Why Republican Economics Have Failed

I have started a post like this many times, and after reaching ten or so typed, single-spaced pages, I generally scrap the whole thing and just write something snarky about Republicans. To my credit, Republicans have been wrong on so many things economically, it’s hard to fit it all into a concise, simple blog post. So, armed with these failed drafts as my guide, I will attempt to enumerate the main points I find to be worth sharing.

It’s hard to know where to start, where a good beginning might be, but I think the best place (and person) to open with is Reagan. No Republican president before him more eloquently demonstrates the failure of current Republican economics like Reagan does. It was Reagan who began the Republican war on the poor, pioneered deficit spending, and popularized the idea that government is inherently bad.

Reagan “invented” American homelessness as we know it today. He slashed funding for low-income housing, public job training, legal services for the poor, public transportation, and mental health services for the underprivileged. His policies ensured that the poor could not afford housing, nor were they provided the means of helping themselves. In the 80s, America began its path towards being the only first-world nation to callously turn its back on those who were destitute, a trend Republicans proudly continue to this day.

While Reagan cut services to the poor, he spent astronomical sums in other ways. Piles of money were thrown at the military, businesses, and most notably, the unregulated savings and loan industry received an (at the time) unprecedented $87.9 billion bailout when its predatory practices led to a market meltdown (sound familiar?). Income disparity began to rise under Reagan, with the poor making less and the rich making so much more, the data almost seemed to indicate that America was experiencing prosperity, when in fact a large chunk of the population was worse off after Reagan left office than they were before he was sworn in.

It’s amazing, really, that someone would be able to spend so much government money without helping the poor. This was largely achieved through what was then an emerging idea among Republicans, summarized by Reagan in one of his typically mindless sound bytes: “The nine most terrifying words in the English language are, ‘I’m from the government and I’m here to help.’” With this simple mythology, he cut benefits for the American people while lining the pockets of the already-wealthy. While government got bigger under Reagan, it “felt” smaller, since no one (except the rich) could count on the government for much during or after his presidency.

Reagan aside, Republicans today are finding new and exciting ways to run this country into the ground. After eight years of Bush driving us directly towards to the precipice of disaster, it’s quite sad what is happening with Obama and the Republicans. Obama has emulated Bush in every way possible. The result has been Republicans becoming irate… for some inexplicable reason. Oddly enough, Obama’s faithful adoption of Bush-era economic policies has emboldened Republicans to get even dumber and even more regressive in their economic views.

Republicans have managed to talk out of both sides of their ass since Obama took office. Republicans are insistent that only private industry, not the government, is able to solve the nation’s economic woes. Then again, Republicans are quick to blame the economic crisis on Obama. It’s one or the other, folks, pick a side and stick with it.

I’m of the opinion the president can do quite a lot if he wants, but that it is ultimately up to congress to actually pass economic stimulus. What the president ought to be doing is taking a more pro-active approach to encouraging solutions. He needs to be the salesman for his policies, but so far… it seems like his policies are merely business as usual. This should have Republicans excited… and it does, but for all the wrong reasons.

Perhaps smelling weakness, perhaps out of some need to differentiate themselves from current policy, Republican presidential candidates have doubled-down on stupid. Not all of them, mind you, but most Republican candidates have begun espousing regressive flat taxes, even suggesting a national consumption tax at a time when consumer spending is already stagnant. I see most of this as posturing within the race for the nomination, and the obvious heir apparent (Romney) has largely risen above such nonsense, but the fact remains: Republicans seem to be chomping at the bit for a “flat tax.”

And why wouldn’t they? Republicans hate the poor, and flat taxes always benefit the rich. Consumption taxes especially hit the poor, who are already living paycheck to paycheck (or running up debt just to get by), while the rich will keep a more sizable portion of their fortune (especially if their marginal income tax rate decreases). Sure, the rich will be discouraged through sales tax from ever spending their hard[ly]-earned wealth, but what’s the harm in concentrating wealth in the hands of a few (you know… besides political corruption, loss of innovation, and a poverty epidemic)?

There’s even social reasons for why Republicans would love a flat tax: no tax deductions. Some Republicans labor under the misguided notion that if marriage had no tax deduction, those pesky gays wouldn’t be so gung-ho about asserting their right to have their unions recognized. I mean sure, there’s only just over 1000 (1,049 to be exact) federal statutory provisions which grant benefits, rights and privileges to married couples (not even counting benefits conferred by states)… but I bet that really, gay people just want the tax deduction, right?

I think it comes down to Republicans acknowledging how dumb they are and how dumb they have made America, therefore seeing the need for a more simple tax system any idiot (see also: American) can understand. You can see it elsewhere, like in the Republican opposition to laws that are long and complex (because reading is hard…) or just in the general hostility Republicans display for science, education, teachers, professors, or really anyone who might make them realize how stupid they really are.

Which leads me to the most laughable Republican concept to come out of the erroneous Reagan-era: the Laffer Curve. As someone who likes numbers, I’ve always been upset that I could never find an accurate representation of the Laffer Curve using real life data. As it turns out, this is because the Laffer curve is bullshit.

If you actually plug in real-world data, the Laffer Curve is not an upside-down U, as conservatives insist it logically must be. Instead, it is a U, with the highest tax revenues collected as the highest marginal tax rate increases.

When people point to Reagan and insist his policies demonstrate that lowering taxes increases tax revenue, there is a fundamental lapse in logic. Namely, Reagan used deficit spending to stimulate the economy. In other words, Reagan was a huge Keynesian Socialist. He used more government money that any president before him, more than he even took in through taxes. The rise in revenue was the direct result of his government policies fostering business interests. Arguably, it’s the one thing Reagan almost did right. Rather than leave the market to the invisible hand, Reagan spent like there was no tomorrow, and business flourished.

Except… not everyone felt the “trickle down” he promised, and there’s a simple explanation for why this is.

Imagine you run a company. Let’s say your operating expenses before factoring in your payroll for your workers last year totaled $10 million, and the company earned $15 million, after corporate taxes. In this scenario, you have $5 million dollars to pay your workers, yourself, and to grow your business. Not bad right?

Now, let’s suppose you have 49 workers, and yourself. How do you spend the money?

Here’s how a business owner today would probably handle that: he would pay the base salary of his workers, grow his business to meet any perceived increase in demand within the market (hiring more people, advertising, developing/improving products, etc.), and the rest is a big, fat bonus (and perhaps a raise next year) for yourself. In the current model, there is no incentive to give your workers more money, and there is some incentive to grow our business, but ultimately, the biggest benefactor of a company’s success will occur for the one(s) at the top who are making their paycheck out to themselves.

It’s quite simple as to why this is: there is no exterior force discouraging individual greed among top earners in any given business. Even if the greed of the individuals at the top bankrupts a company, those at the top have no reason to care; they got their share, and they’ll be taken care of. Plus, in the process of taking the company down, the pensions of all the lowly workers actually doing the jobs necessary for making the company run are often pillaged by those at the top. The rich get what they want and they can move on to exploit another group of people in a new company.

I believe in very progressive income taxes. Bare minimum, 60-65% on income over $400k is what is necessary for allowing private industry to redistribute the wealth itself. What do I mean by that?

Suppose you run that company that made $5 million in profit. You pay your 49 workers an average salary of $59,000 (which is well above average, but I factored in benefits like health insurance, and assumed that some people made well above average salaries). That costs you just under $3 million, for 49 people. That leaves you just over $2 million dollars to grow your business and pay yourself.

Now, suppose your salary is $500,000. And why not? Your daddy was rich, he sent you to the best schools where you got the best education money could buy, and his fortune helped you get started in your third business (he also helped in the first two, which tanked). You had every advantage in life, but you worked hard (mostly getting other people to work hard for you, though I digress…). You “cannot be replaced,” unless the company had some ability to vote you out and they would find some other person willing to tell others to work harder for half a million dollars a year [I’m available for 1/10th of that, if anyone is interested].

So, take out your salary, and you have about $1.5 million left to play with. Now… you could hire more people, or give a bonus to your best workers who helped make this such a good year. Or… you could pocket some, most, or even all of it as a bonus. No one is stopping you. In fact, the only barrier to taking in multi-million dollar paychecks and bonuses is your marginal tax rate.

I take for granted that people know what a “marginal tax rate” is. In layman’s terms, it’s just the tax rate on the last dollar you earned. In a progressive tax system, income up to a certain point is usually not taxed at all (in the US, we have a tax of 10% up to $8,500 a year, but most people earning that little are generally exempt from income tax due to deductions), and then each subsequent dollar earned is taxed at an ever increasing rate. In America, our income taxes are divided into quintiles, meaning we have five “tax brackets.” If this is already common knowledge to you, don’t worry, I’m finished with the remedial stuff.

Someone earning $500,000 dollars is taxed 35% on each additional dollar they earn, because the cutoff for the highest tax rate is $379,151. We have incredibly low taxes on the rich, less than hardly any other developed nation on Earth. The rich can keep more of the money they “earn” in America than nearly anywhere else.

Here’s what happens when the tax rates are so low: look around. The poor stay poor, the middle class dries up and does not grow to meet inflation, and the rich get richer… because they can. There is nothing stopping the rich from stifling growth by pocketing the profits earned on the backs of the poor and middle class.

Here’s what happens when the tax rate on high earners is raised: look at Scandinavia, Japan, Germany, and the US in the 1950s-60s. The US in particular had marginal tax rates of 98% on the highest income earners under Eisenhower, and while I wouldn’t personally suggest such a high rate, it helped us pay for World War II and essentially created the middle class.

Rather than pocketing the money for themselves, few people at the top are willing to write checks to themselves for millions of dollars if they are only going to keep 2% of it. It was in the best interests of the rich to reinvest that money in their company, to ensure the company’s success. A rich person used to depend on their company for their yearly income, as opposed to now, when the rich take a lifetime’s worth of wealth over the course of a few years, and then sail away with a golden parachute (often made of the pensions their employees) as the plane goes down in flames.

When fans of Reaganomics discuss “maximizing tax revenues,” they miss the point entirely. The goal of the government is not to maximize profits, like some kind of business. The goal of government is to enact policies for the greater good. Putting aside the fallacy of the Laffer Curve, even if lower taxes could increase the revenues of a government, I wouldn’t support it. It’s far better to cut spending (and let’s start with the military) than it is to try to bleed the country dry of as much money as possible.

The mechanism by which high tax rates on high income earners helps to provide stable growth for a country has nothing to do with tax revenues, but instead has everything to do with encouraging private businesses across the country to “distribute the wealth.” Perhaps the greatest fallacy of Republicanism is the idea that liberals see taxes as “wealth distribution.” Quite the contrary, a proper progressive tax allows private decisions to be made which encourage the growth of the middle class, which is ultimately what is required for sustaining a healthy economy. Private individuals distribute the wealth in a healthy progressive income tax system.

Without a middle class with disposable income, America turns into a nation of haves and have-nots, mostly have-nots. The haves horde their wealth, spending a far lower percentage of their money than middle and low income earners. This decreases consumption, which is the primary driving force in any economy. Without people willing and able to buy your products, there is no production, and in a worldwide economic crisis like we are in now, there is not enough foreign demand to compensate (especially when American deregulation has resulted in so many American products, from cars to food, being literally illegal to purchase in many developed nations).

This is how Republicans have economically ruined America.