Reaganomics is on the ropes

“person shadow boxing grayscale” by Timothy Eberly on Unsplash

Kansas and Wisconsin sound the death knell for supply side economics

Ronald Reagan came to office promoting prosperity by cutting taxes and getting government off the back of business. A one-time New Deal Democrat, Reagan argued that government was the enemy. Where the establishment prior to Reagan had hoped to use government as a force to achieve their goals, Reagan argued that government itself was the problem. As he stated, “the most terrifying words in the English language are: I’m from the government and I’m here to help.”

We now look back on Reagan, how he worked with Democrats and pushed through a tax increase, as a relative moderate to today’s Republicans. But at the time, he was a revolutionary. I remember looking at the budgets over time for one government program after another. They had seen steady increases over the years…until Reagan came into office. Then, the budgets simply fell off the cliffs.

Later on, Tip O’Neil, Democratic Speaker of the House at the time, said that his greatest regret was not fighting Reagan’s cuts to social programs. But he believed that people would be so outraged by the cuts that they would turn against Reagan. He could not have been more wrong.

The tragedy is that government was well on its way to achieving many of the goals we liberals still dream of. Government activism reached its pinnacle in the Johnson administration, when Medicaid was passed and the war on poverty was well on its way to succeeding. But that all ended in a vice-grip between the left and the right. Johnson lost the support of the left due to Vietnam — a foreign policy he inherited and knew not how to extricate himself from — and from the right due to civil rights.

After all, it was during his time in office that the Civil Rights Act and the Voting Rights Act both passed. These pieces of legislation turned the formerly Solid South Republican and pushed suburban whites to the G.O.P. These one-time Democrats, after all, lived in the Confederacy, or had fled urban diversity for lilly white suburbs. Johnson’s plans to desegregate these two regions led directly to Nixon’s southern strategy and ultimately to Trump.

Anyway, unlike Nixon, Reagan actually had an economic philosophy. His anti-government philosophy was something new, but it was based upon the economic research of Arthur Laffer and Milton Friedman, the dean of the Chicago school of economics.

Laffer was famous for his curve. He argued that higher taxes do not always generate higher revenues, that at a certain point, taxes become so high that people lose the incentive to earn money that can be taxed. Imagine this. From the end of World War II until 1981, the top individual tax rate never went below 70%, and at one time, it reached 94%. You read that right. Such high taxes inevitably lead to the very wealthy cheating, or moving assets overseas to places where taxes are lower, or simply deciding not to work since the government takes so much of their earnings anyway. This is the legitimate issue Laffer was pointing to.

Friedman was close to what we would call a libertarian today. A true genius, he believed that societal welfare was generated by business being successful, and anything that got in the way of business success was bad for America. He famously said that “the social responsibility of business is to increase its profits.” So it is not surprising that he argued that government should not get in the way of business profits through regulation.

These twin goals, lower taxes and lower regulation, became the basis for Reaganomics. Their arguments were not without basis. Taxes probably did need to be lowered somewhat, and excessive regulation could be a drag on economic growth. But at a certain point, both are necessary. It is not always good policy to cut taxes and regulation more. The key is to achieve some level of balance. Even Arthur Laffer’s curve indicated that.

Reagan’s personal popularity, and a pretty robust economy for much of his term, created a myth, one that became the basis for today’s Republican party. At this point, it is a reflexive matter of faith that taxes and regulations should be cut. To Republicans, there is no such thing as a good tax or a good regulation, even if the lack of them result in the problems we have today: high income inequality, huge deficits, and environmental catastrophe in the form of global warming.

Republicans, though, have never been able to truly put their theory to the test. Those pesky Democrats always got in the way of them implementing their theory in full, and demonstrating that cutting taxes will lead to so much economic growth that revenues will actually go up. That is, until Sam Brownback was elected Governor of Kansas. With Republican supermajorities in the state legislature, Brownback decided to make Kansas a supply-side heaven. He deeply cut taxes, assuring people that the economy would boom, and economic growth would make up for the lost revenues.

Well, the economy never boomed. And in short order, deep cuts were necessary to education and law enforcement. The Republican legislature rebelled, and he was only able to save his policy agenda due to his veto power.

Kansas is now a train wreck. The voters decided enough was enough, and they elected a Democrat to the Governorship. Strike one against Reaganomics.

In Wisconsin, Scott Walker decided he was going to gin up economic growth by destroying the power of unions and free-thinking academics. Things didn’t turn out as planned, so the voters kicked him out too and put the Democrats in charge. Strike two.

The total and complete rejection of Reaganomics in these two states is telling. Kansas is especially poignant. That is a Republican state! To elect a Democratic governor is striking. People were really unhappy with what supply-side economics wrought.

Strike three must be the Trump tax cuts. Billed as tax reform, they fooled nobody. These were simply a give-away to the rich while the difference would be made up by cuts to social programs such as Social Security or healthcare. In this last election, people rejected that policy agenda by a wide margin.

What once seemed a coherent economic philosophy has become a laughing stock. But the Republicans don’t know what else to do. In its place, they have resorted to race-baiting, which only serves to further alienate the most educated people in society — the same people who actually see some economic benefit from these tax cuts. Thus, just as government activism was stopped in the 1960s in a vice, so too is the conservative economic agenda. On the one hand, people see that supply side economics are a disaster. On the other hand, its vacuity lead to the Republicans engaging in the basest kind of politics to protect their position, thus alienating many of the people who might actually see some benefit from their policies. The result is what we saw in the midterm election.

It will be interesting to see if they can come up with a new agenda. If they can’t, I predict they are well on their way to irrelevance.

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