For decades, you've been living in a world whose economy was defined by the ideas of Jude Wanniski. A political writer turned investment advisor (and blogger), Wanniski never ran for president or even for congress. He didn't head up the federal reserve. He never even had his own sound effects machine on CNBC or a chance to sit next to a wild-eyed blonde on Fox. Despite making a lot of economic forecasts, he wasn't actually an economist. In fact for most of his life the thing that made Wanniski somewhat famous was the fact that he had to leave his post as assistant editor of the Wall Street Journal after being caught handing out material for a Republican candidate, which was a violation of the paper's ethics agreement. Clearly, times have changed.
So what did Wanniski do to become a global economic Illuminati? Well, it was Jude Wanniski who picked up a data-free supposition scrawled on a napkin by freshly-minted PhD Arthur Laffer and popularized it as the "Laffer Curve." It was Jude Wanniski who created the term "supply side economics" and outlined the ideas that others would describe using the terms "trickle down" or (before becoming converted) "voodoo economics." Wanniski designed the tax cuts of the first Reagan administration, developed the theory that it was unsafe for the government to have any cash, and tagged tax policy as the cause for poverty in developing nations. Steve Forbes and Jack Kemp, among others, learned their ideas of flat taxes and government reduction from Wanniski.
This world you live in—the one where people insist that lower taxes generate more jobs and revenue, the one where both congressmen and pundits advocate "starving the beast" that is government, the one where keeping taxes on the rich low because they're "job creators" draws knowing nods, the world in which presidents are elected on the theme that government is the problem—it's Wanniski World. The Reagan Revolution ran on those ideas, so does the Tea Party, and so does a big chunk of what's become "mainstream" economics.
And the problem with all that is... Wanniski was no economist.
Let me hasten to add, neither am I. Please feel free to take everything below with not just a grain of salt, but whole oceans worth of the stuff. The thing is, Wanniski was wrong. Not just a little wrong, 180 degrees wrong. There's very good evidence that George H. W. Bush was right when it came to supply-side economics: it was voodoo all along. The Laffer Curve? Laughable. The idea that coddling the wealthy will make things better for everyone? Backwards.
The core problem with all these ideas is that they start from a bad assumption. No matter how it may seem, the rich are not job creators. That's as true of the guy who owns a factory as it is of the playboy who lives on daddy's yacht. Giving money to those who have money doesn't open up new markets, spur new investments, or spawn new industries.
Jobs come from consumers. It's consumers who create jobs by driving up demand for goods and services. Being a factory owner or a CEO is not the same as being a job creator. No businessman ever created a job because his wallet was a little thicker. It doesn't matter if it's the CEO of Exxon or the winner of the Irish sweepstakes, pouring money into the pockets of the rich does zip-diddly to create jobs, lift the economy, or improve the lot of the average citizen. It most certainly doesn't boost government revenue. Jobs are created when demand calls for it. Revenues go up when the economy grows. Cutting taxes for the wealthy stimulates neither demand nor economic growth.
Henry Ford was wrong about a great number of things, and a bigot on many more, but he wasn't wrong that paying workers higher wages and not keeping all the cash for himself was the key. It doesn't just work for moving Model T's, it works for building a nation. A good tax policy is one that rewards those companies who pay out their wages to the workers and invest their profits in expansion. A bad tax policy is one that retards expansion and damages consumption by encouraging those at the top to take more for themselves. Redistribution of wealth? Sure. All tax policy consists of redistribution of wealth. It's just that current tax policy redistributes that wealth upward—and that's a recipe for disaster.
How can we know that? We know because we've tried it—and not just once. There's an old rule in publishing that states for every graph added to a work, the number of readers is cut in half. By that measure, I'll have about one-twentieth of a reader by the time we get to the end of this, but join me after the jump, loyal left pinky toe of a reader, and I'll try to make it worth your while.
Here, take a look at this:
That's the top tax rate in the United States going back to World War I. You can see that the current top rate of 35% is not the lowest it's been over the last century, but it's certainly close. You might also notice that even the higher rates of the 1990s are quite low when compared to what was in place for the better part of a century. Not only are income taxes on the rich very low, taxes on capital gains are lower still. By any measure, we're living in rich person paradise when it comes to tax rates.
Now, compare historic rates with economic growth.
That upward slanting line is the GDP adjusted for inflation. This is a familiar image, but it's still a little deceptive. All those fits and starts tend to disguise what's actually happening. Take a look at this one instead.
Now you can see clearly those periods when GDP was going up, and when it was taking a dive. You can also see that the relationship between increasing GDP and low top rates is not just marginal, it's nonexistent. In fact, the statistical correlation between top tax rates and GDP growth is 0.18. That means that GDP actually tends to increase as the top tax rate is increased—though the relationship is so poor that it would be foolish to draw any such direct conclusion. One thing the data definitely does not show is any economic boost from lowering rates.
Here's another way of looking at it. There have been 7 years in which the top rate was below 30%. Over those years, the average GDP growth was a dismal -1.2%. Keep that up across all ranges, and you get something like this...
This chart is a bit deceptive, since the number of years taxes spent in each range varies widely. However, during the course of the years in question there were 29 years in which the top tax rate was below 40%. Over the course of those years, the average GDP growth was less than 1%. In the same period, there were 24 years in which tax rates exceeded 80%. The average GDP growth in those years? 2.8%.
If that sounds coincidental (and it could well be), we're fortunate enough to have another place to check. Conservatives love to look to the states, so let's do just that.
From 1984 to 2009, the government makes available median income values for all 50 states (plus the Distric of Columbia). As you might expect, income growth over the last 25 years has not been evenly distributed. Folks in DC have seen their should-be state raise the median income by 32%. Utah and Iowa have done almost as well at 29%. At the other end of the chart, some states have actually seen negative income growth over the last 25 years—including both Barack Obama's Hawaii and Sarah Palin's Alaska. How do these changes relate to the top tax brackets in each state? Just as with the federal numbers, correlation between income growth and tax rate over 51 states demonstrates a slightly positive relationship (increase taxes for greater income) but again that correlation is a long way from definitive. Put it on a chart and it looks like this.
The pale blue line at the middle of this graph represents the relationship between top tax rate and income growth—not as neat as you would like, but there's certainly no hint of a negative impact on income growth from having a higher tax rate. There are 9 states with a top tax bracket above 8%. Over the last 25 years those states averaged 17.6% growth in median income. There are 7 states with no income tax. Over the last 25 years, those states averaged 10.4% growth. You might want to mention that to the next politician claiming that cutting your local tax rates would make the state more business friendly.
Any way you slice it, the evidence that cutting taxes for the rich stimulates the economy just isn't there. There's a century of federal data behind that, along with data from every state and from other nations. All of which should be enough to blow the Wanniski-based economics of the right out of the water, but then trickle down economics never had any actual numbers behind it to begin with.
And that brings me back to Jude Wanniski. If you're wondering why Wanniski, whose ideas and influence are at the core of much of current conservative policy on taxes and the economy, doesn't enjoy the right wing sainthood of a figure like Ayn Rand or Ronald Reagan, it's because Wanniski lived long enough to fall out of favor with the new right.
For years before the war in Iraq, Wanniski pointed out that the inspectors had not found weapons of mass destruction. After looking at their reports, he doubted the US claims that the inspectors had missed massive stores of weapons. Jude Wanniski vocally opposed getting involved in that war even though taking that stand cost him influence in Washington and lost him many of his big name Republican clients.
Eventually, Jude Wanniski became so frustrated with the Republican Party that he endorsed John Kerry for the presidency in 2004. He died in 2005, after denouncing George W. Bush as a dangerous leader.
All of which is not just ironic, but more than a little sad, especially when you consider that the two other people at that table with the enthusiastic Wanniski and the young Arthur Laffer were a couple of staffers named Donald Rumsfeld and Dick Cheney.