PortFolio Weekly

PortFolio Weekly
October 2, 2007

Crackpot E-Con 101

by Jim Newsom

Alan Greenspan’s memoir/confessional, The Age of Turbulence, has been getting all the publishing headlines lately, zooming up to the top spot on best seller lists while the author makes the rounds of TV chat-em-ups. And it certainly has been interesting to hear the former Fed chief vent about the Bush administration’s out of control tax-cut-and-spend economic policy which he helped to enable.

But another book that came out the same week is actually more noteworthy in its analysis of the Republican economic revolution of the last three decades. The Big Con: The True Story of How Washington Got Hoodwinked and Hijacked by Crackpot Economics was written by Jonathan Chait, a senior editor at The New Republic. In it, he examines the astonishing rise of “supply side” economics (aka “trickle down”) that has driven GOP policies since the Reagan ascendancy, reaching its apex during the six-years-and-counting run of the Bush II administration.

I remember well Ronald Reagan’s embrace of the whacky theory that cutting taxes on the wealthy would magically produce higher incomes for all and greater revenues for the government. You may recall Poppy Bush’s succinct analysis when he was running against the Gipper for the 1980 Republican presidential nomination: he called it “voodoo economics.” He was right, but he abandoned his own wise judgment when he accepted the vice presidential nomination that fall.

Ever heard of David Stockman? He was Reagan’s Director of the Office of Management and Budget from 1981-1985, a vocal proponent and implementer of supply side economics who later wrote his own memoir admitting that the whole thing was just a “Trojan horse” to cut taxes on the wealthy and to intentionally run up the budget deficit as an excuse to cut domestic social programs.

Those of us old enough to have been around in the early ‘80s should know these things. But what Chait does in his book is trace the story back to its beginnings and follow the disastrous consequences through to today. Interestingly enough, Dick Cheney has been involved from the first.

Arthur Laffer was the inventor of the supply side doctrine through his concept of the “Laffer Curve.” An economist who had lost his job with the Office of Management and Budget because of his unconventional methods, he promulgated the idea that higher taxes led to less tax revenue because people had no reason to earn more income if they would have to pay higher taxes on that income. Though recent history had already proven this to be incorrect, Wall Street Journal editorial writer Jude Wanniski latched onto the concept, and in 1974, the two met with President Ford’s assistant Dick Cheney. Chait notes that “Cheney apparently found the Laffer Curve a revelation, for it presented in a simple, easily digestible form the messianic power of tax cuts.”

We know what subsequently transpired: The Republican Party, previously known for its conservative economic policies and its concern with deficits, inflation and excessive spending (“they were quite willing to raise taxes in order to balance the budget”) rapidly devolved into a party whose central economic mantra is “tax cut, tax cut, tax cut.” The political party that spent the 1960s and ‘70s railing against “Democratic deficits” became the party of record-breaking budget imbalances. After he became Vice President, Cheney famously declared “deficits don’t matter.”

The Big Con reminds those who may have forgotten of the reality of American economic history since World War II:

“From 1947 to 1973, the U. S. economy grew at a rate of nearly 4 percent a year—a massive boom, fueling rapid growth in living standards across the board. During most of that period, from 1947 until 1964, the highest tax rate hovered around 91 percent. For the rest of the time, it was still a hefty 70 percent. Yet the economy flourished anyway.”

The first batch of Reagan tax cuts in 1981 cut the top tax rate to 50 percent, and the second batch in 1986 took it down to 28 percent. (Poppy Bush pushed it up to 31 percent in ’91). It doesn’t take an economics Ph.D. to see what has happened since 1981—the gap between the super rich and everyone else has exploded, the middle class has shrunk, and real income for working people has stagnated or declined.

Jonathan Chait boldly states the premise of his book up front. “American politics has been hijacked,” he writes, “by a tiny coterie of right-wing economic extremists, some of them ideological zealots, others merely greedy, a few of them possibly insane.” Incendiary language, yes, but hardly an overstatement. As the Bush years wind down to a thankful close, it is important to keep in mind that not all terrorists use bombs and airplanes.

As Woody Guthrie sang during the Great Depression, “Some will rob you with a six-gun; and some with a fountain pen.”

copyright © 2007 Jim Newsom. All Rights Reserved.