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Why the Obama tax deal with Republicans is insane

Tony Wikrent's picture

[Welcome, Naked Capitalism "must read"-ers! Also, the next post from letsgetitone proposes a different and better "deal," so please read it as well. --lambert]

Cross posted from Real Economics.

The central premise of U.S. economic policy since the election of Ronald Reagan in 1980 has been that the people in the private sector who know how to invest – the rich – do a much better job allocating society’s financial resources than the federal government. In fact, Reagan told us in his first inaugural address, “government is the problem."

In order to get as much of society’s financial resources into the hands of the rich - the people in the private sector who supposedly would do a better job investing it - Reagan, the Republican Party, and American conservatives in general developed a simple-minded faith in tax cuts, especially in reducing taxes on the highest incomes.

What are the results of this thirty year experiment low taxes? The Reagan / Republican / conservative theory DOES NOT WORK. For the first time in American history, we now have a generation that has less education and worse economic prospects than their parents did thirty years ago.

In all the hub-bub and brou-hah-hah of the tax debate the past few days, weeks, and months, hardly anyone has put forward the clear and unambiguous information that






In fact, there have been three grand multi-year national experiments with Republican / Conservative tax cutting over the past century. And all three experiments resulted in the average American becoming poorer, the real (industraal) economy in tatters, and spectacular financial crashes.

Tax Cut Experiment Number 1
In 1921, President Warren G. Harding proposed ending the wartime excess profits tax which had been imposed during World War I. Calvin Coolidge followed Harding into the White House in 1923. Coolidge was launched to national prominence when as Governor of Massachusetts, he mobilized the state’s National Guard in September 1919, to crush a strike of three quarters of the policemen of the Boston Police Department, who were trying to force official acceptance of their membership in, and representation by, the American Federation of Labor.

Coolidge, you may recall, was “rehabilitated” during Ronald Reagan’s (who broke the air traffic controllers' union) term as President. Coolidge’s brutal suppression of the Boston strikers, and his sharply worded rebuke to AFL president Samuel Gompers, led Harding to select him as vice president. So, when Harding died during a speaking tour in California in August 1923, Coolidge became President, and it was Silent Cal who actually signed into law the Revenue Act of 1924, which lowered personal income tax rates on the highest incomes from 73 percent to 46 percent.

Two years later, the Revenue Act of 1926 law further reduced inheritance and personal income taxes; eliminated many excise imposts (luxury or nuisance taxes); and ended public access to federal income tax returns. The tax rate on the highest incomes was reduced to 25 percent.

What resulted was the building up of a speculative frenzy in the stock markets, especially with the application of structured leverage in what were called at that time "investment trusts." In September 1929, this edifice of false prosperity began to wobble, and ended in October 1929 with the stock market crash.

Republican President Herbert Hoover (Coolidge did not seek re-nomination in 1928) responded with more tax cuts! Personal income tax on income under $4,000 was cut by two thirds; personal income tax on income over $4,000 was cut in half. The tax rate on corporations was cut by a full percentage point.

How did the economy respond to these tax cuts? It sunk further into the First Great Depression.

Tax Cut Experiment Number 2
In 1981, Reagan significantly reduced the top marginal tax rate, which affects the very wealthy, a from 70% to 50%; in 1986 he further reduced the rate to 28%. Contrary to the Reagan / Republican / conservative argument that the tax cuts would pay for themselves by boosting economic activity the budget deficit and federal debt exploded. Federal government debt grew from 33.3% of GDP in 1980 to 51.9% at the end of 1988.

Meanwhile, the average American family began working more hours just to keep place. The phenomena of latch-key kids took hold as mothers sought jobs to help keep their family afloat. Wikipedia notes that the number of Americans below the poverty level increased from 29.272 million in 1980 to 31.745 million in 1988, which means that, as a percentage of the total population, it remained almost stationary, from 12.95% in 1980 to 13% in 1988. The poverty level for people under the age of 18 increased from 11.543 million in 1980 (18.3% of all child population) to 12.455 (19.5%) in 1988.

Reagan's tax cuts failed to revive American industry, which was also being hammered by the Reagan / Republican / conservative blind faith in free trade.A number of American industries actually disappeared. By the end of Reagan’s presidency, the American textile, apparel, and footwear making industries had been reduced to less than one tenth the size and sales they had been just two decades before. During Reagan’s tenure, the U.S. lost its trade surplus in consumer electronics, and began to also lose its advantage in industrial electronics. The most important industry of all, the machine tool industry - which is needed to make all other production equipment - slipped into a death spiral from which it has never recovered. Steel, auto, printing equipment, construction equipment, farm equipment, power generating equipment – in industry after industry, under Reagan, the U.S. began to lose its world lead.

Only the aerospace industry, the key component of the American empire’s military-industrial complex, managed to maintain its world lead. Oh, and the banking and financial sector. But in October 1987, the worst stock market crash since the First Great Depression shook Wall Street.

Tax Cut Experiment Number 3
Republicans and conservatives of course contend that the two Bush tax cuts created the economic boom of 2002-2006. But Wikipedia notes the following, rarely discussed, facts:

A significant driver of economic growth during the Bush administration was home equity extraction, in essence borrowing against the value of the home to finance personal consumption. Free cash used by consumers from equity extraction doubled from $627 billion in 2001 to $1,428 billion in 2005 as the housing bubble built, a total of nearly $5 trillion dollars over the period. Using the home as a source of funds also reduced the net savings rate significantly. By comparison, GDP grew by approximately $2.3 trillion during the same 2001-2005 period in current dollars, from $10.1 to $12.4 trillion.

Economist Paul Krugman wrote in 2009: "The prosperity of a few years ago, such as it was — profits were terrific, wages not so much — depended on a huge bubble in housing, which replaced an earlier huge bubble in stocks. And since the housing bubble isn’t coming back, the spending that sustained the economy in the pre-crisis years isn’t coming back either." Niall Ferguson stated that excluding the effect of home equity extraction, the U.S. economy grew at a 1% rate during the Bush years.

The amount of money Americans took out of their bubbling home equity was more than double the increase in GDP under Bush. Meanwhile, U.S. industries continued to weaken and falter. Even the semiconductor and computer industries - once the crown jewels of the American industrial economy - basically collapsed under Bush, fleeing offshore. As Andy Grove, one of the founders and former chairman of semiconductor pioneer Intel wrote back in early July (How to Make an American Job Before It's Too Late):

Today, manufacturing employment in the U.S. computer industry is about 166,000 -- lower than it was before the first personal computer, the MITS Altair 2800, was assembled in 1975. Meanwhile, a very effective computer-manufacturing industry has emerged in Asia, employing about 1.5 million workers -- factory employees, engineers and managers.

The largest of these companies is Hon Hai Precision Industry Co., also known as Foxconn. The company has grown at an astounding rate, first in Taiwan and later in China. Its revenue last year was $62 billion, larger than Apple Inc., Microsoft Corp., Dell Inc. or Intel. Foxconn employs more than 800,000 people, more than the combined worldwide head count of Apple, Dell, Microsoft, Hewlett-Packard Co., Intel and Sony Corp.

Most important to note, wages and earnings for all but the richest Americans continued to stagnate, and actually declined for the bottom quintile of wage earners.

And, in late 2006, the sub-prime mortgage crisis began to unravel the very fabric of the world financial system, leading to the crashes of April and September 2008.

The failure of our national debate on tax cuts
Most discouraging about this entire national debate on taxes, has been the complete failure of President Obama and the Democratic leadership to point to these clear facts, and ask - and answer - the obvious question:

Why do tax cuts lead, counter-intuitively, to industrial decline, stagnant wages, and finally financial collapse?

The fact is that high marginal tax rates strongly correlate with economic growth. As Mike Kimel wrote yesterday on Angry Bear:

But perhaps it is unfair to compare Reagan to big-government types like Lyndon Johnson or Roosevelt, as they served during very different eras. Focusing instead on more recent periods, real GDP also grew faster under Bill Clinton, who raised taxes, than it did under Ronald Reagan. In fact, from 1981 to the present, the period in which Reagan’s philosophies have reigned triumphant, the correlation between the top marginal tax rate and the annual growth in real GDP has been positive. That is to say, higher top marginal tax rates have been associated with faster, not slower real economic growth. Conversely, lower top marginal tax rates have coincided with less economic growth.

The positive relationship between the top [higher] marginal tax rate and the growth in real GDP is very nearly bullet-proof. For instance, it extends all the way back to 1929, the first year for which the government computed GDP data. Additionally, higher marginal tax rates are not only correlated with faster increases in real GDP from one year to the next, but also with increases in real GDP over the subsequent two, three, or four years. This is as true going back to 1929 as it is for the period since Reagan became president. In fact, since the Reagan Revolution took hold, similar relationships have existed between the top marginal rate and several other important variables, like real median income, real private investment, consumer sentiment, the value of the dollar relative to other major currencies, and the S&P 500. Lower tax rates in any given year are associated with slower growth rates for each of these variables, whether those growth rates are measured over periods of one, two, three or four years.

If you look under the hood of the industrial economy, you easily see why there is this counter-intuitive relationship between tax rates and economic growth . With high taxes, the only way to retain the bulk of the wealth created by a business is by reinvesting it in the business -- in plants, equipment, staff, research and development, new products and all the rest. But if tax rates are low, then there is more incentive to pull the wealth out, by declaring it as profits that are taxed at what turns out to be too low a rate. In other words, low taxes create an incentive for profit taking.

This in turn creates an incentive for short-term horizons in business planning. If you’re going to be taking all the profits out of a company, and take home a few million a year, why bother to reinvest anything in the business? You’re going to be rich, and never have to work again, even if the business goes bust. Or gets packed on a boat and shipped to China. Or goes “virtual” and lets all the hard work, like, you know, actually making something, be done by the lowest bidder. Employees? Don’t need them.

But employees are also customers. If enough businesses “take profits”, after some length of time, the former employees also become former customers. Meaning, they stop buying. The economy's aggregate demand generation is crippled. From the three Republican tax cut experiments this past century, it appears the length of time for this to happen is five to seven years.

If tax rates are high enough to discourage profit taking - forcing wealth created by a business to be recycled back into the business – then businesses are pushed toward longer-term planning, as they invest in new plant and equipment that will be used for many years. And you do not get the absurd situation you have now, where companies are posting record breaking profits, but are not buying new equipment, nor hiring new employees.

Low tax rates encourage taking wealth out of industrial companies; the wealth taken out must then be “put to work.” That means more money chasing “investment” opportunities, leading to price increases in financial capital or real estate or some other asset. In other words, an asset bubble. The rise in prices of an asset bubble has nothing to do with the creation of real wealth. It all looks like prosperity – until the asset bubble bursts. That’s where we are now.

Tax cuts only work to build bubbles that enrich mostly the financial sector. Tax cuts do nothing to help the real, industrial economy. The rich of America have proven that they are not very good at investing: they prefer credit default swaps over investing in sustainable energy start-ups. The major economic challenge of the past three decades has been to create a new economy that is not dependent on burning fossil fuels. The Reagan / Republican / conservative theory that the rich are best at allocating our society's financial resources has been a disastrous failure. We have wasted thirty years testing their theory. It's time to force elites to admit that it does not work.

The virtuous economic cycle that was destroyed by Reagan
Another reason tax cuts do not create economic growth has to do with the distribution of income in the economy. The Republican / conservative religious belief that “tax cuts create jobs” has become so shallow and so insipid, that they don’t even understand the actual process of job creation contained in their own lousy theory. Tax cuts do NOT create jobs. It is the response of business to growth of aggregate demand in the economy that creates jobs.

So, will the tax cuts of this new Obama / Republican / conservative deal boost aggregate demand?

A bit, maybe, but not as much as direct spending on infrastructure would.

Dave Johnson explained the essential problem of the flawed economic assumptions of the thinking behind the Obama / Republican / conservative deal back in August:

Tax Cuts Are Theft

The American Social Contract is supposed to work like this:


A beneficial cycle: We invest in infrastructure and public structures that create the conditions for enterprise to form and prosper. We prepare the ground for business to thrive. When enterprise prospers we share the bounty, with good wages and benefits for the people who work in the businesses and taxes that provide for the general welfare and for reinvestment in the infrastructure and public structures that keep the system going.

We fought hard to develop this system and it worked for us. We, the People fought and built our government to empower and protect us providing social services for the general welfare. We, through our government built up infrastructure and public structures like courts, laws, schools, roads, bridges. That investment creates the conditions that enable commerce to prosper – the bounty of democracy. In return we ask those who benefit most from the enterprise we enabled to share the return on our investment with all of us – through good wages, benefits and taxes.

But the "Reagan Revolution" broke the contract. Since Reagan the system is working like this:


Since the Reagan Revolution with its tax cuts for the rich, its anti-government policies, and itsderegulation of the big corporations our democracy is increasingly defunded (and that was the plan), infrastructure is crumbling, our schools are falling behind, factories and supply chains are being dismantled, those still at work are working longer hours for fewer benefits and falling wages, our pensions are gone, wealth and income are increasing concentrating at the very top, our country is declining.

This is the Reagan Revolution home to roost: the social contract is broken. Instead of providing good wages and benefits and paying taxes to provide for the general welfare and reinvestment in infrastructure and public structures, the bounty of our democracy is being diverted to a wealthy few.

So, the idea that these tax cuts will help get boost the economic recovery just when President Obama is campaigning for re-election, is absurd. In fact, Ian Welsh, who has been eerily prescient about economic and political developments in the U.S. the past few years, guarantees that this deal will NOT help the economy

The past 30 years, and the past 10 years in particular, have been a huge experiment in tax-cutting, and for ordinary people, the result has been stagnation and now an absolute decline. Because ordinary people do not have pricing power, either as workers for their labor (since there are plenty of people who need jobs) or as consumers (because the oligopolies who sell food, energy, telecom and so on know you must have their services) every single red cent of tax cuts which go to the middle and lower class will be taken away by corporations and the rich. Those corporations and rich will then use that money to either play leveraged financial games or to offshore jobs to low cost, low regulation domiciles. Not only do tax cuts not do any good, they accelerate the loss of US jobs. No, this isn’t what you’ve been told, indeed propagandized, for the last thirty years. But how has trickle down economics worked out for you? Are you going to believe your lying eyes, or the talking heads who tell you that tax cuts create jobs?

The sane alternative: tax the financial system
Proof that both parties are controlled by a single financial oligarchy – or, as OnePissedOffLibeal proposes, there’s no use blaming President Obama - is that the single best solution is missing from the national discussion. A tax of just one fifth of one percent on all financial market transactions – stocks, bonds, futures, currency forex, options, swaps, and other derivatives - would raise nearly one trillion dollars in the first year, because of the sheer volume of trading. But such a tax would rapidly shrink the volume of trading, so the few economists, like Dean Baker, who have worked the numbers stick with a figure of around $200 billion a year.

In the 1960s, all the trading in all the financial markets amounted to about one and one half times the U.S. annual gross domestic product. Today, the trading of all the stocks, bonds, futures, foreign exchange, and other financial instruments amounts to over fifty times U.S. GDP, or around three trillion dollars a day in the U.S.

Above from the Wikipedia article on Financialization

How much does it cost our economy to move around this much financial paper each and every day? Let us assume that the fees, commissions, and so on paid to the financial system for all this frenetic activity amount to one percent. (An October 2003 study conducted by John P. Hussman, President of Hussman Investment Trust, found that the costs to the funds he manages actually amounted to approximately 1.87%; scroll down to the bottom.)

So, one percent of three trillion a day is $30 billion in commissions / fees / bonuses, etc., paid to the financial system for all that paper being shoved around. $30 billion a day going to the financial system in fees and commissions? Couldn’t that be used instead to pay 600,000 (six hundred thousand) jobs paying $50,000 a year?

Taken ten days of trading away from the financial markets, and we can pay for six million jobs. Six. Million. Jobs.

This is how the financial system sucks the life blood out of the economy. This is where we so desperately need the change Obama promised - a promise it now appears, was merely a campaign slogan. But, as Stirling Newberry noted in March 2009:

The more conservative thinkers are appalled at the idea that the monetary order that emerged post-collapse of Bretton Woods might be attacked, because living off of dipping a small cup in the Niagra Falls of finance is the only world they have ever known. . .

The need to increase the volume of financial trading was the basic driver of securitization of home mortgages, and the development and proliferation of financial derivatives. This level of financial trading, and the toll it exacts on the rest of the economy, is nothing less than a plague of usury of Biblical proportions. Until the financial system is cut down to size, there can NOT be any economic recovery for the rest of us. It is basic economics that when you have too much of socially destructive activity, you should tax it - heavily.

Why is it that no one – NO ONE – among our elites, including even Paul Krugman, ever push for a tax on financial market transactions?

Cui bono?
Why has the entire national debate been so devoid of these facts? Why are certain things, such as the insane level of trading in the financial markets, never discussed?

To answer those questions, simply ask:

Who benefits?
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No votes yet


Submitted by gob on

I pulled out this one phrase of yours from this beautiful post for the sake of those who might think it's too long to read. Of all the ideas you've laid out so well here, this strikes me as one that could be easily and usefully propagated. To help propagate it through a population that may well think, "hey, what's wrong with profit-taking?" I might rephrase as something like:

High taxes create an incentive for investment.

Thanks for this excellent essay!

CMike's picture
Submitted by CMike on

is the only person I know of who has taken the time to make this obvious point, on occasion, heretofore. Boy can he make his right-wing guests sputter when he brings this up. Though we do hear about those Eisenhower days with a top effective tax rate near 90% and the 70% top rate era, put in place by President Kennedy with many of the allowable deductions from the 50's withdrawn from the tax code, I don't think there are many people who understand the useful effects of those rates or take a moment to realize we had plenty enough rich people back then.

Outstanding post Tony.

Submitted by Hugh on

A truly excellent piece of writing. I would point out that you can send $50,000 to 6 million people at a cost of $300 billion/yr. But as labor is only part of the cost of a job, you would probably need 3-5 times that much depending upon the kinds of jobs you were creating. I used to use a number of $140,000/job but I think that was out of date even when I was using it. I haven't found any new numbers to replace it.

I agree that as long as we steer so many of the nation's resources into the unproductive, wealth destroying rich, we will not have the resources for recovery, jobs, infrastructure, health, education, retirements, and rebuilding our industrial base.

TokenRealist's picture
Submitted by TokenRealist on


How do you suppose the wealthy became that way if they are indeed unproductive and all they do is destroy wealth?

The vast majority of people with over a million in net worth did not inherit it, but earned it through sheer hard work and determination.

Aeryl's picture
Submitted by Aeryl on

The vast majority of people with over a million in net worth did not inherit it, but earned it through sheer hard work and determination.

Cuz I ain't buying that at ALL.

Fredster's picture
Submitted by Fredster on

Yeah, ditto on the linkiness please.


Submitted by Hugh on

Welcome back to America. Much has changed in the 35 years you were gone. Trickle down economics became the rage. Well not really the rage, the wealthy bought the politicians. They cut taxes, gutted the unions, ran big deficits, and had the Fed wage war against, err wages, or wage increases in the name of anti-inflationism. In response to this growth slowed. You know there is a post to which this thread is attached that explains a lot of this. You might start there. Then the rich and their bought politicians started a war on regulation in the name of free and efficient markets. This had the effect of allowing them to blow ever bigger bubbles. When these went splat, also sometimes referred to as wealth destruction, no matter. The rubes got hit but the rich could go to their bought politicians, and the politicians would bail them out, even if that meant trillions. It was all very much heads I win, tails you lose, privatize gains and socialize losses.

Now while it's true that a lot of overpriced houses were built in inconvenient places, many of them will decline from neglect because no one can afford them, or get a loan for them if they were crazy enough to want them, or trust that the bank even owned the title to them. Even the building of them it may come as a surprise never produced that many jobs. Much of this was done in the Bush years and even before the recession hit after said splat of the housing bubble, Bush's job creation record sucked big time. So even the upside of the bubble wasn't particularly good for anyone but the rich. Indeed many middle class types were suckered into taking out HELOCs that just put them in debt when housing prices crashed. Ooops! But roads, bridges, water and electric systems, education, healthcare, middle class pensions, all this transfer of wealth to the rich didn't do a damn thing for any of these. So now we see a country with an official unemployment number of 15 million, an un- and under- employment rate of 25 million, and a total disemployment number with the BLS undercounts factored in of 32 million. Housing has not only blown up but is so riven with fraud that it will be decades before it is all sorted out if then.

So yes, Virginia, that is how the wealthy got and expanded their wealth. They stole it through massive frauds and corruption of the political system, and our current economic disasters, involving equally massive losses and bailouts are what came of it.

The next time your gone for 35 years, you don't have to stay completely disconnected. For example, we now have this thing called the internet which I'm sure you have heard of because this is where you read my comment. With practice, it can actually be quite informative. Anyway you might try it, see how it goes.

Oh, and those stories about people making their millions through sheer hard work and determination? That's what they are, stories, Horatio Alger inspired pap for the rubes. The guys who pick up the garbage on my street work harder and with more determination. If hard work and determination is what it is about than give a million dollars to them.

General Washington's picture
Submitted by General Washington on

This illuminates two of the three issues that everyone needs to be aware of to rebuild the Republic - assuming you realise that taxing transactional rent activity isn't enough.

Before you ask, here's the other one.

Submitted by lambert on

Nice to see you here, because of your great work at Yves place.

General Washington's picture
Submitted by General Washington on

Urr... wrong "Washington" Lambert.

He apparently got "George" because I already claimed "General", but I am considering trying to convince him to switch places...

Submitted by Hugh on

On cost per job, a starting point for consideration would be to take the estimated GDP for 2010, $14.6 trillion and divide it by the number of employed (139 million on average for the first 11 months of 2010). This gives $105,000 of GDP per job. Again this is only a starting point. A lot depends on what kind of jobs are being created.

TokenRealist's picture
Submitted by TokenRealist on

Wikirent failed to take into account that what caused the most recent economic debacle and the depression was idiots who over-leveraged themselves. Tax cuts created the positive economic growth environment where everyone felt so sure about future gains that they massively offered/took on debt in order to magnify their gains. This of course blew up in their faces as all get rich schemes do. Tax cuts did their job and promoted a dynamic economy. It was irrational exuberance and uncontrolled lending that caused the trouble in each case. The crash in 1987 was similar to May's flash crash where out of control computer trading did a ton of damage. I don't see how the '87 issues ties to tax cuts at all

I also was amused by the fact that he cited tax cuts for the reason industry has been dying in this country. High labor costs, mostly union related, and competion from abroad are what has driven business out. If I am a business and my products input costs are higher I must charge a higher cost to make a profit. Its a little hard to compete with a company in China making the same product with considerably less labor costs. You might make an argument against globalization with that, but you can't blame it on tax cuts. FYI if you look into it a bit you will find that because of technological advances we actually produce more than ever, we just need fewer people to do it. Consider how many people were needed in the lumber industry in the early 1900s vs. now (it's about a 100/1 ratio).

On my last note I will point out that he gave Clinton credit for the boom in the 90s and a balanced budget when we had higher taxes. The entity that sets the budget is congress, all the president does is sign it. The party in charge of congress when the budget was balanced was Republican controlled which pushed through cost cutting things like social securty reform (which Clinton did sign). The invention and implementation of the internet (which revolutionized the world and its economies) might have had a little something to do with the economic boom then. I would argue that the economy grew exponentially in spite of higher taxes and I have to wonder what could would have occurred if private entities had been able to keep more of their own money to invest.

The above is meant a respectful disagreement which I hope will inspire reasoned and logical debate.

Submitted by wlarip on

The effects of globalization(some good and some bad) have had a lot more to do with the demise of American industry, primarily manufacturing, and fair wage for Americans than tax cuts. Business will get whatever it needs from wherever it can at the cheapest available price in order to maximize profit. That is the mandate of the shareholders.

Calvin Coolidge said it best:

"The business of America is business."

How close the analogy between the second decade of the 20th century and the 1st decade of the 21st.

I wouldn't say tax cuts were the spark that started the fire that has immolated the lifestyle of a lot of middle class Americans and relegated the (so-called) lesser skilled to a life of service sector indentured servitude. I would say they were the gasoline.

The spark was when Regan busted the PATCO strike.. Until that time, labor was viewed as a 'hard commodity' due to the costs of collective bargaining. When the word, 'strike', became meaningless so did collective bargaining. It took a while to migrate from the government service sector to private industry. But the message amplified by tax cuts for business owners was clear.

"Open for business!".

The logistics of reducing labor costs by plant relocation didn't become available
until NAFTA. When it did, the 'giant sucking sound' predicted by Perot became a reality. It began with manufacturing. The American jobs that migrated were from people with a particular skill that provided a decent living wage but didn't transfer well to another line of work. This is called 'downwardly mobile'.

When Al Gore invented the internet, everything that business needed to operate globally on both the production and consumption side was in place. One of business' higher costs during the last decade of the 20th century was IT labor. Business discovered that India could provide the same services for a lot less money and a lot less attitude and their response was as expected. Imagine the surprise of another sector of the middle class that wound up working for a big box retailer. The irony of stocking American products made in China was not lost upon them.

Live beyond your new means and you're suddenly addicted to credit which, lo and behold, creates opportunities for CDOs. It doesn't seem like rocket science to me.

Who's at fault? Well, labor certainly had its excesses and it paid a dear price for them. Should business be encouraged to produce profits and thereby create jobs? Well, yeah. But in the pursuit of profit, business is blind to the people under the wheels. When it gets out of hand, it is not only the obligation but the duty of government to jerk hard on the reins and remind the horses that the fastest time doesn't matter if all the riders are dead.

Tax cuts and strike busting won't do that. It's an equal opportunity sin for both parties because big money spends well from campaign coffers

Tony Wikrent's picture
Submitted by Tony Wikrent on

TokenRealist's comment is so laden with typical wrong-wing propaganda and outright lies, that I will have to compile a list.

Notably, he or she posted the same comment on the financial markets blog SeekingAlpha, using the handle “morg” and was less reserved in his or her hostility.

1. TR writes: "Wikirent failed to take into account that what caused the most recent economic debacle and the depression was idiots who over-leveraged themselves."

Reply: TR must have missed this sentence: "What resulted was the building up of a speculative frenzy in the stock markets, especially with the application of structured leverage in what were called at that time "investment trusts." " And this one: "That means more money chasing “investment” opportunities, leading to price increases in financial capital or real estate or some other asset. In other words, an asset bubble."

2. In his second sentence, TR writes that tax cuts created an investment climate conducive to leveraging. I.e., irrational exuberance. In the very next sentence, TR writes that tax cuts "did their job and promoted a dynamic economy." Obviously, TR wouldn't know real economic growth of it kicked him in the nuts. He or she sees the bubbling exuberance of leveraged lemmings, and mistakes it for growth. The really bad thing is that a lot of people made a lot of money being mistaken like TR was, and they think this "success" of theirs makes them an expert on the economy. I would point the reader to what John Maynard Keynes wrote about speculators, and real economic activity: "When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done." Keynes’ one sentence pretty well summarizes my entire argument in the OP.

3. TR writes “High labor costs, mostly union related, and competion from abroad are what has driven business out.”

Reply: As I blogged here a few weeks ago: Labor costs are only 10% of U.S.-China price differential, "The other 90% is subsidy, currency manipulation, environmental practices run amok and labor practices that are simply deplorable."

In point of fact, U.S. labor costs are lower than those of almost all other advanced industrialized countries. In 2005, Peter Hooper and Kathryn A. Larin reported in the Review of Income and Wealth, that “In 1988, unit labor costs in the United States were below the average level of other industrialized countries.” On October 22, 2009 , the BLS reported that “on a national currency basis, U.S. unit labor costs tended to fall more or increase less than unit labor costs in the other economies from 1979 until 2008.”

4. TR writes: “I will point out that he gave Clinton credit for the boom in the 90s and a balanced budget when we had higher taxes.”

Reply: Clinton is mentioned in one sentence in a quote I use, and not in the context Morg assigns to the quote. And I did not mention "balanced budget" in my article. TR is outright lying here.

5. TR writes: “The party in charge of congress when the budget was balanced was Republican controlled which pushed through cost cutting things like social securty reform (which Clinton did sign). The invention and implementation of the internet (which revolutionized the world and its economies) might have had a little something to do with the economic boom then.”

Reply: Expert hunters able to track a specific type of animal are able to differentiate animals by their “signs” – hoof prints, and droppings. These two sentences are the sign of a typical wrong-wing ideologue. The actual history of the Clinton administration is that one of the most heated points of contention between President Clinton and progressives was his decision to follow the advice of Treasury Secretary Robert Rubin instead of Labor Secretary Robert Reich, and make reducing the deficit, then balancing the budget, a top goal of his administration. Famous quote: "You mean to tell me that the success of the economic program and my re-election hinges on the Federal Reserve and a bunch of fucking bond traders?" TR’s first sentence is the standard half-truth American conservatives were forced to adopt to explain away the “success” of Clinton’s economic policies. (TR and other conservatives may be surprised to learn that people such as myself, and many readers here at Corrente, do not actually see Clinton’s economic policies as a successful, but as a disastrous continuation of the economic neo-liberal policies of free trade and financial deregulation begun in the 1970s and 1980s by Margaret Thatcher and Ronald Reagan.)

So, it’s a bit of hoot that TR throws in that second sentence, and writes that the build out of the internet from a GOVERNMENT program (DARPAnet) to basic civilian infrastructure “might have had a little something to do with the economic boom.”

But to drive my point about my radically different interpretation of Clinton’s economic “success,” the boom of the 1990s was largely based on asset bubble in tech stocks, then in housing. Former AFL-CIO economist Thomas Palley as elucidated exactly how we moved from one upon the pricking of the other. Asset Price Bubbles and the Case for Asset-Based Reserve Requirements, May 2003.

See also Palley’s The Debt Delusion, for a shorter, less technical discussion.

6. TR writes “I would argue that the economy grew exponentially in spite of higher taxes.” Leaving aside for now the stupidity of thinking that any economy can grow exponentially (we shall chalk it up as an unfortunate choice of word), it’s clinically interesting that TR would finally concede my point that the national economy actually does better when there are higher tax rates on top income levels. Well, that’s the simple evidence of the matter: Clinton raised tax rates on the rich, and the Clinton economy turned in a far better performance than the Harding / Coolidge / Hoover economy, the Reagan economy, and the Bush Jr. economy.

The only conclusion I can reach is that TR a.k.a Morg is a typical wrong-wing hack apologist for the oligarchy, who trots out the usual line of bs whenever the oligarchy's systemic thieving is attacked.

letsgetitdone's picture
Submitted by letsgetitdone on

I agree very much with this post.

But there is a glaring omission, and that is the Kennedy Keynesian Tax Cuts of the early 1960s which Reagan used to justify his own move in the 1980s. I think you need to discuss that one to ensure credibility in your analysis, because anyone who is friendly to tax cuts will immediately think of this tax cut and view it as a negative instance refuting your "Tax cuts do not work."

My own position on this is that I am opposed to tax cuts for the wealthy and want to see tax increases instead. I want to do that because I want to make the distribution of wealth more equal. Given the multiplier association with taxes for the wealthy it's plain that raising taxes for the reach will have a small, but negative effect on GDP. That doesn't bother me, because the gain in a better distribution of wealth is worth it.

On tax cuts that benefit the middle class and the poor, I'm pretty agnostic. There I want to see what the multiplier looks like. My understanding is that payroll tax cuts for both employers and employees is pretty stimulative with a multiplier of 1.3. So I'm pretty favorable to these. Income tax and estate tax cuts have pretty pitiful multipliers so I don't think those should happen at all.

General Washington's picture
Submitted by General Washington on

I have to agree with the omission of JFK's tax cuts, which is entirely excusable, since few people seem to mention them - or Nixon's - when tackling this subject.

In addition to wealth/income distribution, I would add that the Kennedy cuts were also the beginning of a loosening of the cash-for-influence bottleneck.

Having your top tax rate cut by 20-plus-percent (it did go from 91 to 70, correct?) certainly can have a stimulative effect on freeing up the wealth necessary to influence those who are inclined to lower it further...

CMike's picture
Submitted by CMike on

However see footnotes 18 and 19 here. The highest "effective tax rate" in '53 was limited "to "88% of statutory 'net income.'" For the last seven Eisenhower budgets, fiscal years '54 through '60, "the highest tax rate was subject to a maximum tax rate limitation equal to 87% of 'taxable income.'"

I assume this means that even though you could be taxed at a rate of 90 plus percent throughout the Eisenhower years on annual taxable earned income in excess of $400,000, if you didn't have enough in the way of other types of income, which were taxed at different rates, to combine for a lower rate, at least you didn't have to actually pay more than 88 percent in federal taxes in '53 and 87 percent in those other years.

Submitted by hipparchia on

... if you didn't have enough in the way of other types of income, which were taxed at different rates, to combine for a lower rate, at least you didn't have to actually pay more than 88 percent in federal taxes in '53 and 87 percent in those other years.

that's a compromise i could live with!

CMike's picture
Submitted by CMike on

Here's a good discussion of some of the issues surrounding the "Kennedy Keynesian tax cuts:"

Start with the situation at JFK's inauguration in January 1961. The economy was near the end of a 10-month recession....

Unemployment had been high during Ike's term, but inflation-adjusted national output grew faster than it subsequently would under Nixon or under either Bush, and not that much less than under Carter, Reagan or Clinton....

A fiscal hawk, Eisenhower had the smallest budget deficits relative to gross domestic product of any postwar president....

Ike's emphasis on sound finance motivated him to back keeping tax rates near their World War II highs even though many in his party called for cuts.

The upshot was that Kennedy entered office with the nation's finances in good shape. Yes, the debt-GDP ratio would fall further until it hit its low point of 32.6 percent at the end of the Carter Administration. But with a deficit of only 0.6 percent of GDP for the 1961 fiscal year in which JFK took the oath of office, there was room for additional spending or for tax cuts....

...[T]he economy took off. By the end of 1961, real GDP was up 6.3 percent over the prior year. For 1962 it was 4.1 percent and for 1963, 5.3 percent. Overall, inflation-adjusted output grew 16 percent over the 34 months from his inauguration to his assassination. And even at the punishingly high tax rates inherited from Truman and Eisenhower, individual income tax revenues for FY 1964 were running more than 19 percent higher when he was killed than they were in FY 1961....

The article doesn't mention the top tax rate reduction from 91% on earned income to 70% was accompanied with the elimination of a lot of tax shelters.