When I was young, there used to be a phrase thrown around that said "empty vessels make the most noise". At the time I was perplexed as to why so many people would be talking about empty ships!! But, (as a huge relief to my parents, I'll bet) I came to realize that the reference was to people who make a lot of "noise" about some issue or other, - shouting, or banging podiums or desks, or other means of getting themselves "heard" - with little or no substance behind what they say. A lot of this partisan political propaganda is just that: empty vessels making noise, and (naturally some might say) in my view, a lot of it emanates from these neo-conservative types who pound the keyboard boardwalks of social media in a seemingly frantic effort to ensure a Republican led Legislative branch. Often this ardor results in false accusations, misrepresented facts, misleading articles and flat out lies.
And during this pre-election period, I think it's important to plainly (of course!) explain some current topics of questionable understanding - and to fulfill a promise made in my last post, namely that I'd expand on the theory and practice of Reaganomics.
The reason for this current compulsion is I've seen quite a number of posts recently that seem to be desperately trying to focus attention away from the catastrophe that is the Trump administration - which would've been a tough enough job without the help of Covid-19, and now must be next to impossible - and they were babbling on about the economy and Trump's role in it's apparent success. Factions such as the Tea Party (talk about last month's flavor!) and other ultra conservative groups prate on about "supply side economics" and "Reganomics" and how they are the basis of the (at the time) huge growth in the historic levels of the various indices, and how Trump's economic policies were modeled on such policies.
Well, the first counter argument to these statements is that by just invoking the name Trump, they completely undermine their own positions because we all know that any such discussion is way over the orange haired bimbo's head and it should end there. But it doesn't shut them up. They keep rattling on listening to their own "voices" as they keep ramming garbage down the throats of social media participants.
To put it in very simplistic terms (what else would you expect from "The Plain Man"??) Supply Side Economics is a theory that holds that tax incentives driven towards business will create more jobs, as business owners and shareholders will ramp up their investing in capital freed up by the changes in the tax laws, expand their businesses and hire more workers. Thus with more people working, more demand for goods and services would be created, thereby growing the economy. Which, like a lot of classical economic theory is great on paper, but is not always what happens in practice. However, the notion that "Supply Side Economics" infers, namely, 'if you produce it, they will buy it', is a strategy for nuthouse economists.
Most (and I emphasize "most") rational people will spend to their limits (whether it's cash in the bank, credit cards or loans), preferentially on goods and services of their choice - assuming they live in a free market system (which where the US is. At the moment.). This is called "consumer demand" and they will make the choices, not those supplying the goods or services. The fundamental notion of "Supply Side Economics" is one that stands in stark contrast to human nature, no matter what kind of economy you live in.
When Reagan came into office in January 1981, unemployment was hovering around 7.5% - not a horrific number given the then recent recession, the actual "upside" of unemployment reduction was somewhat limited already - given that the natural unemployment rate in the US is around 4.5%. And what the "natural unemployment" rate is is the number of people who, at any given point in time are technically "unemployed" for various self-determined reasons - maybe taking a sabbatical from work, perhaps they are taking a break while moving from one job, or one location, to another. It just means that no matter how good an economy is performing, there will always be a certain number of people who can work, but choose not to do so at that particular time.
Listen, I'm not going to go into the history of all the economic aspects of Reagan's time in office. But it's important to note that the first tax legislation he signed (in December of 1981, which was a bill originally penned by Democrats) was, from the point of view of having positive impacts on the economy, a bit of a disaster: government revenues fell, the national debt went up, along with the unemployment number, which went north of double digits.
Subsequent tax reforms, however, did have a significant effect on the economy - in the short term. The Tax Reform Act of 1986 was the main instrument. Under this act, personal rates were cut - slashed for the upper brackets, with less significant cuts for the bottom brackets. Corporate rates were reduced, estate taxes were cut, capital gains tax rate was reduced. And yes, if you think that this is all front loaded for the rich (probably not the "1%" that it is today, maybe it was the 2, or 2.5% in those days). Poorer people tend not to have investments that they dispose of to worry about capital gains, certainly wouldn't worry about paying estate taxes and, for the most parts, don't own a company.
Now, Reaganomics were based on the theory of the Laffer Curve. This model depicts the effect on government revenue at various levels of taxation, and to be honest, when I looked into what that was, it was kind of a "no shit, Sherlock" moment. I mean it stands to reason that given that taxes are mandatory and people have to pay them, that as tax rates rise, government revenue also rises. And it also stands to reason that there is a point (and because an eejit like Laffer can have something named after him, I'm calling this point the TPMP -The Plain Man Point!) where each additional dollar of tax paid directly reduces the disposable income of the taxed unit (individual or family). And as one unit spends less, another unit's income is cut and pays less in taxes. The extreme is when the tax rates are 100% no one will produce anything (neither in goods nor services) because it will all go to the government.
So it stands to sense that if tax rates are reduced, that frees up more disposable income and as that is spent, it increases the revenues of other tax units who then, in turn, will pay more in taxes, with the consequent increase in government revenues. And here's another TPMP: there's a limit on this strategy and that limit is total income: when a taxpayer spends all their income, there is nothing more they can buy - kind of like a saturation point if you like - no incremental revenue is received by the suppliers and, therefore, there is no additional revenue for the government. To me, it's kinda logical, and not earth shattering. But today's conservatives love to commingle the phrases "Supply Side Economics" and "Reaganomics", but they are, in fact, two disparate theories.
Reaganomics was based on increasing revenues for the US Treasury. By lowering tax rates, additional disposable income was created, thus stimulating demand, and suppliers (or corporations, if you like, as a catch-all for all business entities - including the sole proprietors) saw their revenues increase.
All good so far. And in the short term it worked. Consumer demand was stimulated by the additional income on hand and commercial capital spending was stoked by the introduction of new depreciation rules that introduced the concept of accelerated cost recovery - whereby companies could expense a greater portion of capital acquisitions in the first years of service.
And this caused a big shift in the burden of who makes the biggest proportionate contribution to the government coffers. With the introduction of the Modified Accelerated Cost Recovery System (MACRS to the accounting wonks), corporate book profits (i.e. what they showed on paper) were down and thus, their contributions to the US Treasury were also down. So in order for Mr. Laffer's model to even enter the realms of being somewhat accurate, his projected increase in government revenues had to contain a plug for the reduction in corporate contributions, and that plug was the lower income groups who got a disproportionately lower boost to their disposable income than did the rich.
Are you still with me? No? Well then, fuck off with yourself. Yes? Well, let me continue. Here is an example of how the Reagan tax cuts affected two taxpayers. Rich has $200,000 in taxable income, while Les (a word play on "less" - do you get it? I know, comic genius!) has taxable income of $20,000.
For Rich, his old income tax level was 70% and the Reagan plan cut that rate to 50% (initially). So now, instead of paying $140,000 ($200,000 x .70) in taxes, he pays "only" $100,000 (S200,000 x .5). This increases his disposable income by $40,000 or 66.7% more than he had before.
For Les, the old rate at his income level was 14%, with the tax cut bringing that down to 11% (again, initially). So instead of paying $2,800 in taxes, Les now pays $2,200 and sees his disposable income rise by only 3.5%.
That was, in essence, the first really significant revision of corporate taxes that benefited corporations to the extent it did. Revenues were up due to the increased consumer demand, and tax burdens were reduced thanks to MACRS - at least in the short term. And as a result, they were able to build up strong cash reserves from which they were able to pay healthy dividends to stockholders - like Rich and his mates. Les and his mates couldn't afford to buy stocks.
So now these corporate muppets began to think that what they need in the White House is someone who looks to business first for policy, and they have poured money over the last three decades behind campaigns for political office in an unprecedented manner. And successive administration have made these tax cut initiatives that heavily favor those who already have wealth.
So, to the neo-conservative who keep droning on about "Reaganomics" and "supply side economics" are really talking about programs for the already well-endowed minority of Americans. And to fund those programs, it means a greater burden on the middle and lower classes, whose minimal increases in disposable income are often offset by the loss or reduction of some other government support programs.
And this just further enforces the gap between those who have and those that haven't. And as that gap becomes more and more pronounced, the more the chances of some other crises, like a pandemic or the unlawful killing of a man in police custody, will become the tipping point for the under-served to show their displeasure.