Democratic Underground

Bringing the Supply-Side Monster Back From the Dead
August 21, 2001
by Richard Prasad

It is the year 2001, so why is the Bush Administration trying to turn back the clock to 1980? It has already launched plans to continue testing SDI, the missile defense pet project of Reagan and his minions, and the fiscal policy of the Bush administration hearkens back to the supply side economics of the Gipper. As Reagan once said in a debate with Walter Mondale, "There you go again." Well, here the Republicans go again, trying to resuscitate a dead economic policy which has been thoroughly discredited by the economic boom built by the Clinton administration.

Supply side economics was a major component of Reaganomics, as Reagan's economic policies came to be known later. Supply side economics argued that the more the government cut top tax rates, the more these cuts would spur economic growth. So Lawrence Kudlow in the office of management and budget during the first Reagan term in office, and allies in Congress did just that. They passed the Kemp/Roth Bill in 1981 and passed a flat tax cut reform bill in 1986. The result of all these tax cuts was a top income tax rate that came down from 70% to 28% and cut 455 billion dollars in tax revenues from 1981-85.

The Republicans would have you believe that as soon as the tax cuts were implemented the economy took off like a rocket, and stayed there until Clinton came to office. Not true, there was a recession in 1981, and sustained growth for a period of time, but that does not tell the whole story. There was a downside to Reaganomics - its huge budget deficits - that caused critics to call it Trickle Down Economics, or even Voodoo Economics. The last term was coined by George Bush the elder, before he was converted to supply side economics, if he ever was converted to supply side economics, that is.

What caused these budget deficits if Reagan was cutting spending on social programs? Well, the truth is, while he cut some programs, mostly for the poor, he left the big middle class entitlement, Social Security intact. Despite signing some amendments to Social Security in 1983, Reagan did nothing to privatize Social Security, because doing so would have been political suicide in the 1980s. And it still might be for Dubya in 2002.

What also caused the deficit to explode was the unprecedented defense spending of the Reagan era. One estimate says that the defense department spent 1.6 trillion dollars on defense in the 80's. Money well spent say the conservatives, the US won the cold war because of Reagan's military spending. But as I've argued before, the collapse of Communism came over a long period of time with many presidents deserving a share of the credit. Moreover Communism fell because it is bad economic theory, it never allowed for economic incentive and would have fallen eventually of its own weight.

Somehow the budget-balancing conservatives were lost during the dizzying heights of supply side economics, and the Republican party was taken over in the 1980s by what I call "credit card conservatives." These new conservatives were piling up debt as fast as they could and relying on nations like Japan to pay our bills, which only worked because Japan was in good economic shape in the 80's.

The results of supply side economics were starting to materialize in a negative way. For the first time in many decades homelessness became a visible problem, and the Reagan administration turned a deaf ear to an epidemic in its infancy, an epidemic still sadly with us, called AIDS.

In June 1990, George Bush Sr. abandoned supply side orthodoxy and his silly "no new taxes" pledge made in 1988, and raised taxes. Bush Sr was facing a budget deficit of 290 billion in 1992, so he compromised with Congress and signed a tax increase. Republicans rewarded Bush the elder as only they can, by either sitting on their hands, or voting for Ross Perot, and Bill Clinton was elected.

Clinton further distanced himself from supply side or Reaganomics by pushing his own economic plan through congress. It included tax increases on the wealthiest Americans, 70% of Clinton's tax increases were paid by people making above 100,000, and for that reason Republicans voted against it en masse. Clinton's economic plan passed the house 218-216, and it passed the Senate 51 to 50 with Al Gore making that famous tiebreaking vote.

The drumbeat of doom and gloom continued from Republicans continued, with Newt Gingrich becoming speaker and the Republicans gaining majorities in both houses of Congress. If you raise taxes on the wealthy, economic growth will come to a grinding halt, went the Republican mantra. Budget battles loomed in the 1990s between Clinton and the Republican congress, culminating with the Republican shutdown of the government. On January 6, 1996, the longest government shutdown ended after 22 days. Most Americans blamed the Republicans for the shutdown, and America realized that while it didn't like government in abstract terms, when it was shutdown, America liked and needed government very much. This was a turning point for Clinton and the nation, he had stood up to Republican rhetoric and proven them wrong.

Despite all the Republican doom and gloom, the accomplishments of the Clinton economic plan cannot be diminished. 22.5 million jobs created, an average of 4% growth 116 months straight of economic growth and the erasing of hundreds of billions of dollars of debt, turning it into a budget surplus. The end of budget deficits meant a self reliant economic policy for the United States, no more of Japan paying our debts for us, and that is important. Japan has faced a severe economic downturn in the 1990s and has not pulled out of it since, and we escaped economic problems because our economic house is in order. The Clinton economic record did more than any Democratic think tank ever could to destroy supply side economic theory. Or so we thought.

But along came George W. Bush and his big lie technique to save us from our own prosperity. Dubya brought us The Return of Supply Side! Like some monster that wouldn't die, along came Bush Jr with his 1.6 trillion dollar tax cut.

The biggest lie of all was that we could afford a tax cut of that size, have huge defense spending increases, and still have money left over to spend or save for a rainy day.

The second lie was the tax cut was not tilted toward the extremely rich. It lowered the top tax rate from 39% to 35%, and it phases out what Bush calls the "death tax," (which the rest of us call the estate or inheritance tax) except the rest of us don't have estates to inherit. The phasing out of the inheritance tax only affects 2% of the country, and guess what, it ain't the bottom 2% either.

The third lie is that all tax payers got tax relief. Many tax payers who do not pay income tax, but pay Social Security taxes, get nothing from Bush's tax cut. In fact the tax cut may bring some taxpayers close to the threshold of having to pay the Alternate Minimum Tax - a complicated tax system that dates back to 1969.

Despite the pack of lies, Bush's tax cut passed both houses of Congress, after a teeny tiny compromise lowered the tax cut to 1.35 trillion dollars. On the Senate side 12 Democrats voted with 45 Republicans (and James Jeffords) to pass the bill, on the House side, 240 members voted to pass the bush tax cut. Dr. Frankenstein-like shouts of "It's Alive!" could be heard from supply siders everywhere. Yes, supply side economics was indeed alive and kicking.

But wait, this monster might die yet, the Congressional Budget Office is set to report on August 28th that the Bush administration might have to dip into the Social Security fund to pay for budget priorities. In January the surplus was thought to be $125 billion, $74 billion of that went into the tax cut this year, another $40 billion was lost in the economic slowdown, leaving the Bush administration with only $14 billion to play with before they raid the Social Security trust fund. To counteract that bit of news the Bush administration said they "found" an unexpected $4.3 billion in the Social Security trust fund. Sounds like more deception and fuzzy math from the Bush administration.

George W. Bush learned exactly the wrong lessons from his father's no new taxes pledge and pledged to cut taxes without fully understanding what these tax cuts would do to the budget. Instead of waiting to see what the budget numbers looked like, Dubya and his Republican brethren gave life to a monster thought to be long dead, bringing the threat of budget deficits with it. Maybe on August 28th the congressional budget office will give us the tools we need to finally kill the lying beast called supply side economics once and for all.

 
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