roth Tax Cut of 1981, which among other things cut the top federal
income tax rate from 70.0% to 50.0%. The rate would be cut as low as 28.0% in 1988,
before being increased to 31.0% as part of the deficit cutting deal by George Bush I,
breaking his “read my lips” pledge. It is 35.0% today, but would be 39.6% if the George
Bush II tax cuts expired – the level reached after tax increases in the Democratic Clinton
Administration. Critics claimed the tax cuts mostly benefitted the rich. But in response,
Republicans claimed that the benefits would “trickle” down to everyone else as the rich
saved and invested, and productivity and wages rose. Kemp-Roth passed even though
the Democrats still controlled the House of Representatives, due to gerrymandering and
the benefits of incumbency, despite Republican ascendance. (The same reasons, the only
reasons, that the Republicans control the House today).
But Republicans wanted everyone to have an incentive to “save and invest.” So they
created a number of subsidized savings vehicles that in effect cut the federal income tax
on money that was saved, at least for the middle class in the short term, to zero. In 1981
the Individual Retirement Account (IRA), previously available only to those who did not
have pensions, was made available to everyone. The 401K, and 529 for college savings,
followed. And to discourage borrowing even as savings were encouraged, the
deductibility of consumer interest on federal income taxes (except for mortgages) was
eliminated in 1986. Critics complained that this favored the rich, with money to save and
invest, and hurt the less well off, who borrowed, but the “supply side” argument carried
the day.
But the rich wanted even lower taxes. They made the case that lower taxes on capital
gains (the increase in the value of investments that was not actually paid out to investors)
would encourage even more investment, and thus even more economic growth. Not only
that, they claimed that taxes on capital gains amounted to “double taxation.” You work,
get paid, and get taxed on your “ordinary income” at the regular federal tax rate. But
what if instead of just blowing the money on your short term wants, like people raised in
the “culture of poverty,” you nobly save it and invest it? Perhaps you lose it, but if the
value of your investments goes up, you are taxed a second time on the gain. So under the
Clinton Administration, the federal income tax rate on capital gains was cut to just 15
percent.
The payroll tax rate on capital gains, of course, is zero. While the income tax, which
includes investment income and falls more heavily on the affluent, was going down, the
payroll tax, which only falls on work income and falls more heavily on the middle and
working classes, was going up. In fact the massive Reagan payroll tax increase of 1983,
to “Save Social Security,” was the largest tax increase in U.S. history.
After the stock market bubble burst in 2000, the Republicans found that corporations had
stopped paying dividends. After all, why pay dividends taxed as ordinary income when
they could keep the money and increase the value of the firm, or use it to buy back stock?
The value of the remaining stock would rise, and investors would receive capital gains
taxed at just 15 percent! Or at least that was the excuse the corporations who stopped
paying dividends used. Then the capital gains never came. So to encourage the payment
of dividends, the Republicans decided to only tax them at just 15 percent too!
So did all these tax cuts deliver savings and investment, higher productivity and thus
higher wages, more incentive to work, and higher tax revenues as a share of the
economy? Was Social Security saved? After all these years we know the answer, and
the answer is “no” “no” “no” “no” “no!”
Despite the removal of the tax incentive to borrow, and the creation of lots of tax
incentives to save, the U.S. personal savings rate fell from 8.0% in 1980 to 6.0%, then
4.0%, then 2.0%, and finally in 2007 to zero. No net savings by U.S. households at all,
despite the “supply side” policies to encourage saving. Why? No one seems to be asking
that question, which is why no one is providing answers.
But my guess is that this big surprise proves that economic incentives are not the only
thing that drives what people do. Culture matters more. And with real religion (not
including the Prosperity Gospel) in retreat, what has been driving American culture for
30 years has been advertising. People felt a need to spend more and more to have the life
they felt entitled to. The message, over and over and over, was spend, spend, spend. Not
save. And like sheep, they spent. This “present orientation” isn’t the “culture poverty. It
is the culture of consumerism, and it goes right to the top.
At the time, the idea of rewarding savings and not borrowing made sense to me. But that
is because of my own values and lifestyle. I didn’t do anything different because of all
the differences in taxes. And neither did anyone else.
With savings was supposed to come investment. How did that work out? Well we did
have some investment in some sectors, mostly in information technology, software and
telecommunications. Think about what aspect of life has gotten substantially better in
recent years, and what type of work can be done much faster and easier. Yup, that’s it.
But what about U.S. investment as a whole? Has it been higher or lower than it was
before supply-side economics? You may have heard that after 30-plus years of supplyside economics, 70 percent of our GDP is consumption, more than most developed
nations. Gross domestic private investment accounted to 18.3% of GDP in 1981,
according to the Statistical Abstract of the United States. It has been that high only once
since, and has generally been far lower. Gross domestic private non-residential
investment was 13.4% of GDP in 1981. It has been far lower ever since. Despite all the
corporate tax incentives, the lower capital gains tax, and the lower taxes on the affluent
overall.
Either investment wasn’t induced by all those supply side policies. Or the only
investment the supply-siders achieved was conspicuous consumption of overbuilt houses,
investment abroad, and speculation in zero-sum derivatives wages that are just pieces of
paper and create nothing. Why was this? Why did all those tax breaks, deals, incentives
and cuts yield less U.S. investment rather than more? Perhaps because if most workers
have less and less money to spend, generation by generation, because wages are going
down, there less of a market for goods and services. So investment to produce more
goods and services makes less and less sense. More on that in a minute.
We cut the tax on capital gains to get investment, and we didn’t get investment and
investors didn’t get capital gains. We cut the tax rate on dividends and didn’t get
dividends. The S&P 500 dividend yield is currently 2.10%, less than half the historical
(1932 to present) median level of 4.38%. Either dividends would have to double, or
stock prices would have to fall by half, to get to that historical average. But wages are at
an all time low as a share of the economy, and profits are at an all-time high, so where are
all those profits going? Higher executive pay. No where else.
How about the incentive to work? This “supply side” argument sort of made sense to me
at the time. Let’s say you are the lower earning spouse in a two-income household with
two college-educated workers. Not an unusual situation in metro New York. Your
income is low enough that every extra dollar you earn is subject to the 15.0% payroll tax.
But your combined income is high enough that every extra dollar you earn is taxed at a
high federal, state and (in NYC) local income tax rate. Adding it all up, perhaps the extra
dollars earned would be taxed at more than 50 percent. And at that rate, perhaps some
work wouldn’t get done.
But what about the evidence? Yes the labor force participation rate did rise during the
first 20 years of supply side economics. But it has been falling ever since. It reached its
peak in 2000, after the Clinton tax increases, at the federal income tax rates the
Republicans now say discourage work, savings and investment. It has fallen despite the
Bush II tax cuts, and then the Obama cuts to the payroll tax. So why are fewer people
looking for work?
Once again, culture and demographics matter more. On the way up for labor force
participation, you had the entire Baby Boom generation in the workforce until recently.
You had a decision by a large share of U.S. women of that generation that participation in
the labor force was important to their financial independence, self esteem and realization
of their human potential. More recently, you the Baby Boomers start to reach retirement
age. The labor force participation rate followed these social and demographic trends
exactly, and the marginal tax rate not at all. In my family, we worked less when we had
school age children, and more when those children were older. We’ll probably work less
when we reach what used to be retirement age.
So what about tax revenues? The Republicans have endlessly repeated the matra that
there is “natural” federal tax revenue level of 18.0% of GDP. If tax rates are cut, the
greater incentive to work, save, and invest will nonetheless lift federal tax revenues to
18.0% of GDP, they said. If tax rates are increased, the economic disincentives will cap
federal tax revenues at 18.0% of GDP.
So what happened? Federal revenues been at 18.0% of GDP or higher for relatively few
years since the Kemp-Roth tax cuts. Despite the increase in the regressive payroll tax. Of
the 12 years from 1982 to 2009 with federal revenues at 18.0% of GDP or higher, seven
were from 1995 to 2001 when the higher Clinton tax cuts were in effect. And with the
Bush II tax cuts and the Obama payroll tax cut in effect right now, federal revenues are at
a rock bottom level relative to GDP for recent history.
How about higher wages? Well, higher wages were supposed to result from an increase
in non-residential investment in the U.S., and as discussed no such investment occurred.
But in fact the wages of most American workers have been falling for nearly decades,
starting first with high school dropouts, and then high school graduates, then college
graduates, and finally just about everyone.
This didn’t affect consumer spending at first, because as baby boomer women flooded the
labor force total household income continued to rise on average. Then employers started
cutting future income – pensions, 401K contributions, and retiree health insurance. This
didn’t affect total consumer spending in the past, because individuals didn’t save on their
own to make up the difference. But it will affect total consumer spending into the
indefinite future, as millions are forced to retire into poverty. The next phase was a huge
surge in consumer debt, to either (depending on your politics) live large or at least live
the way similar Americans in older generations used to live. That collapsed in 2007.
The federal government has been borrowing itself into bankruptcy, and the Federal
Reserve has been printing money, to keep the debt and consumer driven economy going
ever since. With no end-game, and no ideas. The question for America’s overpaid
corporate executives and the Republicans is this: now that you have beaten down the
serfs, who are you going to sell to? Where is your market? They don’t know. They have
no idea what to do, so they just keep paying themselves huge money, piling up cash on
corporate balance sheets, and hope to retire to some other country before the whole thing
collapses.
This isn’t a crisis of supply. It’s a crisis of demand, and it is global.
You want a historical comparison? The industrial revolution brought a huge increase in
the productive capacity of what is now called the developed world in the first 30 years of
the 1900s. But the resulting income was unequally distributed, with wages falling
(among other things) for the half of Americans still on the farm. Demand was supported
by an explosion of debt. Then you had a collapse, and the Great Depression. The rich
had the value of most of the pieces of paper created in the debt binge wiped out, and the
distribution of wealth and income became drastically more equal.
This time around, the industrial revolution has spread to what is now called the
developing world, leading to a huge increase in the global productive capacity of
humanity. That’s the good news. But the resulting income has been unequally
distributed, with most people in younger generations in the developed world facing
falling incomes, and many of the gains in the developing world accruing at the top. The
shortage of demand had been covered up by yet another debt binge. But rather than
allowing another Great Depression, government stepped in – and preserved the wealth of
the wealthy.
As far as I’m concerned, whether we would have been better off with Great Depression II
remains in doubt. Such a cataclysm, would have wiped out the burdensome debts in a
bonfire of bankruptcy, and the excess wealth of the wealthy at the same time, and would
have prevented the instant return of arrogance seen in the executive class in a handful of
years after their bacon was saved. The wealthy are now holding pieces of paper that say
they are entitled to a large share of the fruits of any labor in the future. Those pieces of
paper are backed not by productive assets resulting from the investments we were
supposed to get, but mere promises that someone else will be poorer in the future due to
money borrowed and spent in the past. Someone else less powerful.
The Republicans have no answer to this. So they yell the same failed ideas, louder and
louder. They think it’s 1980. The Democrats have no ideas either. They think it is 1930,
with the U.S. the world’s biggest creditor with plenty of capacity to create growth by
borrowing, rather than the world’s biggest debtor -- the reality today.
I’ll talk about some additional ideas that have reached dead ends in another post.
Closed Minds: Some Additional Ideas From the Past
In my previous post, I rehashed some arguments that were made when federal tax
policies now in effect were first proposed, and showed that the promises of the time were
not realized. Yet the same arguments are still made for the same policies, by national
Republicans and certain economists. Without much thought about why things went
wrong, and with no thought of adjustment. The Republican era at the federal level, now
seemingly coming to a close, was not without its successes, but even in those cases
lessons were not learned.
Take the case of federal welfare reform. Looked at from a fiscal point of view, as I have
in my two compilations of federal expenditures and revenues as a share of GDP over
time, welfare reform amounted to a large shift in spending from poor people who do not
work to poor people who do. At the same time that “welfare as we know it” was
drastically cut back, spending on support for low-wage workers in the form of child care
assistance, food stamps, the Earned Income Tax Credit (EITC), and Medicaid health
insurance, was substantially increased. And work requirements were imposed on
traditional welfare recipients. The idea was that the government had been encouraging
dependency rather than work, to the long-term detriment of society and the beneficiaries
themselves.
The increase in support for the working poor happened three ways. In part it was the
result of formal changes in program rules, as the EITC and Medicaid eligibility were
made more generous with bi-partisan support. And in part it was the result of efforts to
make sure low-wage workers received the benefits they had already qualified for. Prewelfare reform, while welfare recipients were automatically enrolled in non-cash
programs such as food stamps and Medicaid, equally needy working people were not
savvy about how to navigate the bureaucracy, and often received nothing.
This bi-partisan policy worked far better than most people who had opposed welfare
reform at the time would have expected. The cash welfare rolls fell, but destitution did
not increase. Substantial numbers of poor people never entered the welfare system, and
instead developed work histories.
But when the Great Recession arrived, the cost of benefits for the working poor soared.
And the Republicans then turned against their own policy, and the people who relied on
it. They replaced the race-based and nativist hostility to the non-working poor -- to
Blacks, immigrants, and those living in older central cities – with a class-based hostility
to the entire lower half of the population, to people busting ass in multiple part time
minimum wage jobs regardless or race or country of birth. They are now applying the
same language about a culture of dependency to those who work, or used to work, very
hard that they used to reserve for “welfare queens.”
Why has the cost of programs for the working poor exploded? Two reasons.
First, because more poor people were working, more people qualified for work-related
benefits when they lost their jobs. The U.S. actually has two “welfare” systems – one for
those who don’t work, including SSI, TANF and Safety Net Assistance, and one for those
who do work, including unemployment insurance, workers compensation and full
Medicare and Social Security benefits. The latter two programs require ten years of work
experience. The programs for those who work are more generous.
Since during the late 1990s economic boom, post-welfare reform, more people were in
the formal workforce, rather than hustling for whatever off-the-books work they could
get, more people qualified for unemployment insurance when they lost their jobs years
later. Previously those people would have been on welfare. (On the other hand young
people have been increasingly frozen out of those formal jobs and work related benefits,
and forced to work as “self employed” “freelancers” or “independent contractors” since
the year 2000).
Second, because wages have been falling for 30 years when adjusted for inflation, more
people who might have been middle class 30 years ago are now working poor. And thus
qualify for food stamps, the EITC, Medicaid benefits, etc. It isn’t because people are
lazy. It isn’t because they aren’t working. It is because their wages have been cut, in a
win for businesses in the labor market. That win turns into a loss when businesses they
try to find someone to sell to, now that Americans are no longer going deeper and deeper
into debt to cover the difference.
Expect this trend to continue. The U.S. standard of living has been inflated, and the
impact of rising inequality disguised, by 30-plus years of soaring public and private
debts, and imports in excess of exports. At some point, after one macro-economic
calamity or another, the U.S. will no longer be able to import cheap products from abroad
and pay for them with IOUs. Some of those goods will have to be made at home, and
some will have to be done without.
Thus, I expect the current U.S. labor surplus to disappear, but businesses are not going to
increase wages to attract workers. Because they can’t raise prices, unless they sell
necessities. Because their customers are broke. We are heading for an economy with
plenty of jobs that start at the minimum wage and peak at $15.00 per hour or less,
perhaps freelance work or temporary jobs that are less than full time with lower earnings
per year, assisted by benefits such as food stamps, Medicaid, and the EITC. Or not so
assisted, if the Tea Party has its way.
Another “conservative” idea that had some success was the “broken windows” theory of
crime. Previously police departments had ignored quality of life crimes in low-income
neighborhoods, in part to reduce social conflict with the locals, in part because a low
quality of life and squalor is what the better off thought the poor deserved. According to
the “broken windows” theory by allowing minor crimes, the police were encouraging
ever more brazen victimizations, eventually leading to murder.
So during the 1990s, the police in New York City and elsewhere began applying the same
standards of behavior to poor neighborhoods that they used in affluent neighborhoods.
People weren’t allowed to harass and disadvantage their neighbors through vandalism,
litter, and intimidation, or to deal drugs or engage in open prostitution. And while the
cause and effect is unproven, the number of more serious crimes fell at the same time that
the crackdown on “quality of life” crimes was put into place. Police, and conservative
theorists, took credit.
But as in the case of supporting the working poor, the Republicans/conservatives turned
their back on their own policy with disastrous results. When it came to the sort of “white
collar” quality of life crimes committed by the affluent, they took the same sort of
conflict avoidance approach that inner city cops had previously taken with vandals, drug
dealers and petty thieves in poor neighborhoods. Don’t have the government harass these
people for petty violations, they howled. Don’t “stop and frisk” the financial sector,
affluent taxpayers, and others who might be hiding something to prevent some crime you
can prove is going to happen.
The result, as “broken windows” theorists might have predicted, was a greater and greater
level of “white collar” crime, and more and more serious victimizations that should have
been crimes but were not made illegal. In the end, the U.S. ended up with a devastating
white collar riot involving millions and millions of people. Middle class people lying
about their income on mortgage applications, in effect committing fraud, to cash out
paper equity in their homes and blow the money. Rich people lying about the credit
quality of mortgage bonds, and the prospects of stocks. Hedge funds and private equity
managers claiming their pay was a capital gain on money they had invested. And a big
increase in tax fraud.
Everyone, not just those who benefitted, is being made to pay for the reckoning.
Virtually no one has gone to jail. Instead, Republicans are seeking to pander to the
perpetrators by scaling back the limited and completely inadequate steps that were taken
to make sure they can’t do it again. They have vowed to repeal Dodd Frank and Sarbanes
Oxley, when what they ought to be doing is demanding even harsher measures.
I’ll conclude with one more failure. Medicare Managed Care, Medicare plans offered by
private companies rather than managed by the government, were supposed to take
advantage of the superior efficiency of the private sector to provide more benefits for less
money. It made sense at the time, and President Clinton signed on to the deal.
Well it’s now nearly 20 years later, and we find that instead the health insurance
companies used their lobbying power to charge more than the cost of traditional
Medicare. Instead of more benefits and lower costs from private sector efficiency, we got
higher costs for the same program due to private sector influence peddling. Thus proving
the adage what if you want to be ripped off by politically connected unions vote
Democratic, but if you want to ripped off by politically connected contractors vote
Republican.
Rather than admit that their policy failed to deliver what they promised, the national
Republicans doubled down. First they claimed that a cutback in Medicare managed care
insurance payments to the same level as traditional Medicare was a “Medicare cut,”
rather than just the end of a ripoff. Next they proposed eliminating traditional Medicare
for younger generations, and cutting the reimbursement levels hugely compared to the
benefits Generation Greed has promised itself, to pay back Generation Greed’s debts.
And then claimed that the efficiency of the private sector would assure that younger
generations were no worse off. In the face of evidence that private insurance companies
require more money to provide the same benefits. What did they say about that
evidence? Nothing.
I’m not saying Democrats are any different at the local level here in New York, where the
claim is always ordinary people either need to accept less or pay more, or both. I don’t
vote for them. But I don’t vote for the national Republicans either. They are also the
brain-dead servants of selfish self-interest groups, rather than a party with an ideology.