Voters hate taxes, and the MSM loves saying "tax and spend Democrats". But the alternative has proven to be far worse -- "borrow and spend Republicans".
Tax and Spend means the government wastes our money that we earned today. It sounds bad, but it is more honest.
Borrow and Spend means the government wastes our children's money that we hope they will earn more of tomorrow, so they can pay it back plus interest. This is a faith-based policy from the party of "family values", and in recent memory, their track record is horrible.
Congress approves spending, but earmarks have never dominated the budget -- the President's policies matter most. Since the dawn of modern lobbying in the mid-1970's, the National Debt improved under Democratic presidents and grew worse under Republican presidents -- whether they were one or two-term presidencies.
So... "growing our way to recovery" isn't working. Why?
Since Reagan, the wealthy have promoted the idea that cutting taxes for the rich and businesses will grow the economy through the magic of Supply-Side Economics. Even today there is still vigorous debate between staunch supporters and persistent detractors.
But I have a more fundamental problem with the "pop economics" version of supply-side -- it is a betrayal of the original theory by Jude Wanniski:
- Wanniski never claimed that cutting taxes to the wealthy always spurred growth. What he did say was that when a government taxes people so much that they rebel against taxes by finding alternatives (barter, evasion, black market activity), lowering taxes would improve compliance and thus total revenue. This was his initial insight after learning of the Laffer Curve, and to this day Arthur Laffer himself appears occasionally on the Wall Street Journal Editorial Report (which has moved from PBS to Fox, quelle surprise) to praise the Bush tax cuts and condemn the Democrats.
- Wanniski insisted on a hard money policy -- not a true gold standard requiring huge gold reserves, but a virtual one in which the central bank uses its various policy levers to maintain the price of gold within the ask/bid spread of its gold window, based on the trends it observes. He notes that the Bank of England successfully implemented this policy for centuries with a relatively small gold reserve, but abandoned it in 1931 (after racking up too much debt -- same as the USA in 1971). However, it is not the policy followed by either the Federal Reserve or the Euro Central Bank, both of which are somewhat more activist -- boosting available credit at the cost of slow price inflation, and resisting deflation to protect the ability of debtors to repay.
- Wanniski believed that runaway deficit spending and deliberately easy credit were both idiotic policies, because they led to inflationary booms which distorted economies and trade, and had to be cured either by deflationary busts (bankrupting weaker debtors) or permanent devaluing of the currency (stealing from creditors). He blamed deficit spending and manipulation of interest rates and money supplies for most of the currency dilemmas and fiscal crises around the world since the end of WW2 (and dissects many of them in his book).
- Wanniski had absolute faith in the promise of Free Trade, but he insisted that governments must not impose onerous burdens on their economies or investment would simply go elsewhere. He described many instances where governments enacted successively more "confiscatory" taxes, tariffs, and levies, only to find that their most productive businesses simply packed up and moved away -- and, in cases where the burdens were finally repealed, they recovered.
What would Wanniski say about our economy today?
- He would agree with the economy blogs that we set ourselves up for another huge crash and depression, and that the monetary policy that got us here cannot get us out. Throughout history, inflationary booms have always ended in hyperinflation or deflation.
- He would argue that our expanding public and private debt is inflating prices and devaluing our currency, forcing a sympathetic boom to occur in every country that continues to tie their currency to ours -- while eroding living standards at home.
- He would argue that by maintaining a high cost of living (through inflation and inefficiency) and tax policies that put our exportable industries at a steep disadvantage, the USA's globalization policy has guaranteed that our economy would tilt towards non-exportable industries and that investment capital would flee the country.
This last point is key to understanding why "pop" supply-side economics has not worked:
Supply-side tax cuts must be invested in ways that ultimately result in the needed downstream tax revenue and better economic health, or the policy is a failure.
Pimping up the economy so it spins its wheels faster while sinking deeper into the mud qualifies as "failure".
What did our economic policies actually accomplish?
- The ease with which corporations and investors can move their capital overseas has led to massive boom growth and investor returns in emerging markets -- because that's where the better returns are! This boosts earnings growth in world stock markets while providing relatively little tax revenue growth at home. American job growth since 2001 has been in non-exportable industries like defense, housing, retail sales, personal services, financial services, and health care.
- Deliberate easy credit policies have enabled a consumer culture worthy of a decadent empire, fueling the cycle of WALMARTization whereby unilateral price fixing by WALMART forces our industries to cannibalize themselves as if they were being price-warred by deep pockets -- much faster than with natural free market competition. Perversely, the falling prices compensate for much of the price inflation that we see in other goods and services that WALMART does not sell.
Wanniski gave his book the ambitious title The Way The World Works because he felt it would finally discredit all the incorrect and counterproductive fiscal and trade policies that governments around the world were using:
I actually believed God had chosen me, of all people, to bring the good news of supply-side economics to mankind, thereby saving the world from perpetual economic decline.
I am not joking -- that is from the preface to the 4th edition. Wanniski would be rolling in his grave if he knew how much injustice has been committed in his name.