Smart. Sharp. Funny. Fearless.
Tuesday, February 19, 2019

Reprinted with permission from WashingtonSpectator.

The tax cut proposals first announced by President Donald Trump this April are, simply put, a fraud. They are about greed and politics, not economic growth or true tax reform. The policy has been proved wrong twice already. As a broadly faithful rerun of the Reaganomics of the early 1980s, Trump’s policies, should they be passed, will end as Reagan’s “voodoo economics” did, a failure by virtually any measure. George W. Bush’s sharp tax cuts in the early 2000s also failed to generate a strong economy, one that was driven by speculation rather than strong investment.

Reaganomics was the name given to the self-serving claims of the wealthy that a huge tax cut for them would pay for itself—by creating incentives to invest and work that would lead to renewed economic growth. Tax revenues would simply rise with a growing economy to plug the revenue hole. Some call it trickle-down economics. John Kenneth Galbraith put it scornfully in The Culture of Contentment: if you give a horse enough to eat, some of the kernels will fall to the ground for the sparrows.

In the summer of 1981, Congress, including a Democratically controlled House, passed the Reagan tax proposal, which reduced the top income tax rate from 70 percent to 50 percent. Among other measures, it included a tax break for businesses. Reagan’s economists predicted the budget deficit—the size of which, under Jimmy Carter, was a major campaign issue for Reagan—would fall to $45 billion for that coming fiscal year as the economy recovered. Fiscal 1982 ended with the deficit not at $45 billion but at $140 billion.

The economy began to recover when Federal Reserve chairman Paul Volcker cut interest rates, and to a degree the tax cuts created some Keynesian stimulus. In the real world, growth could not magically rise to the heights needed. Reagan now started raising taxes, including the regressive Social Security tax, to stop the flow of red ink.

Trump has conned some of the electorate into thinking he knows how to channel their anger constructively by being vindictive himself.

It was not enough. When Reagan took office, American debt was $997 billion; when he left, it had reached $2.85 trillion. America became a net debtor nation for the first time in modern history.

Perhaps the debt would have been worth it, but Reaganomics was an abject failure as an economic program. Inflation came down but that was the only achievement. Growth returned but average wages, however measured, stopped growing altogether, whereas they had been growing steadily since the early 1950s. Income inequality started to rise rapidly from early in Reagan’s first term and didn’t stop. The greatest of ironies is that capital investment was tepid and the source of economic growth, productivity, grew only moderately, the opposite of the takeoff that was promised.

George W. Bush reinstated the Reaganomics philosophy with his own major tax cuts, again mostly funneled to the wealthy. The recovery and expansion that followed created the fewest jobs of any expansion since World War II. What economic growth there was had been fueled by the speculation in residential housing that led to the crash of 2008, the year Bush left office.

Trump’s proposed tax cuts are far more radical than those of Bush, and more on a par with Reagan’s. They would be another unjustifiable gift to the wealthy. Some progressives are saying tax cuts never stimulate growth, but this is untrue. They can be a potent Keynesian stimulus from time to time, as were the Kennedy-Johnson tax cuts of 1964. Reaganomics was steroidal Keynesianism—not at all what the master economist had ordered.

Unlike Reagan, Trump will try to impose tax cuts not during a severe recession, but in a fairly strong economy that has been growing for several years and in which the unemployment rate is below 5 percent. Reagan took over when the economy was in the midst of its worst recession and the unemployment rate had reached nearly 11 percent. There was slack that warranted fiscal stimulus.

There is still some slack in the economy. Effective stimulus should take the form of public investment or more robust social programs. A modest but not huge tax cut could be temporarily productive.

Trump’s initial tax cut proposal would cut top tax rates from 39.6 percent to 35 percent, but the major tax cut is reserved for business: from 35 percent to 15 percent. The estate tax and the alternative minimum tax would be eliminated, which benefits only the rich. The wealthy would benefit most, though the details of Trump’s slapdash program are too skimpy to estimate accurately by how much.

Analyses suggest the federal government would lose $5 to $7 trillion in tax revenues over 10 years under the initial plan. I think fears of deficits are often exaggerated, but an additional $700 billion a year of financial borrowing would unsettle the financial markets.

Unperturbed by the lessons of history, Trump’s advisers believe if economic growth is raised by one percentage point to 3 percent a year, enough federal revenue will be raised to fill the hole. Trump’s wish is their command. Americans should be aware that a sustained growth rate of 3 percent a year after a long expansion is almost impossible to achieve. It would require a productivity boom, the kind Reagan never got.

Still more disturbing, it would leave no room to invest in infrastructure, which almost everyone agrees America badly needs. It would require heartless cuts in the safety net and economic development programs—which Republicans covet—which would lead to more inequality. This disastrous outcome could be compounded if this wish list somehow improbably gets enacted, by limiting the deduction for state and local taxes. This measure would hurt states that provide generous social policies and economic development programs.

Deregulation also had a part in the failure of Reaganomics. Reagan defanged the Department of Labor, for example, which then couldn’t enforce fair labor standards. Trump is doing the same.

Trump has conned some of the electorate into thinking he knows how to channel their anger constructively by being vindictive himself. There is almost nothing constructive about his early tax plan. These details will change. But the plan reflects a mean-spirited, self-involved, and uninformed mind at work.

Workers beware. Trump’s reckless mimicry of Reaganomics is likely to lead to stagnating wages and growing inequality for another four years, and no recharging of the dynamics of the American economy will ensue.

Jeff Madrick is a fellow at the Century Foundation and director of the Bernard L. Schwartz Rediscovering Government Initiative.

 

  • Share this on Google+0
  • Share this on Linkedin0
  • Share this on Reddit0
  • Print this page
  • 31

3 responses to “Trump Brings Back Reaganomics, But Worse”

  1. The reason Reagan and so many others like him have failed in America, in my estimation and from reviewing Conservative-minded politicians and conservative ideologues, is that Reagan ignored his Irish roots and history, and he became more mechanical, and resorted to being some sort of manikin incapable of feeling concern for people on the lower rungs of society.

    At the Famine Ship exhibit in New Ross, Ireland, I and other guests at the display paying homage to millions of Irish escaping certain death by starvation, got the opportunity to know the story and the reasons which forced Reagan’s ancestors to flee Ireland for a better life in America. Inside the exhibit—away from the replica of the Famine Ship, Dunbrody—was a panel display of Americans of Irish roots, including Walt Disney, John F. Kennedy, and others. To my dismay was the image of Reagan, which led me to infer that Ronald chose to impose the same harsh, wrong-headed economic policies which the British had imposed on his ancestors, forcing many of them to flee to America for economic relief.

    Ronald obviously developed a profound amnesia about those events, and like some mindless robot, he imbibed the same draconian economic principles which were at play in the British Isles, imported from Britain to the US.

    And many other immigrants of Irish descent are now in Congress, giving a product of German immigrants, Donald, the green light to impose similarly harsh economic policies on Americans, and feeling OK with this because they no longer have the ability to understand hardship and can’t feel empathy.

    All as a result of some transformation of morality that seems part of the experience of fleeing hardship in Europe and being absorbed in a country whose society was already undergoing a focus on a selfish individualism that out former emotions that spurred one to be concerned for the welfare of neighbors and citizens. And have become fixated on materialism when relocating to an obsessively materialist society as we have America, which values selfishness over selflessness.

    What a shame to forget history, and to put so much emphasis on economic policies devoid of moral and spiritual principles.

    • dpaano says:

      At least Kansas figured it out and voted against Brownbeck’s plan to cut taxes again even after the problems it cost that state the past years!

  2. FireBaron says:

    What’s one definition of insanity? Trying the same experiment that has failed numerous times and expecting different results.
    What’s the definition of Teflon Donnie’s Tax Plan (aka Reganomics Lite)? Giving the same tax cuts that didn’t provide trickle-down growth before (twice!) and expect them to work again.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.