The Failure of Supply Side Economics

The Register’s Brian Calle and John Seiler have both weighed in on our repsonse post about the failure of Reaganomics, better described as “supply side economics” citing the 40th president’s view that placing more money in the hands of Americans is a better way to go and that President Obama should heed the advice of President Reagan.  Both Calle and Seiler ignored that fact that the federal tax rate under President Obama has indeed fallen.  An error of omission or convenience because it bolsters their argument not to mention it?  You decide.

Calle wrote: “We still enjoy the benefits of the tax cuts today. Now the top income tax rate is 35 percent, though it is scheduled rise to 39 percent in 2011. Though the top rate has crept up, it still is a far cry from 70 percent. That is one of the many lasting influences of the Reagan philosophy.

The political elite in Washington, D.C, led by President Obama, should heed the example of the 40th president. Burdening the American people further with taxes is the last thing we ought to be doing – we should be putting money back in the pockets of the taxpayers.

Seiler wrote: “The main thing is that it misses the overall effects of the Reagan tax cuts, which we still enjoy today. When Reagan came into office, the top tax rate was 70%. Worse, the horrible 1970s inflation already had pushed many in the middle-class into upper-income tax brackets. Continued inflation would have, by now (2010), pushed almost every American into the 70% income tax bracket.”

Yes, the federal tax rate for the wealthiest Americans did drop from 70 percent to 28 percent, and those cuts benefitted the wealthiest Americans over that of the middle class.  What both Register writers neglect to mention that while President Reagan cut the top tax rate for the richest one percent, he effectively raised taxes on working people via the payroll tax and used inflation against a non-indexed tax system.

When Reagan took office, the United States was the largest creditor nation in the world.  When he left, we were the largest debtor nation.  When Reagan took office, we were the largest exporter of manufactured goods and the largest importer of raw materials; we’re now the largest importer of finished goods and manufactured goods, and the largest exporter of raw materials. And while Calle and Seiler rail against Obama’s stimulus package, its telling that neither gentlemen would mention the bailout of the Savings & Loan Industry.  The cost of that crisis totaled around $160 billion with nearly $125 billion directly paid for by the US government via a financial bailout from President Bush 41 through new charges on their savings and loan accounts and increased taxes.  This crisis helped contrinbute to the large budget deficit that led Bush 41 to break his “no new taxes” pledge.  Any whining about *that* government bailout gentlemen?

Accoridng to Paul Krugman, Nobel Prize winning economist and NY Times columnist, the inflation-adjusted after-tax income for the richest 1 percent of Americans during the Reagan years exploded amounting to big gains for the rich.  The middle class was flat. And the poor got poorer. Under Reagan, the poverty rate went up.

The middle class were acutely hurt by Reaganomics.  The standard of living for the average American deteriorated and the hourly wage rate, adjusting for inflation, fell so that the middle class worked hard and increase their productivity, but did not benefit from GDP growth that made the rich richer.  Reagan’s cuts to education and financial aid as well as drastic cuts to other social programs meant these families had hard choices to make.  Their standard of living fell during the Reagan years.

Oh, to be trapped in Bill Clinton’s economy (go ahead and bring up Monica, and I’ll be happy to bring up Iran-Contra and Reagan’s self-admitted memory lapses).

Here’s another bit from Krugman on the expiration of ther Bush tax cuts, which didn’t have the desired effect when it came to job creation or economic booms, did it?

“According to the nonpartisan Tax Policy Center, making all of the Bush tax cuts permanent, as opposed to following the Obama proposal, would cost the federal government $680 billion in revenue over the next 10 years. For the sake of comparison, it took months of hard negotiations to get Congressional approval for a mere $26 billion in desperately needed aid to state and local governments.

And where would this $680 billion go? Nearly all of it would go to the richest 1 percent of Americans, people with incomes of more than $500,000 a year. But that’s the least of it: the policy center’s estimates say that the majority of the tax cuts would go to the richest one-tenth of 1 percent. Take a group of 1,000 randomly selected Americans, and pick the one with the highest income; he’s going to get the majority of that group’s tax break. And the average tax break for those lucky few — the poorest members of the group have annual incomes of more than $2 million, and the average member makes more than $7 million a year — would be $3 million over the course of the next decade.”

Moody’s Analytics reports that Bush tax cuts and Republican-themed economic stimulus actually is producing a poor ROI for taxpayers.  For every taxdollar spent on the Bush tax cuts, there is only a 32-cent ROI in terms of economic stimulus. If you cut corporate taxes lower than they already are now, that’s also a 32-cent return in economic stimulus. What about Capital Gains tax cuts? That jumps to a 37-cents per dollar ROI.  And Republicans are supposed to be the party of fiscal responsibility?

Let’s contrast this with what Moody’s has to say about the Democratic spending plans:  for every dollar spent on unemployment benefits, there’s a $1.61 return in economic stimulus. Infrastructure spending nets a $1.57 return. Providing aid to the states is a $1.41 ROI. Obama’s tax credits for the middle class account for an ROI that ahcieves a $1.30.

Calle and Seiler should instead acknowledge the mess the Republicans left President Obama with when he took office in January 2009, combined with vetos from President George W. Bush for policies when the Democrats took control of Congress in January 2007 and note that the mess we’re in is going to take years to clean up.