This is an attempt to bring together some threads of thought regarding republican economic theories, why the Clinton years produced an economic boom to the country, why Bush's plans turned to crap for the first term (an may rebound in the second) and finally, what does this have to do with Social Security.
In a nutshell:
* Republican economic theory caused the collapse of the stock market and the squeeze on the fund mangers and middle class;
* Taxes are a social investment on the level of a Pachinko game;
* The Economic growth under Clinton was an unplanned result of his actions because of how and where the feds spent the cash;
* Any economic rebound in GW's second term will be minimal but should be expected and
* The SS battle is attempting to pay off the fund managers, reinvigorate the stock market and even if the battle won by the Dems, the war with Republicans over the conceptual aspect will be a lot, lot longer.
It is timely in that Sterling Newberry's post earlier touches upon some of the same themes.
More below the fold.
Reading Norm Chomsky about a year ago regarding I've been mediating over the economic models of the republican party. I would recommend reading his stuff if you want details but as I understand his discussion:
1) the model of trickle down (or supply side economics) says that by cutting taxes to the wealthy and to corporations you generate movement of investment funds into development and create new opportunities, ergo the government has new sources of tax revenue rather than piling new and bigger taxes on the few, and
2) federal spending and focusing on defense also generates growth while keeping America strong. (Wave flags here.)
Back in the late 40's and 50's, these economic assumptions were probably right. America's economic base DID grow after the WWII, and defense spending during WWII lifted the country out of a long, long depression. But the reasons behind WHY they worked and why they CAN NO LONGER work aren't really discussed in Chomsky.
Think of America back in the 40's though the 70's as a closed ecologic system. We were a manufacturing based economy. Production of goods for the most part were either consumed by American's or exported. Foreign goods were minimal - I'm old enough to remember the attitude that accompanied the "Made in Japan" notices on radios and other goods - and the idea of shipping costs and time made out of America labor unrealistic regardless of how cheap it may have been. Labor forces in the US were plentiful, the aspect of foreign involvement with American goods was suspicious to the US (commies over there, commies every where) so that internal development and reliance was a sign of American strength.
Back then, when the fed's spent tax dollars - regardless of what it was spent on, but in particular on defense - those funds went to American firms that hired American's or who subcontracted those goods out to other smaller American factories across the country. I remember reading somewhere that in the 50's or 60's, when Detroit was in heavy production - 1 out of every 4 or 5 businesses in American were somehow tied to the automobile industry.
When defense contractors or other American companies obtained contracts with federal, state or local governments, those funds actually did flow within the confines of the closed system. There was no "off shore" manual labor (other than some very raw products) so tax dollars flowed from various levels of government back into the blue and white collar workers involved in the production.
The tax dollars spent on defense were a means to prime the pump of the American economy. In fact, Chomsky states that defense spending via IBM, General Motors and other contractors for "research and development" were investments in the long term prospects of the company. Defense at the time (40's thorough the mid-60's) comprised one of largest component of federal spending, making it a logical avenue for economic investments since it was a serious, wide spread public concern in light of WWII and the rise of the Soviet Union. Social service spending was nearly non-existence until the "War on Poverty" and the rise of American social conscious.
When Republicans adopted the economic model of defense spending as a key feed to economic stability, it was only a reflection of what was then a current stable model. This model did not take into account the shift in the economic base of American (from manufacturing and production to a service based economy), nor have Republicans updated the economic model to reflect the reality of today's world. In today's world, a contract to a manufacturing organization may actually be cut among the various international components of the organization and sizable sections of the funds could end up off shore.
So where does the whole, low taxes for the "wealthy" come in? Think about American History again. From the depression until through WWII, average Americans - even those with a little cash - were generally distrustful of banks and the stock market. Americans who were old enough to have cash remember individuals whose wealth was in "paper" (stocks) and they saw their financial footings evaporate as stock prices declined. As stock prices declines, investment opportunities for companies also evaporated.
Those individuals whose investments were not in common stocks, but in the actual ownership of the physical property or in other investment pools were not as affected during the decline of the market. They were the "super-rich" who owned the banks, the rail-road, the steel mills. They took small amounts of their available cash and used that to fund new opportunities. And as these individuals with funds looked for investments, they looked for property - either real or intellectual property - and they looked for stable political systems that they could control.
Following the stock market collapse, the market did not have significant "institutional" forces representing smaller, independent investors. The development of money-market funds, the 401K funds and other investment mechanisms from the 80's on help fuel the growth of the "institutional investors". The investments were being made on behalf of middle class, working individuals who would place small amounts of cash in investment pools over long periods of time. These investments always depended upon the "surplus" cash available to the family at the time. As wages "rose" more than inflation, investments from this group would also increase.
But when the Republican model of "low taxes" to spur investments was made, the individuals who had the cash were the "rich" and, at that specific point in time, there was no real means to spur development without finding means to release or re-direct the cash. As the stock market matured in the 80's and 90's to reflect opportunities for investment by money market funds, IRA's and other institutional level investors representing a huge number of small investors, the need of the super-rich to fund the investment pool was eliminated.
Take a minute to think about GW's double-whammy to the system: first tax cuts to fuel the economy (his justification, not mine.) If those cuts had been effective, then the market and economic conditions of the country would have improved within months of the initial tax cut. Fact is, the wealthy never lack the fiscal resources to invest when the opportunity presents itself; but even the wealthy tend to watch the flux in the market so when institutional investors representing the smaller investor lack the funds and the market stalls, they may be more hesitant to extend their portfolios in risk areas and retreat to more stable but low return investments.
But since the squeeze was really on the middle class - the ones with some liquidity in their investment decisions, like the ability to shift a couple thousand to a mutual fund or to some other investment pool - the market stall reflected the inability of the middle class to address GW's second attack, the cut in domestic spending.
Taxes as Pachinko Game Theory
I have a friend who has adopted a European attitude towards taxes: they are the cost of living in a moral and structured society. But taxes are also a means to an economic end and the spending of those taxes can (and often do) generate benefits "down stream" from their original intention.
In the past, these benefits might have been limited to specific companies or individuals. Today they are more widespread. But regardless of the extent of the benefits (individual or widespread) when tax expenditures are seen as investment pool resources it becomes possible to weigh the overall economic output of the spending decision.
Think of tax expenditures as a type of huge economic Pachinko game. For those not familiar with this Japanese form of "gambling", Pachinko is a combination of pinball and slot machine using steel "ball bearing" type balls. The player shoots the ball to the top of the game and waits for the ball to fall. The pachinko game uses rows and rows of metal pins that influence the fall of a dropped ball and most balls fall to the bottom of the game without a payout.
The only aspect of the game that an individual can control is the speed by which the ball is thrown into the game and the number of balls played - just like taxes. On the pachinko game there are special holes that, if the ball finds its way into that hole or slot, have a payout of additional balls.
If you look at taxes as an investment pool, you can then look at areas of expenditures that might result in a return on the initial investment. These returns can be "social" - reduced crime, higher education - or they can result in actual fiscal improvements over time. They are the special holes that have a payout for the player. When a tax "ball" enters the game, it can fall into a non-return area or into a slot that has a return.
Why Clinton and not GW?
Under GW's plan from 2000 to 2004, the collapse of the economy was a direct result in not understanding how the tax investments in today's society impact the entire economy and his shift in directing balls to low-to-no payouts in the system.
Defense, even with a war, do not generate additional economic opportunities regardless of the systems being built or developed or the replacement munitions needed. The system is at capacity and with the changes in technology, the need for manufacturing growth at level that can be significant is small. In addition, the major defense contractors have off shore capabilities for various components of their efforts (even if the individuals directly tied to a specific defense contract are "on shore".)
Clinton's presidency success was only a matter of "luck" however. As a matter of social policy, Clinton took tax dollars and directed those funds to service sector jobs that reached across America: the police forces, the local educational systems and the health care systems.
However, those systems employee hundreds of thousands who then feed the real economic engines in the US by spending locally and, when possible, feeding the investment pools. When the tax "ball" falls into the special hole called "police" or "healthcare", those dollars then tricky throughout the economy and the remain in domestic pockets.
GW basically took a working "factory" and attempted to re-engineer that factory to specific products that do not generate self sustaining economic forces. When GW pulled (is currently planning on pulling more via reductions in COPS and education) from domestic spending that happens across the country in almost every community to military spending, more of the investment opportunities from the middle class becomes lost and the market will continue to stagnate.
So how do you get new $$$ into the market, by freeing up the funds that reside in Social Security program.