As I have said many times, economic policy and its effectiveness is all about timing and implementation. The Romney-Ryan Plan meets neither criteria. “Trickle-down” was an utter failure for President Reagan and the Romney-Ryan Plan is “Trickle-Down” on steroids”.
Economies are never static. They have natural ebbs and flows. To be successful over the long haul, plans must be flexible, and must be cognizant and adaptable to changing economic factors.
Two examples :
- Austerity: the theory of frugality in government and putting aside reserves that will carry the governing body through the downturns
- Germany has implemented austerity-based economics for years with great success. They squirrel money away for the downturns so that they remain liquid when the inevitable cycle turns
- Keynesian: the theory of having government stimulate the economy, by any number of avenues, during down cycles, but paying down the debt incurred when the economy is in a growth period and is on sound enough ground to do so.
The fly in the ointment since Ronald Reagan (and his “trickle-down” theory) implemented his plan in the early ‘80s has been that Republicans have wanted it both ways.
- Reagan started the mess rolling with his “supply-side” economics. Supply-side economics is better known to some as “Reaganomics“, the “trickle-down” economic policy espoused by former U.S. president Ronald Reagan. He popularized the controversial idea that greater tax cuts for investors and entrepreneurs provide incentives for them to invest in, and produce economic benefits that then “trickle down” into the overall economy by producing such an enormous over-abundance of supplies, that demand (consumers) would not be able to resist and that they would inherently follow that supply; thus “supply-side economics”.
- **(It remains truly bizarre to me that 1) Reagan was able to sell it, and 2) Americans were willing to swallow such smelly cow pies. I argued daily with friends and colleagues about it then, and even more incredibly, I still find myself arguing with people about how foolish an idea this theory remains. To finish the equation started though, with all the tax collection from the population snatching up that over-supply of “stuff”, the government could use that money to pay down debts incurred in “encouraging” (read: subsidizing) the business community to over-produce; but not to leave them in place indefinitely(see: $4 billion/yr in subsidies to the most powerful CEOs on earth…CEOs of oil companies.)**
- But instead of paying down debt, which even supply-side economics dictates, Republicans repeatedly and consistently shifted excess Treasury cash to the wealthiest individuals in the country as tax cuts. This is painfully illustrated in that the wealthiest 400 Americans own the same value in assets as the next 150 million Americans combined!
Like most flawed economic theories, supply-side economics tries to explain the macroeconomic necessities using microeconomics terms and examples. It does not work. It is tantamount to trying to explain the Bible with physics.
Fundamentals of macroeconomics offer policy prescriptions for stable economic growth. Supply-side theorists conversely maintain that there are three pillars to underpinning its success: tax policy, regulatory policy and monetary policy.
Recapping supply-side, the single idea behind all three pillars is that production (i.e. the “supply” of goods and services) is the most important factor of economic growth. It assumes that as long as there is an over-abundance of supply, demand will follow like mice to Pied Piper.
The supply-side theory is in stark contrast to Keynesian theory, which, among other facets, includes the idea that demand will inevitably falter as a normal downward cyclical occurrence, and that when the inevitable lagging consumer demand drags the economy into recession, the government must intervene with fiscal and monetary stimuli as the temporary “consumer of last resort” to retain demand until the cycle turns upward again to the next “big thing”. Ideally however, reserves are present to accommodate the stimulus rather than having to borrow funds because reserves were squandered on tax cuts to favored causes or donors.
This is the single big distinction: a pure Keynesian believes that consumers and their demand for goods and services are the key economic drivers in the economy. A supply-sider believes that producers and their willingness to create an over-abundance of goods and services set the pace of economic growth.
The Main Problem With Supply-Side? It Has NEVER EVER Worked
The big supply-side tax cuts of the 1980s and the 2000s did not work as promised even during the Reagan years.
Kevin Hassett, John McCain’s director of economic policy studies at the conservative American Enterprise Institute said, “What really happens is that, yes, economies can grow vigorously when you lower tax rates during periods of economic expansion. But during the down-cycles supply-side is worthless, if not harmful.”
But even with a growing economy, the promised boons in tax revenues seldom materialized, and when they did, they were minimal, and Republicans, rather than reducing the debt with the increased tax revenues, have always passed the excess along to wealthy donors …..ummm, I mean “job-creators”.
So here we are again with yet another Republican team that feels either Austerity or Supply-Side Economics will repair all that ails America as long as we keep shoveling tax cuts to the wealthy by taking it from the middle-class and slashing spending on everyone else who needs it.
And contrary to the pundits, it is fitting that Mitt Romney selected Rep. Paul Ryan (R-WI) as his running mate. They are both spoiled kids who inherited their wealth and thus are incapable of empathy for those less fortunate. Saturday’s announcement has been widely hailed as a “bold political choice that’s reinvigorated Romney’s campaign” which shows him to be an effective executive who shrewdly oversaw the decision and kept the process a secret.
Wow, Romney kept his pick a secret. What HASN’T Mitt Romney kept as a secret?
- His Economic Plan? Still a Secret.
- His Income tax returns? Nope can’t have those either.
- Tell us about your Mormonism Mitt. Sorry, off-limits.
- Well who are your donors Mr. Romney? None of our business.
- College transcripts Mr. Romney? Hey, aren’t you supposed to asking the black guy about that?
You get the idea.
Republicans Love the Idea: Economists? Not so Much
Another ignored fact; good politics does not necessarily make for good policy. While Representative Ryan gets credit for proposing solutions to the federal budget deficit, he’s offering the wrong solution, at the wrong time for America’s slow recovery. Aside from the fact that the rest of our trading partners are in as bad, or worse shape than we are in, according to Mark Dow, a former policy economist at the Treasury Department and the IMF says, “Just because rich guys will believe any economic theory that ends up in a tax cut doesn’t make it the right policy for the time… even if it will get you their vote,” he quips.
Summarizing, Mr. Dow also confirms my assertion that supply-side economics, (the basis of Ryan’s budget proposals) will not work in today’s economy.
At least when Ronald Reagan championed them in the 1980s, supply side economics made marginal sense. At the time, Regan’s supply-side mentor, Jack Kemp, was helping the President implement the policies.
As I said above, any well-constructed economic plan CAN work if implemented at the right time and if it’s implemented fully. America possessed better demographics while Reagan was President: Baby Boomers were entering their peak earning years, financial leverage was low, and there was pent up demand after the stagnation of the 1970s. Today we have the reverse of pent up demand; most households are deleveraging (paying down debt instead of buying new things) and the labor market is weighed down by globalization and inexpensive labor elsewhere.
“If you’re counting on those policies that worked marginally in 1982 to come to save you…you’re going to be disappointed,” Dow says.
While Mr. Romney emphasizes that he will construct his own budget, he is clearly expressing support for Mr. Ryan’s approach to controlling the federal budget. Ahead of last Saturday’s announcement, Mr. Romney declared that his economic plan, (which is unsurprisingly similar to Mr. Ryan’s) like Mr. Ryan’s budget road map, counts reduced federal spending and lower taxes as key pillars that will propel the economy and help generate 12 million jobs in his first term. I would not bet on that coming true if I had someone else’s money to bet with.
“If you’re counting on pent up demand to be unleashed by supply-side policies, guess what? It’s not going to be there,” Dow declares. “The credit bubble raised demand for services that people were hired to meet. That’s not available anymore because the vast majority of Americans are deleveraging and we have to compete against the rest of the world. So it’s going to be much more difficult” to create jobs and the demand to fuel economic growth.
The Divided State of America
To be clear, Dow does not say President Obama has all the answers or even deserves a second term. He also does not say that supply-side economics are always bad and Keynesian economics are always good; in fact, he is saying the Republicans have become too wedded to supply-side economics as a panacea, just as Democrats became too wedded to Keynesian solutions since the Great Depression.
Rigid adherence to a single economic theory on either side of the political aisle is a big part of the problem the country faces. Whether one is delighted or annoyed by the premise in this article is probably a good indication of where you come down on the ideological debate about the role of government in society. It also most likely indicates the way you feel about Paul Ryan’s plan in particular.
More importantly, however, is how the approximately 15% of Americans who haven’t already made up their minds might be swayed by the Romney-Ryan combination.
Conversely, I personally don’t put a lot of stock in whether undecided voters believe that they should or shouldn’t give Representative Ryan credit for offering bold solutions. Mr. Ryan comes from an affluent background as does Mr. Romney and simply lacks a frame of reference for thinking in meaningful budgetary theory. Nor do I give Romney kudos for choosing the Congressmen as his running mate. But if voters will give at least a cursory examination of Ryan’s plan, they’ll see the same things the nonpartisan CBO saw:
- It slashes Medicare benefits
- It leads to higher medical costs for seniors and
- It decimates the budgets for countless government programs (excluding defense or the increasing size of Congressional staffs or their payrolls of course) while at the same time increasing tax benefits for corporations and the wealthiest individuals.
According to the Tax Policy Center, Ryan’s plan would result in a an average tax cut of $265,000 for Americans making $1 million while 50% of Americans, (i.e., those making between $20,000 and $30,000) would get no tax cut at all.
In essence, Mr. Ryan’s plan would exacerbate the income distribution problems we already have, which assures that societal structure of the middle-class and working poor would continue to disintegrate.
I’m absolutely convinced that is NOT a winning campaign platform…unless you want class warfare to deepen into Civil War-fare.