WTF?! Obama I thought you said .. [ Insert Obama Lie Here ]

Failed Policies Of The Past? Keynes vs Laffer…by John Allen

It is pretty clear by this time that President Obama’s “stimulus bill” did not work. President Obama will try to salvage it and claim it’s working, or that really it was a two-year project (I don’t remember hearing that at the time), or that it was really only meant to “stabilize” the downturn (his latest explanation). Nonsense, this was sold to America as a growth engine for economic recovery and job growth. Remember this quote from Obama when he was trying to sell the nation on the stimulus bill:

That is why I have moved quickly to work with my economic team and leaders of both parties on an American Recovery and Reinvestment Plan that will immediately jumpstart job creation and long-term growth.

Remember that word “immediately”. There has been no immediate impact, which is why the administration is now trying to say they never said it would have an immediate impact. They did. And that’s why they said it was so urgent to pass it so quickly, so that we would start to get the immediate impact. And now, with unemployment heading toward 10% (when they said with the stimulus it would top out at 8%) and Vice President Biden admitting that the Administration “misread” the economy it is pretty clear this bill has been a failure.

President Obama claimed that all economists agreed that we needed this particular stimulus package. That is a flat-out lie. There was a letter signed by over 300 economists, including a few Nobel-prize winners, who argued against this stimulus bill. Almost all Republicans in Congress were against it. There were those who opposed it, despite what Obama said at the time. And, this particular “stimulus” bill was particularly bad because it consisted of so much pork and political payoffs. It was essentially a Democratic spending “wish list”. But, Obama defended it by saying “of course it’s a spending bill, that’s what stimulus is.” Is spending stimulus? Can tax cuts, rather than spending, be stimulative to the economy?

Now, with talk of a second stimulus being kicked around, it might be a good time to look at the history of economic “stimulus” to see what has worked and what hasn’t. It might give us an idea of how we should have stimulated the economy to begin with and how we can, hopefully, avoid making the same mistakes if we go through with a second stimulus bill.

During the debate over the stimulus bill in February, President Obama often dismissed Republican suggestions of supply-side tax cuts as “the failed policies of the past”. At the same time the President proposed his big government-spending, Keynesian approach to the economy as if it were somehow new, fresh thinking. Worse, he seemed to imply that the Keynesian approach has a track record of success. What does the evidence say? If you stack up John Maynard Keynes vs Arthur Laffer, who has been proven right over time? Which approach is really a “failed policy of the past” and which has a track record of leading to economic expansion?

The answer is pretty clear. Let’s start with the Keynesian approach. The biggest example of Keynesian economics (until now) was the massive government spending of the New Deal. By almost every metric the New Deal failed to produce economic recovery. Unemployment, GDP growth and the stock market all floundered throughout the 1930’s. Most recent scholarship suggests that the New Deal prolonged the Great Depression. For example, a study by UCLA economists Harold L. Cole and Lee E. Ohanian found that the New Deal policies prolonged the depression by seven years. That was seven extra years of misery, suffering and heartache for Americans of that era. And here was a quote by Ohanian from 2004:

“Why the Great Depression lasted so long has always been a great mystery, and because we never really knew the reason, we have always worried whether we would have another 10- to 15-year economic slump,” said Ohanian, vice chair of UCLA’s Department of Economics. “We found that a relapse isn’t likely unless lawmakers gum up a recovery with ill-conceived stimulus policies.“

And, if you don’t believe the data just look at the big picture. Imagine if Barack Obama took office in January 2009 and eight years later we were still in the same economic situation. No improvement, no economic growth, no recovery. You would have to consider Obama an unmitigated failure. Well, this is exactly what happened with FDR and the New Deal. Nine years of economic misery (1933-1942). Yet, liberals look to the New Deal as a model of success. The only thing it succeeded at was permanently enlarging the role of government in our economy.

The Great Society of Lyndon Johnson expanded the welfare state, but did nothing to expand the economy and in the 1970’s Gerald Ford tried to stimulate the economy with tax rebates, which failed miserably while leading to the stagflation that plagued the rest of the decade. And, let’s not forget George W Bush’s 2008 stimulus tax rebates, which did absolutely nothing to stimulate the economy. Bush also tried tax rebates in 2001, which didn’t work and it wasn’t until after tax rate cuts in 2003 that the economy began to expand. Japan, during the 1990’s tried one stimulus package after another that did nothing to stimulate the economy during the decade that the Japanese refer to as “the lost decade”. Of course, Obama and other Keynesians try to tell us that Japan’s problem was that their stimulus spending wasn’t large enough. Since Japan has one of the highest national debts compared to it’s GDP in the world thanks to the policies of the 1990’s I think the Japanese might disagree with that analysis.

So, Keynesianism doesn’t exactly have a track record of success. Obama’s own economic advisers Christina Romer and Larry Summers both rejected the idea of Keynesian stimulus before they ended up on Obama’s payroll. But, Obama pressed forward with massive government spending with the belief that it will stimulate the economy. The only thing it actually stimulated is government control and huge deficits. Since every dollar that is spent by government to stimulate the economy is a dollar that is taken out of the private sector and can’t be used to invest, expand business or hire employees it is expanding wealth consumption of the government rather than wealth production by the private sector. This is why Keynesian economics fell out of favor in the 1970’s. It’s only attraction is that during tough times the government can claim it is “doing something” to help the economy. When a big recession like the present one hits, the public likes to see the government “doing something” so they go along with the Keynesian approach.

These questions are more relevant than ever today with news that the huge Stimulus Package passed in February has done nothing to stem job losses and the economy is still struggling. Obama’s economic advisers predicted that if the stimulus bill was not passed unemployment would peak at about 8.8% and with the stimulus package it would only peak at about 8.0%. OK, so we passed the stimulus and we now have 9.5% unemployment and most estimates say it’s a certainty that it will go into double digits within the next couple of months. Larry Summers, Obama’s top economic adviser, predicted that “within weeks” of passing the stimulus bill we would see noticeable improvement in the economy. The Congressional Budget Office predicted that if there was no stimulus package the economy would start to improve and pull out of the recession by the end of this year. But, Obama can claim to have “done something” when doing something may actually be hindering the economy rather than helping it. In this case, according to the CBO, doing nothing probably would have been better than what we did. But, would it have been better than a real “stimulus” bill in the form of supply-side tax cuts?

Let’s take a quick look at the record of supply-side economics. Supply-side tax cuts have been implemented five major times in the U.S. in the last century and every time they have led to economic expansion and increased tax revenues.

The Harding-Coolidge income tax cuts of the 1920’s decreased the top marginal rate from 73% to 25%. The result was robust economic expansion and a doubling of tax revenue between 1923 and 1928. The “rich” also paid more as a percentage of all tax revenue after the tax cuts (45% before compared to 62% after), which is usually a result of supply-side tax cuts.

JFK cut income tax rates in the early 1960’s and the economy expanded. Tax revenues also increased from $63.5 billion in 1961 to $95.7 billion in 1968. Try telling a liberal that their hero JFK was a supply-side tax cutter and watch the blank look on their face.

Ronald Reagan implemented a series of tax cuts in the 1980’s on income taxes and capital gains. The economy added 20 million jobs, tax revenue doubled during his presidency, the stock market tripled in value and GDP grew by 33%. And for those who think that only the rich benefited, the median household income grew by $4,000 during Reagan’s tenure.

Bill Clinton raised income tax rates, which is something Obama points to as proof that raising tax rates on the “rich” will not hurt the economy. But, early in his Presidency, when all he did was raise taxes, GDP growth shrunk. GDP grew by 4.5% in 1992, but averaged between 2 and 3% in 1993 and 1994. Only after 1994 (with a Republican controlled congress prodding him), did Bill Clinton enact policies that offset his income tax hike. Welfare reform and NAFTA were two big policies that had a positive effect on the economy. The other major thing that Clinton did (and again, ask a liberal if they know this) was to cut the capital gains tax. The capital gains tax cuts increased government tax revenue and lead to more investment and economic expansion.

George W. Bush tried “stimulus” rebate checks in 2001 (and again in 2008 after the housing bubble burst) to no positive economic effect. It wasn’t until Bush cut supply-side taxes (income tax and capital gains) in 2003 that the economy took off. Business investment grew rapidly, 8 million jobs were created, government revenues increased (2007 saw record tax revenues), the stock market soared and the deficit shrank from $400 billion to $158 billion in 3 years. After the mortgage meltdown Bush offered stimulus checks and bailouts and the deficit expanded again. There are a whole host of reasons for the mortgage meltdown, but the Bush tax cuts is not one of them.

If we look around the world we see that whenever they are used (Ireland, Estonia and many others), supply-side tax cuts lead to economic expansion. Alan Reynolds of the Cato Institute, in a recent study, divided the world into countries that cut taxes and those that raised taxes. He found that the countries that cut tax rates (supply-side economics) had much faster GDP growth on average than those that raised taxes.

One of the things that critics of supply-side economics always point to is the Reagan and Bush deficits. Since tax revenues increased rapidly after the Reagan and Bush tax cuts the deficits were not a result of lost revenue from cutting taxes. They were a result of overspending, not undertaxing. Both men can be criticized for spending too much, but that has nothing to do with the fact that supply-side tax cuts spurred the economy and increased tax revenues. And, if we are using only one metric (deficits) to judge an economy, then hasn’t Obama already failed? By his own calculations the deficit will balloon under his watch, with trillion dollar deficits projected until the end of the next decade.

Supply-side economics usually (not always, but usually) increases tax revenues. This, in my opinion, is not necessarily it’s best selling point. I don’t believe that the politicians should base tax policy on the assumption that they want to wring the maximum amount of money from the citizens. In other words, I don’t think that we should necessarily always be operating at the peak of the Laffer Curve. I think the priority should be what will provide the greatest boost to the private sector, which is the wealth and job producing part of the economy. But, let’s say you are a liberal and you want more tax dollars for government to spend on entitlements and handouts. You would have to go with supply-side economics which (almost) invariably increases government revenue.

As an added bonus, the share of taxes paid by the “rich” always increases with supply-side tax cuts. When the top marginal income tax rate was 50% the top 1% of earners in America paid 25% of the income taxes. When the rate was lowered to 36%, the top 1% of earners paid 40% of the income tax bill. The evidence suggests that if you really want to screw the rich out of more money you should cut their taxes.

But, critics will say, supply-side economics just benefits the rich. President Obama said at his convention speech in Denver last summer:

For over two decades — for over two decades, he’s subscribed to that old, discredited Republican philosophy: Give more and more to those with the most and hope that prosperity trickles down to everyone else.

This is a gross misreading of supply-side economics. As Thomas Sowell pointed out in his book, Basic Economics, only critics call it trickle-down economics. People who understand it know better. To paraphrase Sowell, when tax rates are cut it increases incentives to invest. Unlike Obama’s reading of it, however, government doesn’t give investors anything. The investor or business owner invests their own money or borrows money to invest. They do this because if they succeed (a big if) they can keep more of their earnings. Of course, if they fail they alone bear 100% of the loss.

And, when they invest money or start a business (because the incentive is favorable) they first have to “trickle” that money out to contractors, suppliers, and employees to get their business up and running or to expand it. In essence, they “trickle” out the money into the economy before they ever see a dollar in profit. And, there is no guarantee that they will ever see a profit. In other words, the money trickles down with no guarantee that it will ever trickle back up. People take this risk, however, because the incentive has been created for them since they get to keep more of their profits if they succeed.

If there is one word that I’d like to tatoo on the forehead of every liberal so that they would learn it’s meaning, it would be incentives. Incentives are the essence of supply-side economics and, indeed, the essence of economics in general. Favorable economic incentives means favorable economic behavior (investing, starting a business, expanding a business, hiring employees, etc.)

President Obama, during the campaign, often talked about building a bottom-up economy instead of a top-down economy. Really? Is there anything more top-down than giving a handful of our government overlords trillions of dollars and letting them dole it out to their favorite pet projects and special interests. Millions for ACORN, billions for the environmentalists’ “green” projects, billions for unions, etc. Obama has built the ultimate top-down economy where every special interest and lobbyist lines up at the trough and politicians pick winners and losers. If you really want a bottom-up economy, cut supply-side tax rates so that private citizens have the incentive to invest their own money to create jobs and generate wealth.

I know some people will say that Obama did cut taxes. In fact (they’ll parrot this line), he cut taxes for 95% of Americans. It’s not the same. He sent rebate checks or, more precisely, he dripped rebate checks into paychecks over the course of a year. Thirteen dollars a week. Four-hundred dollars over the course of the year. You get that whether you invest, save, quit your job, lay on the couch all day, start a business, drop out of college or never take a risk. You even get it if you don’t pay income taxes. In other words, it doesn’t provide incentives. It doesn’t change behavior. You get a set amount, it never changes and you don’t get more if you work harder or invest or take risks to start or expand a business.

Tax rate cuts, on the other hand, have “the more you earn, the more you get to keep” effect. It provides incentives to earn more by working harder, taking risks by starting a business or expanding one. They change behavior and they change behavior so that people are more productive economically. This benefits the economy as a whole.

Here we are mid-summer after the biggest “stimulus” spending bill in the history of the world was passed in February. The economy has not been stimulated, unemployment is still climbing and the country is still plodding along. I believe that in spite of the stimulus bill, the economy will start to improve slightly probably by the end of this year(Remember, the CBO predicted the economy would start to recover without the stimulus bill). That’s what our economy does. It’s resilient. But it will be slow, sclerotic growth. European-style growth, you might say. GDP will probably slog along at about 1-2% annual growth and unemployment will probably remain between 8 and 10% for several years. The media will hype the recovery but it will be a far cry from America’s typical 3-4% GDP growth and 5% unemployment during good economic times.

This could have been an awesome, dynamic recovery though. Imagine if in February, instead of the Keynesian stimulus spending bill, that Obama had instead cut supply-side tax rates. Imagine if he had cut capital gains taxes, cut the corporate tax rate and even, temporarily, cut or suspended the payroll tax. My guess is that capital would have flooded back into the market, businesses would be expanding and we would be poised for a huge economic recovery. Of course, that would have required reaching back to those consistently successful “failed policies of the past”.

By the way, if you want a perfect example of Laffer Curve effects, just look at the capital gains tax. Every single time the capital gains tax has been raised, government tax revenue from capital gains has decreased. And, conversely, every single time the capital gains tax rate has been cut, tax revenue has increased. When tax revenue increases from a tax cut it is because it has had a positive economic impact as a whole by expanding the tax base. In other words, government may be taking smaller bites, but it’s taking them out of a much larger pie.

It’s clear that the history of supply-side economics has been one of amazing success. It has lifted people out of poverty, provided incentives to innovate and has launched economic expansion around the world. If you need more evidence of the success of supply-side economics, I recommend the book The End of Prosperity, by Arthur Laffer, Stephen Moore and Peter Tanous. It’s where I got a lot of my information.

Keynesian economics is the real “failed policy of the past”, and thanks to Obama it will be the failed policy of America’s future. The only good that might come from this recent Keynesian experiment is that maybe, just maybe Americans (and many economists, but don’t bet on it) will realize that it doesn’t work. And then, hopefully, we can bury Keynesian economics once and for all.