It has been my firm conviction for several years that the main problem with American politics, government, and society is the inability of almost everyone to understand how the economy really works. “Supply-side” economic ideology, which took over after WW II with the ascension of Paul Samuelson’s “neoclassical synthesis” simply presumed , religiously, that balanced economic growth would continue to provide “full employment” and optimal economic “efficiency,” no matter what.
Income and wealth distribution was irrelevant. Nineteen editions of his textbook Economics , beginning in 1948, preached the gospel. Observing in his 6th Edition (1964) that Karl Marx had predicted that capitalism would inevitably lead to increasing inequality and economic decline, he maintained that Marx had been proved wrong by the postwar decline in U.S. inequality. In the 18th Edition (2004), however, confronted with more than 25 years of growing income inequality, Samuelson and his coauthor William Nordhaus retreated to Arthur Okun’s 1975 book “Equality and Efficiency: The Big Tradeoff,” in which he argued that attempting to reduce inequality would only decrease “efficiency.”
To understand what Okun meant, I reread the Okun book a couple of times: Okun had merely railed against communism and central government economic planning, and cited nothing more than the “Invisible Hand” of Adam Smith. This was, in fact, his sole basis for eternal optimism in continuous steady growth with unfettered capitalism, a philosophy that had never been supported by scientific analysis. In his 2001 book Economics as Religion: from Samuelson to Chicago and Beyond, Robert H. Nelson argues that “economics” is essentially a secular religion: It’s a good point.
Incredibly, to persuade people that Adam Smith in 1776 had argued in The Wealth of Nations that a market economy would always take care of itself, supporting the entire population, Samuelson and Nordhaus actually rewrote the one and only metaphorical reference Smith made to an “invisible hand” in The Wealth of Nations, to make it look like a restatement of their position that everyone’s pursuit of individual self-interest promotes the overall public interest. There was no acknowledgement of their wholly improper fabrication. Of course, Adam Smith, who detested greed and feared the growth of collective economic power, never said any such thing. (See my book Reinventing Economics: The Failure of Capitalism and the Economics of Inequality, available as an e-book at Amazon Kindle, Ch. 5 and App. A.)
Today, as the House prepared to vote on the draconian Paul Ryan health care bill, I watched the White House press secretary, Sean Spicer, field questions, and at one point he insisted the bill had to be passed because it was the only way to “save the system.” Then it dawned on me: As the debate has raged, supporters of the AHCA may actually see the elimination of health care benefits for as estimated 24 million Americans by 2026 to be economically necessary! If so, they necessarily believe that tax cuts for the wealthy are needed to stimulate the economy. They are firm believers in the Trump/GOP trickle-down economics mythology.
This is a strange outgrowth of the Samuelson religion. If the “invisible hand” always makes everything work out well, then one might think the economic gods could tolerate a little “socialism,” if only to the extent of providing health care to everyone. But the gods, evidently, insist that everyone pursuing their own self-interest does not extend to everyone trying to stay healthy. Apparently, the invisible hand is only interested in taking care of the top 1%.
This is what happens when “economics” degenerates into religious ideology instead of “science.” It ends up as a purely elitist social science. It should be obvious that extreme inequality is proof of economic failure for most Americans — which is why the elitism of Samuelson and Nordhaus should also be obvious; and why the near-universal acceptance of voodoo economics is impossible to understand.
Donald Trump is reportedly concerned (as are Wall Street investors) that failing to pass the AHCA might jeopardize the planned huge tax cuts for the wealthy. This bill as originally proposed, according to the March 13, 2017 Congressional Budget Office (CBO) “CostEstimate” would by 2026 reduce Medicaid compensation by $1,226 billion dollars, reduce the federal budget deficit by $337 billion, and provide tax savings to the wealthy of $883 billion (See Table 1). The idea that this is essential to our economy, however, is rarely articulated as openly as Spicer did today.
Even the conservative New York Times columnist David Brooks balked at this bill. In this morning’s column- “The Trump Elite, Like the Old Elite, but Worse!” - he wrote:
“I opposed Obamacare. I like health savings accounts, tax credits and competitive health care markets to drive down costs. But these free-market reforms have to be funded in a way to serve the least among us, not the most. This House Republican plan would increase suffering, morbidity and death among the middle class and poor in order to provide tax cuts to the rich. It would cut Medicaid benefits by $880 billion between now and 2026. It would boost the after-tax income for those making more than $1 million a year by 14 percent, according to the Tax Policy Center. This Bill takes the most vicious progressive stereotypes about conservatives and validates them.”
Despite Brooks’ commendable recognition of the draconian immorality of this bill, a couple of comments are in order:
First, there are some erroneous numbers in this column, as I read these reports: (1) The CBO analysis identified a reduction in Medicaid benefits of $1,226 billion by 2026, and tax savings for the wealthy of $883 billion; (2) Brooks appears to have grossly overstated the TPC’s estimates of the income effects of the tax savings. These estimates will no doubt be updated soon, but TPC reported the “average tax change as percentage of income” for those making over $1 million to be only -1.6% (See “Who gains and Who Loses under the American Health Care Act,” TPC, March 2017, here);
Second, and more importantly, Brooks fails to recognize that the kinds of policies he favors can only favor the rich. The idea that health care markets, or any unregulated markets for essential services like health care, will automatically produce low-cost outcomes is a mirage. The trickle-down philosophy that drives the entire Trump and GOP economic agenda is completely fraudulent, as has been amply proven over the last 35 years. Recall the Heritage Foundation’s 2001 “forecast” that the Bush tax cuts would eliminate the federal debt by 2010, increasing real median income by 10% (“The Economic Impact of President Bush’s Tax Relief Plan,” The Heritage Foundation, Center for Data Analysis Report #0101, April 27, 2001, here), but federal deficits increased instead, and by 2010, the federal debt had doubled. The effect of the tax reductions at the top, in fact, far more than offset the more modest tax reductions for lower income groups. (See Reinventing Economics, Chapter 14).
As my previous posts explain, the Trump/GOP trickle-down agenda reflects a fundamental misconception of how the economy works. It’s impossible to know how much of the frantic support for increasing the wealth of the very rich is due to pathological greed, and how much is due to this misunderstanding of economics. However, because so many people are under the spell of voodoo economics — even people who are not at all wealthy — I continue to blame the economics profession, and Paul Samuelson and his followers, for the terribly dysfunctional America we continuously endure. Their support for wealthy interests has been implicit in their denial of depression, and of the negative effects of inequality on growth and prosperity.
Epilogue: A while ago my wife came to tell me that the AHCA failed to pass in the House: Hope springs eternal!