Washington Post: The Big Lie that Caused the Budget Catastrophe

[Fergasun]

I was searching through Congressional Record archives and found this article. I don't know how to statically link to the Library of Congress page. It can be found online via Thomas.loc.gov in the Congressional Record for October 9, 1990 (for the Senate).

October 7, 1990, Washington Post

The Big Lie That Caused the Budget Catastrophe

By Lester C Thurow

In 1980 the American electorate embarked on a grand experiment--supply-side economics. Ten years later, that experiment continues to warp the political process. Its enduring influence explains why Congress and President Bush found it so difficult to reach any budget agreement at all; why the failed agreement was so peculiarly shaped; and why the public, nourished on a decade of false promises, seems unwilling to make even modest sacrifices to assure the nation's economic future. In the current economic climate almost any solid deficit-reduction package would be welcome. Still it is remarkable that the initial deal struck last week would aggravate the very features of the current tax system that seemed most generally objectionable to tax experts and the public: Its `small business growth incentives' would offer new tax dodges to the wealthy--who had supposedly traded away their shelters for the much lower tax rates provided by the 1986 tax reform; its tax-deduction limit would worsen, rather than eliminate, the disreputable `bubble' feature which grants the very, very rich lower marginal income tax rates, and hence lower capital-gains tax rates than those faced by the merely well-to-do taxpayers; and it would increase the relative tax burden borne by low- and moderate-income taxpayers. All this in a package endorsed by Democratic leaders who claimed to have tax fairness as their top concern.

What explains the persistence of supply-side mythology? From where comes its power to so constrain American politics? When America first jumped on the supply-side bandwagon, people felt, rightly, that the economic performance of the 1970s was unacceptable. The political and military affronts in Tehran were compounded by the vision of a chained economic giant wilting in the face of Japanese and German competition. A GNP growth rate of 2.8 percent was unacceptable when compared with the 4.1 percent growth rate of the 1960s. That dismal record was compounded by an even more important measure of economic performance, productivity growth--the rate at which a nation is becoming more efficient and hence more affluent. The 1960s' growth rate of 2.9 percent had fallen to only 1.4 percent in the 1970s. Such a decline meant that instead of doubling every 24 years, American's standard of living would take 50 years to double--each generation could no longer expect to have a standard of living twice that of its parents. Facing these facts Americans were willing to try something new and different. Supply-side economics, as enunciated by President Reagan and later embraced by Bush, promised that lower taxes on upper income groups would stimulate savings and hence permit more investment--the argument used by Bush to advance his capital-gains tax cut proposals in the recent budget summit. Higher investment would lead to higher growth. In addition to restoring economic vigor and rebuilding international competitiveness, higher growth would accomplish two other important objectives--without asking for painful sacrifice from anybody.

First, with a larger economy, government tax revenue could go up even though tax rates had been reduced. In 1981 Reagan promised that the federal budget would be balanced in 1985 without having to make significant spending reductions. Second, although most of the tax cuts would go to high-income individuals (it was they who had the capacity to save more), higher growth would lead to better paying jobs for middle- and low-income Americans. In the short run their total tax rates would go up--for 80 percent of the population the extra payroll taxes they would be asked to pay to fund Social Security would be larger than the income tax cuts they would get. But with higher earnings they would in the end benefit. All gain, no pain. Politically supply-side economics delivered the goods--three presidential elections have been won using it--but economically it has not delivered on any of its promises.

Where higher GNP growth was promised, lower growth was delivered--2.6 percent over the decade of the 1980s. In 1990 the economy is stalled on the lip of a recession, just where it was in 1980. Because of the debt and banking problems built up during the 1980s, any recession in the 1990s will produce levels of bankruptcy not seen since the Great Depression. Even without a recession, middle-class wealth is melting away as housing prices fall in much of the nation in reaction to the debt excesses of the 1980s. Instead of growing faster, productivity slowed down--1.2 percent during the 1980s. In 1989 productivity actually declined. There is only darkness visible at the end of the productivity tunnel.

Savings rates plunged. In the last four years of the 1970s, American families saved 7 percent of their disposal income; in the last four years of the 1980s, they saved only 4 percent. The rich saved nothing from their tax cuts. In contrast, the Japanese saved 15.7 percent of their income in the past 12 months. If total national savings (a measure that includes corporate savings and government dissavings) is examined, savings fell from 17.4 percent of the GNP in the last four years of the 1970s to 11.3 percent of GNP in the last four years of the 1980s. As a result, in 1989 Japanese investments in plant and equipment per worker were three times as large as those in the United States. At the beginning of the decade the United States had a small surplus in its trading accounts ($1.5 billion in 1980 and $8.2 billion in 1981). At the end of the decade it recorded a current-account deficit of $129 billion in 1988 and $110 billion in 1989. What was a competitive problem at the beginning of the decade was a competitive disaster at the end of the decade.

In 1981 the United States was the world's largest creditor nation with net assets totaling $141 billion. Every year the rest of the world paid interest, dividends, and profits to Americans. By 1989 the United States had become the world's largest net debtor nation with debts totaling $620 billion. Where Americans used to get, they now give. The federal deficit did not, of course, vanish in 1985. In the year ahead, the deficit is estimated to be $254 billion and rising if last week's deficit reduction proposals are passed by Congress ($294 if they are not) and over $300 billion if the Social Security surpluses are excluded from the totals, as they ought to be. A budget summit that reduces the deficit by $40 billion is essentially the equivalent of Nero fiddling while Rome burns. The difference is that Nero wanted to burn Rome so that he could rebuild it--the Roman Colosseum was his. Unfortunately there is no evidence that the current fiddlers have any real rebuilding in mind.

President Bush is fond of saying that `we have more will than wallet.' He has it exactly backwards. Our GNP after correcting for inflation is four times as large as it was in 1947 when we were paying to rebuild the world after World War II. Our per capita GNP is 2.3 times as large. We can afford to do what must be done abroad; we can afford to do what must be done at home. America is not an over-taxed country. In 1989, Americans paid fewer taxes as a percentage of GNP (about 30 percent) than the citizens in any other industrial country. Taxpayers in 22 industrial countries, including the Japanese and the Germans, paid more. Morever, there are places where the budget can be cut without harm. Based on the performance of other countries (far lower spending levels; far better performances when it comes to health and longevity), substantially less could be spent on health care if the system were fundamentally reorganized. The events in Eastern Europe mean that big defense cuts can occur while still maintaining our ability to fight wars in the Third World. America has more than 2 million troops; fewer than 200,000 are in the Middle East.

The American problem is will--not wallet. In a democracy, will depends upon leadership and in the United States that means presidential leadership. It isn't leadership to spend months arguing that a capital-gains tax cut is the most important issue facing the American economy. Whatever one believes about the growth-enhancing aspects of a capital-gains tax cut--or other `tax incentives'--everyone agrees that they leave more after-tax income in the hands of the wealthiest. In the last decade America has already had a heavy dose of that kind of `sacrifice.' Recently the U.S. Census Bureau confirmed that inequality in the distribution of income had increased substantially in the last decade. Every statistic points in the same direction. In the decade of the 1980s, the average real income of the top 5 percent of the population rose from $120,253 to $148,438. At the same time the average real income of the poorest 20 percent fell from $9,990 to $9,431. After-tax measures of income would report an even wider gap. As the income share of the top 20 percent rose in the 1980s, the income share of each of the bottom four quintiles was falling--the lower the quintile the bigger the decline. Despite a 21-percent rise in the real per capita GNP, the average real hourly wages of rank-and-file workers fell 5 percent. Those promised good jobs for middle- and low-income Americans did not appear.

If the income share of the rich is rising at the expense of the rest of the population (it is), if government is directly altering its policies to augment the income share of the rich (it has), if the campaign contributions of special interests increasingly dominate the political process (they do), if fewer and fewer middle- and lower-income individuals vote (it's happening), America is, under the cover of supplyside economics, rapidly moving towards becoming (dare we say it openly?) a plutocracy. Unfortunately history tells us that as a social and governmental system, plutocracy does not for long work.

[SteveFromYellowstone]

So sad. It really is. We could have been in a great position as a country and as an economy. My father lost nearly his entire retirement during the most recent recession and it's because of the myth of supply-side. Why does half the country continue to buy this bs? Sometimes I wonder if America wouldn't be better off as two separate nations...

[Kindred]

This should be the link. Good article

http://thomas.loc.gov/cgi-bin/query/C?r101:./temp/~r101yJpHCq

I agree, we should be focusing on increasing demand not supply.

[zoony]

So sad. It really is. We could have been in a great position as a country and as an economy. My father lost nearly his entire retirement during the most recent recession and it's because of the myth of supply-side. Why does half the country continue to buy this bs? Sometimes I wonder if America wouldn't be better off as two separate nations...

Reagan's legacy

But, it is interesting how conservatives pick and choose. Seeing libertarians and conservatives whine about TARP, for instance. Always good for a chuckle.

[aREDSKIN]

Although Thorow's credentials far exceed mine his predisposition towards objectivity is clearly suspect.

"Thurow is a longtime advocate of a political and economic system of the Japanese and European type, in which governmental involvement in the direction of the economy is far more extensive than is presently the case in the United States"

http://en.wikipedia.org/wiki/Lester_Thurow

[Prosperity]

Although Thorow's credentials far exceed mine his predisposition towards objectivity is clearly suspect.

"Thurow is a longtime advocate of a political and economic system of the Japanese and European type, in which governmental involvement in the direction of the economy is far more extensive than is presently the case in the United States"

http://en.wikipedia.org/wiki/Lester_Thurow

So, you are saying people that advocate for a position could not have been objective in reaching the conclusions that support the position they advocate?

Is a "predisposition from objectivity" mutually exclusive from advocating a position?

That sort of thinking will hinder your growth because any time some advocates a different position than yours you will feel as if they are not objectively predisposed (Whatever that means) and then you will feel ok about completely ignoring what they have to say.

[SteveFromYellowstone]

Reagan's legacy

But, it is interesting how conservatives pick and choose. Seeing libertarians and conservatives whine about TARP, for instance. Always good for a chuckle.

It's hilarious to ask them what would have happened if TARP wasn't passed. They don't seem to think about consequences very often.

How do we move away from this myth (supply-side) as a country? It just seems to me that they are so set in their ways that it will take a monumentally bad event for them to question their beliefs...and even then they would probably blame it on the other side

---------- Post added December-16th-2012 at 01:03 PM ----------

Although Thorow's credentials far exceed mine his predisposition towards objectivity is clearly suspect.

"Thurow is a longtime advocate of a political and economic system of the Japanese and European type, in which governmental involvement in the direction of the economy is far more extensive than is presently the case in the United States"

http://en.wikipedia.org/wiki/Lester_Thurow

One word: austerity

[aREDSKIN]

So, you are saying people that advocate for a position could not have been objective in reaching the conclusions that support the position they advocate?

Is a "predisposition from objectivity" mutually exclusive from advocating a position?

That sort of thinking will hinder your growth because any time some advocates a different position than yours you will feel as if they are not objectively predisposed (Whatever that means) and then you will feel ok about completely ignoring what they have to say.

1) Depending on the specific issue not all, but many and probably a majority in the politcal process are. Their advocates for a contittutency group and POV.

2) Nope you can have both but Thorow's position is well known and has been for many years. He's an advocated for a POV. Hardly, IMO an impartial conclusionist.

3) Mypoia is rampant in the American political process and has been since the begining. To differing degrees I suspect but still a cornerstone of Americana.

[Kindred]

Essentially this all boils down to a flawed philosophy that thinks if you increase the wealth at the top it will "trickle down" (in the form of 'investments'. First of all, this is completely counter to the natural direction of wealth which moves upwards. 2nd of all, it doesnt take into account that demand is the fundamental force which drives an economy - demand drives job grow, not investment. Companies increase production and hire people only when demand calls for it. period. Investment ALLOWS for this growth IF the demand is there.

Given these basic fundamentals, one would think that you would want to focus on a bottom up approach. Increase wealth at the bottom of our economy so that this drives demand UP. You build a solid foundation - a healthy middle class that spends more and pays more in taxes, that has lots of opportunity to move up, and everything else will fall in line. To put it simply: "its about trickling up, stupid"

[Veretax]

the problem isn't supply side or demand side economics... The system isn't static. All kind of stimuli change our economy. I think the real game changer it the globalization movement.

[Stadium-Armory]

I think there might be some recent studies and evidence to support the notion that tax increases on top earners will increase growth because of its effect on the deficit. The theory goes like this: benefits from drastic debt reduction which is funded by tax increases on high earners outweighs any negative impact on potential investment (perceived or otherwise). As evidence, one might point to the 1993 debt reduction deal, when then President Clinton and a Democratic-controlled Congress enacted deficit-reduction legislation (with no Republican support) that raised income tax rates for high-income taxpayers. What followed was a time of economic growth despite the higher marginal rate on high income earners. The tech boom occurred despite this increase in taxes. Could that boom have been bigger under less taxes? Maybe. I'm willing to entertain the possibility. Anyway, this study appears to support that notion about deficit reductions via tax increase, and although I admittedly can't get my head around it enough to say anything for certain, it seems to be based in as much fact as is possible when discussing what is probably a very complex ecosystem:

http://www.cbpp.org/cms/index.cfm?fa=view&id=3756

This one plots growth to marginal tax rate:

http://conceptualmath.org/philo/taxgrowth.htm

[Mursilis]

So sad. It really is. We could have been in a great position as a country and as an economy. My father lost nearly his entire retirement during the most recent recession and it's because of the myth of supply-side. Why does half the country continue to buy this bs? Sometimes I wonder if America wouldn't be better off as two separate nations...

It's exceedingly foolish to think most Americans are somehow enamored with supply-side economics. I'd bet a majority of Americans couldn't even accurately define the term! Rather, I think the vast majority are motivated merely by a basic desire for more gov't services and benefits for which they don't actually want to have to pay for.