Thursday, October 4, 2012

The Incredible Hoax of Reaganomics- Trickle-Down 2/3

by Nomad


In Part One of this series, we looked at David Stockman, Reagan's budget adviser and his candid assessment back of Reagan's application of supply-side economics, better known as the trickle-down theory. Now let's take a look at the intellectual origins of the idea.
Plutocracy is abhorrent to a republic; it is more despotic than monarchy, more heartless than aristocracy, more selfish than bureaucracy. It preys upon the nation in time of peace and conspires against it in the hour of its calamity.
William Jennings Bryan
Horse and Sparrow Theory
History is sometimes a fickle thing. Often it remembers those who should probably be forgotten while forgetting those who, for one reason or another, deserve our lasting appreciation.

William Jennings Bryan is one of those people who was quite popular in his time but has now been largely consigned to unread records. However, not unlike his contemporary, Teddy Roosevelt, Bryan’s words and thoughts, once considered fixed to a particular time and particular circumstance of American history, seem to be suddenly just as apt in our own times.

Born in 1860 in Salem, Illinois, Bryan was a gifted orator of his day and as an American political figure,, ran three times for president in the liberal wing of the Democratic Party. Bryan never won the presidency but eventually became Woodrow Wilson’s Secretary of State in 1913

His name is familiar in some circles because of his role in the famous Scope’s “Monkey Trial” in which he argued against the teaching of evolution in public school. Although he was left humiliated after being called to the stand himself to defend religion against science, Bryan, in fact, he won the case; the teacher was found guilty of breaking the law but the verdict was later overturned on a technicality. For that to be his only claim to fame is a pity. He appears to have much to say to our present age.

Who knows, today Bryan’s brand of populism might well have been more successful than in his own time. Wikipedia has this to say of Bryan:
With over 500 speeches in 1896, Bryan invented the national stumping tour, in an era when other presidential candidates stayed home. In his three presidential bids, he promoted Free Silver in 1896, anti-imperialism in 1900, and trust-busting in 1908, calling on Democrats to fight the trusts (big corporations) and big banks, and embrace anti-elitist ideals of republicanism.
His earliest and most famous speech, The Cross of Gold Speech, was delivered by Nebraska Congressman William Jennings Bryan on July 9, 1896, at the Democratic National Convention in Chicago. It was a diatribe against the Republican plan to use a gold- as opposed to a silver monetary standard. Listen to what Bryan said:

There are two ideas of government. There are those who believe that if you just legislate to make the well-to-do prosperous, that their prosperity will leak through on those below. The Democratic idea has been that if you legislate to make the masses prosperous, their prosperity will find its way up and through every class that rests upon it.

It was this speech that economist John Kenneth Galbraith cited as the reference for the intellectual origins of the trickle-down effect, the supply side economics that David Stockman, Ronald Reagan’s budget director had developed as the centerpiece of the so-called Reaganomics.As Galbraith wrote in an article for the New York Review of Books:
"Mr. David Stockman has said that supply-side economics was merely a cover for the trickle-down approach to economic policy—what an older and less elegant generation called the horse-and-sparrow theory: 'If you feed the horse enough oats, some will pass through to the road for the sparrows.'"
It was pointed out that all this revolutionary talk of supply-side economics was really nothing new. That, in itself, is not a refutation of the theory. Though supply-side was sold the American public as some new-fangled economic theory, it was hardly revolutionary. Only the names were revised but the same bill of goods was sold to a gullible public by Ronald Reagan.

Ronald and the Magical Theory of Taxation
Back in 1985, Former Senator Daniel Patrick Moynihan (D-NY) argued that supply-siders never expected higher revenues and simply invented the idea of supply-side economics. Stockman- but not Reagan- might well have agreed with that.

Of the 1981 Reagan tax cut, Moyihan bombastically deemed it ''an auction of the Treasury,'' ''a great barbecue'' predicated on ''a magic theory of taxation.'' To be fair, as Bruce Bartlett, a domestic policy adviser to President Ronald Reagan, notes:
Every official document and statement ever released by the Reagan Administration made clear that the 1981 tax cut would lose large revenues. Moreover, its estimates were comparable to those of independent analysts such as the Congressional Budget Office. In the words of Bill Niskanen, a member of the Council of Economic Advisers under President Reagan, "Supply-side economics.... does not conclude that a general reduction in tax rates would increase tax revenues, nor did any government economist or budget projection by the Reagan Administration ever make that claim."

And in this remark lies an important point. Tax cuts were intended to spur growth and thereby incidentally reduce unemployment but they also result in lost revenue. It is true that reduced unemployment means less government spending and also (indirectly and over time) increased tax revenue on taxable income. That much seems obvious without any complicated explanation. 


Any cuts in taxation had to be matched in reduced spending or another means to increase revenue.
Apparently something did work, whether liberal Democrats want to concede that point or not. The economy did turn around in the Reagan years regardless of the merits of the trickle down theory, so, it is only fair to ask why?
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There are a lot of possible reasons (and none of them have anything to do with tax cuts for the wealthy.)


For one thing, Reagan’s patriotic message to “Keep American workers working-Buy American” coupled with easy personal credit changed the United States from a nation of producers to a nation of consumers. Credit card shopping suddenly gave the middle class an illusion of apparent wealth. 

Having more and basing it on deficient spending- cheap credit- is a heady combination. It certainly created an engine of growth while it lasted. The problem is that while Americans were rushing out to purchase the latest gadgets, they were buying material success (not unlike the government) on credit, banking on the fact tomorrow was a going to be as bright and “rainy-day” free as today. After all, the grandfatherly president told us so. Meanwhile, nobody was checking the labels to find out where all these cheap and living standard-enhancing items were actually coming from. 
Hint? It wasn’t the United States.

Another factor in the so called Reagan’s economic success story includes the build-up in military spending. Increased military spending resulted in a cascading effect on other related businesses, giving the economy a sizable boost. And who benefited? Boeing, Lockheed, General Electric, Westinghouse, McDonnell Douglas, to name a few. 

Weren’t those the same corporations that had once objected to Stockman’s cutting of government subsidies? These corporations needn't have worried about that. The military buildup was to turn out to be a much more lucrative proposition.

Of course, that increase was, in no way, a part of the supply side theory, as Stockman repeatedly stated. Defying the principles of supply-side with seemingly limitless spending on the re-building the military, Reagan was able to parlay this into promoting his own image as a Cold Warrior. 

When the Soviet Union finally collapsed on Reagan’s watch, it seemed as though it was merely a sign that the US was blessed by God. And it was common knowledge in Reagan’s time, that when God approved, he rewarded his beloved with material success. Being rich and successful (even when it was just with the help of easy credit) was merely God’s gold star and being poor was a disease, a moral failing and a shame.

Finally another possible factor in the boom years that began under Reagan was the drive toward deregulation. Deregulation certainly loosened the brakes that had held industries in check and had perhaps stunted growth. 

The problem- which we later had to learn the hard way- was that some regulations actually served an important purpose. Some regulations, for instance, kept corruption in check and actually promoted fair competition. Some regulations actually promoted a fair and balanced democracy, like the Fairness Doctrine of the FCC. And meanwhile, some de-regulation came at the cost to the health and safety of the American worker and to the protection of the consumer.

The Two Ronnies
From a political marketing point of view, Reagan basically said what people wanted to hear. Carter’s call for sacrifice and warnings against excess and selfishness and greed didn’t play as well as Reagan’s feel-good platitudes. It felt good to be proud again and flag-waving became a full time hobby for many Americans during Reagan’s time.
As Andrew Bacevich points out in his book “The Limits of Power”
No doubt Reagan spoke from the heart but his real gift was a canny knack for telling Americans what they wanted to hear. As a candidate for the White House, Reagan did not call on Americans to tighten their belts, make do and settle for less. He saw no need for sacrifice or self-denial. He rejected as false Carter’s dichotomy between quantity and quality. Above all, he assured his countrymen that they could have more.
An important point to keep in mind is there were at least two Reagan personas. The Reagan before the elections and the Reagan after the elections.That was true when he ran for governor as well. Before the presidential election, he was all about the greatness of the nation and its people and America being a land without limits. It played well against Carter’s down-beat (but essentially honest) message of seriousness and sacrifice, of living within our means and getting back to our roots.

The Reagan after the election was a bit more like Jimmy Carter. Realistic limits and practical thinking were important, after all. This Reagan was a bit more pragmatic, but both Reagans were equally intellectually dishonest.
For example, he told the American people:
For decades now we piled deficit upon deficit, mortgaging our future and children’s future for the temporary convenience of the present. To continue this trend is to guarantee tremendous social, cultural, political and economic upheavals.

You and I, as individuals can by borrowing live beyond our means, but only for a limited period of time. Why the should we think that collectively as a nation we’re not bound by that same limitation?
All very well and good but there was only one major problem.

While incontestable as his words about the economy were, Reagan never matched his real policy accordingly. As one source observes, when you compare George W. Bush and Ronald Reagan to President Obama, the current president is actually "embracing fiscal conservatism more than any other president in recent history, with the exception of fellow Democrat Bill Clinton."


As Bacevich notes:
During the Carter years. the federal deficit had averaged $54.5 billion annually. During the Reagan era, deficits skyrocketed, averaging $210.6 billion over the course of Reagan’s two terms. Overall federal spending nearly doubled, from $590.9 billion in 1980 to $1.14 trillion in 1989. The federal government did not shrink. It grew, the bureaucracy swelling by nearly 5% while Reagan occupied the White House. Although his supporters had promised that he would shut down extraneous government programs and agencies, that turned out to be just so much hot air.
Despite what neo-conservative revisionists might want you to believe, Reagan’s record as a tax-cutting, program slasher is wholly imaginary. As CBS reporter Brian Montopoli explains

Then there's the fact that after first pushing to cut Social Security benefits - and being stymied by Congress - Reagan in 1983 agreed to a $165 billion bailout of the program. He also massively expanded the Pentagon budget.
Meanwhile, following that initial tax cut, Reagan actually ended up raising taxes - eleven times. That's according to former Republican Sen. Alan Simpson, a longtime Reagan friend.
"Ronald Reagan was never afraid to raise taxes," historian Douglas Brinkley, who edited Reagan's diaries, told NPR. "He knew that it was necessary at times. And so there's a false mythology out there about Reagan as this conservative president who came in and just cut taxes and trimmed federal spending in a dramatic way. It didn't happen that way. It's false."
And that’s not all.
Reagan also raised the gas tax and signed the largest corporate tax increase in history, an act Joshua Green writes would be "utterly unimaginable for any conservative to support today."
With Reagan, it went beyond merely a failure to change the decline. He must have known that that it was impossible and yet he proceeded to sell a false bill of goods to the public at the same time that his budget director was telling journalists that the plan was hopeless, that things were simply not working according to plan.

From that typical run-of-the-mill political hypocrisy was born the myth of the Reagan miracle and the magical thinking the Republican party has lied and relied upon for the last thirty years. Reagan the great communicator. Reagan the Cold Warrior. Reagan the Savior of the American Economy. 

All of those myths, told by a growing number of voices with more and more of the embroidery of heart-felt conviction and patriotism with every telling, gradually became something very close to a historical fact. Simply by repeating the same lies over and over doesn’t make it any more true. 

And the consequences of believing a lie was to prove a disaster.

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So, to answer the question, did the trickle down theory ever actually work?
The answer is.. there is no answer because supply side economics was never implemented by the Reagan administration at all. He talked about it a lot and seemed to having unshakable faith in the idea of it. He just never tried it. It wasn’t possible. 


There was no realistic way to put the theory to the test. The demands of the budget, the reality of running the nation, would never have allowed it to be tested. 

Supply-side economic couldn't work in half or partial measures. It required a complete re-fitting of government and a full commitment by everybody involved and that was an impossibility.

Apart from Reagan’s dishonesty about his actual policy, the sole reason why it’s even necessary to address this question is that, despite all of the abuses and misrepresentations by the Republican party and the regaling of the phony Reaganomics, the trickle-down idea somehow manages to materialize every election. 

This election is no different. The new bottles for the old wine of trickle-down effect is the objection of “taxing the job creators” and the ominous warning “class warfare.”


In Charlotte North Carolina, the mayor of San Antonio Julian Castro, the first Latino to keynote a Democratic National Convention, told the nation and the attending delegates,
“Republicans tell us that if the most prosperous among us do even better, that somehow the rest of us will too. Folks ... we’ve heard that before. First they called it ‘trickle-down.’ Then they called it ‘supply side.’ Now it’s ‘Romney/Ryan.’ Or is it ‘Ryan/Romney’? Either way, their theory’s been tested. It failed. Our economy failed. The middle class paid the price. Mitt Romney just doesn’t get it. But Barack Obama gets it.”.
The question is, of course, whether voters, all but innocent of their own history, have gotten it or whether the same con game will be played one more time.
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In the third and final part of this series we will look at the people who shaped and groomed Ronald Reagan the actor to become Ronald Reagan, spokesman for the Conservatives and politician.


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